Ladies and gentlemen, thank you for standing by, and welcome to the New Residential Investment Corporation Third Quarter 2019 Earnings Call. At this time, all participants are in a listen-only mode. After the speaker’s presentation, there will be a question-and-answer session. Please be advised that today’s conference is being recorded. I would now like to hand the conference over to your speaker for today, Kaitlyn Mauritz, Investor Relations. Please go ahead, ma’am.

Thank you, Carl. And good morning everyone. I’d like to welcome you today to New Residential’s third quarter 2019 earnings call and thank you for joining. Joining me here today are Michael Nierenberg, our Chairman, CEO and President; and Nick Santoro, our Chief Financial Officer. Throughout the call this morning, we are going to reference the earnings supplement that was posted to the New Residential website this morning. If you have not already done so I’d encourage you to download the presentation now. Before I turn the call over to Michael, I’d like to point out that certain statements made today will be forward-looking statements. These statements, by their nature, are uncertain and may differ materially from actual results. I encourage you to review the disclaimers in our press release and earnings supplement regarding forward-looking statements and to review the risk factors contained in our annual and quarterly reports filed with the SEC. In addition, we’ll be discussing some non-GAAP financial measures during today’s call. A reconciliation of these measures to the most directly comparable GAAP measures can be found in our earnings supplement. With that, I’d like to turn the call over to Michael.

Thanks, Kait. Good morning, everyone, and thanks for joining us today. So for us, the third quarter was a very good one for us. The quarter more than any other quarters saw the different segments of our business is contributing in areas where others were a little bit more challenged. During the quarter, treasury rates rallied by 35 basis points to 10-year closing approximately 165 versus a 2% yield at the end of Q2. However, the mortgage market did not see the same. During the quarter, mortgage rates fell by only 10 basis points during the quarter. So effectively agency mortgages got cheaper. Refi incentives were a little bit lower during the quarter. Our robust risk management and hedging strategies help protect book value. During the quarter, we saw a slight increase in book value. Our investment portfolios performed extremely well. Where we are today, we’re really starting to see the earnings power of our mortgage company. It’s really starting to ramp up and we’re very excited to see the continued growth in our NewRez and Shellpoint franchise. The completion of the Ditech acquisition which happened subsequent to the end of Q3 creates great scale for us as well as more capacity to originate loans and improve our recapture rates on our MSR portfolios. The lower rate environment has enabled us to reduce our borrowing costs, saving our company approximately $75 million on an annual run rate and we will continue to focus on ways to increase that number even more. We do believe we will see one to two more cuts from the Fed this year, which should create further savings in our financing costs.

Thank you. Our first question comes from Bose George from KBW. Please go ahead.

Yes, good morning. Can you remind us how much equity will be deployed in the Ditech transaction? The ROEs there and also just a little color on the Ditech portfolio would be great. Just like the loan size, cost to service, any differences from your portfolio?

Sure. So let me address the assets that we bought first, both the MSR is the Fannie, Ginnie and PLS MSRs are smaller balance, a little bit more higher delinquent in nature. I think when we look at our cost of service, we think about it the same way because whether it would be NewRez or LoanCare who are currently servicing those portfolios give us a cost per loan to service that loan and that cost per loan is consistent across our entire portfolio. When we think about the return on equity we’re hoping – I would say this. On the MSR acquisition, Ditech took the hedge risk throughout the time that we agreed to do this transaction until it was funded and the bond market rallied like crazy. So overall the multiples we acquired these MSRs that were extremely attractive for our business. When we think about the return on equity of the business, I pointed out we’re picking up 1,100 talented employees. We’re getting a West Coast presence in our Arizona operation. We’re picking up a recovery business that we’re extremely excited about. I can’t tell you now because we closed on this thing on October 1. The overall ROEs I think we’re expecting to be north of 20% on this acquisition.

Okay, thanks. And then actually just in terms of the MSR, it felt that you’re acquiring, is there going to be any sort of mark up or down just based on the closed versus where you got it?

Yes, they will be marked up. As I pointed out, the bond market rallied significantly, the overall multiples we acquire those are – it will take something a little bit south of the two multiple, give or take between the different product mix. Obviously each thing is valued separately. So you’ll see a mark up on that asset.

