Mr. Cooper sees a $1.5T MSR opportunity in 2023

On the origination side, company expects to deliver profits in the first quarter

The servicing portfolio propelled Mr. Cooper Group‘s overall earnings in the fourth quarter of 2022 when cost-cutting initiatives weren’t enough to bring the origination business to profitability. And investors can expect the company to keep growing its servicing business in the months to come. 

Mr. Cooper reported on Friday it delivered $1 million in net income from September to December, compared to $113 million in the third quarter. The performance was impacted by a mark-to-market of $58 million, adjustments related to severance and property consolidation of $23 million, and equity investment losses of $10 million.  

On the originations side, the company registered a $2 million loss in the quarter, compared to a $46 million profit in the previous quarter. Mr. Cooper’s volume declined to $3.2 billion in the fourth quarter from $5.7 billion in the third quarter. 

The direct-to-consumer channel was responsible for 60% of total originations from September to December, with the remainder coming via correspondent lending. 

“We took rapid and decisive actions last quarter to reduce capacity,” Chris Marshall, vice chairman and president of Mr. Cooper, told analysts during a call. “As a result, we were roughly breakeven in the fourth quarter and are now on track for positive results.”

Jay Bray, chairman and CEO of Mr. Cooper, said that last October, as mortgage rates were trending higher, Mr. Cooper eliminated 1,000 positions, most of them in originations. Prior to that, Mr. Cooper announced layoffs of about 420 staff members in the second quarter, in addition to about 250 employees in the first quarter.

“We are now on target to earn approximately $10 million in EBT for the first quarter of 2023, which is consistent with the guidance we gave you last fall,” Bray said. “We feel good about driving these numbers higher if mortgage rates settle at meaningfully lower levels or if MBS pricing improves.”  

The company’s projections for 2023 are based on the federal funds rate reaching 5%, mortgage rates settling around 6% and conditional prepayment rates at 6% for the year. Mr. Cooper has $1.9 billion in liquidity. According to Bray, the company has several initiatives underway to reduce costs while improving customer experiences.  

Mr. Cooper sees a $1.5 trillion opportunity 

On the servicing side, Mr. Cooper’s portfolio reached $870 billion in the fourth quarter, up from $854 billion in the previous quarter. Owned MSRs increased 21% in the same period to $411 billion. Meanwhile, subservicing rose 24% to 459 billion. MSR’s acquisitions reached $22.7 billion from September to December. 

Mr. Cooper delivered a $159 million profit through its servicing business in the fourth quarter, compared to $81 million in the previous quarter. The company forecasts $600 million in operating EBT for 2023, which is a “conservative estimate,” according to Bray. 

Mr. Cooper expects a cycle-wide opportunity for MSR acquisitions this year. Based on the data for nearly 500 originators, the company estimates a backlog of as much as $1.5 trillion in unpaid principal balance (UPB) that needs to be sold in the market. The estimate is for $3.9 trillion from 2023 to 2025. 

“You’ve read public statements from industry leaders who decided to strengthen servicing portfolios. I’ll tell you that other large operators have quietly made the decision to exit,” Marshall said. “There’s no mystery about the reason for consolidation pressure is the critical need for scale, technology, operational skills and efficiency.” 

Bray said Mr. Cooper reviewed nearly 300 MSR deals the company was offered over the last two years. “We elected to analyze about two-thirds and then bid a little under half. We ended up winning 23% of what we bid on or 11% of the total deal flow. Going forward, we expect those ratios to remain relatively constant.” 

However, the executive highlighted to analysts not to expect the company to buy “every pool that comes to market,” only those the company is sure it can service efficiently. Wells Fargo is reportedly selling its MSRs as the company is exiting the correspondent channel and reducing its servicing pipeline. 

According to Moody‘s vice president Stephen Lynch, Mr. Cooper benefited from record-low prepayment speeds and higher interest income on escrow balances. 

“Mr. Cooper’s capitalization is among the strongest of its rated non-bank mortgage peers,” Lynch said. “It will allow the company to strategically acquire fee-generating servicing assets that should provide refinancing and purchase opportunities in a more favorable origination environment.”

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