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Shares in mortgage loan servicing giant Mr. Cooper surged to an all-time high Wednesday after the company delivered an earnings surprise and said it’s on track to grow its servicing portfolio to $1 trillion by the end of the year.
Dallas, Texas-based Mr. Cooper reported a $142 million second quarter profit, as operational revenue from loan servicing grew by 9 percent from a year ago to $442 million.
Mr. Cooper generates the bulk of its revenue from the fees it collects from investors and lenders for collecting mortgage payments from 4.3 million borrowers on their behalf. Loan servicing generated $182 million in pretax operating income during the second quarter as Mr. Cooper grew its mortgage servicing portfolio by 10 percent from a year ago, to $882 billion as of June 30.
Mr. Cooper servicing portfolio hits $882 billion
Source: Mr. Cooper earnings reports.
Factor in another $75 billion in pending transactions for servicing rights, including Mr. Cooper’s pending acquisition of Home Point Capital, the servicing portfolio will soon be at $957 billion, said Mr. Cooper President Chris Marshall.
Chris Marshall
“Based on our internal forecast, we’re expecting to hit our $1 trillion dollar target by year end, which would be 12 to 18 months ahead of schedule,” Marshall said on a call with investment analysts.
As a result, Marshall said Mr. Cooper is raising its full-year guidance for operating income from loan servicing by 17 percent — from $600 million to $700 million. It’s not just that Mr. Cooper’s servicing portfolio is growing, but that business is becoming more profitable thanks to initiatives like a move to replace many call center workers with artificial intelligence.
“While cyclical trends are favorable right now, the real story in servicing is our relentless focus on perfecting our platform, which is honestly like a religion for us,” Marshall said. “Currently, we’re laser focused on our customer call center where we have a year-end goal to take out $50 million in annual operating costs while improving our customers’ experience. Our strategy is to drive lower call volume by making information much easier for customers to access on their own, which is a win-win for them in the company.”
Even as the servicing portfolio has grown, the number of full-time employees at Mr. Cooper’s call centers has declined 20 percent, from 1,897 at the end of last year to 1,512 as of June 30, the company said. The number of servicing calls per loan has declined from 2.1 a year in 2020 to 1.5 — not far above the long-term target of 1.25.
Source: Mr. Cooper earnings reports.
Mr. Cooper also originates mortgages, primarily by offering refinancing directly to homeowners it collects payments from. Second quarter originations totaled just $3.8 billion, about one-fifth the volume the company was achieving during the pandemic when low mortgage rates fueled a wave of refinancings. But Q2 originations were up 41 percent from the first quarter, signaling that originations may have hit bottom.
Marshall said Mr. Cooper continues to invest in its direct-to-consumer mortgage origination platform, “with the goal of making further gains in speed and efficiency and producing an even better customer experience.”
Initiatives like “Project Flash,” which digitizes and automates tasks in the originations workflow, have slashed 45 percent from direct processing costs per loan in the last year.
“Not only does this mean lower costs today, but this progress bodes extremely well for our ability to scale up in the next cycle whenever that might occur,” Marshall said.
In addition, Mr. Cooper’s Xome subsidiary, which operates an auction platform for foreclosed and real-estate-owned (REO) properties, managed to break even as sales surged by 24 percent from Q1 to Q2, to 1,862.
Share repurchases
As profits roll in from loan servicing, Mr. Cooper is repurchasing millions of dollars in shares. During the second quarter, Mr. Cooper repurchased 1.2 million shares of common stock for $57 million, and the company’s board of directors has greenlighted another $200 million in share buybacks.
Shares in Mr. Cooper, which have traded for as little as $37.54 in the past year, surged more than 5 percent to hit an all-time high of $57.74 after Wednesday’s earnings announcement before giving up some of those gains.
Jay Bray
Mr. Cooper Chairman and CEO Jay Bray said that while company executives “were quite pleased” to see the stock price reach a new high, they believe it’s still trading at a discount.
“We don’t think the market fully appreciates our competitive advantages, the benefits of the Home Point acquisition and the progress we’re making on strategic initiatives,” Bray told investment analysts.
In a note to clients, analysts at BTIG led by Eric Hagen called it “a good quarter,” for Mr. Cooper, which has “enough liquidity to support additional bulk MSR [mortgage servicing rights] purchases, as banks, in all likelihood, will be net sellers of servicing over the foreseeable future.”
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