Rising mortgage rates are prompting loan servicing giant Mr. Cooper to lay off workers engaged in lending, but also making what has traditionally been the company’s main line of business — collecting mortgage payments from nearly 4 million borrowers — much more profitable.
Mr. Cooper also hinted that a sale of its Xome subsidiary could be in the works, as lenders step up foreclosure filings and the distressed property auction platform’s inventory swells to record levels, in reporting first quarter earnings last week.
Shrinking loan originations prompt layoffs
Although Dallas-based Mr. Cooper was the nation’s fourth-largest loan servicer in 2021, it’s also a major player in mortgage lending, ranking among the top 15 loan originators.
To help grow its mortgage servicing portfolio, Mr. Cooper buys purchase mortgages originated by correspondent lenders, and also offers refinancing directly to many of the homeowners it collects payments from.
Although Mr. Cooper resells most of the loans it originates, it generally retains the mortgage servicing rights (MSRs) on those loans, collecting payments on behalf of investors.
Mr. Cooper mortgage originations by channel
Source: Mr. Cooper investor presentation.
As interest rates have soared, Mr. Cooper’s direct lending business — refinancing homeowners’ existing loans — has shrunk by 32 percent from a year ago, with $7.8 billion in loans refinanced during the first quarter of 2022.
Over the same period, Mr. Cooper has virtually shut down its correspondent lending channel, throttling down loan production by 72 percent, to $3.8 billion.
All told, Mr. Cooper funded 46,933 loans in the first three months of 2022, totaling $11.6 billion — a 33 percent drop from the previous quarter, and a 54 percent decline from a year ago. While there’s still interest in cash-out refinancings, the company expects it will only originate between $7 billion and $8 billion in loans per quarter for the rest of the year.
Mr. Cooper responded by laying off 250 workers during the first quarter, a spokesperson for the company told Inman via email, citing the impact of rising rates on mortgage origination volumes.
Jay Bray
At the end of last year, Mr. Cooper had 8,200 employees. But more layoffs are ahead, CEO Jay Bray warned on an earnings call with investment analysts.
“You’ll see us operating [the company’s loan origination business] with consistent profitability, albeit at lower levels, as this is clearly not the time to chase volume or market share,” Bray said. “We’ve already taken several steps to adjust our capacity, and you’ll see us doing more.”
Loan servicing portfolio approaching $1 trillion
Mr. Cooper’s loan servicing business, on the other hand, is booming, as the company pursues a long-term goal of growing its loan servicing portfolio to $1 trillion.
Not only is the pool of borrowers the company collects payments from growing, but that business only gets more profitable as rates go up.
As of March 31, Mr. Cooper was collecting payments from 3.9 million borrowers who owed $796 billion in outstanding mortgage debt, up 27 percent from $628 billion at the same time a year ago.
Mr. Cooper loan servicing portfolio
Source: Mr. Cooper investor presentation.
More than half of the company’s servicing portfolio — $412 billion — consists of loans for which it owns mortgage servicing rights (MSR). The remaining $384 billion consists of loans that Mr. Cooper collects payments on as a subservicer for other lenders and investors.
Rising interest rates mean fewer homeowners have the motivation to refinance their existing mortgage. While that cuts into Mr. Cooper’s lending business, it makes loan servicing much more profitable.
With fewer borrowers prepaying their loans — and potentially ending up with another loan servicer — Mr. Cooper can keep its existing customers longer, resulting in lower amortization.
The prepayment rate on Mr. Cooper’s mortgage servicing portfolio has dropped from 23.7 percent during the first quarter of 2021, to 15.1 percent during the first three months of this year. By the end of the year, Mr. Cooper expects the prepayment rate to drop to 8.1 percent.
For every 1 percent improvement in the prepayment rate in Mr. Cooper’s favor, the company stands to make an additional $15 million in pre-tax income each quarter, or $60 million a year, the company said in an investor presentation.
