Onity Group Inc. (NYSE:ONIT) Q3 2025 Earnings Call Transcript

Onity Group Inc. (NYSE:ONIT) Q3 2025 Earnings Call Transcript November 6, 2025

Onity Group Inc. beats earnings expectations. Reported EPS is $3.44, expectations were $1.98.

Operator: Good day, and welcome to the Onity Group’s Third Quarter Earnings and Business Update Conference Call. [Operator Instructions] Please be advised today’s program will be recorded. It is now my pleasure to turn the program over to Valerie Haertel, Vice President, Investor Relations. You may begin.

Valerie Haertel: Thank you. Good morning, and welcome to Onity Group’s Third Quarter 2025 Earnings Call. Please note that our earnings release and presentation are available on our website at onitygroup.com. Speaking on the call will be Chair, President and Chief Executive Officer, Glen 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 may be identified by reference to a future period or by use of forward-looking terminology and address matters that are uncertain. Forward-looking statements speak only as of the date they are made and involve assumptions, risks and uncertainties, including those described in our SEC filings.

In the past, actual results have differed materially from those suggested by forward-looking statements, and this may happen again. In addition, the presentation and our comments contain references to non-GAAP financial measures such as adjusted pretax 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 their 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.

Now I will turn the call over to Glen Messina.

Glen Messina: Thanks, Valerie. Good morning, everyone, and thank you for joining our call. We’re looking forward to sharing our third quarter results and reviewing our strategy and financial objectives to deliver long-term value for our shareholders. Let’s get started on Slide 3. Our third quarter results again demonstrate the effectiveness of our strategy and the strength of our execution. Our balanced business delivered sustained results with lower interest rates driven by originations profitability offsetting MSR runoff. Record origination volume and steady servicing profitability drove increased adjusted pretax income versus the second quarter and continued book value growth. Adjusted ROE exceeded our guidance for the quarter and year-to-date, and we’re expecting to exceed our guidance for the full year, underscoring our commitment to strong shareholder returns.

Q&A Session

Let’s turn to Slide 4 to review a few highlights for the quarter. We delivered adjusted pretax income of $31 million and annualized adjusted return on equity of 25%, driven by strong originations performance and favorable fair value gains on reverse buyout loans and servicing. GAAP net income and earnings per share of $2.03 reflect a $4 million or $0.48 per share tax provision expense related to tax planning strategies to support future utilization of our deferred tax asset. Average servicing UPB continued to grow steadily, fueled by year-over-year volume growth, which exceeded total industry originations growth for the same period. And finally, book value increased to $62 per share, up 5% versus prior year. We believe our third quarter results demonstrate our effectiveness in navigating changing market conditions with a balanced business model working as designed.

Let’s turn to Slide 5 for more about the capability of our balanced business. We believe our scale in both servicing and originations enables us to perform well with high or low interest rates. You can see on the left, our total business is delivering improved performance as we have grown servicing and improved overall productivity. Originations is responding well to changing market conditions with profitability increasing as rates have generally declined in the second and third quarter. If interest rates were to materially decline like in 2021, we believe industry origination volume and margins would increase while higher MSR runoff would reduce servicing earnings. In this scenario, we would expect originations to again deliver most of our earnings.

Regardless of interest rates, we’re always maintaining agility to capitalize on asset management and other opportunities consistent with our strategy to create value for shareholders. Let’s turn to Slide 6 for more about our growth focus and actions. We delivered servicing portfolio growth versus the prior quarter and prior year, driven by double-digit originations growth in the same period. We’ve increased our owned MSR portfolio, consistent with our objective to retain more MSRs to grow earnings and book value as well as reload our portfolio for recapture opportunity. Ending total servicing in the third quarter is up $17 billion or 6% year-over-year with $39 billion in servicing additions net of runoff more than offsetting planned transfers to Rithm and opportunistic client MSR sales.

With MSR demand keeping prices elevated, several of our clients have taken the opportunity to monetize their MSRs and are replenishing their portfolio as industry origination volume increases. I believe our ability to replenish and grow our portfolio while our clients execute opportunistic MSR sales highlights the power of our origination capability and the success of our growth strategy. Now please turn to Slide 7 for some highlights on our originations performance. In the third quarter, our originations team delivered volume growth of 39% and 26% versus prior year and prior quarter, respectively, in both cases, exceeding the industry and many of our public peers. Consumer Direct is demonstrating strong growth driven by declining rates in the third quarter and improved execution.

