Giant well positioned to capitalize in 2023, chairman says
Despite volatility with interest rates due to inflation, Mr. Cooper Group reported “exceptional” fourth quarter earnings, the company said.
Jay Bray, the company’s chairman and chief executive officer, led an earnings call on Friday during which he revealed fourth quarter net income of $1 million, or $0.01 per diluted share. Net income included other mark-to-market of $58 million, he added, excluding fair value of excess spread accretion of $2 million. Excluding other mark-to-market and other items, the company reported pre-tax operating income of $82 million.
On another front, the company reported a $23 million charge due to severance property consolidation and a $10 million loss associated with equity investments, and $1 million loss in intangible amortization. Bray also disclosed the firm had entered an agreement to buy a registered investment advisor to provide the company with an asset management platform to raise third-party capital.
‘Outstanding’ performance relative to peers, chairman says
Despite what he called “…a very challenging year for the industry due to one of the biggest rate increases on record,” Bray touted the company’s fourth quarter performance to end 2022 – a showing he largely attributed to a balanced strategy and technology investments. As evidence, he pointed to 23% growth of the company’s customer portfolio and 29% expansion of tangible book value per share. “Relative to our peers, this is outstanding performance,” he noted.
Bray expressed optimism for 2023: “And I will add that 2023 is shaping up to be a year of meaningful opportunity for Mr. Cooper. By executing on the strategy we’ve consistently shared with you in making the right tactical decisions, we stand to grow our customer base even further, plus put the company on the path to rising returns,” he said.
He showcased a key financial metric as further evidence of a solid fourth quarter performance: “I would point to a 200-basis-point lift in operating ROTCE [return on average tangible common shareholders equity] as servicing income nearly doubled in the quarter,” Bray said. “And bear in mind, our current return on equity is impacted by a very robust capital base, which you can see in the 31% ratio of tangible net worth to assets.”
Servicing portfolio expands, company shares repurchased
He then turned the focus to operations, pointing to a servicing portfolio that reached $870 billion, or 4.1 million customers – up 23% year-over-year. “And this growth, plus rising rates, helped push servicing income to a record high of $159 million in the fourth quarter,” he said, exceeding the November guidance of $140 million.
Given the current market climate, “rapid and decisive action” was taken last quarter to reduce capacity, he said. “And as a result, we were roughly break-even in the fourth quarter and are now on track for positive results, which will be in line with what we guided you to expect,” he said.
In terms of capital management, Bray revealed the company repurchased 1.3 million shares for $54 million “…as we continue to allocate capital both to growing our portfolio and to stock repurchase, with the goal of maximizing investor returns.”
Acquisition details disclosed
He then detailed a planned acquisition: “Finally, I want to mention that we’ve entered into a definitive agreement to acquire a registered investment advisor called Roosevelt Management Company and its sister company, Rushmore Loan Services, which is a highly regarded special servicer,” he said. “This acquisition will provide us with an asset management platform to raise third-party capital on an ongoing basis from institutional investors who seek exposure to MSRs and other mortgage assets.”
The chief executive said he expected the deal to close by mid-year following regulatory approval. Terms of the deal were not disclosed due to a non-disclosure agreement with the seller “but the cash outlay is not material,” he added.
Chairman has positive outlook for 2023
On the servicing front, Bray said he foresees “an unprecedented volume” of MSRs (mortgage servicing rights) coming to market. “In summary, we’re estimating that nearly $4 trillion will trade over the next three years, which on an annual basis is nearly double the historical run rate,” he said. “Now, bear in mind, this surge in volume is taking place in the context of a concentrated market with a limited number of buyers,” he 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 pointed to a pair of industry trends in explaining what’s driving the market:
- “First, during the pandemic, we saw a very noticeable change in originations behavior,” he said. “Simply put, they chose to retain a much higher volume of MSRs than their historical practice for the obvious reason that they were awash in cash, and they could afford to retain the servicing rights. Today, however, originators are facing the worst margins in years. In fact, we’re expecting for the first time ever to see three consecutive quarters of losses in the MBA quarterly origination performance survey.”
- “And this also means, for many operators, that liquidity is becoming a pressing need,” he continued. “Based on data from nearly 500 originators, we estimate there’s a backlog of as much as $1.5 trillion in UPB [unpaid principal balance], which needs to be sold. The second trend is consolidation. You’ve read public statements from industry leaders who decided to shrink their servicing portfolios.”
Formerly Nationstar Mortgage Holdings Inc., Dallas-based Mr. Cooper is a non-bank mortgage originator operating throughout the US.