Okay, thanks. And then just on the MSR hedging, can you just walk through the strategy a little bit? How much is derivatives, how much is the – on balance sheet agencies and just sort of the philosophy of that?

So the bulk of it is we have been pretty vocal about the balanced nature of our portfolio coming into – at the end of Q3, I think our loan book was about $7 billion, our bond book was about $8 billion. And then we have a large agency book now that we haven't had in the past. So we see leverage ratios on our balance sheet, our leverage ratios are in, I think, the mid threes right now as a result of the agency pools that we put on our balance sheet versus our MSRs. So we have – so our strategy as a couple, one is we have agency mortgages against the MSRs. I pointed out earlier that agency mortgages or mortgage rates themselves rallied by only 10 basis points, so widening in the basis, which means that the refi incentives for homeowners is a little bit lower in the quarter versus the rally we saw in treasury rates. So that's why we use mortgages. On the other side of that, we have swaps where we have receivers against that portfolio, which protects us in a rallying market. So it's really just, I would say, swaps and mortgages coupled with the long duration that we have in our overall portfolio. And I think we illustrated that on one of our slides. I'm not sure what page that was.

Okay. So that's helpful. Thanks. And actually one last one, the MSR mark, the negative $228 million. Can you dis-aggregate that just what part of it was the just the runoff of the portfolio versus the move on rates?

The MSR mark was lower than that in the quarter. And Nick, do you want to take that?

Sure, the majority of those are related to amortization. So approximately $170 million of the $228 million that you're referencing was amortization and the remainder was mark. Our met mark for the quarter was a negative $45 million.

Okay, great. Thanks.

Thanks, Bose.

Our next question comes from Giuliano Bologna from BTIG. Please go ahead.

Good morning and thank you for taking my questions.

Good morning.

Well, I want to kind of touch on – first is on the originations front. You guys are targeting about $40 billion and $50 billion next year. Is there any sense of the kind of margin that you could generate because there's significant kind of recapture and replenishment cost savings on the margin side there?

Yes, I think, listen, it's the easy path to grow is to do more correspondent and wholesale. So one of the things we were working on this morning even prior to the call is how do we think about increasing our overall gain on sale and making us what I would – putting us I think in a tier that's comparable with some of our peers in the marketplace. So we have a lot of work to do there. I think you're going to see more correspondent as we go forward, a little bit more wholesale. And then we're looking at a lot of different retail channels. So, I think, the growth overall will be significant for us, but we have to be prudent because I'd rather do less volume and make more money for shareholders than do more volume and make less money. Big thing is again, we have a $600 billion MSR portfolio, so keeping that and protecting our balance sheet I think is really, really key. The other side of that is, when you think about our origination business and servicing business, now that we're fully into the ancillary business lines. We want to continue to see growth in the earnings and revenue there. And partnering with Covius and again, hopefully, getting some of our industry peers and friends involved in the third party business I think could be really significant for overall book value as we look down the road. The one thing I just point out on book value, when we acquired Shellpoint last year, the company made $30 million, or $34 million I think the interest for 2018. This year we are at a run rate to make between – we take about $150 million in true earnings. So it's huge growth, not only in what we're doing in the business, but more importantly for shareholders and earnings.

That makes a lot of sense. And the way that I was kind of trying to look at it was from – also from a replenishment perspective, because you can also – your MSR portfolio granted this was before Ditech is probably about $6.4 billion on your balance sheet. But if you're able to originate $40 billion to $50 billion next year, you could replenish a little under 10% to kind of 12% on the high-end, which could take – take away most of the amortization internally, which would be a great stabilizing effect in the portfolio.

Well, listen, as long as the earnings work right, I mean everything is about protecting both value and providing earnings for shareholders. So yes, we're on board.

That sounds good. The only other pieces around kind of scaling up the internal subservicing, is there something that type of margin you can generate on that business because obviously you're taking that profitability and bring it in house. So there's some accretion potential there, especially as you scale up another $120 billion or so in the next five quarters?

You mean on the Shellpoint servicing side? Yes, I think, the way I look at the Shellpoint business is it's truly a third party business, Shellpoint was really treated as a special servicer. And there are two things. One is very countercyclical if you think about it, so should we get into a scenario where a recession or the consumer rolls over that business should continue to do extremely well. If we don't, the business continues to operate extremely well and very profitable. And Jack Navarro and his team are – they work with third parties in the industry, not just us.