In business-to-business, we leverage an enterprise sales approach to deliver our wide range of products, delivery methods and services, coupled with a strong focus on client service. We’ve continuously invested in technology and process optimization to enhance the customer experience, reduce cost and improve scalability and competitiveness in both business-to-business and consumer direct. We’re launching new and upgraded products and services to expand our addressable market and access higher-margin market segments, create alternatives for our customers and manage operating capacity for surges in refinancing activity. To highlight how far we’ve come in origination, our third quarter funded volume was the highest we’ve recorded with a market size that’s only 41% of the 2021 market peak.

Let’s turn to Slide 8 to discuss our recapture platform. Our consumer direct team is delivering top-tier recapture performance to enhance MSR returns for us and several of our subservicing clients. As you can see on the left, funded volume was 1.8x the prior year level with an interest rate environment that is comparable between the 2 periods, reflecting the success of our investments. Based on our refinance recapture benchmarking, our third quarter year-to-date recapture performance, excluding home equity products, is better than several of our peers and the ICE reported average. In addition, our refinance recapture rate where the previous loan was originated by our consumer direct channel is 85%, on par with other retail originators. This points out the significant upside in recapture as we continue to improve our first-time recapture capability.

We continue to invest in talent, AI tools, predictive analytics and leverage internal and external data sources to help us better understand our customers, proactively identify opportunities and further improve our capability and the customer experience. Let’s turn to Slide 9 to discuss our near-term expectations for subservicing. We continue to see a high level of interest amongst prospective clients to explore subservicing options and alternatives. We’ve signed 9 new clients so far this year and have 6 new agreements under negotiation. We expect subservicing additions in the second half of $32 billion or over 2.5x the first half level, driven by these new relationships, our existing clients and synthetic subservicing with our MSR capital partners.

And we expect that momentum to continue into the first half of 2026 with subservicing additions from these clients of over 2x the first half of 2025. One area where we are seeing attractive growth opportunities is the small balance commercial segment, where our subservicing UPB is up 9% versus the second quarter and up 32% year-over-year. While the requirements are more complex than performing residential servicing, the returns are better, we have the expertise, and we’re investing to drive continued growth here. Overall, we’re excited about the growth potential in subservicing, and we continue to invest in our sales and operating capabilities to pursue a robust opportunity pipeline. Regarding our subservicing relationship with Rithm, we have received notice of nonrenewal and expect to transfer this portfolio to them starting in the first quarter of 2026.

Approximately $8.5 billion of UPB requires trustee and other consent, the timing and success of which are uncertain. We appreciate the opportunity to have served Rithm and its customers for nearly 10 years. The Rithm subservicing is a shrinking portfolio of mainly low balance pre-2008 subprime loans and accounts for over half our delinquent loans and borrower litigation. The portfolio attributes result in a high cost of servicing and declining profitability. For the third quarter of 2025, the Rithm subservicing was less than 5% of our total adjusted revenues and one of our least profitable portfolios before corporate allocations. After corporate allocations, it lost money in the last 2 quarters with third quarter loss increasing over the second.

For the past several years, we’ve assumed in our planning the subservicing would not be renewed for the coming year, and our plans for 2026 assume the same. We expect to adjust our cost structure and replace the earnings contribution with more profitable business that are aligned with our current growth focus and not our past. We do not expect the removal of these loans to have a material financial impact for the full year 2026. Let’s turn to Slide 10 to talk about our continued investment in technology. We’ve been investing across 4 categories of AI. Robotics, natural language processing, vision and machine learning to improve business performance and competitiveness on several dimensions. We’ve cultivated our own award-winning robotic process automation center of excellence and technology innovation lab, which support projects of increasing size and complexity.

These projects typically focus on 4 desired outcomes: drive cost leadership, accelerate revenue growth, maximize customer retention and deliver superior operating performance. I’m proud of what the team has accomplished through focused and purposeful investment to enable a highly competitive platform, top-tier recapture performance and an improved customer experience. We continue to utilize this 4×4 approach to technology innovation and to ensure our investments are aligned with delivering outcomes that matter most to our stakeholders. Let’s turn to Slide 11 to see what we’ve accomplished and where we’re taking our technology program. We believe our AI investments have been an important enterprise-wide performance enabler, creating value for all Onity stakeholders.

