The Motley Fool recently disclosed details from Mr. Cooper Group’s (NASDAQ: COOP) Q4 2024 Earnings Call, taking place on Feb 12, 2025, at 10:00 a.m. ET. The session featured Prepared Remarks, Questions and Answers, and Call Participants.
Operator: Good morning. Welcome to the earnings conference call for Mr. Cooper Group’s fourth quarter of 2024. Kenneth A. Posner, the Senior Vice President of Strategic Planning and Investor Relations, commenced the call alongside Jay Bray, the chairman and CEO; Mike Weinbach, the president; and Kurt Johnson, the executive vice president and CFO. The call was recorded, and slides are accessible on the investor relations webpage at investors.mrcoopergroup.com. Please note that during the call, we may reference non-GAAP measures, reconciled to GAAP results in the slide deck, and provide forward-looking statements impacted by identified risk factors in our filings with the SEC.
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Jay Bray then took the floor to discuss the standout achievements of the fourth quarter. Notable highlights include pre-tax operating income reaching $235 million, operating ROTCE at 15.8%, and tangible book value growing to $71.61 per share, a 12% increase from the previous year. With a capital ratio of 24.4% and liquidity amounting to $3.4 billion, Bray expressed satisfaction with these outcomes. The acquisition of Flagstar’s mortgage banking operations, resulting in the onboarding of 1.1 million customers, was emphasized as a significant success, marking one of the largest transfers in the industry’s history.
The Servicing segment saw a 39% increase in pre-tax income to $318 million, fueled by strong cash flows from the portfolio and resilient Originations, contributing $47 million in EBT despite market fluctuations. These results showcase steady and reliable performance amid industry challenges, painting a promising outlook for the future.
We have surpassed market expectations, demonstrating excellent performance in the correspondent channel. Thanks to the dedication of our correspondent team and the trust of our clients, we have secured a top five position in market share. As previously mentioned, our cost structure and retention rates position us as a top buyer of MSRs across all channels. In addition to these achievements, we are proud to have been honored with the prestigious SHARP Gold Award from FreddieMac for our commitment to quality, risk management, and performance excellence.
Furthermore, our efforts have helped elevate several of our subservicing partners to gold level recognition due to the exceptional performance we have delivered on their portfolios. Fitch’s recent upgrade of our master servicing business to a one minus rating serves as a significant third-party endorsement. Our master servicing division, which oversees the performance of other mortgage servicers on behalf of investors, has secured the No.2 position in the market through the provision of cutting-edge solutions and exceptional service. It is worth noting that master servicing contributes valuable fee income to our business.
Looking ahead, we are pleased to share that Moody’s has placed our corporate rating on a positive outlook, citing the growing strength and scale of our franchise, strong return on assets, solid liquidity position, and our hedge program as credit positives. The fourth quarter marked a successful conclusion to an outstanding year for Mr. Cooper, with 2024 representing the culmination of a three-year journey filled with challenges and opportunities.
Our proactive response to the interest rate shock in 2022, which led to industry turmoil, enabled us to swiftly adapt and position ourselves for new opportunities. We capitalized on the shift in the market landscape by strategically acquiring MSRs, which has significantly expanded our portfolio to $1.5 trillion, servicing the loans of over 6 million customers and solidifying our position as the largest servicer in the U.S. Our leadership in subservicing, coupled with our technology advantage, has driven positive operating leverage and increasing returns on tangible equity.
Looking forward, our robust momentum has led us to revise our ROTCE guidance range to 16% to 20% for the upcoming period. We are optimistic about the future, fueled by the dedication of our team, the potential of our technology, and the strength of our competitive advantage.
In 2025 and ’26, our projected growth is higher than our previous guidance of 14% to 18%. Despite potential macro shifts, we have established a resilient model to withstand interest rate volatility and are well-prepared to navigate through challenging cycles. Our confidence in the future outlook stems from our strategic focus on investing in our company culture. Being certified as a Great Place to Work for six consecutive years, we have observed tangible benefits from our high-trust environment and minimal turnover. We recently conducted a successful two-day off-site event for our senior leaders, sparking remarkable energy and collaboration.