Rising interest rates are setting the stage for “strong, recurring, annuity-like cash flow, which in the current rate environment will last for years and years to come,” Bray said. By the end of the year, Mr. Cooper “should be generating at least $100 million per quarter in pre-tax income” from mortgage loan servicing, he said.
Mr. Cooper’s growing mortgage servicing portfolio helped the company’s loan servicing segment generate $716 million in first quarter revenue, up 26 percent from a year ago.
But revenue generated by loan originations fell 45 percent, from $595 million a year ago to $324 million during the first quarter of 2022.
Mr. Cooper reported first quarter profits for the company as a whole were up by 18 percent from a year ago, to $658 million, on $1.05 billion in revenue. But that was largely due to the $223 million net gain the company reported on the March 31 sale of its servicing platform to software developer Sagent. Without that contribution to the bottom line, Mr. Cooper’s net income for the quarter would have been down 22 percent from a year ago.
Auction platform Xome to become profitable again
Although Mr. Cooper sold its title, valuations and field services businesses last year, its Xome subsidiary continues to operate an auction platform for foreclosed and real-estate owned (REO) properties.
During the pandemic, millions of borrowers were granted forbearance on their mortgage payments, and lenders were forbidden from initiating foreclosures at the height of the crisis.
But with the July 31 expiration of federal foreclosure moratoriums — and the Dec. 31 sunset of additional borrower protections put in place by the Consumer Financial Protection Bureau — lenders are cautiously resuming foreclosure proceedings against delinquent borrowers.
During the first three months of the year, a record 11,509 homes were added to Xome’s auction marketplace, bringing the site’s inventory to an all-time high of 18,254.
Flow of new properties to Xome exchange, by quarter
Source: Mr. Cooper investor presentation.
“As servicers, we’re moving forward cautiously on foreclosures, wanting to make sure their borrowers had every possible opportunity to avoid it,” Bray said. “But there’s no mistaking the growing backlog in REO. In the last two months, we’ve seen much higher inflows and in March, our inventories hit an all-time high.”
Inventory on the online real estate auction platform Hubzu has grown by 53 percent in the past year, site operator Altisource said last week.
Home price appreciation has also driven sales prices on Xome’s exchange up by 22 percent, which means every home that’s auctioned off on the site generates more revenue for Mr. Cooper.
Chris Marshall
Having lost “a small amount of money for the past two years” on Xome due to the foreclosure moratorium, Mr. Cooper projects that the exchange will break even in the second quarter, and generate $120 million in pre-tax earnings in 2023, Vice Chairman and President Chris Marshall said.
While mortgage servicers have been taking “a very cautious approach to restarting their foreclosures,” Marshall said, “sooner or later, foreclosure inventory has to be cleared.”
If foreclosure levels return to pre-pandemic levels of about 210,000 foreclosures a year, that would be double the current rate. If the economy weakens, “foreclosure volumes would be substantially higher for an extended period of time,” he added.
Mr. Cooper estimates that Xome currently commands about 30 percent of the single-family auction market, a share it expects to grow to 40 percent by year-end.
Marshall hinted that given the business’s potential, it might be ripe for a spin-off.
“As we think about the potential of Xome, we are not wavering in our commitment to our investors to realize the full value for this business,” Marshall said. “We regard the auction exchange as a world-class, fully digital business with huge revenue potential, and none of that is reflected in our stock price.”
Mr. Cooper is having “initial conversations with bankers that advise us on monetization alternatives, and I look forward to giving you further updates next quarter,” he said.
Mr. Cooper’s diverse sources of revenue mean its share price has weathered rising rates better than some companies that are focused more tightly on mortgage lending.
Over the last year, shares in Mr. Cooper have traded for as little as $31.42, and as much as $52.34. After reporting earnings Thursday, shares in Mr. Cooper closed out the week at $44.97, up 43 percent from the 52-week low seen on May 6, 2021.
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