Our past investments in AI have been focused on improving cycle times, processing cost, customer access and self-service, scalability of operations, customer opportunity identification and reducing delinquencies. The outcomes of these efforts are reflected in the center column of this slide. And as you can see, they’ve had a profound impact on our business. Today, our focus is continued integration of robotics, large language models and machine learning across all operations to empower our people and processes where every process is optimized, every decision is data informed and every outcome is superior. For our people, our goal is to provide them with enhanced tools and data-enabled intelligence that drives heightened responsiveness, real-time decisions and superior outcomes.

For our customers, our focus is increased personalization, enhanced self-service, continuous improvement in ease of use and anticipating their needs. The opportunity here is exciting, and the potential impact is incredibly powerful. Now I’ll turn it over to Sean to discuss our results for the quarter in more detail.

Sean O’Neil: Thanks, Glenn. Let’s turn to Slide 12 for a recap of the key financial measures. 2025 continues to be a strong year for us as evidenced by the following third quarter results. Revenue grew by double digits, both year-over-year and over the trailing quarter. This was driven by both the servicing and origination operating units. Our third quarter adjusted return on equity was 25% and exceeded our full year 2025 guidance, both for the quarter and year-to-date. Our ability to deliver steady net income added over $2 to book value per share in the quarter. Please turn to Slide 13 for a historical trend of our adjusted pretax income, which is positive for the 12th straight quarter. We posted a strong quarter for adjusted pretax income of $31 million.

This shows the strength of our balanced business where originations and servicing each support growth in a diverse range of interest rate environments. The year-to-date adjusted ROE was 20% above the upper end of our guidance. And as mentioned, we expect to exceed our full year adjusted ROE guidance of 16% to 18%. GAAP ROE was 14%, and the appendix has a walk from net income to adjusted PTI to help you understand the differences. Please turn to Slide 14 for the pretax income results for the Originations segment. Originations adjusted pretax income was significantly higher year-over-year and versus last quarter. This was driven primarily by strong execution of recapture and improved performance in our B2B channel, which drove record funding levels and improved margins in most channels.

Consumer Direct continued another strong quarter, driven by recapture performance, resulting in elevated funding volumes. We also benefited from stronger closed-end second volumes. Business-to-business saw elevated volumes and margins as well with growth in our Ginnie Mae mix. Reverse originations maintained profitability with higher margins on lower volumes. This was a breakout quarter for originations as we were able to post margin gains amid record volume. Please turn to Slide 15 for the Servicing segment. Servicing remained a solid contributor to adjusted pretax income with $31 million for the quarter. Forward servicing again experienced growth in average UPB with higher revenue both sequentially and year-over-year. The revenue lift from servicing growth was offset by higher runoff in the third quarter.

This was driven by a greater amount of owned MSRs as well as higher prepay speed. The ability to capture some of this runoff is measured in the recapture metric. Reverse servicing pretax income rebounded to a positive $4 million in the quarter, driven primarily by stronger gain on sale on the reverse assets. Regarding delinquency, our owned MSR portfolio exhibited improved delinquency statistics again this quarter. For example, our Ginnie Mae MSR portfolio had better delinquency metrics than the broader Ginnie Mae market. Please see the MSR valuation page in the appendix for more details on delinquency by investor type. Page 16 will give you an assessment of our continued strong hedging performance. The hedge strategy on the MSR continues to perform well and as intended.

As a reminder, our strategy is designed to mitigate interest rate risk and our hedge has been effective in minimizing the impact of interest rates on our MSR valuation, net of hedge, as you can see on the graph. Over the last 2-plus years, we have increased our hedge coverage ratio such that by the end of 2023, we were seeking to hedge most of our interest rate exposure. When we compare our results with information in the public domain, we believe we provide an effective MSR hedge at an efficient cost relative to our peers. Given that an MSR hedge is dependent on the interest rate and relative derivatives market, we frequently review and assess our hedge strategy to manage risk and optimize liquidity as well as total returns. Please turn to 17 for commentary on our guidance for full year 2025.

As mentioned, following the strong quarter of net income, we now expect to exceed our 2025 adjusted ROE guidance. Note that this guidance on ROE is not dependent on the release of some of the valuation allowance, but is rather driven by our view of the strength of the operating businesses. Our UPB growth for the full year is now estimated to be between 5% and 10% versus the prior guidance of 10-plus percent. We don’t believe the positive but smaller growth will have an adverse effect on our ’26 forecast as we are generating growth in higher-margin servicing areas that need less UPB to deliver comparable pretax income. Consider Glen’s earlier comments on commercial subservicing as an example. Overall, I’m pleased to report another good quarter that grew book value per share and delivered a continued strong return on equity for our shareholders.

