Mr. Cooper’s profits are down even as lower rates boosted its origination business

Mr. Cooper Group’s Jay Bray, left, and Mike Weinbach say that mortgage origination income that exceeded expectations in Q3 2024 isn’t likely to be the norm in the near future.

When mortgage rates declined in the third quarter of 2024, Mr. Cooper Group doubled its gains in the origination business. But executives don’t expect to repeat this performance in the coming quarter. 

“Our origination segment generated $69 million of pretax income, which significantly exceeded our guidance,” chairman and CEO Jay Bray told analysts during an earnings call on Wednesday. “This was, of course, due in part to the drop in mortgage rates in the quarter. However, we also benefited from investments we’ve been making in both our direct-to-consumer and correspondent platforms.“

Through its origination business — which focuses on acquiring loans from correspondent lenders and refinancing existing loans through its direct-to-consumer channel — Mr. Cooper delivered $69 million in pretax operating income from July to September. This compared favorably to $38 million in the previous quarter, according to filings with the Securities and Exchange Commission (SEC) on Wednesday.  

Taking all business together, however, the Dallas-based company delivered $80 million in net income in Q3 2024, compared to $204 million in the second quarter. This included a $415 million mortgage servicing rights (MSR) mark-to-market offset by $289 million in hedge gains, equivalent to a 70% hedge ratio. (The company’s target remains a 75% ratio.)

Mr. Cooper’s funded loan volume increased to $6.8 billion in Q3 2024, up from $3.8 billion in the previous quarter. Its correspondent channel volume grew from $2.1 billion to $4.5 billion during the period “without sacrificing margins,” executives said. Meanwhile, direct-to-consumer volume rose to $2.3 billion, compared to $1.7 billion in the previous quarter, mainly due to aggressive marketing and competitive pricing.

But President Mike Weinbach told analysts that ”mortgage rates have backed up since September, reducing some of the opportunity to help customers with rate-and-term refinances.”

He added that, “as such, we guide you for now to a more normalized level of profitability in the fourth quarter, with the pretax originations income in a range of $45 million to $65 million.” 

Regarding its servicing portfolio, Mr. Cooper had 5.4 million customers and $1.239 trillion in unpaid principal balance (UPB) at the end of September, up 32% year over year. Its portfolio brought in $305 million in pretax operating income in Q3 2024, compared to $288 million in the prior quarter. 

The acquisition of Flagstar’s servicing and subservicing portfolios along with its third-party origination platform will increase Mr. Cooper’s customer base to 6.6 million. The migration process is expected to be completed by early 2025.  

Bray told analysts the company has slowed its bulk MSR acquisitions due in part to seasonality. “We have acquired a couple of small pools, slightly less than $10 billion. There’s still activity. We’re going to participate in that activity, and we expect it to pick up in the first half of next year. And the bulk markets are always going to be there.” 

During the third quarter, the company issued $750 million in senior notes priced at 6.5%. Mr. Cooper said it has strong liquidity to support its model. At the end of June, it had $4 billion in liquidity, including $733 million in unrestricted cash. 

The company’s refinance recapture rate declined to 69% in the third quarter, compared to 73% in the second quarter. Overall recapture remained at 22%. But executives said that, looking ahead, they are working to improve customer experience through technology, enhanced application processes and development of loss-mitigation services.

“Earlier this month, we began piloting Agent IQ, a state-of-the-art AI-driven coaching platform, which listens to calls in real time, assesses sentiment and prompts our team members on how best to help the customers,” Bray said. ”If you reduce your calls by 10% because you’re delivering such a great digital experience to the customer, that’s over $10 million in savings.” 

According to Bray, one area of focus is loss mitigation “since delinquencies are so low today, but we know the cycle will eventually turn.” 

Mr. Cooper’s shares were trading around $88 on Wednesday morning, down from the previous day.