Nonbank mortgage lender and servicer Mr. Cooper Group reported a net income of $151 million in the second quarter of 2022, a staggering 77% reduction in profits compared with the $658 million it recorded during the previous quarter.
The Dallas-based company’s performance reflects gains with mortgage servicing rights (MSR), which offset lower profitability related to originations, according to quarterly earnings released Wednesday.
During a call with analysts, Jay Bray, chairman and CEO of Mr. Cooper, said the servicing income is a benefit in the current transitional environment, given the pressure on originations.
“This is exactly why we operate with a balanced business model, and it’s a major differentiator for Mr. Cooper,” he said Wednesday.
In the context of concerns about a possible recession, Bray said the company will likely “continue growing at a modest pace for the next few quarters,” as executives closely monitor whether additional stress on the mortgage market develops.
In fact, Mr. Cooper had a $17 million pretax operating income in the second quarter of 2022, down from $96 million in the first quarter.
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However, the company also posted a $196 million gain with mark-to-market mortgage servicing rights. That’s because as interest rates rise, loan-prepayment speeds drop due to diminished refinancing activity, which, in turn, amplifies the value of MSRs because they pay out over a more extended period.
On the origination side, the company’s pretax operating income reached $63 million in Q2, representing a 60% decline quarter-over-quarter and a 70% drop year-over-year. Mr. Cooper originated $7.8 billion from April to June, down 32.7% compared to the previous quarter and 67.5% compared with the same period in 2021.
Gain-on-sale margin decreased to 1.03% in Q2, compared with 1.53% in the previous three months. In the second quarter of 2021, it was 1.36%.
According to company executives, margins were affected by a higher mix of correspondent volume, from 32.7% of the total volume funded in the first quarter, to 42.3% in Q2.
After reducing capacity in the first quarter, Bray said Mr. Cooper is now “aligned” with the current level of demand in the mortgage market, continuing to produce “new loans with solid margins.” The company laid off 250 employees during the first quarter.
Regarding its servicing portfolio, pretax operating income was $30 million in the second quarter, compared with $7 million in the first quarter.
Mr. Cooper ended the Q2 with $804 billion in unpaid principal balance (UPB), a 1% increase quarter-over-quarter and 23% year-over-year. Owned MSRs reached 49% of the portfolio mix in the Q2, compared to 52% in Q1.
The company acquired $8.1 billion in MSRs in the second quarter, significantly less than the $81 billion in the previous quarter, as it expects to reduce its purchases in the market.
“We are a little more inclined at this point to be more patient, more opportunistic, especially given the uncertainties,” Chris Marshall, the company’s vice chairman and president, said to analysts, referring to its goal of achieving a $1 trillion servicing portfolio.
Mr. Cooper has a capital ratio of 30.6%, but the target is 15%, which means it has resources for stock purchases. The company repurchased 2.3 million shares during Q2, for $100 million.
The company’s stock, was trading at $43.67 around 1 p.m. EST Wednesday, up 7.96% compared to the previous day’s close.
