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Investors bid shares in mortgage loan servicer Mr. Cooper to a new all-time high Friday, after the company reported that its loan servicing business generated record profits in 2023 and that it’s now collecting payments on more than $1 trillion in mortgages.
Loan servicing generated $869 million in 2023 pretax operating income as Mr. Cooper grew its mortgage servicing portfolio by 14 percent last year, to $992 billion as of Dec. 31, the company said in reporting fourth quarter earnings results.
Chris Marshall
“As you recall, we announced the $1 trillion target in July of 2021 when the portfolio was only $650 billion,” Mr. Cooper Vice Chairman and President Chris Marshall said on a call with investment analysts. “It’s taken an enormous amount of energy, discipline and effort on the part of our entire workforce. It’s really very gratifying to be reaching the target so much faster than most people believed possible, and now we’re already exceeding it.”
For the final quarter of 2023, the Dallas-based loan servicer reported $46 million in net income, down 83 percent from $275 million in Q3, as revenue dipped by 30 percent to $404 million and expenses rose by 10 percent to $332 million.
On the revenue side, net gain on mortgage loans held for sale dropped by 58 percent from Q3, to $59 million, while service-related revenue was down 20 percent, to $345 million.
Driving the increase in expenses were $41 million in “mark-to-market” write-downs of the value of Mr. Cooper’s mortgage servicing rights, as falling interest rates increased the likelihood that some borrowers will refinance into loans serviced by a rival company.
Mr. Cooper also racked up $27 million in costs defending itself against a cyberattack last fall that it says exposed the personal information of nearly 15 million current and past customers to hackers.
Shares in Mr. Cooper gained 5 percent to close at $71.97 Friday, up 92 percent from a 52-week low of $37.54 registered March 24, 2023.
Mr. Cooper’s path to $1 trillion servicing portfolio
Source: Mr. Cooper earnings reports.
Mr. Cooper expects its mortgage servicing rights (MSR) portfolio will continue to grow, and that it will be collecting payments on $1.1 trillion by the end of the first quarter.
Jay Bray
“This milestone represents the culmination of a multiyear journey, one that’s taken us from very humble beginnings to our current position as industry leader,” Mr. Cooper Chairman and CEO Jay Bray said. “So, where are we going from here? We’re now seeing some of the best growth opportunities in the company’s history, and we will continue to grow our servicing portfolio as we have for the past 15 years.”
Marshall said Mr. Cooper is in the process of onboarding a $90 billion MSR portfolio “for a very important new client,” and is in discussions with institutional investors, pension plans, sovereign wealth funds and asset managers to raise capital for the company’s first MSR fund.
Bray said that as Mr. Cooper continues to grow its mortgage servicing rights, it will continue to focus on “ROTCE” — return on tangible common shareholders’ equity — which has steadily grown from less than 2 percent in mid 2022 to a 2023 high of 13.8 percent in during Q3 2023. Company executives project operating ROTCE in the 14 percent to 18 percent range this year and next.
“Our strategic focus is now squarely on return on equity, which shouldn’t surprise you since we’ve been commenting on ROTCE on every quarterly call,” Bray said.
As Mr. Cooper grows the portfolio of mortgages that it collects payments for on behalf of investors, it’s also invested in technology and processes that make the company more efficient and profitable, Bray said.
Those investments include a multi-year AI initiative aimed at slashing hundreds of million of dollars in annual call center expenses, and Pyro, a document management solution that taps a library of more than 300 mortgage-specific machine learning models on Google Cloud.
Rising rates strangle loan originations
Source: Mr. Cooper earnings reports.
In addition to collecting payments from 4.6 million customers on behalf of investors, Mr. Cooper is also a mortgage originator, funding loans through a “direct to consumer” channel that offers refinancing to homeowners it collects payments from, and through a correspondent channel that purchases or originates loans from mortgage bankers.
Rising mortgage rates have taken a toll on both channels, with total originations dropping from more than $20 billion a quarter during the pandemic refinancing boom to less than $4 billion a quarter last year.
Although mortgage rates retreated in the final two months of 2023, Mr. Cooper saw originations dwindle to $2.7 billion during the fourth quarter, down 20 percent from the previous quarter and 16 percent from a year ago.
Disruption caused by last fall’s cyberattack, which forced the company to implement a four-day precautionary shutdown that affected both loan servicing and loan originations.
While Mr. Cooper had previously estimated that its mortgage originations business would rack up as much as $10 million in pretax operating losses due to the data breach, it ended up generating $10 million in pretax operating income instead.
Bray said that from 2019 to 2021, when mortgage rates were near historic lows, “the entire mortgage industry enjoyed outsized returns, thanks to the massive refinance wave that generated what will probably turn out to be once-in-a-lifetime margins.”
“During 2022, we passed through an inflection point as the market struggled with the sharpest mortgage rate increases in recent memory, which impacted originations immediately while it took servicing a few quarters to ramp up.”
Marshall said that as rates began to rise, the company’s direct to consumer channel “did a fantastic job pivoting to cash-out refinance. Since then, we’ve rolled out second liens and are now making great progress with purchase recapture, which, together, make up more than a third of our total volumes.”
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