Mr. Cooper delivers $658M in profit in Q1 on strength of MSRs

Company originated $11.6 billion in Q1 2022, down 33% from Q4 2021

Nonbank mortgage lender and servicer Mr. Cooper Group reported net income of $658 million in the first quarter of 2022, increasing its profits by a factor of four compared to the $155 million recorded in the previous quarter.

The performance reflects gains with mortgage servicing rights (MSR) and a deal with the fintech Sagent, which offset lower profitability related to originations, according to the quarterly earnings filing with the Securities and Exchange Commission (SEC) on Thursday.  

“The first quarter was extremely volatile, with the conflict and humanitarian crisis in Ukraine shocking the markets; further supply chain disruptions leading to headaches for many industries; accelerating inflation forcing the Federal Reserve into action; and the sharpest increase in mortgage rates in many years, if not decades,” Jay Bray, chairman and CEO, told analysts during a conference call. 

He added: “For Mr. Cooper, this kind of environment demonstrates the benefits of our balanced business model, which by design includes a much higher contribution from servicing than most of our peers.” 

In fact, Mr. Cooper had $96 million pretax operating income in the first quarter of 2022. However, the company also posted a $552 million gain with mortgage servicing rights (MSRs) transactions due to the higher interest rates, and a pretax income of $223 million from a deal with Sagent, which strongly increased its earnings.   

In February, Mr. Cooper and Sagent announced that they would be joining forces to create a cloud-native servicing platform. Mr. Cooper sold certain intellectual property rights related to its cloud-based technology platform for Sagent and received a minority equity stake in the fintech company. 

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Presented by: Sagent Lending Technologies 

On the origination side, the company’s pretax operating income reached $157 million in the first quarter, a 14% decline quarter-over-quarter and a 57% drop year-over-year. Mr. Cooper originated $11.6 billion from January to March, down 32.5% compared to the previous quarter and 54% compared to the same period of 2021.

Gain-on-sale margin surprisingly increased to 1.53% in the first quarter, compared to 1.41% in the previous three months. In the first quarter of 2021, it was at 1.63%. 

“Margins will come down over time; we’ve been saying that for several quarters. What you’re seeing is volume dropping off more significantly at the corresponding channel, where margins are smaller,” Chris Marshall, vice chairman and president, told analysts. 

Originations in the correspondent channel declined 54% quarter-over-quarter, compared to a 13% drop in direct to consumer. 

According to Marshall, the company will protect its margins “to some degree” in the coming quarter by reducing its expenses. “Rationalizing capacity is an unavoidable theme for everyone in originations,” he said. “In the second quarter, you will see us taking charge for staff reductions related to our lower volumes.”

Bray said that, given the magnitude of the rate increase over the last 90 days, the company forecasts quarterly earnings before taxes with origination in the range of $65 billion to $85 billion and a funded volume of around $8 billion.

Regarding its servicing portfolio, the pretax operating income was $7 million in the first quarter, but the company forecasts at least $100 million for the fourth quarter of 2022, reflecting the impact of projected higher interest rates on amortization and servicing interest income. 

Mr. Cooper ended the first quarter with $796 billion in unpaid principal balance (UPB), a 12% increase quarter-over-quarter and a 27% growth year-over-year. Owned MSRs reached $412 billion, compared to $276 billion in Q1 2021. 

The company acquired $81 billion in MSRs in the first quarter but expects to reduce its purchases in the market. “We intend to continue growing through MSR purchases, but we’ll be more selective right now because prices have exceeded where we thought they’d be at this point,” Marshall said. 

Bray added: “We shifted our focus from MSR acquisitions to stock repurchases.” Mr. Cooper has a capital ratio of 26.8%, but the target is 15%, which means it has resources for more stock purchases. The company repurchased 700,000 shares in the first quarter for $35 million. 

On Thursday, the company’s stock closed at $45.46, up 6.44% compared to the previous close. After reporting the earnings, it traded at $45.79 in the after-hours, up 0.73%.  

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