Mr. Cooper confirmed in an earnings call Wednesday that it will remain a buyer in a mortgage servicing rights market
Although Mr. Cooper ended the first quarter of 2023 with a $853 billion portfolio that was down from $870 billion at the end of 2022, it was up from $796 billion a year earlier. And with the subsequent additions, it should be in a strong position to achieve its goal of building efficiencies through scale by becoming a $1 trillion-plus player in the market, executives said.
"More important than size, however, is return, which is why we remain fanatical about protecting the platform through a combination of innovation and discipline," Chairman and CEO Jay Bray told analysts during the call.
Placing limits on investments in mortgage servicing rights from government loans in securitizations backed by Ginnie Mae, and ensuring strong borrower equity levels are examples of this, executives said.
Just 15% of the company's portfolio consists of government-backed MSRs, "which is where you have recessionary risk and maybe higher expenses," said Kurt Johnson,
Mr. Cooper's investment in servicing was a theme within the discussion of the company's earnings of $37 million, which were up from $1 million the previous quarter. While this was down considerably from $658 million in the same quarter a year earlier, an extraordinary one-time markup on servicing had boosted results during that period. It was followed by two tough quarters in which the company and many others in the industry
While the company hasn't been immune to the past year's origination slump, the recent banking crisis and pending regulatory changes, it is different from some other mortgage companies that have been under more pressure to sell servicing rights for cash rather than buy them. That's because Mr. Cooper is in a relatively good position to cope with these challenges, executives and analysts said.
The company's liquidity position grew by around $640 million from the fourth quarter of 2022 to $2.4 billion, according to a Keefe, Bruyette & Woods. This allows the company "to play offense with bulk MSR acquisitions," Bose George, Michael Smyth and Thomas McJoynt Griffith, analysts at the company, said in a report issued Wednesday.
And while the banking crisis, which
"We do have a very diverse group of banks that provide financing to us, largely money-center banks. They've all been pretty comfortable with the risk," Johnson said.
Also, Mr. Cooper's origination unit returned to profitability in the first quarter, generating $23 million in pretax operating income. This line item was not as strong as the $157 million in pretax income recorded in servicing. However, the origination number was favorable when compared to a pretax loss of $2 million in the fourth quarter of last year.
Pretax servicing income nearly matched the previous quarter's $159 million and was up considerably from $8 million a year earlier, when the equivalent number for originations was far higher at $157 million. Originations generally benefit from lower rates while servicing does better from the opposite scenario and they're generally thought of as natural but potentially imperfect hedges for each other.
Mr. Cooper also has an artificial hedge of derivatives such as Treasury futures to mitigate interest-rate risk's impact on its servicing portfolio, and upsized it. That hedge generated $59 million in gains that offset $96 million in negative rate-related MSR marks in the first quarter.
More on servicing
As far as pending regulatory changes at Ginnie Mae that will set
"We, by and large, are comfortable with the framework that they've put in place," said Johnson.
In addition to having billions of dollars of MSR purchases in the pipeline, Mr. Cooper is also adding some $37 billion in subservicing contracts in line with
While Mr. Cooper announced the acquisition the previous quarter, there had been questions about the extent of the assets involved due in part to
The acquisition of an additional special servicing platform, which specializes in distressed assets, could benefit the company if the U.S. does slip into a recession in line with recent forecasts, executives noted.
"In a higher delinquency environment, we'd expect subservicing margins to remain stable or even potentially expand," said Chris Marshall, the company's vice president and chairman, during the earnings call.
Tech talk
The company is continuing to watch the margins of its different business lines carefully and apply technological efficiencies where possible.
The company is working on a project that utilizes artificial intelligence to anticipate customer calls and handle them on a proactive basis through digital self-serve tools and improvements to its interactive voice response technology, Marshall said. Mr. Cooper plans to implement it in "the back half of the year," and subsequently remove $50 million in annual run-rate expenses from the call center.
Using voice recognition and transcription, AI can transcribe information and summarize that for call center representatives, Johnson noted.
"Even if AI is not being used from a customer-facing standpoint,
The company's effort to build the industry's first cloud native platform for servicing through its
"We expect Sagent to continue operating slightly below break-even until the integration is complete, which we estimate around year-end," Johnson said during the call.
When asked about
"To talk about the acquisition, the technology in this space is really 50 years old and the new technology that exists today is just really exciting," he said.