While we have made significant strides in enhancing customer experience in recent years, the emergence of new technologies presents fresh opportunities for value creation. We are exploring various innovative propositions to enhance customer satisfaction, with plans to implement some of these initiatives this year. The advent of AI is revolutionizing industries, and we believe that leveraging large language models in call center operations could be a game-changer. Our AgentiQ rollout has received positive feedback from our team members, and our partnership with Sagent places us ahead of competitors in transitioning to cloud-based real-time processing.
Looking ahead, our strategic direction for the next two years emphasizes key drivers that have consistently delivered results. We will maintain a sharp focus on cost efficiency by leveraging technological advantages, invest in origination platforms to boost volumes, expand fee revenues by attracting new clients, and explore strategic acquisitions to drive value creation. President Mike Weinbach will now provide an overview of our operating performance.
Starting with the Servicing segment, we achieved pre-tax income of $318 million, a 39% increase year over year. This growth was driven by favorable market conditions, robust credit performance, portfolio expansion, and operational efficiencies. The Flagstar acquisition significantly enhanced our scale, with $59 billion in UPB acquired on the owned side. Our ability to sell $18 billion to subservicing clients while retaining the incremental benefits underscores our unique value proposition and competitive edge. Looking ahead to 2025, we are optimistic about growth opportunities in correspondent and co-issue markets within our targeted returns. Additionally, the healthy market yields for MSRs and a promising bulk pipeline offer further growth prospects.
Our growth is increasing steadily. If profit margins continue to face pressure, we anticipate higher activity levels throughout the year. The past year has been transformative for our subservicing division. We have doubled in size, now leading the market in share and representing the majority of our servicing book. Various factors are driving our growth, with the Flagstar transaction being a significant contributor, adding $275 billion of UPB in the fourth quarter. This will decrease slightly in Q1 as some loans move to other servicers after the completion of Flagstar transfers. New clients are also fueling our growth, with new partnerships established in 2024 and discussions ongoing for additional partners in 2025. However, our proudest achievement is the organic growth in this business, with our clients thriving by utilizing our top-notch servicing platform to focus on their strengths and grow faster than the industry average. Looking at earnings, the outlook remains strong through 2025, with a first-quarter EBT guidance range of $315 million to $335 million.
Moving on to AgentiQ, an agentic framework application designed to enhance our call center team’s performance by analyzing real-time conversations to detect customer intent and sentiment trends. This tool provides insights to support agents in delivering superior service, training the model on millions of customer calls to offer relevant information, suggestions for next steps, and generating transcripts and call summaries compliant with privacy laws and our responsible AI policy. AgentiQ was piloted in the fourth quarter and is now fully operational in the servicing call center, analyzing 400,000 calls monthly, receiving positive feedback from team members and customers for improving service quality and issue resolution rates. It also benefits management by providing automated summaries of key call center issues and enhancing compliance and quality control functions. The rapid deployment of AgentiQ within a year showcases our strong tech capabilities and dedicated team. The tool will be extended to our originations team after a telephony upgrade later this year.
On slide 8, let’s discuss our Originations segment, which saw a $47 million EBT increase due to the uptick in mortgage rates during the quarter. I want to emphasize the exceptional performance of our correspondent team, who achieved a remarkable 48% sequential growth in production following a strong third quarter. As a result, Mr. Cooper now ranks among the top five correspondent lenders, a significant improvement from our position outside the top 10 a year ago. Our focus on reducing servicing costs allowed us to enhance our platform by upgrading pricing models, developing a new client portal, refining capital market strategies, and reassessing relationships with clients and prospects.
