Mr. Cooper has entered into a “definitive agreement” to buy Flagstar Bank’s residential mortgage servicing business for $1.4 billion, including their mortgage servicing rights (MSRs) and third-party origination (TPO) platform, the company announced in a press release Thursday.
Flagstar Bank is a subsidiary of New York Community Bankcorp, Inc. (NYCB), acquired by NYCB at the end of 2022. Mr. Cooper and NYCB both announced second-quarter earnings Thursday, also, the former reporting $204 million of net income.
“This purchase will be funded through available cash and drawdowns of existing MSR lines,” Mr. Cooper’s announcement reads. On an earnings call with investors, executives noted that $1.1 billion of the $1.4 billion price tag will come from the MSR drawdowns.
The transaction is expected to close in the fourth quarter of 2024, at which time Mr. Cooper expects to welcome 1.3 million new customers. Mr. Cooper has 5.3 million servicing customers, as of Thursday’s second-quarter earnings announcement.
Bray said in the earnings call that the acquisition is a win-win for Mr. Cooper and Flagstar, helping the bank solve for their “balance sheet goals” while enabling Mr. Cooper to achieve a “major step-up in scale.” Putting the context of the acquisition in Mr. Cooper’s “strategic journey” to dominate the bulk MSR market, Bray said Mr. Cooper has capitalized on the consolidation of the servicing industry.
The MSRs and subservicing contracts to be purchased from Flagstar total roughly $356 billion in unpaid principal balance. Mr. Cooper’s servicing portfolio grew year over year in the second quarter to more than $1.2 trillion. The company acquired Home Point Capital’s $84 billion servicing portfolio in May 2023 for $324 million. Mr. Cooper shuttered its wholesale lending platform back in 2020.
Bray commented in the company's press release, “We have the operational capacity to onboard Flagstar’s customers with a smooth and positive experience, which will be our top priority. We also look forward to welcoming Flagstar team members to the Mr. Cooper family.”
Servicing generated pretax operating income, excluding other mark-to-market, of $288 million for Mr. Cooper in the second quarter.
Eighteen percent (18%) of the Flagstar servicing portfolio Mr. Cooper will acquire includes notes above 6%, as reported in a call Thursday morning with investors, presenting an "attractive refinance opportunity." Those higher coupons provide the opportunity to scale up originations in 2025 should Federal Reserve rate cuts create the opportunity for servicing customers to refinance through Mr. Cooper's direct-to-consumers channels.
Roughly one-third of Mr. Cooper's entire servicing portfolio have notes over 5%. The company hired around 100 originators in the second quarter, adding capacity to prepare for any movement on interest rates, as reported in the call with investors.
In a press release announcing second quarter earnings and the sale of Flagstar’s mortgage operations, NYCB Chairman, President, and Chief Executive Officer Joseph M. Otting explained that the company “continued to simplify our business model” in the second quarter “by agreeing to sell certain parts of our mortgage business, including our mortgage servicing rights to Mr. Cooper, one of the leading mortgage companies in the country.”
Otting also noted that the move helps to bolster NYCB's "liquidity profile" and will "result in higher capital ratios."
As of July 25, NYCB’s stock has fallen 64% year to date. In January 2024, NYCB reported a quarterly loss and reduced its dividend for shareholders, causing its stock to drop sharply. Risky acquisitions and a challenging commercial real estate market have hurt the regional lender, leading them to report a net loss of $323 million compared to a net loss of $327 million in the first quarter.
"The Flagstar mortgage servicing platform is well-respected throughout the industry, which we believe is reflected in the premium we received,” Otting added. "This was not a decision we took lightly and I want to thank our teammates in mortgage servicing and third-party mortgage originations and all of the support teams who deliver high-quality service day-in and day-out."
Flagstar sold $5 billion worth of warehouse loans to JP Morgan Chase this past May. The bank will continue to provide residential mortgage products to its retail and private wealth customers.
“While the mortgage servicing business has made significant contributions to the Bank,” Flagstar’s press release read, “we also recognize the inherent financial and operational risk in a volatile interest rate environment, along with increased regulatory oversight for such businesses."