Well, that's great. I really appreciate it. Thank you.

Thank you.

Our next question comes from Doug Harter from Crédit Suisse. Please go ahead.

Thanks. Michael, just a little bit more color on that – on your goal for 20% return Ditech. Just wondering kind of the pacing to get there ultimately achieve that target?

You broke up a little bit, but maybe I could take it in steps. One is on the MSR portfolio based on the acquisition price we acquired those, we think the levered returns will be north of 20%, as I pointed out. On the overall origination business where we have a lot of room to grow, I think that – I mean, just to get a sense, by November 15, which is in a couple of weeks, all Ditech and NewRez employees will be in the same building. So we've done a significant amount of planning prior to us getting awarded this deal working alongside the company in anticipation of hopefully winning this deal. So I think to that point, where I – I want to – I would say we're ready to roll and we are rolling now. But like anything, it takes a little bit of time to get going and we still have a lot of work to do. But going from $7 billion of origination to 22 or 23 is a significant step for the company and doubling that volume next year will be even a more significant step. As I just pointed out in the earlier comments as long as we're making money that works. If the volume – if we're doing more volume in them and you're not seeing the real return, we'll end up throttling it back, doing less volume, but more profitable volume. So we have to really kind of pay attention to that.

And then kind of operationally on the servicing side as you integrate the Ditech – I mean are you planning to sort of continue to use Black Knight on the Ditech portfolio or kind of how do you plan to – kind of roll that into the Shellpoint platform?

I would say, overall, look we don't want to have all our eggs in one basket. I think that's a safe thing to say. But the Shellpoint, New Res guys do a great job for us on the servicing side. Clearly, they've grown pretty significantly that's why we use other third parties for some of the servicing. But controlling our own life and being able to offer a homeowner a better solution is something that that we prefer to do. And that's – from a counterparty risk – not that we're concerned about counterparty risks with the loan care guys and they do a great job and we have a great relationship there. But just being able to offer our consumers products, get the ancillary business, have recapture, that's really our ultimate goal. The other thing to point out is if you buy a pool of mortgage servicing rights, it's not like – and I know you know this, but we don't flip on a switch and say, okay, 30 days later we're transferring over to Shellpoint or NewRez or take. This will go over the next six months.

Great, thank you.

Thanks, Doug.

Our next question comes from Tim Hayes from B. Riley FBR. Please go ahead.

Hey, good morning Mike. Thanks for taking my questions. First one, can you just touch on capital allocation? You highlighted the returns across your asset classes. And it sounds like you expect the pace of deployment to be pretty modest, at least in the near term. But what do you view to be the most attractive use of capital today? And where do you actually see the portfolio growing? And then how do you think about the buyback in this context with where stock is trading at a slight discount to book at a 12.7% yield?

Great question. So I think the investing environment for what we all do in fixed income in the legacy mortgage market is just not that interesting. A couple of things just to point out if you look at loan volumes, for example, this year in RPL, year-over-year since 2018 we saw a roughly $85 billion of loans sold into the marketplace; 2019, year-to-date $42 billion has been sold into the marketplace. So obviously a huge drop on an annualized basis. But I would expect that to continue as the GSEs and the banks continue to clean up their legacy RPLs and NPLs. So overall, those markets should remain extremely well built. So I think in our last earnings call, we get asked why are we investing in these loans. We’ve been able to generate very good returns, but I think, over time you're going to see the returns on that business probably go down just because there's less product and people have plenty of capital to deploy. The non-agency bond business over the course of the past few years, we bought bonds that were consistent with our call strategy. Last quarter we sold some bonds because levered yields are 5% to 6%. So if we could sell that are not quarter or call strategy, if we did sell assets that are 5% to 6% kind of levered returns, where we own them obviously significantly cheaper, redeploy that capital into something else, we'll do that. So going forward, the stock remains attractive. Depending upon where we are on a percentage to book, we will continue to be as opportunistic, I think, as we've ever been. And the most important thing I want to point out on this is that we need to protect our book value. And if we can protect book value whether we trade at a 10% dividend yield, 12% dividend yield, I don't know that there's any magic there. The one thing I would point out is that when you look at whether it be NRZ, or some of our friends and peers out in the marketplace, 175 10-year notes, dividend yields of 8% to 14% to me seems crazy. So there's really no value given to the managers out there. So we'll see where we go. But going forward, we're going to protect book value, we're going to look for opportunistic things to invest in. I can't tell you what those are right now because we looked at everything, but there's nothing that's jumping at us right now. It could be where we maintain more cash, look at stock buy backs, but there's nothing right now on the table.