The recent Flagstar acquisition has expanded our customer base, particularly among banks and credit unions, leading to positive outcomes and improved margins. Transitioning to slide 9, let’s shift our attention to DTC, where loan volumes increased by 16% quarter over quarter as we funded loans locked during a brief market rally in the third quarter. This quarter, we assisted nearly 2,000 customers in reducing their monthly payments, helped over 8,500 access home equity, and supported more than 1,400 individuals in purchasing new homes, showcasing the value we provide to our customers.
We experienced an unusual decline in our refinance recapture rate to 35%, primarily due to a large portfolio acquisition with unique characteristics from the previous year. Excluding this portfolio, our refi recapture rate would have been 53%, in line with expectations given the higher volume of rate and term refinances in the quarter. Looking ahead, we anticipate first-quarter EBT in the range of $30 million to $50 million, with potential growth opportunities later in the year from our expanding servicing portfolio and customer experience enhancements.
Approximately 20% of our customers have note rates of 6% or higher, positioning us well to benefit from rate rallies. Home equity presents another growth avenue, with 94% of our customers having at least 20% equity and an average customer equity of nearly 50%, totaling an estimated $675 billion in equity potential. Cash-out refinances and home equity loans are expected to be consistent sources of business and customer value, even in a scenario of prolonged higher interest rates.
Lastly, let’s delve into the composition of our revenue streams, particularly the growing importance of fee income from subservicing, master servicing, and other client-related activities, as highlighted by Jay. Slide 10 illustrates the percentage contribution of owned servicing and originations to our overall revenue landscape.
Fee income contributes significantly to our total revenue, with various businesses generating fees, including our leading subservicing platform. In 2024, service-related fee revenues totaled $500 million, representing more than 20% of our total revenue and experiencing double-digit growth over the past three years. These businesses do not require substantial capital or liquidity, enhancing our return on tangible common equity. Over to Kurt for a financial update.
Kurt Johnson, our CFO, provided a summary of our financial performance. Net income stood at $204 million, including a $92 million positive mark net of hedge, $235 million in pre-tax operating earnings, and $39 million in adjustments. Noteworthy adjustments include a $22 million charge for facility shutdown costs, $18 million accrued for a court ruling, and a $9 million reserve release related to the Home Point acquisition, among other charges. Corporate segment expenses totaled $51 million, including year-end incentive accruals and stock vesting. Looking ahead, we expect corporate expenses to stabilize at $40-$45 million in the second quarter. The mark-to-market line saw a favorable adjustment due to rising interest rates and lower CPR expectations, offset by hedge losses of $581 million. Our high-quality mortgage portfolio continues to perform well, with low delinquencies reflecting our strategic portfolio construction and effective loss mitigation efforts.
Keeping the dream of homeownership alive is our priority. We are closely monitoring delinquency trends at Ginnie Mae and have observed a gradual deterioration in industrywide performance for all product types and vintages, especially for loans that have undergone modifications. This trend is also evident in our Ginnie Mae delinquencies, although our portfolio has only grown by less than 4% in the past year, representing just 19% of our total loan portfolio and therefore not a significant exposure.
Moving on to Slide 13, let me provide an update on our key balance sheet metrics. At the end of the fourth quarter, our liquidity stood at $3.4 billion, down from $4.1 billion in the third quarter as we utilized MSR lines to finance the acquisition of $1.3 billion in assets from Flagstar, primarily consisting of mortgage servicing rights. Our liquidity includes $753 million in unrestricted cash, with the remainder in MSR line capacity, fully collateralized and immediately available.
Our capital ratio, measured by tangible net worth to assets, closed the fourth quarter at 24.4%, down from 27.9%, reflecting the increase in MSR assets and higher loans held for sale due to strong correspondent growth. We are operating comfortably within our target range, deemed appropriate for the current environment and asset mix.
Lastly, I want to emphasize that our ROTCE range of 16% to 20%, as mentioned by Jay earlier, does not rely on leveraging up or compromising our strong liquidity position.
Thank you for listening to our report, and I will now pass the call back to Ken for the Q&A session.
