Onity Group Q2 2026 Earnings Call Transcript

Onity Group (NYSE: ONIT ) held its second-quarter earnings conference call on Thursday. Below is the complete transcript from the call. This content is powered APIs. For comprehensive financial data and transcripts, visit Access the full call at Summary Full Transcript OPERATOR Hello and welcome everyone joining today's Onity Group's second quarter earnings and business update conference call.

At this time all participants are in a listen-only mode. Later, you will have the opportunity to ask questions during the question-and-answer session. To register to ask a question at any time, please press star one on your telephone keypad. Please note this call is being recorded.

We are standing by if you should need any assistance. It is now my pleasure to turn the meeting over to Valerie Hartel, Vice President, Investor Relations. Please go ahead. Valerie Hartel, Vice President, Investor Relations Good morning and welcome to Onity Group's second quarter 2026 earnings call.

Please note that our earnings release and presentation are available on our website and speaking on the call will be Chair, President and Chief Executive Officer Glenn Messina and Chief Financial Officer Sean O'Neil. As a reminder, our comments today may contain forward-looking statements made pursuant to the safe harbor provisions of the federal securities laws. These statements, which speak only as of the date they are made, may be identified by reference to a future period or by use of forward-looking terminology and address matters involving assumptions or risks and uncertainties, including those described in our SEC filings.

In addition, the presentation and our comments contain references to non-GAAP financial measures such as adjusted pre-tax income. We believe these non-GAAP measures provide a useful supplement to discussions and analysis of our financial condition because they are measures that management uses to assess the performance of our operations and allocate resources. Non-GAAP measures should be viewed in addition to and not as an alternative for the company's reported GAAP results.

A reconciliation of these non-GAAP measures to the most directly comparable GAAP measures and management's reasons for including them may be found in the press release and the appendix to the investor presentation. We made changes to our non-GAAP methodology this quarter and encourage you to review the presentation's note regarding non-GAAP financial measures. Now I will turn the call over to Glenn Messina. Glenn Messina, Chairman and CEO Thanks, Valerie.

Good morning and thank you for joining our call. We're looking forward to sharing our results for the second quarter as well as reviewing our strategy and financial objectives to deliver long-term value for our shareholders. Let's get started on Slide 3. In the second quarter, our sound strategy and strong operating fundamentals delivered double-digit year-over-year revenue growth and record origination volume.

Our balanced business performed well, with rising interest rates driving increased adjusted pre-tax income in servicing, offsetting declining adjusted pre-tax income in origination. We're excited to report we've completed the reverse asset sale to Finance of America, as well as transferred most of the legacy subservicing back to Rithm. We believe these transactions simplify the business, improve profitability and focus, and increase strategic flexibility. The second quarter net loss includes roughly $33 million of pre-tax costs related to these transactions, as well as market-driven unfavorable asset fair value adjustments.

Finally, considering persistent geopolitical instability, inflation, and market volatility, we expect our full-year 2026 adjusted ROE to be at the low end of our guidance range. Let's turn to Slide 4 to review a few key financial highlights. We again delivered double-digit year-over-year revenue and servicing UPB growth, as well as record origination volume with improved revenue margins versus last quarter. 8 times versus prior year, driven by our strong originations and subservicing additions, which exceeded our first-half expectations.

Consumer Direct continued to perform well, delivering funded volume up about three times over last year with improved refinance recapture rates. Our net loss includes $9 million of pre-tax costs related to the reverse asset sale and legacy subservicing transfer, as well as $24 million of pre-tax asset fair value change, of which about half is related to reverse. John will provide more details on these costs later in the presentation. Origination adjusted pre-tax income increased over three times versus last year, reflecting lower interest rates driving higher industry volume levels as well as improved execution.

Servicing adjusted pre-tax income decreased over 60% versus last year, as lower interest rates drove an increase in MSR runoff of almost 80% versus prior-year levels. Our presentation of adjusted pre-tax income now reflects MSR runoff based on actual servicing UPB runoff, and all changes due to rates, inputs, and assumptions are classified as notables. We believe this approach is consistent with certain of our peers and addresses feedback from investors. Let's turn to Slide 5 to discuss the actions we're taking that we believe will improve long-term ROE performance.

We are taking focused and deliberate actions to improve ROE long term that we organize into three categories: servicing scale, portfolio optimization, and technology-driven productivity. Regarding scale, every $50 billion in servicing can reduce fixed cost per loan by 13%. We continue to target a roughly 50/50 mix of owned servicing and subservicing to grow our portfolio on a capital-efficient basis as well as balance EPS growth and ROE. Our organic growth strategy, focused on delivering positive outcomes for customers, has driven steady servicing portfolio growth.

