Mr. Cooper’s origination segment is back to profitability  

Overall, the company delivered a $37M net income in Q1 2023

Mr. Cooper Group‘s profits strongly increased in the first quarter of 2023, as forecasted by its executives. The servicing portfolio again propelled the quarterly performance, but this time, the origination segment also contributed to the results by returning to profitability.

The company reported on Wednesday that it delivered $37 million in net income from January to March, compared to $1 million in the fourth quarter. The result included a mark-to-market of $63 million, a $1 million severance charge and $10 million losses with equity investments.

Mr. Cooper’s chairman and CEO Jay Bray said the operating results are due to a “balanced business model” between servicing and origination, according to a news release. He added executives are “positioning the company to navigate a volatile environment.”

The company’s servicing portfolio ended the quarter with a pretax operating income of $157 million, compared to $159 million in the previous quarter.

Mr. Cooper had 4.1 million customers and $853 billion in unpaid principal balance (UPB) at the end of March, compared to $870 billion at the end of December. The reduction resulted from a client that decided to take the portfolio in-house, executives said during a call with analysts. 

But the servicing portfolio is expected to grow. Mr. Cooper announced it agreed to acquire Rushmore Loan Management Servicess special servicing platform, which has $37 billion in sub-servicing contracts. The platform has 244,500 loans and will be combined with RightPath, bringing several hundred employees to Mr. Cooper.

Regarding its origination business, which focuses on acquiring loans through the correspondent channel and refinancing existing loans through the direct-to-consumer channel, Mr. Cooper had a $23 million pretax operating income, compared to a $2 million loss in the previous quarter.

Mr. Cooper’s funded volume declined to $2.7 billion in the first quarter of 2023 from $3.2 billion in the previous quarter. Direct-to-consumer comprised $1.4 billion and correspondent was responsible for $1.3 billion.

“Servicing continued to produce consistent stable predictable results, while originations outperformed on strong DTC execution,” Chris Marshall, vice chairman and president, said in a statement. “We continue to see exciting opportunities to grow our customer base, while our focus on positive operating leverage will help us generate higher returns.”

According to a team of equity analysts at Jefferies, the first quarter earnings “showed stability of servicing performance in a higher-rate environment.” Meanwhile, performance in the originations segment “was a welcome surprise to the upside after several quarters of tightening gain-on-sale margins and declining volumes.”

Acquisition mode for Mr. Cooper

Bray told analysts that Mr. Cooper expects to increase its servicing portfolio. Despite the reduction in the unpaid principal balance in the first quarter of 2023, Mr. Cooper won deals that will include $57 billion in MSRs in the next few months, the executive said. 

“You’re familiar with our strategic target of growing the portfolio to $1 trillion, but I’d share with you that we think of that as an absolute minimum for where we can go,” Bray said.

The recent banking crisis adds some opportunities to acquire MSRs, but the market is still in a “state of transition as everybody digests what has happened in the last month or two,” according to Bray. “But we expect more to come from the banks. And we expect to be active there.”

Regarding the appetite of bidders in the MSR market, executives said it’s smaller for Ginnie Mae’s portfolio than for the government-sponsored enterprises (GSEs), Fannie Mae and Freddie Mac.

Overall, “there’s not a significant number of bidders, but it’s competitive,” Bray said. Marshall added, “As the pools get larger, certainly as they get above $10 or $20 billion, there’s a handful of potential buyers.” 

To support its acquisition mode, Mr. Cooper said it has strong liquidity. The company had $2.4 billion in liquidity at the end of April, including $534 million in unrestricted cash.

“Since the year-end, we’ve upsized several of our MSR line facilities, increasing aggregate capacity by $1.5 billion,” Kurt Johnson, the company’s CFO, told analysts. “Given the turmoil in the financial markets, we’re very pleased that our banking partners continue to see us as a sound counterparty with strong capital, risk management, and controls and were eager to support our growth throughout the quarter.”

Looking forward, Mr. Cooper continues to provide a forecast of $600 million EBIT for 2023.  

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