Kenneth A. Posner — Senior Vice President, Strategic Planning and Investor Relations
Thank you, Kurt. Marvin, could you please start the Q&A process?
Questions & Answers:
Operator
[Operator instructions] Our first question comes from Terry Ma of Barclays. Terry, you may go ahead.
Terry Ma — Barclays — Analyst
Good morning. Starting with the revised ROE target range, could you discuss the factors that could drive us to 20%? How much of this is dependent on interest rates, and can we achieve this target in the current rate environment?
Kurt Johnson — Executive Vice President, Chief Financial Officer
Thank you for the question, Terry. The services segment highlighted this quarter generates fee-based income, contributing to a higher ROTCE due to its asset-light and equity-light nature. Additionally, a favorable origination environment, like in Q3, can boost fee-based income and push us towards the higher end of the ROTCE range.
Moreover, operating leverage plays a crucial role. Despite significant servicing portfolio growth, we have managed to add minimal staff, showcasing the efficiency and scalability of our organization. We believe we can achieve our ROTCE target range regardless of the interest rate environment.
We are currently in the middle innings of our strategic initiatives. We believe there is significant leverage, cost savings, and an improved customer experience that we are dedicated to enhancing every day. This focus is expected to be a key driver of our success. Our President, Mike Weinbach, emphasizes that execution is key, not just interest rates. We are confident in our balanced business model’s ability to achieve our return targets, regardless of the interest rate environment. We have experienced notable growth across various segments of our business, including B2B origination, correspondent relationships, direct-to-consumer business, and home equity opportunities. We are also proud of our success in servicing, as evidenced by winning prestigious awards.
On the topic of fee-based revenue, we are proud of the double-digit growth we have achieved and aim to sustain this momentum. Our fee-based revenue, often referred to as services revenue, represents our strengths made available to the industry. This revenue stream is steady and offers significant growth potential. We are actively exploring opportunities to expand our services to existing and potential clients, aiming to maximize this higher-earning revenue stream.
During the Q&A session, questions were raised about our pipeline for bulk MSR and platform sales. Despite being within our tangible net worth assets range, we maintain capital flexibility and are evaluating opportunities in this area. The returns from these initiatives are expected to be accretive to our target range of 16% to 20%.
Question: Are there opportunities you are targeting for the next two years?
Jay Bray — Chairman and CEO: Yes, I believe the bulk market, as mentioned by Kurt, is rebounding and presenting attractive levels. In a scenario of higher interest rates for an extended period, the bulk market is likely to benefit as more originators will need to sell. We anticipate growth in this market throughout the year. From an acquisition perspective, I still see consolidation happening in our industry. We have been selective and disciplined in pursuing opportunities, and I am optimistic that attractive opportunities will arise. Consolidation will persist, and we aim to be a part of it.
Kurt Johnson — EVP, CFO: While returns may not reach the peak levels seen a few years ago, we continue to observe solid risk-adjusted returns. Our hedging strategies have been effective, and we foresee returns in the range of 16% to 20% as we make acquisitions. We prioritize disciplined purchases over chasing yields.
Mark DeVries — Analyst: Your special servicing business and digital real estate auction marketplace provide a valuable countercyclical revenue stream. Are you considering monetizing Xome if revenue improves, or do you view it as a hedge against market cycles?
Jay Bray — Chairman and CEO: We have invested in Xome, and it has performed well, increasing its market share. As the market improves, it will become a valuable asset. We see potential for some form of monetization in the future to capture its value strategically. We are patient and will seek the right value for it.
Mark DeVries — Analyst: Understood, thank you.
Operator: Our next question is from Crispin Love of Piper Sandler. Can you provide insights on servicing expenses and future efficiencies through scale, technology, and AI?
Jay Bray — Chairman and CEO: We believe there is significant potential to further reduce servicing expenses. Our investments in AI and process improvements are aimed at driving costs down. We are optimistic about the opportunities ahead and are actively making investments in this area.
