Mr. Cooper Group Inc. reported its quarterly financial results for the period ended September 30, 2024. The company’s revenue increased by 12% to $1.34 billion, driven by growth in its mortgage banking and title operations. Net income rose to $143 million, or $1.23 per diluted share, compared to $114 million, or $0.99 per diluted share, in the same period last year. The company’s mortgage banking segment saw a significant increase in originations, while its title segment benefited from higher volumes and pricing. The company’s financial position remains strong, with a cash balance of $1.23 billion and a debt-to-equity ratio of 0.45. The company also repurchased 1.4 million shares of its common stock during the quarter, totaling $50 million.
Anticipated Trends
In the third quarter of 2024, our Servicing segment generated strong income before income tax expense of $177, and our servicing portfolio grew to $1.2 trillion, a 32% increase year-over-year. However, due to the Federal Reserve cutting interest rates during the quarter, we expect downward pressure on servicing income in the fourth quarter as prepayment speeds and amortization rise. We also anticipate lower net interest income from the interest rate cuts.
Our Originations segment significantly outperformed expectations, with income before income tax expense of $69 driven by an 80% increase in funded volume compared to the prior quarter. This was due to growth in both our direct-to-consumer and correspondent channels. We expect the Originations segment to return to more normal profitability levels in the fourth quarter as mortgage rates have risen from their September 2024 low point. We remain well-positioned to benefit from lower interest rates overall.
The Company is finalizing the acquisition of certain mortgage operation assets of Flagstar, which is expected to close in the fourth quarter of 2024. This will increase our customer base to over 6 million.
While recent inflation appears to have subsided, ongoing inflationary pressures may limit borrowers’ disposable income and increase our operating costs. However, changes in interest rates typically have a greater impact on our financial results than changes in inflation.
Results of Operations
Our total revenues decreased in the three months ended September 30, 2024 compared to 2023 due to negative fair value adjustments on our mortgage servicing rights (MSRs) driven by declining mortgage rates. In contrast, 2023 saw positive fair value adjustments from rising rates. For the nine months ended September 30, 2024, total revenues increased primarily due to growth in our servicing portfolio.
Total expenses increased in both the three and nine month periods, mainly due to higher general and administrative costs from the growth in our servicing portfolio and originations volume. Total other income, net decreased as we had gains from acquisitions in 2023 that did not recur, as well as higher interest expense.
The effective tax rate was 29.1% in Q3 2024 compared to 21.7% in Q3 2023, primarily due to the impact of quarterly discrete tax items relative to income before taxes.
Segment Results
Our operations are conducted through two main segments: Servicing and Originations.
The Servicing segment generates income by growing the portfolio and maximizing the servicing margin. Key competitive strengths include our low-cost platform, loss mitigation capabilities, strong customer service, industry-leading compliance, and successful loan boarding. This is reflected in our strong servicer ratings.
The Originations segment originates loans through our direct-to-consumer channel, which provides refinance options for existing customers, and our correspondent channel, which purchases or originates loans from other lenders. This segment plays a strategic role by originating MSRs at an attractive cost compared to bulk acquisitions.
Servicing Segment
Servicing segment revenues decreased in Q3 2024 compared to 2023, primarily due to negative fair value adjustments on MSRs from declining mortgage rates, partially offset by growth in the servicing portfolio. Subservicing fees remained consistent.
Servicing expenses were relatively flat, with increased costs from portfolio growth offset by cost reductions. Other income increased due to higher float income on custodial deposits from portfolio growth, partially offset by higher interest expense.
For the nine months, servicing revenues increased due to the larger portfolio, while expenses rose from higher corporate allocations and servicing support fees. Other income improved from higher interest rates and float income.
The servicing portfolio grew to $1.2 trillion in UPB, a 32% increase year-over-year, with agency loans comprising 89% and non-agency 11%. Delinquency rates improved, with 60+ delinquencies at 1.5% compared to 1.9% a year earlier.
Loan modifications and workouts increased in the nine months, up 26% from 2023, as loss mitigation programs expanded.
Originations Segment
The Originations segment significantly outperformed in Q3 2024, with a 100% increase in funded volume to $6.8 billion driven by growth in both the direct-to-consumer and correspondent channels. This led to a 70% increase in revenues compared to Q3 2023.
Expenses also increased, primarily from higher variable compensation tied to the higher volumes, as well as increased marketing costs. Interest income and expense rose in line with the higher origination activity.
The Originations margin decreased to 0.81% in Q3 2024 from 0.93% in Q3 2023, due to a shift in mix towards the lower-margin correspondent channel.
For the nine months, funded volume grew 35% to $13.5 billion, with the direct-to-consumer channel accounting for 39% of volume compared to 45% in 2023.
Corporate/Other
Corporate/Other includes the results of our Xome real estate exchange operations, unallocated overhead expenses, and interest expense on our unsecured senior notes.
Revenues and expenses were relatively flat in the three months, while the nine month period saw higher expenses from increased headcount, executive compensation, and Xome operating costs. Interest expense rose due to new unsecured note issuances.
Liquidity and Capital Resources
We held $733 million in cash and cash equivalents as of September 30, 2024, up from $571 million at year-end 2023. We have ample borrowing capacity, with $12.9 billion available across our advance, warehouse, and MSR facilities, of which $3.3 billion was immediately collateralized and available.
In early 2024, we issued $1 billion of 7.125% unsecured senior notes due 2032, and $750 million of 6.5% unsecured senior notes due 2029, using the proceeds to pay down a portion of our MSR facilities.
Our cash flow from operations decreased in the nine months ended September 30, 2024 compared to 2023, primarily due to lower originations activity and increased repurchases of loans from Ginnie Mae securitizations. Cash used in investing activities increased from higher MSR purchases and lower proceeds from MSR sales, while financing activities generated more cash from the new unsecured note issuances.
We remain in compliance with all required financial covenants and seller/servicer capital and liquidity requirements from the GSEs and Ginnie Mae. We are evaluating the impact of upcoming revisions to these requirements, but expect to meet the new standards.
Analysis
The Servicing segment continues to be the primary driver of our financial performance, generating strong income and growing the portfolio to $1.2 trillion in UPB. However, the expected decline in servicing income in Q4 2024 due to rising prepayment speeds is a near-term headwind.
The Originations segment had an exceptional quarter, more than doubling funded volume, though the lower-margin correspondent channel grew faster than the direct-to-consumer business. Maintaining the profitability of this segment will be important, as its counter-cyclical nature helps offset Servicing volatility.
Overall, we remain well-capitalized with ample liquidity to fund growth, as evidenced by the successful unsecured note issuances. The Flagstar acquisition will further expand our customer base. While inflationary pressures and regulatory changes pose some risks, our diversified business model and operational strengths position us well to navigate the current environment.