Okay. Okay, I appreciate the color there. And you made it clear that protecting book value is your top priority and then you've done a very good job of that. But looking at core earnings $0.50 this quarter, covered the dividend, but the lowest quarterly number you've put up in quite some time and your outlook for capital deployment and the overall investment environment a little bit I would say meek. But just wondering how you think about core earnings and dividend coverage going forward is reflecting that environment, but given a little bit steepening in the yield curve and all the other investments you've been making?

We're going to have to grow quite frankly in our operating business. I think Doug asked about ROE on a Ditech acquisition, we're going to have to – that's really where we're going to have to grow it. I mean, think about it this way year ago, we had, the Shellpoint acquisition, roughly $30 million in earnings, this year $150 million in earnings. If we could get that on a steady run rate higher and think about some other things, I think, we'll grow our way into a higher core number. But if we don't want to do anything stupid, I mean, we've all seen this thing play out in the marketplace and I think when you listen to, for example, Jamie Dimon talking about quarterly earnings and how to manage a business to quarterly earnings, we don't want to do anything stupid in this environment because the risk returns are absolutely skewed to the downside. So growing our operating business we have a lot of people focus there that company has a little over 4,000 people. On the NRZ side and Fortress side we have 60 dedicated professionals working on risk management models and everything else. We have a big investment in the business, but again there's no free lunch, there's nothing easy out there that we think is very cheap right now. So we'll be very disciplined about capital.

That makes sense. And I guess I'll just pick on this a little bit more, but I guess my question is it sounds like you have a lot of confidence in the investments you are making in the operating platform and being able to grow earnings over time through those businesses, but are you willing to maybe see core earnings go down a little bit before they go up and kind of keep that dividend steady? I know it's a Board decision, but just wondering how you think about that?

We talk about it a lot. Could core earnings go down before they go back up? Absolutely. Because as you think about higher yielding investments burning off and to the – again going back to Doug's question about how long does it take really to ramp this stuff up, we have to monitor it. I'm not going to promise higher or lower dividends at this point. I do think no matter if our dividend was $0.50, $1, $0.10, trading at 12% or 13% dividend yields in a 1.75% 10-year rate environment is crazy.

I would agree with that. And then just last one from me, do you have the core earnings contribution from call rights this quarter?

It was $0.02 cents for the quarter.

Great. Great, well thanks again guys and congrats on a good quarter.

Thank you.

Our next question comes from Trevor Cranston from JMP Securities. Please go ahead.

Hey, thanks. Good morning. As you guys are looking for places to deploy fresh capital and you think about kind of the growth you're expecting on the origination side over the next several quarters, can you comment on whether or not you guys have explored entering into agreements with the agencies where you might be able to retain the credit risk on your loan originations and if that's something you guys might be interested in doing going forward?

Yes, I mean, I think we did volume of $5.9 billion or $5.7 billion in the quarter. As our business grows, which it has, obviously those conversations will happen and whether we do credit risk transfer bonds we're a little bit small right now. That's why we're really excited about the runway and our ability to grow versus our other peers or friends in the marketplace. So that part we are extremely excited about. I think everything is on the table, Trevor, but we're clearly in the operating business now and that's a bigger segment from where we were a few years ago. And we've done that obviously for a couple of reasons to control counterparty risk. But most importantly right now is to help figure out alternative ways to grow earnings in this difficult rate market.

Okay, got you. And then on the sales of the non-agency securities this quarter, you mentioned that they were sales of bonds that were sort of non-core to the call rights strategy. Can you say roughly how much of the remaining non-agency bond portfolio you would consider not core to the call rights that you might look at something opportunistically?