President Yes, I’d like to add that our investments in technology are increasing, allowing us to feel more confident in expanding our investments due to the exceptional execution of our team. Our focus remains on scaling, continued investment, and consistently striving to improve for our customers. This includes enabling customers to handle tasks independently, enhancing the effectiveness of our team members serving customers, and making incremental improvements every day. These efforts are contributing to the positive results we are seeing, and we are optimistic about the opportunities that lie ahead.
Crispin Love from Piper Sandler Analyst: Thank you for that insight. Regarding the new Return on Tangible Common Equity (ROTCE) guide, last quarter, you mentioned being comfortable at the midpoint of the previous guide, around 16%. Are you confident in hitting the midpoint of the new 2025 guide? Should we expect an upward trend over the next two years, subject to interest rates? What are the key drivers behind the changes in the guide from three months ago to now?
Kurt Johnson, Executive Vice President and Chief Financial Officer: It’s a valid question. Our ROTCE target is set at 16% to 20% for the next two years, acknowledging that individual quarters may vary within this range. We are leveraging additional business from a services perspective and enhancing operational efficiency to drive scale. Our focus remains on continuous improvement, which has been our strength. Over time, we anticipate seeing the ROTCE climb as a result of these efforts.
Operator: Thank you. Our next question is from Doug Harter of UBS. Please go ahead.
Douglas Harter, Analyst: Can you discuss your capacity in the Origination business and how you plan to maintain recapture rates in potential refinancing opportunities?
Mike Weinbach, President: We have maintained buffer capacity throughout 2024 to manage anticipated fluctuations in interest rates. When rates dropped in September, we were prepared to capitalize on the refinance opportunity, resulting in increased originations and earnings. Despite rising rates reducing refinance opportunities, we have excess capacity that we are actively seeking to utilize. One significant area of growth potential is in home equity products. With many customers still holding low-rate mortgages and increased home values, home equity loans present a valuable opportunity. We have seen steady growth in this area since launching the product two years ago, but there is still significant untapped potential that we are working on enhancing.
Every day, we are increasingly focused on filling capacity with new products to meet our customers’ needs. We plan to maintain a buffer this year due to volatile rates, aiming to capitalize on opportunities as they arise. This strategic approach includes significant investments in our origination platform, enabling us to scale efficiently compared to two years ago. Our team has done an excellent job in this regard, and we will continue to enhance our scalability through ongoing investments. We anticipate further growth in our correspondent market share by leveraging our scale, cost leadership, and retention focus. Following the recent acquisition of Flagstar, we are strategically evaluating our operations, including the decision to divest the PPO business that did not align with our long-term vision. We are committed to finding suitable homes for our team members and ensuring a smooth transition.
One: I understand that you may not disclose margins by channel, but considering the shift in channel mix, could you give us some general insight on how they trended and how we should approach this in the short term?
Kurt Johnson, the Chief Financial Officer, mentioned that there wasn’t a significant change in margins from the fourth quarter to the first quarter. Margins remained consistent across channels, even with the decrease in rates at the end of Q3. The margins have been stable by product and channel throughout.
Regarding the mix of subservicing and owned MSR, historically, the company aimed for a 50-50 split. However, with the recent growth in subservicing clients and the emphasis on enhancing services, the percentage of subservicing may increase more rapidly than owned servicing. Both areas present growth opportunities, with subservicing showing strong organic growth.
When considering MSR valuation inputs and assumptions, Kurt Johnson mentioned that recapture is factored into the valuation, as it is a standard consideration in the industry. The company has been using an option-adjusted spread model for valuation, and while it can be complex, it generally reflects stability for loans with lower coupons. Loans closer to being out of the money may see fluctuations in the option-adjusted spread based on various market conditions.
Portfolio, which is why we acquired a significant number of deep discount loans in 2022 and 2023.
Eric Hagen — Analyst
Great, interesting insights. How do you foresee any potential changes in CFPB resources affecting your business?
