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Oct. 28, 2021, 10:59 a.m. EDT

10-Q: MR. COOPER GROUP INC.

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(EDGAR Online via COMTEX) -- Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

Management's discussion and analysis of financial condition and results of operations ("MD&A") should be read in conjunction with the accompanying unaudited condensed consolidated financial statements and in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2020. The following discussion contains, in addition to the historical information, forward-looking statements that include risks, assumptions and uncertainties that could cause actual results to differ materially from those anticipated by such statements.

Dollar amounts are reported in millions, except per share data and other key metrics, unless otherwise noted.

We have provided a glossary of terms, which defines certain industry-specific and other terms that are used herein, at the end of the MD&A section.

Overview

We are a leading servicer and originator of residential mortgage loans. Our purpose is to keep the dream of homeownership alive, and we do this as a servicer by helping mortgage borrowers manage what is typically their largest financial asset, and by helping our investors maximize the returns from their portfolios of residential mortgages. We have a track record of significant growth, having expanded our servicing portfolio from $10 billion in 2009 to $668 billion as of September 30, 2021. We believe this track record reflects our strong operating capabilities, which include a proprietary low-cost servicing platform, strong loss mitigation skills, a commitment to compliance, a customer-centric culture, a demonstrated ability to retain customers, growing origination capabilities, and significant investment in technology.

Our strategy is to position the Company for sustainable long-term growth, drive improved efficiency and profitability, and generate a return on tangible equity of 12% or higher. Key strategic priorities include the following:

Strengthen our balance sheet by building capital and liquidity, and managing interest rate and other forms of risk;

Impact of the COVID-19 Pandemic

The COVID-19 pandemic introduces unprecedented uncertainty in the economy, including the risk of a significant employment shock and recessionary conditions, with implications for the health and safety of our employees, borrower delinquency rates, servicing advances, origination volumes, the availability of financing, and our overall profitability and liquidity. We have implemented the provisions of the Coronavirus Aid, Relief, and Economic Security Act (CARES Act), which makes available forbearance plans for up to eighteen months for borrowers under government and government agency mortgage programs, which we have extended to borrowers in our private label mortgage servicing portfolio. As of October 17, 2021, approximately 2.4% of our customers were on a forbearance plan, down from a peak of 7.2% in July 2020. More customers are now exiting forbearance than are entering. We include loans in forbearance related to the CARES Act, whereby no payments have been received from borrowers for greater than 90 days, in loans subject to repurchase rights from Ginnie Mae in other assets and payables and other liabilities on a gross basis. The balance was $2,486 as of September 30, 2021. See liquidity discussion related to the COVID-19 pandemic in Liquidity and Capital Resources section in MD&A.

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In the third quarter of 2021, our forward MSR portfolio continued to grow due to strong execution across all channels, primarily correspondent, direct-to-consumer, and acquisitions. We expect to see continued portfolio growth in the remainder of 2021 as the bulk market is starting to present us with more sizable opportunities. We closed on $21.6 billion in acquisitions this quarter, and anticipate closing on $32 billion in acquisitions subsequent to the third quarter of 2021. We have continued to benefit from early-buyout gains in 2021, which have driven strong operating income for our servicing segment, as we helped customers exit forbearance. We expect another quarter of solid early-buyout revenues in the fourth quarter of 2021, although down from third quarter of 2021, after which revenues will begin to taper off because we will be nearing the end of the inventory as loans in forbearance status continue to decrease. Based on the current interest rate environment, we expect prepayment speeds and amortization to remain elevated in the fourth quarter of 2021. On July 1, 2021, we entered into a definitive agreement for the sale of our reverse servicing portfolio, operating under the Champion Mortgage brand. The sale is expected to close in the fourth quarter of 2021. Refer to Note 2, Discontinued Operations, for further details.

Our Originations segment continued to generate strong funded volumes from both the correspondent and direct-to-consumer channels in the third quarter of 2021 despite competitive pricing pressure. Additionally, our pull through adjusted lock volume grew by 9%, as we took advantage of the drop in mortgage rates during the quarter. We expect the originations profit margins to compress quarter-over-quarter in the fourth quarter of 2021 as a result of continued pricing pressure.