Yes, most of it is. Our bond portfolio is a little bit south of $8 billion, I think, from an overall market value it’s between $7 billion and $8 billion. Most of our stuff is core. We did it over the course of the past year and a half or so acquired some fixed rate AAA passthroughs that we thought had a good spread to where mortgages were at the time. So those are different than our call strategy, but levered mid-teens type returns. But most of the stuff we have now like think is core to our call strategy.

Got you, okay. And then just the last question, on the agency MBS you guys have on balance sheet now, can you just give any additional color around the bonds you guys are holding in terms of that that there are like low loan balance, or generic, or just any additional color on those holdings would be helpful.

They are fairly generic. They are for the most part they are Fanie 3s, 3, 3.5 and 4s. And again, we use those, we think as a hedge versus a lot of our – some of our newer production MSRs that we've been paying up points for low loan balance.

Okay, great. Appreciate the comments. Thank you.

Our next question comes from Matthew Howlett from Nomura. Please go ahead.

Good morning. Thanks for taking my question. Hey Mike how are you doing? Just looking at this Slide 9 on the $200 billion of UPB targeted, that's an ambitious target. What are you seeing on the servicing acquisition front? Does that contemplate some big acquisitions sort of like the Ditech size, or is it just – you just got to win more the flow type product given maybe there is a lower bid out there now for the MSRs?

Yes really it's the Ditech acquisition and it's really our own production as we go forward. We have not – we agree to a couple of these larger MSR acquisitions with prepaid protection in Q2 that's funded in Q3. But overall, I think, this is more geared to our own – our own production pipelines.

That's just more internally.

Yes, exactly. To that, I mean, if you lower, absolutely. With Ditech, I think, and the transfer right now we are at about $250 million.

Okay.

It's not all going to be boarded this year, but – and then we couple with next year's production we think we'll get, but I think the point to make to everybody is we don't need to be the biggest, that's not the goal here, it's to be the most to be as profitable as we possibly can. So that number is 200, or 300, or whatever the number is. And as long as we're providing proper service to the homeowner, that's really the goal.

Got it. And then that's my next question. On the recapture, where do you – I mean, what's the target? Where do you like to get up to? How we'll Ditech help you with the recapture going forward? Actually, we look at that and think about that.

So I wouldn't say right now recapture rates are lower than we'd like. We're spending a lot of time whether it be on data analytics, models and most importantly, or not most importantly, but importantly the amount of personnel we have focused on that part of the business. So when you ask about Ditech, we pick up a significant amount of what I would call very good quality folks who've been in the mortgage business for many years. So that part is going to help us on recapture. Overall recapture rates if you go back a few years back, we were in probably the mid-30s depending upon the product side. Now your refi stuff is kind of okay, but the overall numbers are in the lower 20s. So we got a lot of room to go. And part of this whole thing on our operating business is great to tell you that we've made a lot of money this year in our operating business. Fabulous, it's great for shareholders. But what's really important, I think, for us is to go forward around increasing, recapture, growing origination and driving more profitability through our business.

Got it. And on that do you expect sort of CPRS on the – I know you break it out in the Q, but will they be higher in 4Q like some of the banks are saying? And then would you expect them to come down and subside in 2020 just how do you think about just the overall refi outlook?

Yes, we think speeds are a little higher now as we go forward for the next few months and then we expect at some point to see them level off. And that's kind of consistent with how we look at our overall book, although it's a little bit different than the broader market.

Got it. And then last question Mike you mentioned with the dividend yield at 12%, you sort of pointed out and I noticed you did the two preferred at just under 7%. The last one came in lower. So when you look at capital is that more of a realistic or just in the clearly cheaper source to target more just preferred equity now given where your common dividend yield is?

Yes, I mean we don't have a need for capital, but it's a very valid point. I mean, if you could issue – I mean, the problem with the retail preferred market is it's a little bit – it's much smaller than, common.

Right.

With something significantly large that we needed to do, we'd explore – obviously we explore all options. The Ditech thing was a $1.2 billion, we didn't raise equity and we’re still dealing with a bunch of cash and liquidity on our balance sheet. So our planning around liquidity and I think Trevor or Tim asked a question about our bond portfolios. We have a lot of liquidity on our – we have a $40 billion portfolio if you can't generate liquidity from that you have to take a step back and think twice. So we have three lines today. If we need to raise a bunch of money, we could do that off our balance sheet.

