Mr. Cooper to buy Roosevelt Management, Rushmore

Mr. Cooper plans to buy an investor in mortgage-related assets and a special servicer in order to brace itself for a potential credit-cycle shift, executives revealed during an earnings call Friday.

The mortgage company plans to close on the purchase of Roosevelt Management Co., a registered investment advisor, and its sister company, Rushmore, by mid-year. Roosevelt invests in whole loans and mortgage servicing rights.

"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 MSR and other mortgage assets," Jay Bray, Mr. Cooper's chairman and CEO, said during the earnings call.

Bray declined to state specific terms of the deal due to a nondisclosure agreement, while noting that "the cash outlay is not material."

Mr. Cooper has faced questions about how a forecast recession could impact it, one company executive said during the call that having additional special servicing operations could help position the company to weather such an event.

"Many of you have asked about the risk of a credit cycle change impacting returns, and our response would be first, that we purposely carry excess operating capacity to absorb higher levels of loss mitigation activity, and second, we will look at a higher delinquency environment as an opportunity to grow our special servicing business," said Chris Marshall, Mr. Cooper's vice chairman and president. Special servicers focus on in distressed assets.

Mr. Cooper's executives declined to comment on analyst questions about Specialized Portfolio Servicing's earlier agreement to buy some of Rushmore's assets last year, but they noted that their company's pending acquisition involves buying the entity itself.

The company earned $1 million in the fourth quarter of last year. In comparison, it generated $155 million in net earnings a year earlier, and $113 million in net income in  the third-quarter of 2022,

Mr. Cooper has turned in remarkably consistent profitability given that lenders last year recorded the largest average, quarterly loss seen since 2008, with just a little under half of companies profitable during that period, according to the Mortgage Bankers Association.

The company reported a pretax loss of $2 million related to originations in the fourth quarter of 2022. In the third quarter of last year, it managed to generate $45 million in pretax income. During the fourth quarter a year earlier, pretax income on originations was $181 million.

Executives said the small pretax loss on originations suggests it's close to breaking even on production operations after rightsizing through mass layoffs. The company has eliminated 1,000 positions, primarily in originations, executives said.

The company's strength in servicing, which has historically been considered a natural but imperfect hedge for origination declines, has been largely credited for its strong performance during the rate rise that occurred earlier in 2022 and reduced production industrywide.

Without servicing just 25% of mortgage bankers companies were profitable in 3Q22, according to the MBA. The association's release of profitability numbers for fourth-quarter 2022 were pending at deadline. Mr. Cooper executives said those numbers will likely continue to reflect an average loss per loan for the industry.

Mr. Cooper reported $159 million worth of pre-tax net income from servicing during the fourth quarter of last year when mark-to-market and accounting adjustments are excluded. It recorded $81 million during the same period a year earlier when those adjustments were excluded.

While servicing has its benefits as a cyclical hedge, mark-to-market valuations can be volatile. The company reported -$56 million in mark-to-market adjustments to servicing in the fourth quarter.

"MSR valuations and returns are probably at or near peak levels," Bose George, Michael Smyth, and Thomas McJoynt-Griffith, analysts at Keefe, Bruyette & Woods said in a report on the company's earnings.

Mr. Cooper executives said that given the wave of sales anticipated in the market, opportunities to buy MSRs at relatively low prices and generate strong returns still look favorable to them.

Executives also noted during the call that the company has been continuing to work on upgrading its customer-facing servicing technology through a business partnership with Sagent, which is taking a final step aimed at completing a cloud native platform.

"Having a modern application suite provides tremendous efficiencies for servicing. Tasks that you've had to do manually suddenly are done faster," said Marshall.