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Nationstar posts net loss of $20 million, but the news is better than it seems

Adjusted earnings rises to $42 million

Nationstar Mortgage, the nonbank soon to be known as Mr. Cooper, reported Thursday that it saw its first quarterly net loss in a year, but the news is actually better than it appears.

Overall, Nationstar posted a GAAP net loss of $20 million (or $0.20 per diluted share) in the second quarter, but on an adjusted basis Nationstar saw earnings of $42 million, or $0.43 per share.

For comparison, in the first quarter, Nationstar reported a GAAP net income of just $2 million or $0.02 per diluted share, which was down substantially from $198 million in the fourth quarter.

But on an adjusted basis, Nationstar reported first quarter earnings of $29 million for the first quarter, or $0.30 per share.

And in the second quarter of 2016, Nationstar recorded a GAAP net income loss of $92 million, or $0.92 per share, but on an adjusted basis, the company said it reported net income of $52 million, or $0.52 per share.

The difference between the company’s GAAP net income/loss and its adjusted income/loss is the carrying value of its mortgage servicing rights.

In the second quarter of this year, Nationstar’s servicing segment posted a $42 million GAAP pre-tax loss, but $55 million in adjusted pretax income.

In its earnings release, the company said that despite higher prepayments, an increase in reserves, and elevated boarding activity, its servicing operations delivered “strong quarterly adjusted pretax income driven by continued focus on operational improvements and the performance of the underlying portfolio.”

But on a GAAP basis, the company said that declining interest rates during the second quarter were the primary cause for the fair value loss on its MSR portfolio.

And the company’s mortgage servicing portfolio is only going to grow.

The company said that during the second quarter, it boarded $52 billion of loans, including $38 billion of subserviced loans, which are expected to generate “significantly higher returns on equity due to the limited capital deployed.

The company said that it expects to board an additional $111 billion during the remainder of 2017.

Nationstar also reported that its originations segment generated $53 million GAAP pretax income or $56 million adjusted pretax income in the second quarter, based on funding approximately $4.3 billion in loans during the quarter.

In its earnings release, Nationstar noted that the originating new mortgages is “most cost-effective” way to acquire new servicing rights, which is why the company is focusing on improving its customer service as part of its transition to Mr. Cooper, which is set to become official this month.

“We embarked on a journey to rethink the way we do business to retain our most valuable resource – our customers,” Nationstar Chairman and CEO Jay Bray said.

“Becoming Mr. Cooper is not about a name change, it is a representation of our journey to re-invent our company from the inside out in order to create an incredible customer experience,” Bray said. “By establishing a supportive culture that empowers team members to be advocates for customers on their homeownership journey, we can create customers for life.”

The company added that the “enhancements” it made to its customer service experience helped drive a 72% reduction in overall customer complaints in the last three years.

“In addition to those investments, the company has also focused on creating a more positive team member environment by redefining its values, improving benefits, and offering additional training and mentoring opportunities,” the company added in its release. “The heightened level of team member engagement combined with increased efficiencies and a focus on customer self-service further validate the company’s guiding principle that happy team members lead to happy customers which will deliver strong shareholder value.”

Bray added that the company is “confident” that its strategy is working and will “further our position as a leader in the mortgage industry.”

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