In addition, we completed the sale of the Field Services business in October 2021. The sale of the Field Services business and the reverse servicing portfolio allow us to focus on our core business. Xome's revenue has been, and is expected to continue to be, negatively impacted, as the REO exchange continues to be idle while the foreclosure moratoriums remain in effect. We expect the foreclosure moratoriums to expire at the end of the year and the resumption of foreclosure sales in 2022.







        Results of Operations
        Table 1. Consolidated Operations
                                                              Three Months Ended September 30,
                                                                  2021                    2020                Change
        Revenues - operational                            $             709          $       879          $      (170)
        Revenues - mark-to-market                                       151                  (16)                 167
        Total revenues                                                  860                  863                   (3)
        Total expenses                                                  402                  455                  (53)
        Total other expenses, net                                        44                  162                 (118)
        Income from continuing operations before income
        tax expense                                                     414                  246                  168
        Less: Income tax expense                                        104                   59                   45
        Net income from continuing operations                           310                  187                  123
        Less: Net earnings attributable to
        non-controlling interests                                         -                    5                   (5)
        Net income from continuing operations
        attributable to Mr. Cooper                        $             310          $       182          $       128
        


During the three months ended September 30, 2021, income from continuing operations before income tax expense increased to $414 from $246 in 2020. The increase was driven by a decrease in total other expenses, net and total expenses. Total other expenses, net decreased primarily due to the $53 loss in 2020 on redemption of the 2023 unsecured senior notes and increase in interest income related to higher pandemic related buyouts in 2021, whereas, the decrease in total expenses was related to the sale of Xome's Title and Valuations businesses in 2021. See further discussions in Note 1, Nature of Business and Basis of Presentation, in the Notes to the Condensed Consolidated Financial Statements and the Segment Results section of the MD&A.

The effective tax rate for continuing operations during the three months ended September 30, 2021 was 25.0% as compared to 23.9% in 2020. The change in effective tax rate for continuing operations is primarily attributable to state income taxes and nondeductible executive compensation expenses during the three months ended September 30, 2021 as compared to 2020.

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        Table 1.1 Consolidated Operations
                                                               Nine Months Ended September 30,
                                                                  2021                    2020                Change
        Revenues - operational                            $           2,317          $     2,363          $       (46)
        Revenues - mark-to-market                                       376                 (618)                 994
        Total revenues                                                2,693                1,745                  948
        Total expenses                                                1,281                1,277                    4
        Total other income (expenses), net                              294                 (330)                 624
        Income from continuing operations before income
        tax expense                                                   1,706                  138                1,568
        Less: Income tax expense                                        410                   33                  377
        Net income from continuing operations                         1,296                  105                1,191
        Less: Net earnings attributable to
        non-controlling interests                                         -                    2                   (2)
        Net income from continuing operations
        attributable to Mr. Cooper                        $           1,296          $       103          $     1,193
        


During the nine months ended September 30, 2021, income from continuing operations before income tax expense increased to $1,706 from $138 in 2020. The change was primarily driven by a favorable MTM adjustments in 2021 compared to negative MTM adjustments in 2020 due to the interest rate environment. The change was also attributable to the completion of the sale of Xome's Title and Valuations businesses in 2021, which resulted in a $494 gain recorded in total other income (expenses), net. See further discussions in Note 1, Nature of Business and Basis of Presentation, in the Notes to the Condensed Consolidated Financial Statements and Segment Results section of the MD&A. In addition, total other income (expenses), net in 2020 included the $53 loss on redemption of the 2023 unsecured senior notes.

The effective tax rate for continuing operations during the nine months ended September 30, 2021 was 24.0% as compared to 23.8% in 2020. The increase in effective tax rate for continuing operations is primarily attributable to the completion of the Title Transaction and excess tax benefit from stock-based compensation expenses during the nine months ended September 30, 2021 as compared to 2020.

Segment Results

Our operations are conducted through two segments: Servicing and Originations.

The Servicing segment performs operational activities on behalf of investors or owners of the underlying mortgages, including collecting and disbursing borrower payments, investor reporting, customer service, modifying loans where appropriate to help borrowers stay current, and when necessary performing collections, foreclosures, and the sale of REO.