Back to you, Glen.

Glen Messina: Thanks, Sean. Let’s turn to Slide 18 for a few comments before we open the call for questions. We’re focused on accelerating profitable growth and creating value for all stakeholders. I’m proud of the team’s relentless focus on delivering on our commitments. Our strong third quarter results led by record originations volume validates our balanced business and its ability to perform through market cycles. We’ve built a technology-enabled award-winning servicing platform that is efficient, delivers differentiated performance and service excellence. We’re delivering profitability comparable to our peers at a more attractive valuation, and we expect to exceed our adjusted return on equity guidance for the full year, underscoring our commitment to strong shareholder returns.

All this comes together to suggest a share price that we believe has significant upside. And we intend to continue to take the necessary action and maintain agility in a dynamic market to harvest that value for the benefit of all stakeholders. Overall, we could not be more optimistic about the potential for our business. And with that, Aaron, let’s open up the call for questions.

Operator: [Operator Instructions] And we will go first to Bose George with KBW.

Bose George: Just on the Rithm, the transfer that’s going to happen. When you look at that portfolio, just based on your commentary, what’s the — like the present value of that, was it basically flat or even negative? Just how do you think about that?

Glen Messina: Yes. To put it in context for you, Bose, look, that portfolio is about 25% of the size it was about 5 years ago. So it’s really run down quite a bit. From a contribution perspective, look, we said it was one of our lowest margin portfolios. Look, if you compare it to Ginnie Mae owned servicing, for example, Ginnie Mae owned servicing has about 4x the profit margin of the Rithm portfolio. And looking at it on a dollar value basis, our $5 billion commercial subservicing portfolio generates a multiple of the dollar profit before corporate overhead. So it’s really run down quite a bit. We — the portfolio probably had maybe another year of marginal profit contribution associated with it. Again, that has a lot of assumptions baked in it and stuff like that.

But look, it’s gotten to the point where the portfolio is so small, delinquencies are high, cost of servicing is high. I’m sure for the Rithm team, they’ve got servicing oversight responsibilities. It’s just at the point where it’s pretty much getting to where it’s uneconomical for us and our clients to maintain the current relationship. And I’ve said it throughout the course of this year and even last year, this was an eventuality. It was inevitable, and we’re at that point. And yes, so we’re going to get on with it. We’ll transfer the portfolio, adjust our operations accordingly and feel good about the growth pipeline we have to replace the business. And again, there’s many areas of our business have a much higher profit margin than the Rithm portfolio.

And we’ve got a strong team that is demonstrating incredible growth, outpacing the industry and many of our peers.

Bose George: Okay. Great. And then just your ROE guidance, I assume it’s based on your current capital, but by the end of the year, your DTA gets reversed and your capital goes up, I guess, as that happens and the ROE on that, obviously, I guess, will be a little bit lower because of that. Is that right? Or if you can — you’ll have a GAAP tax rate that will run through next year as well. So where does that kind of shake out after that?

Glen Messina: Yes, Sean, I’ll turn it over to you.

Sean O’Neil: Sure. Bose, Yes, generally speaking, the directional changes you indicated are what will occur. It’s all dependent on the amount of the valuation allowance that we do release at the end of the year. But you are correct, that will flow through. It will increase equity. And therefore, all else being equal, we’ll have to generate a higher return to maintain the same ROE. And then the tax rate — the effective tax rate will go up once we release the VA. If we release all of the VA, it would look in line with any other normal corporate taxpayer. I think 21% federal and a couple more for states. And then if we do a partial release, it will be somewhere in between.

Operator: [Operator Instructions] We can go next to Eric Hagen with BTIG.

Eric Hagen: With the valuation allowance expected to be released, can you comment on how that drives the appetite to hedge the portfolio? I mean, do you feel like that changes the interest rate risk profile of the capital structure in any way?

Glen Messina: Yes, the bottom line is the short answer is no, we don’t, right? Look, we — our decision of hedging — our hedge strategy and approach and hedge coverage ratio, instrument selection and all those things is really a function of protecting book earnings, I should say, GAAP net income, book equity. And as well, we do have secured MSR financing. So we take into consideration the pluses and minuses of margin calls on our derivative instruments as well as margin calls on our debt obligations. So when we take all those factors into consideration and as well the recapture — performance of our recapture platform as well, too, and that’s done on a portfolio basis, agency versus government and the like. Yes, whether or not we — how much of the valuation allowance gets released, I don’t expect will have a material impact in terms of how we think about hedging our MSR.

