Mr. Cooper Group improved its profitability in the third quarter of 2023 mainly due to the performance of its servicing portfolio, which benefited from high rates and low delinquency. However, the company still faces challenges on the origination side of the business, resulting in lower earnings and origination in the period.
On Wednesday, top executives at the company told analysts that Mr. Cooper is now the largest servicer in the country and will continue to grow its portfolio by acquiring large bulks of mortgage servicing rights (MSRs), mainly from banks expecting additional capital requirements through Basel III rules.
Overall, Dallas-based Mr. Cooper delivered $275 million in net income from July to September, compared to $142 million in the second quarter. The firm’s profitability also improved compared to the third quarter of 2022, when net income came in at $113 million.
The earnings included, among other things, a $67 million gain from the collapse of a securitization trust and a $96 million preliminary bargain purchase gain related to the Home Point Capital acquisition. The firm also had a $39 million loss associated with equity investments primarily related to the sale of its title business in 2021.
Mr. Cooper’s chairman and CEO, Jay Bray, said the company’s earnings reflect the strength of its balanced business model, which propelled the company to be the “nation’s leading servicer” and “one step closer to achieving our $1 trillion target” in unpaid principal balance (UPB).
“Given the attractive yields available in the market, as well as new subservicing agreements in place, we will exceed our $1 trillion strategic target in the first quarter of next year,” Bray told analysts.
Mr. Cooper had 4.3 million customers and $937 billion in UPB at the end of September, compared to $882 billion at the end of June. Executives said the company has over $100 billion in deals scheduled to close and onboard in the first quarter of 2024, as well as $80 billion in subservicing related to a contract signed recently.
The company’s servicing portfolio ended the third quarter with a pretax operating income of $301 million, compared to $182 million in the previous quarter and $81 million in the same period of 2022.
Kurt Johnson, CFO at Mr. Cooper, told analysts that the company’s 2% delinquency rate at the end of the quarter was “the lowest we’ve ever seen in our portfolio.” He expects the delinquency rate to “tick up slightly,” but it “won’t be a material adverse environment for us in 2024.”
Mortgage originations
Through its origination business — which focuses on acquiring loans from correspondent originators and refinancing existing loans in the direct-to-consumer channel — Mr. Cooper delivered $29 million in pretax operating income in Q3 2023, compared to $38 million in the previous quarter and $45 million in the same period of 2022.
Chris Marshall, vice chairman and president who informed the company of his plans to retire at the end of 2024, said that Mr. Cooper had solid earnings in originations despite headwinds from rising rates, with refinance recapture reaching 83%, nearly four times the industry average.
However, Marshall said the fourth quarter is the weakest of the year, with distractions of the holidays and rates well above 7%. That’s when customers are more likely to take advantage of second-lien products, which have smaller margins.
“Also, we are seeing pricing pressure returning to the correspondent channel due to higher mortgage rates and pressuring origination volumes. So, as such, we got a range of $10 million to $20 million for the fourth quarter [for earnings in origination],” Marshall said.
Mr. Cooper’s funded volume declined to $3.3 billion in the third quarter of 2023 from $3.8 billion in the previous quarter and $5.7 billion in the third quarter of last year. The correspondent channel fell to $1.7 billion in Q3 2023 from $2.2 billion in Q2 2023. Meanwhile, direct-to-consumer rose to $1.7 billion, compared to $1.6 billion in the previous quarter.
A team of equity analysts at Jefferies said the third-quarter earnings show the core fundamentals at Mr. Cooper are “solid and improving.”
“The performance continued to demonstrate the earnings potential of the servicing segment in a higher-rate environment; the portfolio continues to show the benefits of operating leverage,” the Jefferies analysts wrote in a report. “Despite a challenging originations environment, COOP has achieved profitability through its direct-to-consumer platform throughout [2023].”
Looking ahead, analysts said bank capital requirements may provide the company “with a meaningful supply of bulk MSR deals to bid on in the medium/long term.”
To support its acquisition mode, Mr. Cooper said it has strong liquidity. The company had $2.7 billion in liquidity at the end of September, including $553 million in unrestricted cash.
Mr. Cooper’s share was trading at $56.76 on Wednesday around noon, up 5.81% from the previous closing.