Refer to Note 16, Segment Information, in the Notes to the Condensed Consolidated Financial Statements for a summary of segment results.

Servicing Segment

The Servicing segment's strategy is to generate income by growing the portfolio and maximizing the servicing margin. We believe several competitive strengths have been critical to our long-term growth as a servicer, including our low-cost platform, our skill in mitigating losses for investors, our commitment to strong customer service and regulatory compliance, our history of successfully boarding new loans, and the ability to retain existing customers by offering attractive refinance options. We believe that our operational capabilities are reflected in our strong servicer ratings.

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        Table 2. Servicer Ratings
                             Fitch(1)        Moody's(2)            S&P(3)
        Rating date          May 2021       February 2021       December 2020
        Residential            RPS2             SQ2-            Above Average
        Master Servicer        RMS2+             SQ2            Above Average
        Special Servicer       RSS2             SQ2-            Above Average
        Subprime Servicer      RPS2             SQ2-            Above Average
        


(1)Fitch Rating Scale of 1 (Highest Performance) to 5 (Low/No Proficiency)

The following tables set forth the results of operations for the Servicing segment:







                                                              Three Months Ended September 30,
                                                          2021                                    2020                               Change
                                                 Amt                  bps(1)             Amt              bps(1)             Amt               bps
        Revenues
        Operational                      $          402                  25           $   268                19           $   134                 6
        Amortization, net of accretion             (202)                (12)             (129)               (9)              (73)               (3)
        Mark-to-market                              151                   9               (16)               (1)              167                10
        Total revenues                              351                  22               123                 9               228                13
        Expenses
        Salaries, wages and benefits                 69                   4                66                 5                 3                (1)
        General and administrative
        Servicing support fees                       19                   1                26                 2                (7)               (1)
        Corporate and other general and
        administrative expenses                      28                   2                31                 2                (3)                -
        Foreclosure and other
        liquidation related (recoveries)
        expenses, net                                 1                   -                (6)                -                 7                 -
        Depreciation and amortization                11                   1                 6                 -                 5                 1
        Total general and administrative
        expenses                                     59                   4                57                 4                 2                 -
        Total expenses                              128                   8               123                 9                 5                (1)
        Other income (expense)
        Other interest income                        39                   2                 1                 -                38                 2
        Interest income                              39                   2                 1                 -                38                 2
        Advance interest expense                     (4)                  -                (7)               (1)                3                 1
        Other interest expense                      (61)                 (4)              (61)               (4)                -                 -
        Interest expense                            (65)                 (4)              (68)               (5)                3                 1
        Total other expenses, net                   (26)                 (2)              (67)               (5)               41                 3
        Income (loss) from continuing
        operations before income tax
        expense (benefit)                $          197                  12           $   (67)               (5)          $   264                17
        Weighted average cost - advance
        facilities                                  2.7    %                              3.0  %                             (0.3) %
        Weighted average cost - excess
        spread financing                            9.0    %                              9.0  %                                -  %
        


(1)Calculated basis points ("bps") are as follows: Annualized dollar amount/Total average UPB X 10000.







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        Table 3.1 Servicing - Revenues
                                                            Three Months Ended September 30,
                                                        2021                                 2020                               Change
                                               Amt               bps(1)             Amt              bps(1)              Amt              bps
        Forward MSR Operational Revenue
        Base servicing fees               $      230               14            $   231               16            $     (1)            (2)
        Modification fees(2)                       6               -                   3               -                    3              -
        Late payment fees(2)                      15               1                  15               1                    -              -
        Other ancillary revenues(2)              155               10                 52               4                  103              6
        Total forward MSR operational
        revenue                                  406               25                301               21                 105              4
        Base subservicing fees and other
        subservicing revenue(2)                   61               4                  71               5                  (10)            (1)
        Total servicing fee revenue              467               29                372               26                  95              3
        MSR financing liability costs             (6)              -                  (8)              -                    2              -
        Excess spread payments and
        portfolio runoff                         (59)             (4)                (96)             (7)                  37              3
        Total operational revenue                402               25                268               19                 134              6
        Amortization, Net of Accretion
        Forward MSR amortization                (261)             (16)              (225)             (16)                (36)             -
        Excess spread accretion                   59               4                  96               7                  (37)            (3)
        Total amortization, net of
        accretion                               (202)             (12)              (129)             (9)                 (73)            (3)
        Mark-to-Market Adjustments
        MSR MTM                                  155               10                (52)             (3)                 207              13
        MTM Adjustments(3)                       (13)             (1)                  2               -                  (15)            (1)
        Excess spread / financing MTM              9               -                  34               2                  (25)            (2)
        Total MTM adjustments                    151               9                 (16)             (1)                 167              10
        Total revenues - Servicing        $      351               22            $   123               9             $    228              13
        


