• Pretax Operating Income: $246 million.
• Operating ROTCE: 16.8%.
• Tangible Book Value: $69.93 per share, up 11% year-over-year.
• Capital Ratio: 27.9%.
• Liquidity: $4.1 billion, a record high.
• Servicing Portfolio: $1.2 trillion, serving 5.4 million customers.
• Pretax Servicing Income: $305 million, up 38% year-over-year.
• Originations Pretax Income: $69 million.
• Net Income: $80 million.
• Corporate Debt Interest Expense: Increased to $75 million sequentially.
• MSR Valuation: Marked down by $415 million.
• MSR Hedge Gains: $289 million, 70% coverage.
• MSR Delinquencies: 1.1%.
• Unrestricted Cash Balance: Gradually rising.

• Warning! GuruFocus has detected 5 Warning Signs with COOP.

Release Date: October 23, 2024

For the complete transcript of the earnings call, please refer to the full earnings call transcript.

Positive Points

• Mr. Cooper Group Inc (NASDAQ:COOP) reported a solid quarter with pretax operating income of $246 million and an operating ROTCE of 16.8%, which is at the upper end of their guidance.
• The company's tangible book value grew 11% year-over-year to $69.93 per share, and they maintain a strong balance sheet with a capital ratio of 27.9% and record liquidity of $4.1 billion.
• The servicing portfolio expanded to $1.2 trillion, representing 5.4 million customers, and generated $305 million in pretax servicing income due to strong operating leverage.
• The Originations segment significantly exceeded guidance with $69 million in pretax income, driven by investments in direct-to-consumer and correspondent platforms, achieving 80% sequential growth in fundings.
• Mr. Cooper Group Inc (NASDAQ:COOP) was certified as a great place to work for the sixth consecutive year, highlighting their commitment to a positive work environment.

Negative Points

• Interest rates are expected to rise, leading to higher amortization and some pressure on net interest income due to custodial deposits managed by the company.
• The company anticipates a slightly lower level of earnings in both servicing and originations for the fourth quarter.
• Corporate debt interest expense increased from $67 million to $75 million sequentially, with expectations to rise to $79 million in the fourth quarter due to new senior notes issued.
• The MSR portfolio experienced a markdown of $415 million due to lower interest rates and expectations for higher CPRs, partially offset by hedge gains.
• The company faces challenges in maintaining profitability in the Originations segment due to fluctuating mortgage rates, which could impact rate and term refinance opportunities.

Q & A Highlights

Q: Can you discuss the $45 million to $65 million pretax guide for originations in the fourth quarter and the drivers behind it? A: Michael Weinbach, President: Yes, the $45 million to $65 million guide reflects the challenging quarter due to fluctuating mortgage rates. Despite this, we see momentum in our direct-to-consumer business and opportunities in cash-out and home equity loans. Over 80% of our customers have more than $50,000 in equity, providing opportunities regardless of the rate environment. Jay Bray, CEO, added that the balanced business model will benefit if rates remain high, particularly in servicing.

Q: What did you observe in the DTC channel versus expectations, especially regarding volume increases in the third quarter? A: Michael Weinbach, President: The quarter was split into two halves, with a significant shift towards rate-term refinances when rates dropped in August. Correspondent business growth was driven by internal changes rather than rate fluctuations. Jay Bray, CEO, emphasized the importance of recapture, which was close to 70%, and the potential for growth in the correspondent channel due to their cost leadership and recapture capabilities.

Q: What is the current state of the pipeline for bulk servicing acquisitions, and what flexibility do you have for more deals post-Flagstar? A: Jay Bray, CEO: The Flagstar acquisition is on track to close in the fourth quarter, and while the bulk market has slowed, we expect activity to pick up next year. We have ample capacity and liquidity to act on opportunities. Additionally, we anticipate growth in subservicing, partnering with financial buyers and originators.

Q: How do you view the correspondent channel now, and do you plan to take more share in this area? A: Jay Bray, CEO: We are committed to growing our correspondent channel, leveraging our cost leadership and recapture capabilities. While we will remain disciplined in capital deployment, we see significant opportunities to expand our presence in this channel.

Q: Regarding the Ginnie Mae capital rules, how do you see the market responding, and could this catalyze bulk servicing trades? A: Kurt Johnson, CFO: We are well-capitalized according to Ginnie Mae's guidelines, and while the rules may drive some bulk sales, we've seen modest activity in the Ginnie Mae space. We continue to monitor the situation closely.

Q: Can you elaborate on your 14% to 18% ROTCE target for 2025 and what could drive you to the higher end of that range? A: Kurt Johnson, CFO: Several factors could drive us to the higher end, including increased originations, more subservicing volumes, and a stable interest rate environment. Michael Weinbach, President, added that their balanced business model and capital-light revenue streams position them well for strong returns.

Q: How do you plan to maintain or improve recapture rates in this cycle compared to previous ones? A: Jay Bray, CEO: We are confident in maintaining or improving recapture rates due to investments in process improvements, customer experience, and analytical capabilities. Our marketing and propensity models have improved, allowing us to better serve customers and drive results.

Q: Does your guidance for servicing and originations include the impact of Flagstar, and when do you expect the transaction to close? A: Kurt Johnson, CFO: Yes, the guidance includes the impact of Flagstar, and we anticipate the transaction will close earlier in the fourth quarter.

For the complete transcript of the earnings call, please refer to the full earnings call transcript.