Mr. Cooper’s earnings slide from Q1 but benefit from servicing

Mr. Cooper’s second quarter profits, which marked big declines from both the same quarter in 2021 and the previous period this year, were heavily driven by a $196 million positive mark-to-market valuation on its mortgage servicing rights.

As predicted, earnings in both its servicing and originations segments were down compared with the year-ago period.

“The quarter was consistent with our expectations and…our results demonstrated the consistency and predictability of our business model,” Chairman and CEO Jay Bray said during Mr. Cooper’s earnings call.

The company reported net income of $151 million. Its pretax operating income was just $17 million.

This compares with net income of $658 million and pretax operating income of $96 million in the first quarter. For the second quarter of 2021, Mr. Cooper’s net income was $439 million while it reported pretax operating income of $227 million.

Its servicing segment’s pretax operating income of $30 million was up from $7 million in the first quarter, but below the $80 million posted one year ago.

Mr. Cooper expects the servicing segment income to grow to at least $65 million in the current quarter and $125 million by the end of the year. That estimate is “based largely on the forward curve, as well as continuous incremental operating efficiencies,” Bray explained. “Given the obvious pressure on originations, this is exactly the reason we operate with a balanced business model and it is a major differentiator for Mr. Cooper.”

However, Mr. Cooper did pull back a bit on servicing rights acquisitions during the quarter, electing instead to repurchase stock with its liquidity as it balances capital allocation and where it can get the best returns, Bray said. But its target is still to exceed $1 trillion in MSRs.

When asked if Mr. Cooper is active in the MSR purchase market, Bray noted more portfolios are coming onto the market right now compared with this same point during the second quarter. “So we’re actively looking at that, but we’re being patient there as well,” he continued.

A lot of that is coming from other independent mortgage bankers and the yields on those portfolios are very attractive.

Mr. Cooper serviced $804 billion in mortgage loans as of June 30, just $8 billion more than at the end of the first quarter. Owned MSRs slipped to $398 billion from $412 billion on March 31 as the company sold a $15 billion portfolio to an undisclosed investor. But it has a subservicing and customer recapture contract for those, Chris Marshall, vice chairman and president, pointed out.

The deal gave Mr. Cooper additional liquidity to pursue other opportunities. “Now I’m pointing this out, because it’s a great example of the flexibility we have with our business model which is to pivot to a more asset-lite strategy when that makes sense, which allows us to keep growing our customer base and our operational scale without employing as much cash,” Marshall said.

Meanwhile, Mr. Cooper, following its announcement of an origination headcount reduction of at least 250 people during the first quarter call, has its capacity appropriately aligned with demand, Bray said, indicating for now that it is not contemplating further layoffs.

Pretax operating income of $63 million was down from $157 million in the first quarter and $213 million for the second quarter of 2021. The drop in gain on sale to 103 basis points from 153 bps from the prior quarter and 136 bps from the previous year, was the result of a shift in channel mix to correspondent away from direct-to-consumer, company management said.

Lower-margin correspondent production made up 42% of the $7.8 billion originated in the second quarter. In the first quarter, this channel was 33% of the $11.6 originated, although one year ago, correspondent made up 53% of the $22.2 billion of production.

Bray, when asked during the call if Mr. Cooper was looking for acquisition opportunities, called a whole company purchase unlikely.

“It would have to be a platform that would bring something differentiated to the table, whether that was technology or something that we don’t have today and we simply believe we have the best servicing platform and direct-to-consumer platform in the marketplace,” he declared.

But later in the call, Lee Cooperman of Omega Family Office, a shareholder in the company, turned that question around, asking if management would be open to selling if the right price was offered.

Noting that Omega owns more shares in Mr. Cooper than either Bray or Marshall does, the vice chairman and president responded that “if somebody is willing to offer more value than we can deliver the shareholder, we would sell it tomorrow.”