(1)Calculated basis points ("bps") are as follows: Annualized dollar amount/Total average UPB X 10000.

Servicing Segment Revenues

Forward - Other ancillary revenue increased during the three months ended September 30, 2021 as compared to 2020 primarily due to the $131 gain on sale associated with loans bought out of GNMA securitization, modified and redelivered following GNMA guidelines.

Forward MSR amortization increased during the three months ended September 30, 2021 as compared to 2020, primarily due to higher runoff values in 2021 due to favorable discount rates.

MTM adjustments increased during the three months ended September 30, 2021 compared to 2020, primarily due to favorable impact from changes in interest rates.

Subservicing - There were no material changes for Subservicing fees during the three months ended September 30, 2021 as compared to 2020.

Servicing Segment Expenses

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        Table 4. Servicing Segment Results of Operations
                                                            Nine Months Ended September 30,
                                                       2021                                  2020                               Change
                                              Amt                bps(1)             Amt              bps(1)             Amt               bps
        Revenues
        Operational                      $   1,215                  26           $   862                19           $   353                 7
        Amortization, net of accretion        (567)                (12)             (362)               (8)             (205)               (4)
        Mark-to-market                         376                   7              (618)              (14)              994                21
        Total revenues                       1,024                  21              (118)               (3)            1,142                24
        Expenses
        Salaries, wages and benefits           205                   4               205                 5                 -                (1)
        General and administrative
        Servicing support fees                  62                   1                71                 2                (9)               (1)
        Corporate and other general and
        administrative expenses                 88                   2                93                 2                (5)                -
        Foreclosure and other
        liquidation related (recoveries)
        expenses, net                          (19)                  -               (29)               (1)               10                 1
        Depreciation and amortization           23                   -                14                 -                 9                 -
        Total general and administrative
        expenses                               154                   3               149                 3                 5                 -
        Total expenses                         359                   7               354                 8                 5                (1)
        Other income (expense)
        Other interest income                   87                   2                44                 1                43                 1
        Interest income                         87                   2                44                 1                43                 1
        Advance interest expense               (14)                  -               (20)                -                 6                 -
        Other interest expense                (187)                 (4)             (175)               (4)              (12)                -
        Interest expense                      (201)                 (4)             (195)               (4)               (6)                -
        Total other expenses, net             (114)                 (2)             (151)               (3)               37                 1
        Income (loss) from continuing
        operations before income tax
        expense (benefit)                $     551                  12           $  (623)              (14)          $ 1,174                26
        Weighted average cost - advance
        facilities                             2.9    %                              3.0  %                             (0.1) %
        Weighted average cost - excess
        spread financing                       9.0    %                              9.0  %                                -  %
        


(1)Calculated basis points ("bps") are as follows: Annualized dollar amount/Total average UPB X 10000.

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        Table 4.1 Servicing - Revenues
                                                            Nine Months Ended September 30,
                                                       2021                                 2020                              Change
                                              Amt               bps(1)             Amt              bps(1)             Amt              bps
        Forward MSR Operational Revenue
        Base servicing fees               $     677               14            $   720               17            $   (43)            (3)
        Modification fees(2)                     19               -                   8               -                  11              -
        Incentive fees(2)                         1               -                   9               -                  (8)             -
        Late payment fees(2)                     44               1                  54               1                 (10)             -
        Other ancillary revenues(2)             507               11                134               3                 373              8
        Total forward MSR operational
        revenue                               1,248               26                925               21                323              5
        . . .
        


Oct 28, 2021

COMTEX_395960082/2041/2021-10-28T10:59:11

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