Jay Bray — Chairman and Chief Executive Officer
Our approach is to collaborate with regulators consistently, aligning our customer-centric goals with theirs. While we anticipate staying engaged, we don’t anticipate immediate changes and will adapt accordingly.
Eric Hagen — Analyst
Thank you for the clarification. Operator, next question from Mikhail Goberman of Citizens JMP.
Mikhail Goberman — Analyst
Good morning. Could you elaborate on achieving the upper end of the originations guidance range for the first quarter? Would it rely on sustained momentum in the correspondent space or growth in the DTC sector?
Mike Weinbach — President
The primary driver would be a decrease in interest rates. While the correspondent business continues to expand, it contributes less to earnings due to lower margins. We are focused on leveraging opportunities in cash-out refinances, home equity, and purchases. A significant rate drop could spur refinancing and enhance customer value.
Jay Bray — Chairman and Chief Executive Officer
We are observing positive results in the DTC segment. Our progress in second lien products presents substantial growth potential. Investor confidence in our product quality translates into better customer pricing, driving further growth.
Kurt Johnson — Executive Vice President, Chief Financial Officer
Our foray into second lien products has yielded excellent performance, enhancing customer satisfaction and execution. This positive trend allows us to offer competitive pricing, fueling business expansion.
Mikhail Goberman — Analyst
Thank you for the insights and best wishes for the future.
Kurt Johnson – EVP, CFO
Thank you, Mikhail.
Operator
Thank you. Our next question is from Giuliano Bologna of Compass Point. Go ahead, Giuliano.
Giuliano Bologna – Analyst
Good morning. Congratulations on the outstanding performance. I have a question about the growth in your servicing UPB. Should we expect low double-digit or mid-double-digit growth, possibly higher, given the changing market dynamics? How do you anticipate the growth trajectory of UPB in the near to medium term?
Kurt Johnson – EVP, CFO
Giuliano, it’s Kurt. Thank you for your question. We anticipate a growth rate in the low double digits for our UPB. While we focus on growth, we are also mindful of our stock performance and will continue to repurchase stock to maintain a balanced approach. We remain open to opportunistic investments while staying cautious in pursuing growth.
Giuliano Bologna – Analyst
Thank you for that insight. Regarding originations, with a 57% increase in UPB this year, can we expect continued growth, even in the current rate environment? What factors could drive an acceleration in DTC volumes?
Mike Weinbach – President
Yes, Giuliano. We anticipate ongoing growth in originations driven by the expanding portfolio. Our focus remains on executing well, particularly in home equity, driving cost efficiency, and enhancing our digital self-service tools to support customer needs. We are well-positioned to capitalize on opportunities and drive growth in the coming quarters.
At COOP’s recent earnings call, it was highlighted that the company is focusing on investing in automation to drive growth in its portfolio. Analyst Giuliano Bologna expressed optimism about the opportunities on the horizon for the business. The participants, including Kenneth A. Posner, Jay Bray, Mike Weinbach, Kurt Johnson, Terry Ma, Mark DeVries, Crispin Love, Douglas Harter, Bose George, Derek Sommers, Eric Hagen, and Mikhail Goberman, engaged in discussions during the call.
The call was moderated by an operator who indicated that there were no further questions at that time and invited Ken Posner to provide closing remarks. Ken Posner, Senior Vice President of Strategic Planning and Investor Relations, thanked everyone for joining and encouraged them to reach out to the investor relations team with any follow-up questions.
Chairman and CEO Jay Bray also expressed gratitude before the operator concluded the call. The transcript provided was created for The Motley Fool, with a disclaimer that while efforts were made to ensure accuracy, errors may exist. The Motley Fool does not accept responsibility for any decisions based on this content, advising individuals to conduct their own research, review SEC filings, and listen to the original call for additional insights. The Motley Fool maintains a strict disclosure policy and is not invested in the stocks discussed during the call.
