Sign in
MC

Mr. Cooper Group Inc. (COOP)·Q3 2024 Earnings Summary

Executive Summary

  • Q3 2024 delivered solid operational performance: pretax operating income of $246M and operating ROTCE of 16.8%; GAAP net income was $80M as a negative MSR mark-to-market of ($126M) offset strong segment results .
  • Servicing operating pretax income rose to $305M (from $288M in Q2), while Originations pretax income surged to $69M (vs. $38M in Q2), aided by rate volatility and execution in DTC and correspondent channels .
  • Liquidity reached a record $4.1B and capital ratio stood at 27.9%; management guided Q4 pretax servicing income to $285–$305M and Originations to $45–$65M (including Flagstar impact), with 2025 ROTCE targeted at the midpoint of 14–18% .
  • Potential catalysts: originations momentum, subservicing pipeline, and Flagstar integration; headwind remains MSR mark-to-market sensitivity to rates, though hedging coverage was ~70% in Q3 .

What Went Well and What Went Wrong

What Went Well

  • Originations outperformed guidance: pretax income was $69M vs. prior $35–$45M guide, on 80% QoQ funded volume growth and nearly 70% refinance recapture; DTC funded $2.3B and correspondent $4.5B .
  • Servicing operating leverage: pretax operating income rose to $305M with portfolio UPB at $1.239T (+32% y/y); operational revenue $616M and continued process efficiency gains (declining calls/loan, digital-first adoption) .
  • Balance sheet strength: record liquidity $4.1B; incremental MSR financing capacity, issuance of $750M senior notes (6.5% coupon), and disciplined capital deployment including $46M buybacks (0.5M shares) .

Quotes:

  • “We produced a very solid quarter with pretax operating income of $246 million and operating ROTCE of 16.8%…” .
  • “Our Originations segment generated $69 million of pretax income which significantly exceeded our guidance.” .

What Went Wrong

  • MSR mark-to-market headwind: negative other mark-to-market of ($126M) driven by lower rates and higher CPRs; MSR valuation marked to 148 bps UPB, offset by $289M hedge gains (~70% coverage) .
  • Sequential revenue decline: consolidated revenues fell to $424M from $583M due to servicing mark-to-market and amortization pressures; corporate net interest expense rose to $75M post-August notes .
  • Slight uptick in delinquencies: MSR 60+ DPD rate rose to 1.5% (from 1.4%), driven by FHA/VA collateral mix; management expects higher amortization as CPR rises in Q4/2025 .

Financial Results

MetricQ1 2024Q2 2024Q3 2024
Revenue ($USD Billions)$0.564 $0.583 $0.424
Net Income ($USD Millions)$181 $204 $80
Diluted EPS ($)$2.73 $3.10 $1.22
Operating ROTCE (%)14.5% 15.3% 16.8%
Net Income Margin (%)32.1% (181/564) 35.0% (204/583) 18.9% (80/424)

Segment breakdown (pretax unless noted):

Segment Metric ($USD Millions)Q1 2024Q2 2024Q3 2024
Servicing Total Revenues450 456 256
Servicing Pretax Income313 354 177
Servicing Other MtM (ex-hedges)(42) (68) 126
Servicing Pretax Operating Income273 288 305
Originations Pretax Income32 38 69
Corporate/Other Pretax(113) (115) (134)

KPIs and operating metrics:

KPIQ2 2024Q3 2024
Servicing Ending UPB ($T)$1.206 $1.239
MSR Carrying Value ($B)$10.352 $10.035
MSR Value (bps of UPB)153 bps 148 bps
60+ Day DPD (period end)1.4% 1.5%
Annualized CPR5.6% 7.1%
Modifications/Workouts22,645 21,817
Pull-through Adjusted Volume ($B)$4.473 $7.491
Funded Volume ($B)$3.794 $6.825
Refinance Recapture (%)73% 69%
Purchase Mix (% of funded)62% 69%

Guidance Changes

MetricPeriodPrevious GuidanceCurrent GuidanceChange
Servicing Pretax IncomeQ4 2024N/A$285–$305M (includes Flagstar impact) New
Originations Pretax IncomeQ4 2024$35–$45M (Q3 guide referenced) $45–$65M (normalized; rate-dependent; includes Flagstar impact) Raised vs prior guide
Corporate Net Interest ExpenseQ4 2024 onward~$75M in Q3 actual ~$79M/quarter run-rate from Q4 (full notes impact) New run-rate
ROTCE (Operating)FY 202514–18% target range introduced earlier Expect midpoint of 14–18% in 2025 Maintained (midpoint reiterated)
Flagstar Closing/ContributionQ4 2024Close in Q4 (announced Q2) Closed Nov 1; integration into 2025 Completed