Next is optimizing our owned servicing and subservicing portfolios. We've reduced our investment in reverse MSRs because yields are 2 percentage points lower than forward, are not easily leveraged, and have a higher relative volatility. We are leveraging machine learning using client, asset, and consumer data to identify what we believe are the most profitable MSRs to focus our origination activities and improve returns in subservicing. We've largely exited the Rithm subservicing and are growing in commercial and reverse, which is more profitable and requires specialized skills and systems, which we have.

Finally, technology-driven productivity has been a foundational element of our strategy embedded in our business culture. We've significantly reduced expenses since the acquisition of PHH while delivering servicing portfolio growth and building a top-10 non-bank originations platform from scratch. Robotic process automation, intelligent document processing, and natural language processing have reduced manual effort as well as transformed document management and customer engagement. Future investments are focused on driving additional productivity, improving recapture, and enhancing the customer experience.

Let's turn to Slide 6 to review what I believe differentiates Onity Group from our peers. We've built a strong foundation and a growing customer-focused business by consistently delivering positive and differentiated outcomes for our customers. We're a top-10 non-bank originator, servicer, and subservicer with a balanced and resilient business built to perform through business cycles. Our award-winning, technology-enabled platform has been recognized as a top-tier servicer by Fannie Mae, Freddie Mac, and HUD for five consecutive years.

Our platform delivers superior operating outcomes for our customers which, when combined with our enterprise sales model, expansive product suite, and diverse capabilities, fuels meaningful portfolio growth. We've built a strong foundation by shedding unprofitable assets and relationships, investing in talent and technology, and building trust with clients by delivering a positive experience and targeted solutions that create measurable value. We're now growing from a position of strength with a more focused and simplified business with increased strategic flexibility. Let's turn to Slide 7 to review our balanced business model.

While there may be variability in any given quarter due to evolving market dynamics, our balanced business continues to demonstrate long-term resiliency to changes in interest rates. The complementary profitability dynamics of origination and servicing balance each other as interest rates have declined in the twelve months ended the second quarter of 2026 versus the twelve months ended second quarter of 2025, and with interest rates increasing in the second quarter, servicing adjusted pre-tax income has improved, offsetting declining origination income.

We continuously optimize operations, capacity and scalability, as well as our MSR investment profile, to enable our balanced business model to operate as intended through interest-rate cycles. Let's turn to Slide 8 for more about our growth focus and actions. Our enterprise sales approach and focus on delivering value for clients is producing terrific results. In the second quarter, our originations grew 64% versus prior year, outpacing industry volume growth and achieving record levels.

Since we built our platform, we've improved our refinance recapture rate to 51% in the second quarter, up 3 percentage points versus the prior year, with a roughly 3 times increase in refinance payout volume. Our recapture performance has continued to exceed the ICE industry average for the last 12 months, and we believe we're delivering top-tier recapture performance versus our third-party origination-centric peers. With mortgage interest rates increasing, we've seen a doubling of home equity product volume versus the second quarter of last year.

We believe this is a valuable product for consumers and one that helps us manage operating capacity and improve customer retention. As a reminder, we do not include home equity volume in our refinance recapture rates. Our originations team is performing very well, and we're continuing to invest in technology and process optimization to enhance the customer experience, reduce costs, and improve scalability and competitiveness. Let's turn to Slide 9 to see what we're working on.

We're embedding AI, analytics, and automation across our lending platform to improve our recapture rate by increasing capacity and improving human performance. We are using voice agents to support customer communication across several aspects of the lending and servicing process. Voice agents create historically unparalleled capacity to engage borrowers seeking to refinance or access their home equity and generate actionable leads for our sales team. This is driving improved connectivity with customers and increasing engagement, which in turn drives increased locks and fundings.

AI call monitoring analytics provide insights to optimize marketing, improve opportunity identification, fine-tune value propositions, and improve sales performance. Real-time Magentic AI integration through our partnership with Blend is aimed at optimizing customer and employee workflows and providing a faster, more guided experience. Technology allows us to turn interactions, VAR signals, and workflow events into intelligence that drives superior recapture performance and customer experience. It's clear that our investments are delivering tangible results, and we remain excited about the future potential of our investment pipeline.

Let's turn to Slide 10 to discuss subservicing. The disruption created by industry consolidation among subservicers continues to create opportunities. We are winning new clients with strong platform performance and a compelling value proposition. First-half subservicing additions of $35 billion exceeded our guidance with key wins with capital partners, banks, and independent mortgage banks, and we continue to have an active opportunity pipeline across all three segments.

