Mr. Cooper Group Inc. (NASDAQ:COOP) is a leading residential mortgage servicer and originator, providing customer-centric servicing, origination, and transaction-based services related to single-family residences throughout the United States. The company operates under its primary brands: Mr. Cooper® and Xome®.
Business Overview
Mr. Cooper has a long history of significant growth, having expanded its servicing portfolio UPB from $10 billion in 2006 to $1.2 trillion as of June 30, 2023. This impressive track record reflects the company's strong operational capabilities, loss mitigation skills, commitment to compliance, customer-centric culture, and ability to retain customers. Additionally, the company's growing origination capabilities and significant investment in technology, such as its proprietary Pyro AI system, have contributed to its success.
Mr. Cooper's strategy is focused on positioning the company for sustained growth, delivering a world-class customer experience, increasing its return on tangible equity into the high teens, and acting as a trusted partner for its key stakeholders. Key strategic initiatives include strengthening the balance sheet, improving efficiency, sustaining industry-leading refinance recapture rates, growing its purchase recapture rate, delighting customers, reinventing the customer experience, using its Pyro platform to transform mortgage servicing, sustaining talent and culture, and maintaining strong relationships with agencies, investors, regulators, and other counterparties.
Financials
For the full year 2023, Mr. Cooper reported annual net income of $500 million, annual revenue of $1.794 billion, annual operating cash flow of $896 million, and annual free cash flow of -$972 million. In the second quarter of 2024, the company generated pre-tax operating income of $219 million, up 46% year-over-year, and an operating ROTCE of 15.3%, up nearly 400 basis points from a year ago. This strong performance was driven by the Servicing segment, which reported pre-tax income of $288 million, up 58% year-over-year, reflecting the benefits of portfolio growth and operational leverage.
The Originations segment generated pre-tax income of $38 million in the second quarter of 2024, at the high end of the company's guidance, despite the challenging market environment. Mr. Cooper's total market risk is influenced by a wide variety of factors, including market volatility and the liquidity of the markets.
Recent Developments
Acquisition of Flagstar's Mortgage Operations
In July 2024, Mr. Cooper announced the acquisition of Flagstar's mortgage operations for approximately $1.4 billion in cash. The transaction includes the purchase of Flagstar's mortgage servicing rights (MSRs) and advances, totaling $1.2 billion, as well as its subservicing business with a total UPB of $270 billion. Additionally, Mr. Cooper will subservice $9 billion in Flagstar loans remaining on their balance sheet. The total UPB of the acquired assets is approximately $356 billion.
The acquisition is a strategic fit for Mr. Cooper, as it aligns with the company's focus on growth and operational excellence. The transaction provides Mr. Cooper with additional scale, fee income from subservicing, and the opportunity to realize further operating leverage. The company expects the acquisition to be accretive to its return on tangible equity, potentially adding up to 1.5 percentage points to its ROTCE.
Servicing Segment
Mr. Cooper's Servicing segment is a key driver of the company's success, generating $288 million in pre-tax income in the second quarter of 2024, up 58% year-over-year. This strong performance reflects the benefits of portfolio growth and exceptional operational efficiency gains, with expenses increasing only 16% year-over-year despite a 37% increase in revenues.
The company's digital-first strategy, which includes initiatives such as chat technology, IVR optimization, and self-serve tools, has been instrumental in driving down the cost per loan by 50% over the last three years. Additionally, the company's focus on loss mitigation and loan modifications has contributed to a record-low delinquency rate of 1.0% in the second quarter of 2024.
Looking ahead, Mr. Cooper expects servicing income to be relatively stable in the third quarter of 2024, with EBT in the range of $280 million to $300 million. However, the company anticipates that rising amortization and lower deposit yields will be headwinds in 2025, which it plans to offset with potentially higher origination earnings.
Originations Segment
Mr. Cooper's Originations segment generated pre-tax income of $38 million in the second quarter of 2024, at the high end of the company's guidance. The segment's performance was driven by strong execution in both the direct-to-consumer (DTC) and correspondent channels, with a refinance recapture rate of 73% and purchase loans accounting for 28% of total volumes.
The company has been investing in its DTC platform, including workflow automation, customer experience enhancements, and scalability, to prepare for a potential increase in refinance activity as prepayment speeds are expected to rise. Additionally, the company's MSR portfolio now has 18% of mortgages with coupons of 6% or higher, up from only 3% in 2022, providing opportunities to scale up originations in 2025.
For the third quarter of 2024, Mr. Cooper guides originations EBT in the range of $35 million to $45 million, assuming current mortgage rates. The company remains focused on delivering a world-class customer experience and leveraging its technology investments to drive operational efficiency in the Originations segment.
Liquidity
As of June 30, 2024, Mr. Cooper held cash and cash equivalents of $642 million and had sufficient borrowing capacity to support its operations, with total available borrowing capacity for advance, warehouse, and MSR facilities of $11.951 billion, of which $2.594 billion was collateralized and immediately available to draw.
The company's balance sheet remained in strong shape at the end of the second quarter, with a capital ratio (as measured by tangible net worth to assets) of 28.4%, well above the company's target range of 20% to 25%. Even after the Flagstar acquisition, the company's pro forma capital ratio would have been approximately 26%, still above the upper end of the target range.
Mr. Cooper continues to evaluate the prospects for new unsecured debt issuances to increase the mix of unsecured debt in its capital stack and keep upward pressure on its ratings. The company's financial covenants and seller/servicer financial requirements remain well within compliance.
Risks and Challenges
Mr. Cooper's market risk is influenced by a wide variety of factors, including macroeconomic conditions, changes in interest rates, and secondary market pricing. The company has identified several key risks, including adverse changes in the economy, interest rate volatility, changes in prepayment assumptions, declines in home prices, and discrete events affecting specific borrowers.
Outlook
Despite these risks, Mr. Cooper remains well-positioned for continued growth and operational excellence. The company's strategic initiatives, investments in technology, and focus on customer experience position it to navigate the evolving mortgage market. The acquisition of Flagstar's mortgage operations further strengthens Mr. Cooper's scale and market presence, and the company expects the transaction to be accretive to its return on tangible equity.
Looking ahead, the company has guided that it now feels comfortable at the midpoint of its 14% to 18% ROTCE range for 2025, with the Flagstar acquisition contributing to this improved outlook. Mr. Cooper remains committed to its disciplined capital deployment strategy and will continue to evaluate additional growth opportunities that align with its strategic priorities and deliver value for shareholders.
Conclusion
Mr. Cooper Group Inc. is a leading residential mortgage servicer and originator with a proven track record of growth and operational excellence. The company's strategic initiatives, investments in technology, and focus on customer experience have positioned it for continued success. The acquisition of Flagstar's mortgage operations further strengthens Mr. Cooper's scale and market presence, and the company expects the transaction to be accretive to its return on tangible equity. With a strong balance sheet, ample liquidity, and a disciplined capital deployment strategy, Mr. Cooper is well-poised to navigate the evolving mortgage market and deliver value for its shareholders.