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    Mr. Cooper Group (COOP)

    Q2 2024 Earnings Summary

    Reported on Apr 14, 2025 (Before Market Open)
    Pre-Earnings Price$86.64Last close (Jul 24, 2024)
    Post-Earnings Price$89.28Open (Jul 25, 2024)
    Price Change
    $2.64(+3.05%)
    • Accretive Flagstar Acquisition: The Flagstar deal is expected to boost returns significantly—with current ROTCE at 15.3% and guidance positioning 2025 in the mid‐to‐high teens—while adding scale through a balanced mix of owned MSRs and subservicing, which enhances profitability.
    • Operational Efficiency & Cost Leverage: Strong investments in technology—such as AI-driven tools that lower cost per loan and improve process efficiency—are driving operating leverage and margin improvements.
    • Robust Origination & Replenishment Capacity: The company is replenishing over 100% of its portfolio and expanding its capacity (including adding nearly 100 loan officers), while integrating Flagstar’s TPO business that originates over $1B per month, positioning it for solid organic growth.
    • Integration and execution risks: The Flagstar acquisition involves integrating both MSR and subservicing operations, including onboarding new team members and aligning technology systems, which could lead to higher-than-expected operating expenses and delays in realizing synergies.
    • Increased leverage and liquidity concerns: The acquisition is entirely debt-funded using cash on hand and MSR line draws. This could reduce liquidity—from a reported $3.3 billion to a pro forma high $2 billion—potentially limiting financial flexibility if market conditions worsen.
    • Margin pressure and uncertainty in earnings accretion: Guidance on accretion suggests a modest improvement (approximately 1 to 1.5 percentage point increase in ROE) and there are indications that higher operating costs from integrating the new business may pressure margins, possibly delaying or dampening expected earnings enhancements.
    1. Earnings Accretion
      Q: Earnings accretion impact?
      A: Management expects the Flagstar deal to add accretion by blending high‐teen returns on MSRs with subservicing, helping drive ROTCE toward the upper end of the 14–18% target for 2025.

    2. Deal Structure
      Q: Flagstar debt vs. equity?
      A: The acquisition is entirely debt-financed—about $1.1B for MSRs plus $85M in advances—with goodwill pending final calculations.

    3. Funding Impact
      Q: MSR line draw affects liquidity?
      A: While drawing on MSR lines will reduce liquidity, management expects post-deal liquidity to remain in the high $2B range with additional facility capacity.

    4. Fed Rate & Hedge
      Q: Fed cuts affect MSR values?
      A: The forward curve already prices in anticipated rate cuts, and a consistent 75% hedge ratio is expected to offset most adverse effects.

    5. Valuation Multiple
      Q: Value split: platform vs. MSR?
      A: The MSR component trades at roughly 5.3x the base servicing fee, while overall deal metrics—factoring in subservicing and origination—suggest a slightly lower effective multiple than 5.6x.

    6. Origination Scale
      Q: Can origination handle increased recapture?
      A: COOP is expanding capacity with nearly 100 new LOs and enhanced digital tools to efficiently manage growing recapture volumes and first-lien activity.

    7. Credit Ratings
      Q: Ratings agencies’ view on Flagstar?
      A: Management reported positive feedback from rating agencies regarding the transaction, with capital ratios remaining within targeted ranges, though no specific details were disclosed.

    8. Recapture Agreements
      Q: Details on recapture agreements?
      A: The team noted a mixed approach with some clients relying on COOP’s recapture capability while others use their own, without divulging detailed figures.

    Research analysts covering Mr. Cooper Group.