We're excited about the growth we're seeing in business purpose residential and commercial subservicing. Driven by our expanded product offerings, UPB is up 25% versus prior year, and we were named the servicer on our first single-family rental securitization for a top-tier client. In that space we continue to invest in technology to improve transparency, increase turn times, and client self-service functionality. Our efforts are yielding results, as evidenced by our client net promoter score of 70 in the first half of 2026, a level rivaling some of the best service organizations.

Let's turn to Slide 11 to talk about how we've grown our servicing portfolio. Total servicing UPB ended the quarter up 10% year over year versus total industry servicing growth of 3%, with growth in both owned MSR and subservicing. Year-over-year servicing additions net of runoff of $76 billion was largely driven by organic growth and more than offset planned transfers to Rithm and other client asset sale—driven deboardings. With MSR demand keeping prices elevated, we continue to see clients monetize their older MSRs while replenishing their portfolio with new originations.

There should be no question as to our ability to compete for business and grow our servicing portfolio. Our double-digit portfolio growth, despite the Rithm transfer and client MSR sales, highlights the strength of our value proposition and the power of our origination capability. Now I'll turn it over to Sean to discuss our financial results in more detail. Sean O'Neil, Chief Financial Officer Thanks, Glenn.

Let's turn to slide 12 where we describe the impact to GAAP pre-tax income. The main story here is that the bulk of the decline in pre-tax income, about $24 million, is due to nonrecurring transaction costs or fair value marks on reverse assets. Ongoing operations and servicing was the strongest contributor to the $6 million increase in GAAP pre-tax income quarter over quarter. The Finance of America transaction and, to a lesser extent, costs associated with the rhythm de-boarding created a $9 million negative one-time impact in the quarter.

This was further exacerbated by a decline in the fair value of the reverse assets due to mark-to-market impacts, primarily less favorable HECM spreads. The majority of these assets, about 80% of the fair value, have been sold to Finance of America. Thus, the impact of fair value changes on the remaining portfolio will be greatly reduced. Furthermore, the assets we are retaining are older and have less sensitivity to spread movements given their shorter duration.

The remaining mark-to-market impacts were due to a mild increase in delinquency as well as hedge costs. Regarding delinquencies, if you refer to the appendix page on MSR valuation, you will see the 30+ delinquency bucket on GSEs deteriorated. However, the Ginnie Mae delinquency buckets improved quarter over quarter. The 30+ category is the most volatile measure, so we focus more on the longer periods such as the 60+ and 90+.

We are closely monitoring the portfolio for any indications of longer-term stress on borrowers. 5 billion fair value MSR book that we hedge. Please turn to slide 13 for a perspective on MSR fair value impacts. This graph shows three different drivers of MSR fair value broken into runoff rates, net of hedge, and inputs and assumptions.

Runoff is the actual MSR value of unpaid principal balance that either paid in full or amortized during the quarter. Then we show the impact of interest rates, net of hedge, and finally MSR fair value changes from inputs and assumptions. This last category includes changes in loan characteristics such as delinquency status, borrower escrow payments, assumptions for prepayments, loan defaults, servicing costs, ancillary income, discount rate, and changes in bulk market MSR prices, all of which impact modeled cash flows and MSR fair value.

Runoff is always detrimental to net income and can increase due to several variables, including higher prepayment speeds due to lower interest rates. You can see this impact from Q4 25 through the current quarter when we had several refinance surges due to a temporary but meaningful drop in mortgage rates. Another driver of runoff is portfolio size, which has been increasing with respect to the other categories. Both interest rates, net of hedge, as well as inputs and assumptions become smaller drivers when considered across multiple quarters in a cumulative fashion.

The average of either of these categories shows a volatility of about plus or minus three basis points. That's why we show these impacts in notables, which impact net income, but do not include them in adjusted pre-tax income given the periodic volatility or swings. We believe this is similar to several large competitors in our space. Please turn to slide 14 for a similar view of reverse.

Here you can see that the reverse book experiences far more volatility than the forward book. The impact from interest rates and inputs and assumptions are both materially greater as a percentage of the total balances in reverse compared to forward on the prior page. This shows how our recent sale of the majority of this book should lessen MSR fair value volatility going forward. Please turn to slide 15 for a recap of key financial measures.

Revenue was up 24%, continuing the strong year-over-year growth trend. Both servicing and originations contributed to the year-over-year growth in revenue due to higher volumes and stronger execution, which included improved recapture, reduced servicing advances, and better data analytics. Sequential revenue growth was up slightly as servicing increased more than the origination decline.