Mr. Cooper boosts Q2 profits to $142M as servicing business grows

Originations business also exceeded expectations in Q2

In acquisition mode, Mr. Cooper Group continued to improve its profitability, beating analysts’ expectations in the second quarter of 2023. The company’s servicing and origination platforms performed better than in the previous quarter. 

Mr. Cooper delivered $142 million in net income from April to June, compared to $37 million in the first quarter, the company reported Wednesday. The result included, among other things, a mark-to-market of $61 million, a cost related to the acquisition of Rushmore Loan Management Services of $6 million and a $1 million charge due to severance. 

Mr. Cooper’s chairman and CEO, Jay Bray, said the company delivered “strong margins in both servicing and operations, while Xome generated higher sales this quarter.”

Bray said Mr. Cooper is working on three strategic initiatives: drive further reductions in costs, which will help to generate greater operating leverage and deploy capital to portfolio growth; improve the direct-to-consumer platform contribution to the overall profitability, exploring new products; and grow the subservicing business, which provides incremental income, including gain on sale from recapture without tying up capital or liquidity. 

The company’s servicing portfolio ended the second quarter with a pretax operating income of $182 million, compared to $157 million in the previous quarter. Based on these results, executives said Mr. Cooper raised its full-year guidance for operating income by 17%, from $600 million to $700 million. 

Mr. Cooper had 4.3 million customers and $882 billion in unpaid principal balance (UPB) at the end of June, compared to $853 billion at the end of March. The servicing portfolio grew because of Rushmore’s special servicing platform acquisition, which brought about 300 employees to Mr. Cooper. 

Other deals may bring the servicing portfolio to $957 billion, including $83 billion from the acquisition of Home Point Capital and $25 billion in pending bulk acquisitions, executives said. 

The Home Point deal is expected to close in the third quarter, with loans onboarding in late 2023 or early 2024, executives told analysts. On Monday, Heisman Merger Sub, Mr. Cooper’s subsidiary, extended the expiration date of its offer to acquire all of Home Point’s outstanding shares of common stock for $2.33 per share. 

“We continue to see a buyers market for MSRs, with plenty of attractive pools trading at unlevered pretax yields in the low double digits for conventional loans, and even higher for Ginnie Mae, which is exactly what we guided you to expect when we shared our proprietary forecasts late last year,” Chris Marshall, vice chairman and president, told analysts. 

According to Marshall, “We’re now seeing a sharp increase in regional banks bringing MSR pools to market,” and one of the reasons is the expected new capital requirements for these financial institutions. 

Regarding its subservicing business, Mr. Cooper is in the process of launching an MSR Fund. “We’re expecting our acquisition of the platform company to close in the third quarter subject to regulatory approval, positioning us to begin a fundraising campaign in the fourth quarter,” Marshall said. 

Mortgage originations 

Mr. Cooper’s origination business, which focuses on acquiring loans through the correspondent channel and refinancing existing loans through the direct-to-consumer channel, delivered $38 million in pretax operating income, compared to a $23 million net income in the previous quarter.

“During the quarter, we saw continued outstanding execution by our DTC platform and somewhat more rational competition in the corresponding channel,” Marshall said. “However, with mortgage rates hovering at 7%, we’re going to keep our guidance unchanged at $20 to $30 million [net income] per quarter.”

Mr. Cooper’s funded volume increased to $3.8 billion in the second quarter of 2023 from $2.7 billion in the previous quarter. 

Direct-to-consumer originations reached $1.6 billion, compared to $1.4 billion in the previous quarter. Meanwhile, according to executives, the correspondent channel was responsible for $2.2 billion in Q2 2023, compared to $1.3 billion in Q1 2023, due to more rational pricing. 

Mr. Cooper had strong second-quarter earnings, said a team of equity analysts at Jefferies

“While volumes in the originations segment improved, ancillary revenues in servicing primarily drove the beat,” the Jefferies analysts wrote in a report. “As COOP is now occupied with closing the HMPT acquisition, we anticipate the company taking a step back from the bulk market in the N/T.” 

At BTIG, analysts said it was a “good quarter,” reflecting the benefit of slow prepayment speeds and significant operating leverage.

“We think earnings visibility has strengthened as the company has further scaled its servicing portfolio, and the expense load appears relatively well-calibrated for the current interest rate environment. We also see enough liquidity to support additional bulk MSR purchases, as banks, in all likelihood, will be net sellers of servicing over the foreseeable future.”

To support its acquisition mode, Mr. Cooper said it has strong liquidity. The company had $2.2 billion in liquidity at the end of June, including $517 million in unrestricted cash.

Mr. Cooper’s share was trading at $57.17 on Wednesday around noon, up 5.73% from the previous closing. The firm’s board of directors has authorized stock repurchases of $200 million. 

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