Onity Group Inc. Q1 FY2026 earnings call

• Delivered double-digit year-over-year growth in adjusted revenue, origination volume, subservicing additions, and total servicing UPV. • Balanced business performed well in face of record prepayments but was impacted by heightened interest rate and financial market volatility, higher than expected refinancing activity, and increased FHA late-stage delinquencies. • Taking decisive actions to address these items, including revising proposed strategic partnership with Finance of America Reverse and resubmitting it for approval. • Originations team doubled volume year over year versus 44% growth to overall industry, with Consumer Direct volume growth of four times versus prior year due to declining rates increasing consumer refinancing demand. • Subservicing additions up 94% versus prior year, with new relationships and existing clients, and on track to achieve first half and full year targets. • Integrating AI into every stage of the borrower journey across business, with investment focus on lead generation, lead conversion, and platform scalability, seeing positive impacts like increased leads on payoffs resulting in new loans and improved lead to lock conversion

Origination's adjusted pre-tax income was significantly higher year-over-year by $24 million. Servicing adjusted PTI declined by $54 million year-over-year, predominantly driven by high MSR runoff and partially offset by growth in float volumes and other positive operational improvements. Servicing revenues were up 12% year over year but down slightly from last quarter due to lower float revenue from a seasonal dip. Servicing-owned UPB grew about 18% year-over-year and total UPB grew about 10% year-over-year. First quarter servicing segment experienced adjusted pre-tax loss, primarily driven by MSR runoff and seasonal float income declines. Origination volume saw double-digit year-over-year growth, with Consumer Direct increasing origination volume by nearly four times over the first quarter of last year. Subservicing additions were up 94% versus prior year, with first quarter subservicing additions driven by new relationships and existing clients, and on track to achieve first half subservicing additions target of $28 billion and over $50 billion for full year. Total servicing UPB ended the quarter up 11% year-over-year versus total industry servicing growth of 3%

• Revised full year 2026 adjusted ROE guidance to 10 to 15% to accommodate ongoing and potential future interest rate volatility. • Other areas of guidance unchanged, including continuing to grow total servicing book to $338 billion or up 11% on the year, improving operating efficiency, and continuing strong hedging performance

• Heightened interest rate and financial market volatility, higher than expected refinancing activity, and increased FHA late-stage delinquencies driven by recent changes to FHA loan modification rules could impact results. • Market and spread volatility can naturally affect origination pipeline hedging and loan sales performance, leading to variation in pre-tax income. • The transaction with Finance of America Reverse is still subject to GDMA approval and is currently under review, with uncertainties related to its approval

Q: Hey, everyone. Good morning. Actually, first on the MSR runoff, I think last quarter you noted that the higher FHA, you know, delinquency issue was 14 million impact. You know, what was that number this quarter? And just trying to figure out how big a piece of it, of that 17 million increase in MSR civilizations came from the FHA.

A: We sized that at approximately $4 to $6 million, you know, in the first quarter. And as we noted last quarter, we did expect that there would be some carryover effect into the first quarter. Again, $4 to $6 million. But again, we're expecting delinquencies to normalize by the end of the second quarter based on some of the things that Sean talked about in terms of seeing modifications begin and resolutions begin to flow again.

Q: And so the rest of the increase in the realized cash flows was was from actual increase in prepayments that you saw quarter over quarter?

A: That's correct, Boz.

Q: And then, in terms of, is there a P&L impact as well from the higher FHA delinquencies? So as, you know, next quarter if delinquencies stabilize at these levels, I assume then the marks are, you know, decline or go away. But is there a P&L impact we should think about if delinquencies remain, you know, somewhat elevated because of this issue?

A: Yeah, if delinquencies, let's say, don't change, so if they just stay flat, Sean, correct me, but I think that would produce zero impact from a runoff perspective. If delinquencies actually improve, that would be a favorable impact to runoff or a reduction of runoff. So as delinquencies move around, again, if they go up vis-a-vis end of the first quarter, it could be increased runoff if they get better. it could be less runoff.

Q: And then just one on the pipeline hedging. You noted the volatility there. Does that just flow through the gain on sale so that shows up as a slightly lower margin?

A: That's correct, Bo. That would show up through gain on sale. And again, I think as you know, when you have a lot of market volatility, unfortunately, it does increase hedge costs and reduce hedge effectiveness as a result of pull-throughs. in your pipeline, your actual pull-through deviating from your estimates, and that all boils down into a gain on sale impact.

Q: Thanks a lot.

A: Thanks, Moses.

Q: Thanks, and good morning. As you think about the updated guidance, how much of that is just reflecting the fact that the first quarter sort of came in below that range versus, you know, what, you know, as we think about kind of what the expected range for kind of quarters two through four would be?

A: Hey, Doug, it's Sean. Good morning. The range of expected guidance incorporates both the reduced adjusted ROE we're seeing this quarter as well as anticipating high rate volatility and essentially elevated rates for a longer period of time. And so it's a combination of both.

Q: Great. Appreciate that. And then as You look at slide six with the opportunities that you lay out, what would be the timeframe that you would expect really for the first three, obviously the fourth one's more challenging, but how do you think about the opportunity or the timeline to achieving those first three items on slide six?

A: Doug, on the first one for the origination pipeline and loan sales effectiveness, again, that could vary from quarter to quarter, right? So that is relative volatility. We have seen that move in both directions over time. Case in point would be the second quarter of last year when Liberation Day and the tariffs were announced, right? There was an adverse impact on the quarter, and it reversed out the next quarter. So timing is going to be market volatility dependent. On the origination scalability, you know, that takes, you know, obviously, that is going to be dependent upon the level of refinancing activity and a refinancing surge. So that is somewhat market dependent, but the incremental staffing and the incremental investment, you know, we'll start to see improvements of that, you know, to Q3, Q4, right? So that will take into effect through the balance of the year, and the magnitude is going to be a function of What is the surge in refinancing volume? Since that's basically what we're quantifying here was the lost refinancing opportunity. On the FHA modification changes, we expect delinquencies to normalize by the end of the second quarter. So assuming that they do normalize, we'll see most of this kind of bleed through in the second and third quarter.

Q: Great. Appreciate that. Thank you.

A: Yes, sir