Got it. Thanks. That’s helpful. Thanks Mike.

Thanks Matt.

Our next question comes from Henry Coffey from Wedbush. Please go ahead.

Good morning everyone. And thanks for taking my questions. Great quarter.

Good morning.

And you guys spent an enormous amount of time with me this quarter helping me really get to understand the business. So I wanted to thank everyone on your IR team for that. Just number one, I'll start with the tough question. As you look at book value in dividend, you're earning your dividend on a GAAP basis, you've got good access to capital. You've got a well hedge portfolio. How do you balance dividend versus book value? I mean, is there a point where you have to reduce the dividend to grow the book value or do you sort of look at those two and say, look, I need to defend both.

I would say we're all warriors. We will try to defend both as much as we possibly can. But, as I pointed out in some of our earlier remarks, we don't want to do anything stupid. So I can't tell you whether the dividend is going up, not going up, but I can't tell you whether it's going down. We got to see how the quarter plays out and what we're doing in the operating business. And the markets move so much, right, when you think about rate, 10-year treasury bounces between 2% and 1.40%, right. And this could happen in a matter of a couple days. So we really just don't know until we get closer to the end of the quarter where we're going to end up falling out on this. But during that quarter we have to make sure that we protect our book value.

And then just a kind of a technical question, 140 – $154.8 million in investment gains, how does that breakout in terms of sale of non-agency, call right gains, sale of agency, trading, just in general terms.

Approximately a $100 million of that came from sale of both non-agency and agency securities. And the remaining was primarily sale of the RPLs.

And then – okay. And then in terms of looking at your operating business is the focus going to be on building out a mortgage originator? Is it an opportunity to acquire a non-QM and related assets that you can then hold on balance sheet and fund was securitizations? Is there a focus on having to integrate and cut costs? What's the overall strategy in terms of how this thing creates – the operating business as a lump creates value for NRZ.

I think it's going to – well, I mean forget about the financial aspects of it, having a better recaptured business if you go from 20% to 30%, or 20% to 35% that's going to help our overall results in our MSR portfolio. I think the growth in our operating business and creating something that just to give everybody the math I mean we paid roughly $200 million for Shellpoint. There'll be some earn out from management. So let's say you get to a book value of about $250 million. When you look at a company that's generating roughly $150 million of EBITDA that value, the $250 million it's probably worth 3x that. And if you think about that on our balance sheet from a book value standpoint, 415 million shares outstanding, you're understated by a fair amount. So all of a sudden your book value is really at least a $1 higher. So there's a lot of, what I would call, opportunity around some of the things that we're doing there. We're not looking to be the biggest and mortgage origination business. If we could do something that's key to our business that works for shareholders, we're going to continue to do it. But all this stuff is we're not all over the place. That's something I want to point out as well. We're not in – we’re not running around just to deploy capital or to deploy capital. Strategically, the Shellpoint acquisition has been a good one. Reducing counterparty risk and making a lot of money for shareholders sounds like a good thing.

Great, thank you. And congratulations on a great quarter.

Thanks Henry.

Our next question comes from the line of Kevin Barker from Piper Jaffray. Please go ahead.

On Bose’s question regarding the Ditech MSR. And you mentioned that you got them for less than two times servicing fee. Now I understand Ditech it's a smaller balance stuff, so it has lower revenue. When you think about the profitability on that MSR where do you think the MSR should be valued just given the lower revenue you would expect just given the lower balances on the UPB?

They'll probably be up in value about $30 million, $40 million approximately just from the value perspective.

On the overall portfolio roughly what?

On the – by the time we settle, I guess it's a little under $60 billion. And we keep in mind like when you look at the breakout there's $5 billion of PLS, which is mostly MH servicing, there's $21 billion of Ginnie Mae's and there's $34 billion of conventional. So it's mixed. Obviously, the Fannie multiples are higher than the Ginnie, and the Ginnie is higher than the PLS.

Okay. And then regard to the MSR this quarter held up really well compared to what we've seen across the market. Was there anything specific adjustments that you saw or better performance within your MSR compared to what we saw from most of the industry this quarter?

