The centerpiece of Mr. Cooper's earnings on Thursday were the ramifications of its $1.4 billion
In explaining the primary drivers of the sale, Flagstar had cited an interest in improving its capital position in addition to regulatory pressure and concern about interest rate volatility.
There have been broad expectations that the pending
The transaction transforms Mr. Cooper into the market's top servicer, exceeding former leader JPMorgan by roughly $100 billion, according to an analysis by BTIG.
"We get a major step-up in scale," said Jay Bray, chairman and CEO of Mr. Cooper Group, said in an earnings call comment on the deal, noting that the acquisition was in line with a dislocation in the market the company anticipated from regulatory pressure on banks.
The company paid for the transaction with a mix of cash and funds from financing secured by servicing assets, with the capacity of the funding vehicle anticipated to grow as a result of the deal.
Based on unpaid principal balance, the transaction brings a total of $356 billion of additional servicing assets to the company, according to BTIG's analysis. Subservicing accounts for the majority or $279 billion of the Flagstar assets. The remaining $77 billion are MSRs.
The company aims for a 50/50 mix in subservicing and MSRs overall, although the split has been slightly more in favor of the former recently at 52% vs. 48%, President Michael Weinbach said during the earnings call.
He said the company wouldn't rule out more acquisitions but said they'd likely be a "distant priority" compared to completing the onboarding process resulting from the Flagstar transaction, which has a targeted completion date in early 2025.
In addition to bringing on MSRs and subservicing, Mr. Cooper also has acquired third-party origination operations. It also took on responsibility for servicing advances in the transaction. Servicing advances are amounts that must be temporarily fronted for delinquent borrowers.
Overall, the company's bottom line was $208 million, up compared to
Net income for the quarter included certain one-time mark-to-market changes of $68 million
Mr. Cooper's challenge will be to keep servicing costs manageable enough for the business to remain profitable at a time when interest rates could fall, potentially forcing it to lean more on what's been a tough origination market.
Weinbach said the company has been fine-tuning its automation to keep its servicing efficient and in line with customer preferences, leaning heavily on chat functions it's found borrowers like to use. It's also been fine tuning interactive voice-response technology used to self-serve.
A recent
That study also noted signs of a potential uptick of distress could make customer service more challenging and that servicers that specialize in that area could have organically lower scores.
Weinbach said in the earnings call that special servicing operations Mr. Cooper acquired earlier to prepare for the possibility of an increase in distress have been performing well.
In addition to positioning its servicing operations for various market conditions, Mr. Cooper also has been preparing its origination channels, including direct-to-consumer, for recapture to minimize runoff in its servicing book.
Recapture is growing in importance because while a large number of outstanding borrowers with historically low rates have limited prepayment risk, Weinbach said 18% of Mr. Cooper's borrowers now have rates above 6%. The mix is similar in assets acquired from Flagstar.
"We're ready if something happens on the rates side," Bray said.