Eric Hagen: Okay. Got you. Any perspectives on prepayment speeds through September and October? I mean, can you share how flow MSRs are pricing over these last 6 or 8 weeks? And has the cash balance changed since the end of September as you guys have backfilled or presumably backfilled some of the MSR portfolio?

Glen Messina: So from a speed perspective, Sean, (sic) [ Eric ] when we release the Q, there’ll probably be some information in the Q where we can go and calculate speeds. I mean, obviously, speeds are up. I think if you look at Slide 24, which is our MSR valuation page, you’ll probably notice that speeds — the presumed life of portfolio prepayment speeds and the valuation have increased versus periods when they were lower, the interest rate environment was higher and the coupon was lower relative to current market conditions. So yes, we did see an uptick in prepayments in the third quarter. We did see an uptick in MSR runoff. But again, the balanced business, originations performed very, very well and frankly, more than offset that, which was really pretty good.

In terms of the fourth quarter and what we would expect, look, we — I don’t think anybody’s crystal ball on interest rates is magically correct. When we look at the MBA and the Fannie Mae industry forecast, they are expecting origination volumes for the fourth quarter to be roughly consistent with where they were in the third quarter. Mix shift is a little bit different, though. They are expecting a little bit more or some growth in refinancing volume and a decline in purchase volume. So if you look at that and parse that data, it would suggest that perhaps speeds may pick up a bit in the fourth quarter. But again, it is going to be highly dependent upon where the average 30-year fixed rate mortgage rate settles in for the fourth quarter.

Eric Hagen: Yes. That’s good color. I appreciate you guys. Can I sneak in one more? I mean, do you guys ever shock the MSR portfolio for changes in interest rates? And what is sort of the max drawdown, if you will, you think you guys can tolerate on the MSR portfolio? And aside from a change in rates or like speed assumptions, what are the variables that you feel like could lead to a correction in the MSR valuation? How do you harness that risk?

Glen Messina: Yes. Yes, Eric, we do a fair amount of benchmarking to bulk trades in the MSR marketplace as we think about our valuation of the MSR. We use that as benchmarks to make sure that our portfolio fair value is stated correctly. We look at market transactions in the secondary market or bulk market to support that. As you know, we have historically from time to time, sold portions of our MSR either on a subservicing retained or servicing release basis to take advantage of what we believe are valuations in the market that are better than what we see as intrinsic value in the mortgage servicing rights. Last year, we did a couple of trades like that. This year, we haven’t largely because our recapture platform is performing so well.

I don’t want to give up the recapture opportunity in the portfolio, right? So that’s not necessarily a focus for us. And from a portfolio balance perspective, we may from time to time consider synthetic subservicing trades with our capital partners to balance our 50-50 mix of owned servicing and subservicing. So Look, we are — we take a dynamic approach to asset management and our MSR management. We don’t fall in love with any of our assets. But we do like that 50-50 mix and think that serves best for us to optimize earnings growth, dollar earnings growth and return on equity. In terms of the MSR sensitivity to interest rates, the chart that Sean talked about showed the effectiveness of our derivative hedging program on the MSR. It’s performed very, very well.

Super proud of our CIO and his team and the work they’re doing to manage the MSR interest rate risk. And a good portion of that is our originations team and how they’re doing from a recapture — how well they’re doing from a recapture perspective. So the combination of the operational hedge and the financial hedge really gives us, we believe, nice protection on fair value changes to the MSR. As a matter of our — when we look at our hedging performance, we do rate shock analysis for plus or minus 100 basis points. We do target a hedge coverage ratio. And I think we’ve talked about all those things in the past. So really pleased again with how the MSR is performing, how our hedge program is performing. And we’ll continue to take a very dynamic approach to managing MSRs. And if there’s an opportunity to sell at a value above what we believe is intrinsic value, as we have in the past, we’ll harvest that opportunity.

Operator: [Operator Instructions] At this time, there are no additional questions. I’d like to turn the program back over to Glen Messina for any closing remarks.

Glen Messina: Thanks, Aaron. I’d like to thank our shareholders and key business partners for supporting our business. We also would like to thank and recognize our Board of Directors and global business team for their hard work and commitment to our success. I look forward to updating all of you on our progress at our next quarterly earnings call. Thank you for joining.

Operator: Thank you for your participation. This does conclude today’s program. You may disconnect at any time.