Mr. Cooper reports slim profit on servicing gains in tough market

Mr. Cooper on Wednesday reported that during the third quarter it managed to generate net income at a challenging time for the business thanks to better than expected earnings in servicing.

The company generated $113 million during the period. That number was down from $151 million the previous quarter and $299 million a year earlier, but analysts generally described it as a win considering the industry’s challenges.

“Given the very severe operating conditions for nonbank residential mortgage companies, Mr. Cooper demonstrated resilience in being able to eke out a modest profit,” Gene Berman, an assistant vice president at Moody’s Investors Service, said in a press statement.

Like production units at many mortgage companies, Mr. Cooper’s originations were negatively impacted by rising interest rates, which hammered its volumes and margins, in addition to “somewhat elevated” operating expenses, Berman said. 

However, servicing beat some analysts’ estimates, exceeding Keefe, Bruyette & Woods expectations by $0.16 in earnings per share as it recorded modest growth in its portfolio to $854 billion from $804 billion. 

While servicing has been a relative bright spot for the industry, Mr. Cooper executives said in an earnings call that they expect to see participants in the space exit or enter merger and acquisition arrangements.

“We do expect to see more pain in the mortgage industry as the current players grapple with challenges that many of them have never faced,” said Mr. Cooper Chairman and CEO Jay Bray.

“We have to be prepared to deal with stress and instability in our markets, which could also produce extraordinary opportunities.”

Mr. Cooper plans to, for example, continue to be selectively active as a buyer in the MSR market as this occurs, said Chris Marshall, Mr. Cooper’s vice chairman and president. 

While the company has been relatively less active in the market the past two quarters, it recently began preparing to buy a large portfolio, according to Marshall.

“We remain an active participant in the market. In fact, as we speak, we’re due diligencing a $20 billion pool with attractive collateral pricing. However, the key themes for us at this point in the cycle are discipline and patience,” Marshall said.

Mr. Cooper is one of a limited number of buyers with the wherewithal to absorb bulk packages of MSRs in that size range because of the extent to which it is capitalized, executives said during the call.

“We expect over the next couple of years to see many more firms exiting and very few entering the business as servicers face operational and compliance demands, which are extremely high. And as you know, regulators raise their expectations in terms of capital and liquidity,” said Marshall.

Mr. Cooper seeks deals that account for that in their pricing, Marshall said.

“We’ve been focusing on pools that we’re comfortable we can manage through the credit cycle, and we’re looking for deals that compensate us for the risk of deploying capital in an uncertain environment,” said Marshall.

In line with those goals, it’s also been working to avoid concentration risk, particularly in the Ginnie Mae sector. Ginnie Mae MSRs are slated to be subject to higher risk weighting by the end of 2024, and credit issues in the underlying loans are relatively more prevalent that in other sectors of the market.

“We’ve maintained diversity within the owned portfolio with respect to Ginnie Mae loans, whereas other servicers have focused primarily on this segment, ” Marshall said.

Mr. Cooper may, however, find opportunities in its capacity to subservice distressed loans if the credit cycle turns, executives noted, saying that the company could potentially return to efforts to sell its Xome unit, an asset management unit that deals with foreclosure properties.