Yes, I mean, here is what I tell you, I mean, if we look back, and we did a bunch of regression analysis going to lower rates, how many of these folks have seen 140 10-year rate. And 75% of our portfolio is in that bucket. On the new production MSRs acquired from third parties and I pointed out we funded $45 million in the quarter. All of those have prepayment protection. Our CPRS are 3.2% slower than the industry. Our net prepayments were 77% of the industry or 4.5 slower in net-net. So overall when this company was started, the credit impaired nature of the MSRs that were acquired was consistent with a thesis that we thought in all kinds of rate scenarios that Seattle would perform extremely well and we're seeing that now. But it's not like we haven't marked down our above $425 million since the end of last year is fair amount of money,

Were there any specific drivers this quarter that held up, was it the discount rate with rates lower or…

Discount rate is a little bit lower. I mean, quite frankly, do I think they should be lower? The answer is yes. But it's all these other things, right. Again, 75% of our portfolio has seen this level of rates and they're older than three years. We have lower gross pre-payments, lower net prepayments. We did increase some of our speeds on some of our stuff as we look forward for the next – for the near term and then we'll see what happens there. From a refinancing perspective, again, only 24% of it is eligible for refinance today. And then the new production stuff again it all has prepayment protection.

Okay. And then with the MSR portfolio growing to – or the servicing portfolio growing greater than $600 billion here on a pro forma basis a lot of it going more towards the agency or Ginnie's, how much of that do you think is re-financeable just given where it sits on different servicing platforms? And given the Ditech origination platform and the – and the new rise platform, how much do you think you can actually target to be refinanceable?

Again it's right now based on current industry standards, right. Underwriting from Fannie, and Freddie and some of the stuff we're doing in non-QM and we estimate it to be about 24%, 25%. Where we go and what kind of GSC reform we see going forward could open the door a little bit more if you see more PLS. But I would think – another point Kevin is that when you look at our portfolio, we have a large amount of PLS. And the PLS stuff was originated back from anywhere from 2003 to kind of 2008 and a lot of these loans are just stuck in these pipelines in these – and a lot of these borrowers or delinquent at times. But there's a $125 billion out of our total servicing portfolio that's PLS. That’s a significant amount. Now if we could clean up the legacy PLS market, which we've been trying to do and we'll continue to try to do, $125 billion could see some faster prepays. But that would help our call business as well. So there’s an offset there.

So you're saying there's some alternative products that you can offer to those types of borrowers?

Yes, we just don't know. I mean, we're not stretching the boundary on any of our origination stuff. We've seen that play out over the years, obviously. So even on our non-QM product, we do a significant amount, more of the answer's yes. But we're extremely cautious around this stuff. We want to offer products to people that they were able to afford and pay with the right credit boundaries. But depending on what happens with GSE reform that may change things. But right now we're steady as she goes.

Okay. And then with your origination business, you're starting to grow, gain on sale quite a bit. Does that start to impact your taxes or some of the re-eligibility? And at what point would you start to have to maybe restructure some of the revenue or where it's coming from in order to keep the REIT eligibility?

Right now we have plenty of runway to continue to stay at REIT. Obviously if our origination business continued to grow – or servicing business from our standpoint, continue to outpace our investment portfolio, with a 20% corporate tax rate maybe you rethink that. And we're always looking at different things. But I think for now we're going to continue down the path and maintain our REIT status.

Okay. Thank you for taking my questions.

Thanks, Kevin.

Our next question comes from Stephen Laws from Raymond James. Please go ahead.

Hi, good morning.

Good morning Stephen

You hit on this a little bit in your response to Henry's question Mike, but really want to touch it on the ancillary services opportunity. How integrated is that? A lot of it is new. How should we track whatever the right metric is, whether it's penetration or number of services? And just as importantly, a lot of that's done through partnerships, which doesn't go through your income statement. So how do we think about the value your creating in some of these minority investments that maybe aren't reflected in book value as those businesses grow?

