Onity Group Inc. Q4 FY2025 earnings call

• Balanced business model effective: Originations and servicing acted as primary earnings drivers in different interest rate environments. • Growth actions: Origination segment had 44% year-over-year volume growth, B2B and Consumer Direct volumes strong. Launched new products/services. • Technology investment: Invested in AI across robotics, NLP, vision, ML to enhance refinance recapture performance. • Subservicing: Second half subservicing additions $33B, projected $28B in 2026. Boarding 8 new clients in 2026 with 8 agreements under negotiation. • Servicing platform: Strong platform servicing 1.4M loans for over 3,000 investors, recognized for industry-leading performance. • Industry outlook: Macro environment favorable for housing, but FHA rule changes, government shutdowns, competition, and housing supply issues as headwinds.

Origination: Fourth quarter adjusted pretax income was significantly higher year-over-year and sequentially, driven by record origination volume in Direct and B2B channels, including Ginnie Mae and new product volume. Servicing: Profitable but impacted by higher-than-expected MSR runoff expense due to FHA loan modification changes and government shutdown. UPB and revenue improved in the fourth quarter, but higher runoff offset this. Origination contributed to revenue growth with 44% year-over-year volume growth vs industry 18%, while servicing had specific headwinds but maintained profitability with certain adjustments.

• Adjusted ROE for 2026 targeted at 13% to 15%. • Expected 5% to 15% increase in servicing book UPB growth. • Effective tax rate projected to be 28% to 30%. • Combined impact of Rithm-related restructuring and Finance of America transactions expected to be $19M to $20M. • MSR hedge strategy to maintain high effectiveness to protect MSR value.

• FHA modification rule changes continuing to adversely impact delinquencies and MSR runoff, with normalization expected but still elevated near term. • Increased willingness to tolerate government shutdowns over budget disputes. • Increased competition in forward residential subservicing. • Evolving K-shaped economy may lead to increased delinquencies and defaults in certain portfolio segments. • Housing supply constraints limiting purchase origination volume.

Q: Hey, everyone. Good morning. Just on the FHA impact on the MSR that you noted. So it is $14,000,000 in the fourth quarter. You noted there will be some impact in the first quarter and the second quarter. Can you help quantify that as well?

A: Bose, good morning, and thanks for your question. Look, you know, we certainly have quantified the impact for the fourth quarter because we go through a very intense analysis looking at every attribute of the MSR portfolio to see what impacted runoff, whether it is scheduled payments, unscheduled payments, escrow balances, delinquencies. Hard to predict right now on a go-forward basis how customers are going to perform throughout the course of the year. We have done a fair amount of modeling to support our estimation that we would expect this to stabilize by the second quarter. We think that is enough time for it to set a new norm, so to speak. And once your delinquency is at a new norm level, if you think about it, even if it is higher than it was previously—I will just pick some numbers. If it was 8% in one quarter and went up to 10%, that is a 200 basis point increase. That is an adverse impact to MSR valuation, and that is similar to what we saw in the fourth quarter. If it stays at 10% versus 10%, there is really nothing that flows through the MSR runoff line for delinquency because there was no incremental delinquency and no incremental change. So, right now, we are monitoring it closely. We are keeping an eye on how consumers are behaving. But with some of the new rule changes, and in particular, Bose, this requirement for consumers who are seeking a modification to do an attestation to say that they have the financial resources to complete the modification and go through, it is consumer behavior. It is hard to predict. We are keeping an eye on it to see how consumers are reacting to that. So, yeah, we would love to be able to give you a number. It is X in that quarter, Y in that quarter, but right now, it is just a little difficult to see.

Q: Okay. Yeah. That makes a lot of sense. And then just on the origination side, with the government shutdown, was there an impact in terms of making it harder to recapture some of those FHA loans as well, or was the origination cycle alright even during the shutdown?

A: You know, interestingly enough, from a refi perspective, we did not see a material impact as a result of the government shutdown. I mean, it was just a tremendous quarter for us, a record-setting quarter from a refinance perspective. And, with lower rates as we can see from the MBA refi application index, continuing to chug along quite nicely. So, the refi expectations for the industry, at least coming out of the gate, seem to be reasonable and appropriate. So did not see any impact there. Excited about how our recapture platform is performing, and looking forward to working with our team to maximize performance of our recapture platform.

Q: Okay. Great. Actually, just one more for me. The 13% to 15% guidance number, is that a post-tax number? So is that after that 28% to 30%?

A: No. Adjusted ROE is always on a pretax basis, Bose. It is a pretax income look. Yeah. It is pretax. Again, it does take into consideration the $120,000,000 increase to the equity base for our earnings for 2025, which is net-net a good thing. But we are conscious of making sure we can generate competitive return on equity on both a pretax and after-tax basis, and we will be mindful of our return on investment hurdles over the course of 2026 to make sure that we can deliver competitive returns.

Q: Hi. This is Brendan on for Eric. Do you think that there is an ideal interest rate environment for the subservicing business? And are there any catalysts you see to add a lot of scale in the subservicing business in the near term, or is that really a long-term growth opportunity?

A: Good morning, Brendan. Thanks for your question. Look, we have seen steady opportunity in subservicing. Quite frankly, it is not necessarily a function of interest rates, although in particular for the independent mortgage bankers, the privately owned independent mortgage bankers, when people are going through a refinancing wave, there is a tendency for privately owned independent mortgage bankers to hold more MSRs on their balance sheet for tax planning and tax management strategy. And because originations, retail originations in particular, tend to be cash flow positive during refinancing cycles, it provides more cash for the privately owned independent mortgage bankers to hold MSRs on their balance sheet. So during the last two years, we have seen a cycle where, I will use the term IMBs, independent mortgage bankers, IMBs were selling MSRs to harvest cash because origination margins were really quite thin. You know, I think it is an opportunity now with rates coming down for them to reload their portfolio. And we would expect to see growth there. Over the past couple of years, the big catalyst for subservicing has been, quite frankly, the amount of subservicing platforms that have changed hands. There were probably five platforms in the last two to two and a half years that have changed hands. And anytime you have that kind of disruption in the marketplace, it creates opportunities. It is an opportunity for subservicing clients to rethink and explore their options and alternatives. More recently, just yesterday, we saw the announcement of PennyMac’s acquisition of Cenlar. First off, my congratulations to David Spector and Jim Daras. I have a lot of respect for both those people. It looks like it was a good transaction for them. But, look, I would expect, as we have seen previously, it will create an opportunity for clients to rethink: What do I want to do? Do I want to stay here? Do I want to go? Whatever. It does create more people coming into the market to consider their alternatives. We love that. Quite frankly, as you have seen, we have grown our subservicing business quite nicely this year, $48,000,000,000 total subservicing additions this year. We have got another $28,000,000,000 in the hopper that we expect to board in the first half. Eight new clients signed up that are going to be boarding in the first half. Eight new contracts under negotiation. Love the momentum we have there. I think the subservicing business has always been fiercely competitive. Cenlar has been a competitor in the marketplace for years. And they are formidable, expecting to continue to be a formidable competitor. But I think this creates net-net opportunity to grow. Bottom line.

Q: And how much capital do you think will become available once the Rithm portfolio is fully transferred?

A: In terms of capital availability with the transfer of the Rithm portfolio, subservicing generally does not free up capital because we do not have an investment in that portfolio. So that in and of itself will not free up capital. Closing the sale of the reverse mortgage business, the MSRs, to Finance of America Reverse, we expect that will free up roughly $100,000,000 of capital, and convert that all to subservicing. And we are just tremendously excited to be partnering with Brian Libman and his team over at Finance of America.