It’s not often you hear a chief executive officer describe a 99% decline in earnings from the previous quarter as “exceptional results.”
Nonetheless, that’s how Mr. Cooper Group Chairman & CEO Jay Bray described the company’s earnings report for the fourth quarter of 2022 during a teleconference with analysts and the media on Friday.
The Dallas-based nonbank mortgage lender and servicer reported net income of $1 million, or 1 cent per diluted share, down from $113 million, or $1.55 per diluted share, in the third quarter.
Net income was affected by mark-to-market of $58 million, which excludes fair value of excess spread accretion of $2 million. Mark-to-market refers to a way to value accounts that can fluctuate over time.
Excluding other mark-to-market and other items, Mr. Cooper reported pretax operating income of $82 million. Other items included $23 million charge due to severance and property consolidation, a $10 million loss associated with equity investments, and $1 million loss in intangible amortization.
Originations Fall 45%
For its mortgage loan originations segment, the company reported a pretax loss of $14 million and a pretax operating loss of $2 million. It reported funding 12,746 loans in the fourth quarter, totaling approximately $3.2 billion in unpaid principal balance (UPB). That included $1.9 billion in direct-to-consumer and $1.3 billion in correspondent. Funded volume decreased 45% quarter-over-quarter, the company said.
The servicing segment, meanwhile, served 4.1 million customers and reported pretax income of $98 million in the fourth quarter, including other mark-to-market of $58 million. The servicing portfolio ended the quarter at $870 billion in UPB, it said.
Servicing generated pretax operating income, excluding other mark-to-market, of $159 million. At quarter end, the carrying value of the mortgage servicing rights (MSR) was $6.65 billion, the company said.
Bray said Mr. Cooper “produced exceptional results in 2022, growing the portfolio by 23% year-over-year and tangible book value per share by 29%, despite a very challenging year for the industry.”
He said the results were a “clear validation of our balanced business model, the investments we’ve made in technology, and the incredible talent and hard work of our people.”
Bray added that he believes 2023 “is shaping up to be a year of meaningful opportunity for Mr. Cooper,” one in which it can grow its customer base and “put the company on the path to rising returns.”
MSR Opportunity
During the earnings conference call, Bray said he sees “an unprecedented volume of MSRs coming to market,” with the company estimating that nearly $4 trillion in UPB will trade over the next three years, including approximately $1.3 trillion in 2023 and $1.5 trillion in 2024.
“Now, bear in mind, this surge in volume is taking place in the context of a concentrated market with a limited number of buyers,” Bray said. “And as a result, we expect pools will trade at very attractive yields. And in fact, we're already seeing some of the highest yields since the Great Recession.”
He added that, “among a handful of large servicers, we believe Mr. Cooper is in the best position of any buyer to capitalize on this opportunity.”
Bray noted that Mr. Cooper reviewed “the nearly 300 deals we were offered over the ast two years,” and said that, of those deals, “we elected to analyze about two-thirds and then chose to bid on a little under half.” Mr. Cooper won 23% of what it bid on, and “going forward, we’d expect those ratios to remain relatively constant.”
As for the company’s operations, Mr. Cooper’s Vice Chairman & President Chris Marshall said that, as mortgage rates were trending higher last October, the company made the “difficult but necessary decision to eliminate 1,000 positions, most of which were in originations.”
Because of that decision, he said, Mr. Cooper was “roughly breakeven in the fourth quarter” and is now “on target to earn approximately $10 million in EBT (earnings before tax) for the first quarter.”
Marshall added that the company feels “good about driving these numbers higher if mortgage rates settle in at meaningfully lower levels or if MBS pricing improves.”