Three questions, so the likelihood is we're going to continue to try to grow with our friends at Covius. And it's going to – they are going to run the company, it'll be a third party business. We won't see any earnings from that. But the goal there would be to create a real services company that trades at 15 times EBITDA or you pick some kind of large multiple, because if you keep that internal in our own mortgage company we’ll never realize for shareholders the true value of what that revenue stream could be. So for example, right now we own 25% of Covius with the ability to grow that to 70%, little under 70%. If there's a way to create a vehicle with other industry folks where people that own it as well, quite frankly, I think that's really the opportunity to create more book value for shareholders. So with that, for example, if we own 25% and earnings go to $100 million a year and it trades at 15 times and that's a $1.5, well where our shareholders are going to be the winner there. So that's roughly another $1 a share give or take. If you look at our Shellpoint acquisition, as I pointed out earlier, I think, there's another $1, at least a $1 of implied book value gain there. So the couple of things there plus what our stated book value, not counting any given any credit for our call rights, I think, our book value significantly understated.

That's really appreciated.

You’ll see the results in distributions or book value creation. Distribution start rolling some book value creating now.

Appreciate the comments on that Mike. And then kind of looking at the $40 billion origination target, or stated projection for next year, the mortgage rates haven't dropped as quickly as interest rates. We're seeing some widening there. What mortgage rate assumption have you used for next year to get to that $40 billion and kind of is there a rate we should watch on the high end or low end that would make that $40 billion significantly more or significantly less? Are there any inflection points maybe on the high end where that volume all the refi cuts off or if mortgage rates keep dropping we see on a level where all of a sudden a significant amount of origination opportunity turns on from the refi? Kind of love to get you to frame kind of your thoughts on mortgage rates as we look out for say the next 12 months.

I don't know what the magical rate is. I think it's really our ability and desire to capture some share of the market that we currently don't have. So if you stayed in this rate environment, which is very possible, we could stay in this 175 10-year notes through the rest of the year I just don't know, right, because the markets are so volatile based on the geopolitical stuff that's going on. I think that it's really just capturing more market share. So rates can move up a little bit, they can go down a little bit. I think we have just a large amount of growth initiative and runaway to go. Keep in mind again, last year, $7 billion of origination this year, $22 billion or $23 billion yes rates have dropped a ton, right. Last November 10-year rate was about 330, now we take 175. But I think if we withstand this benign rate environment, we could actually capture more market share from others. That's really what we are focused on.

Right. And one last question kind of a bigger picture and you touched on – you mentioned GSE reforming in your response to Kevin. But are there couple of issues that you think that significant positives coming out of GSE reform, whether it's redefining QM or the QM patch expiration. And then at the same time are there one or two GSE reform discussions taking place or anything that you think might pose a headwind to the business? I know that's a bigger – hard to predict that of Washington, but any comments around the topics you're watching closely in GSE reform?

Listen, everybody keeps talking about the patch. For years everybody was talking about non-QM and not to belittle non-QM. But if you’re doing $300 million or $400 million a quarter that's great, but there needs to be other alternatives for homeowners they said that they can't get an agency mortgage. So when and if the patch comes off that'll create an opportunity for private capital. Should the GSCs go on their own, I think, that'll create opportunities for private capital. So I think there's a lot of good stuff that will come. I don't know when it's going to come. Obviously you're getting into an election year next year and I don't think anything happens between now and then other than maybe the patch. But there's a lot of good stuff that could come out of this, which is kind of how they need, require a need for large amounts of private capital. And I think we're perfectly situated to take advantage of that.

Right. I appreciate the comments, Mike. Have a great day.

Thank you. Have a good weekend.

Thanks.

Our next question comes from Doug Harter from Credit Suisse. Please go ahead.

Thanks. So just following-up on the earlier question about, REIT status, I guess, how do you and the Board think about what the right payout ratio is now that more of the profitability is coming from operating businesses versus kind of the investment portfolio.

I think we'll can continue to pay out what we're currently doing on a percentage basis. I don't think there has been any shift. And I don't think we will have any shift at this point. So obviously we always want to maximize our capital structure for our shareholders and earnings and dividends. But for now Doug, there will be no shift.

Great. Thank you, Michael.

Thank you.

We have no further questions in queue at this time. I'll turn the call back to Michael for closing remarks.

Well, that was a long one. Thanks for everybody's questions and look forward to updating everybody with our Q4 results. Have a great weekend and have a great holiday season. And thanks for all your support.

Thanks you.

Ladies and gentlemen this concludes today’s conference call. Thank you for participating, you may now disconnect.