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The profits continue to roll in at loan servicing giant Mr. Cooper, which will be collecting monthly mortgage payments from nearly 7 million homeowners with the help of AI when its deal to acquire Flagstar Bank’s mortgage servicing business closes later this year.
Even before the Flagstar deal closes, Mr. Cooper’s mortgage servicing rights (MSR) portfolio has swelled by 32 percent in the last year, to $1.24 trillion as of Sept. 30, the Dallas-based servicer said Wednesday in reporting an $80 million third-quarter profit.
While that’s less than half of the $204 million profit Mr. Cooper racked up during the second quarter, loan servicers and mortgage lenders often see big swings in their profits — on paper at least — as they adjust the fair value of their mortgage servicing rights.
When mortgage rates go down, that can reduce the fair value of MSRs, since borrowers are more likely to refinance and end up with another loan servicer.
Operating revenue in Mr. Cooper’s servicing segment was up 2 percent from Q2 and 28 percent from a year ago, to $616 million. But a $125 million write-down in the fair value of the companies’ MSRs weighed on the bottom line.
“Under the current interest rate environment, which included the Federal Reserve cutting interest rates during the third quarter, the company expects downward pressure on servicing income in the fourth quarter as prepayment speeds and amortization continue to rise,” Mr. Cooper said in its latest quarterly report to investors.
Falling mortgage rates can also fuel more lending, and Mr. Cooper boosted Q3 loan production by 80 percent from Q2 to $6.8 billion. Net gain on mortgage loans held for sale totaled $136 million, up 39 percent from the previous quarter.
Mr. Cooper pitches refinancing directly to homeowners that it collects loan payments from and also purchases loans originated by mortgage bankers through its correspondent channel.
While Mr. Cooper’s direct-to-consumer originations grew by 35 percent from the previous quarter to $2.3 billion, it funded $4.5 billion in loans through the correspondent channel — a 115 percent increase from Q2.
Mr. Cooper President Mike Weinbach said the direct-to-consumer channel “helped customers take advantage of the rally in mortgage rates during September, while our correspondent channel implemented a number of new initiatives which were well-received by clients.”
At $305 million, pretax operating income for the company as a whole was up 6 percent from Q2 and 38 percent from a year ago, as Mr. Cooper continued its strategy of pursuing growth while investing in technology to keep expenses in check.
Mr. Cooper’s servicing portfolio at $1.24T and growing
Mr. Cooper mortgage servicing rights, 2021-2024. Source: Mr. Cooper earnings reports.
The deal to acquire Flagstar Bank’s mortgage servicing business and correspondent lending platform, which remains on track to close by the end of the year, is projected to grow the company’s MSR portfolio to $1.59 trillion.
The Flagstar deal is expected to add $77 billion in owned MSRs and $279 billion in subservicing, Mr. Cooper said in releasing Q2 earnings.
Technology is helping Mr. Cooper cut costs and manage its massive loan servicing portfolio more efficiently. Last year the company revealed that it spends several hundred million dollars a year on call center operations and expects to realize at least $50 million in annual savings from its investment in a multiyear artificial intelligence project.
This month Mr. Cooper revamped its leadership team to get the most out of its investments in new technologies and AI. Sridhar Sharma, who is credited with developing Mr. Cooper’s patented AI, was promoted to a new role, and Mr. Cooper hired three new technology leaders from other companies.
Mr. Cooper was collecting monthly mortgage payments from 5.4 million borrowers as of Sept. 30 and has said its $1.4 billion acquisition of Flagstar’s mortgage servicing business and correspondent lending platform will add an additional 1.3 million servicing customers.
On a call with investment analysts Wednesday, Mr. Cooper Chairman and CEO Jay Bray provided some insight into the scale of the job.
Jay Bray
“As of today, we’re running at 152 million customer interactions per year. As a result, we’ve amassed an enormous amount of information about how best to serve mortgage customers,” Bray said. “In fact, our data lake now contains 16 petabytes.”
That data is being used to train employees — and AI — to serve Mr. Cooper’s customers more efficiently.
“In a world of digital technology and especially AI, this data gives us a real advantage when it comes to understanding customers’ needs and how to create value for them. Our goal is to become increasingly more proactive at anticipating their needs and faster at solving them.”
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