Earnings Call Themes & Trends

TopicPrevious Mentions (Q1 & Q2)Current Period (Q3)Trend
AI/Technology InitiativesOngoing digital-first investments; no specific AI pilot noted in Q2 PR Piloted Agent IQ real-time AI coaching; plan rollout in 2025; cloud-native stack emphasis with CTO/Chief Innovation appointments Accelerating tech deployment (AI move from concept to pilot)
Interest Rates & CPR/AmortizationCPR: 4.7% (Q1), 5.6% (Q2); amortization rising with CPR CPR 7.1%; management expects further increases, higher amortization, some pressure on custodial deposit NII Rising prepay/CPR; spotlight on rate sensitivity
Originations Mix & RecaptureQ1/Q2 growth: funded $2.878B→$3.794B; recapture 70–73% Funded $6.825B; recapture ~69%; DTC $2.3B, correspondent $4.5B; pricing/model enhancements improve share without margin sacrifice Strong execution; correspondent scaling; resilient recapture
Regulatory/Legal (Ginnie Mae Capital Rules)Not highlighted in Q1/Q2 PRs Well-capitalized; potential catalyst for Ginnie bulk trades; modest Ginnie activity increasing Monitoring; potential opportunity creation
Capital & LiquidityLiquidity $3.2B in Q2; senior notes priced at 6.5% (July) Record liquidity $4.1B; lines largely termed to 2026; capital ratio 27.9% Strengthened balance sheet
M&A/Platform ExpansionAnnounced Flagstar acquisition in Q2 for ~$1.4B; expected Q4 close Closed Flagstar Nov 1; expect >6M customers; integrate early 2025 Platform scale-up completed; integration ahead

Management Commentary

  • Strategy and returns: “Pretax operating income of $246 million and operating ROTCE of 16.8%… balance sheet remains in strong shape with a capital ratio of 27.9% and liquidity at a record high of $4.1 billion.”
  • AI/customer experience: “We began piloting Agent IQ… listens to calls in real time, assess the sentiment and prompts our team members on how best to help the customer.”
  • Originations execution: “We funded $2.3 billion [DTC]… correspondent more than doubled volumes… without sacrificing margin.”
  • Hedging and MSR valuation: “Marked down the MSR by $415 million… offset by $289 million in hedge gains (~70% coverage)… 148 basis points via PV.”
  • Outlook/returns: “We continue to anticipate 2025 ROTCE at the midpoint of our 14% to 18% guidance range… accretion from the Flagstar Mortgage Banking acquisition.”

Q&A Highlights

  • Originations outlook: Q4 pretax guide $45–$65M reflects rate sensitivity; opportunity across cash-out and home equity even if rate-term refi moderates; balanced model offsets via servicing .
  • Correspondent vs bulk strategy: Expect to take share in correspondent with disciplined capital deployment; bulk market not “played out” and remains opportunistic; capacity ample .
  • Ginnie Mae rules: Company well-capitalized; rules could catalyze bulk trades; observed modest uptick in Ginnie activity .
  • Corporate expense normalization: Corporate expense to trend back toward ~$40M run-rate in Q4; Q3 had some onetime items .
  • Guidance inclusions: Q4 segment guidance includes impact from Flagstar; expected earlier Q4 close; subsequently confirmed with Nov 1 completion .

Estimates Context

  • Wall Street consensus (S&P Global) for Q3 2024 EPS and revenue was unavailable at time of request due to data access limits. As a result, we cannot quantify beats/misses versus consensus for Q3 within this report. Management noted Originations significantly exceeded internal guidance for Q3, while servicing operating income remained strong despite MSR mark-to-market headwinds .

Key Takeaways for Investors

  • Servicing resilience and operating leverage: rising CPR pressure is being offset by stronger originations and continued efficiency gains; operating pretax servicing income lifted to $305M despite negative MSR marks .
  • Originations momentum is real: 80% QoQ funded growth with robust recapture and improved correspondent win rates; expect normalized Q4 profitability but a larger 2025 contribution as investments scale .
  • Balance sheet optionality: record $4.1B liquidity and termed lines to 2026 support opportunistic MSR acquisitions, correspondent growth, and buybacks; corporate interest expense resets to ~$79M/quarter from Q4 .
  • Subservicing and fee income: capital-light revenue streams likely to support high-end of ROTCE range, particularly if rates remain higher-for-longer .
  • Flagstar integration: closed Nov 1, adding >1.3M customers and ~$356B UPB; expect operational integration in early 2025 with scale benefits across servicing and origination funnels .
  • Watch the rate path: EPS volatility tied to MSR mark-to-market; hedging coverage (~70%) mitigates, but traders should anticipate headline sensitivity around CPR and MSR valuation marks .
  • Near-term setup: Q4 guidance points to solid servicing earnings and normalized originations; if rates dip again, originations could upside surprise; if rates remain elevated, servicing NII and lower speeds support ROTCE .

Appendix: Additional Q3 Details (from the 8-K and PR)

  • Consolidated: Revenue $424M; Net income $80M; Diluted EPS $1.22; Basic $1.24; shares diluted 65.5M .
  • Servicing: Operational revenue $616M; Amortization (net) ($235M); mark-to-market ($125M); ending UPB $1.239T; MSR $10.035B (148 bps) .
  • Originations: Pull-through volume $7.491B; funded $6.825B; refinance recapture 69%; purchase mix 69% .
  • Capital actions: Repurchased 0.5M shares for $46M; issued $750M senior notes at 6.5% .