Q2 2025 Mr. Cooper Group Inc Earnings Call
IC planning and investor relations at Mr. Cooper group with me today are J, bra. Chairman and CEO, Mike Weinbach president and Kirk Johnson Executive, Vice President and CFO.
This morning will be reviewing the company's financial performance for second quarter 2025, and you can find the slides. Accompanying, our remarks on our investor relations web page at investors Mr. Cooper, group.com.
As a reminder, we may refer to non-gaap measures which are reconciled to Gap results in the appendix to the slide deck and press release. Also, we may make forward-looking statements, which you should understand. Could be affected by risk factors that we've identified in our 10K and other SEC filings. We are not undertaking any commitment to update these statements of conditions change.
Speaker Change: Finally due to depending combination with rocket, we will not be taking questions on today's call with that. I'll turn it over to Jay.
Good morning everyone. I'm going to start on the slide 3 with a review of second quarter highlights. Then I'll turn it over to Mike to take you through a more detailed discussion of operating results.
Speaker Change: And Kurt will wrap up with financials.
In summary, this was a very solid quarter marked by consistent recurring and predictable performance.
Speaker Change: Operating rotce was 17.2% up from 16.8% last quarter and squarely, within our guidance range of 16 to 20%.
As, you know, we paused our stock, we purchased program due to the pending merger with rocket. If we normalize the capital ratio back to where it was at year end, our rotce would have been in the upper end of our guidance range.
I am very pleased with these results. In fact, I'd say the company is firing on all cylinders. This is a real achievement considering the difficult environment with persistent High mortgage rates contributing to ongoing, affordability, challenges sluggish, home sales, and home prices coming under pressure in some markets.
Speaker Change: According to the NBA's, latest survey, Originators have lost money in 10, out of the last 12 quarters.
Speaker Change: In contrast, Mr. Cooper has produced solid. Double digit returns for nearly 2 and a half years straight, which demonstrates the power of our scale platform and balanced business model.
Speaker Change: Over this time the key themes for our performance have been very consistent.
Speaker Change: Operating. Leverage the income and Nimble execution, and originations.
Speaker Change: These themes, reflect the combination of people scale and technology in this formula for success is accelerating as we roll out AI, which is driving even better experiences for our customers as well as incremental efficiencies.
At the end of the day however it's people who produce results and we put a lot of care into creating a purposeful and inclusive environment.
Speaker Change: I was very pleased to see the company recognized by the great places to Work Foundation as 1 of the best places to work in Texas.
Speaker Change: To all my cert teammates. I'd like to say thank you once again for your consistent, amazing work.
The balance sheet is in great shape with a super strong Capital ratio of 26.6% and robust liquidity at 3.8 billion.
Speaker Change: Asset quality remains pristine.
With delinquencies declining in the quarter to 1% and our hedging program continues to perform as expected.
Speaker Change: Now, turning to the segments servicing generate 332 million in pre-tax income up, 15% year-over-year while originations generated 64 million despite elevated rates
I was pleased with our momentum and the home equity loans, where we completed 2.
Speaker Change: And by our continued, strong performance in the correspondent Channel, where we are a top 5 player in climbing.
Speaker Change: Separately, I'm excited to announce that after a concerted multi-year effort, we have successfully launched our Maiden MSR fund with 200 million in initial commitments and plans to scale rapidly from here.
Speaker Change: We're working with blue chip fixing company investors who know us well, and you see our platform as integral to maximizing MSR economics.
Speaker Change: By doing a good job for these investors, we'll build out an important asset light strategy to grow our platform.
Speaker Change: Finally, I will mention that we're thrilled to see rocket closed, the acquisition of red fin which is a major component of the integrated home ownership platform, which we are so excited to be building together.
Speaker Change: And investors.
Mike: And with that, I'll turn the call over to Mike.
Thanks, Jay and good morning everyone.
Mike: If you'll turn to slide 4, I'll start with the servicing portfolio which is holding steady around 1 and a half trillion. Following the successful acquisition of Flagstar as we prepare for the merger with rocket while. Also maintaining our pricing discipline within the bulk and corresponding channels
Starting with sub-servicing, we continue to have a very strong Market position.
Mike: The slight declining upb. This quarter is driven by a single client.
Mike: Who is pursuing a different strategy.
Mike: Doing the second quarter. WE deboarded 12 billion in loans for this client and we deboarded the remaining roughly 50 billion earlier this month.
Mike: Otherwise we're enjoying very strong momentum with Organic growth and I'm pleased to report a new client win. That is bringing a sizable portfolio of about 40 billion in loans that we expect to board by year end.
Mike: Turning to the own portfolio. We're pleased with the flow, is coming from our corresponding Co issue channels, and we've been bidding on select bulk pools, which meet our asset quality, standards and return targets.
Mike: Recent wins include a sizable portfolio from a major institution, which values our seamless onboarding process and high quality customer care.
We expect a board about 20 billion in MSR Acquisitions in the third quarter.
Mike: For the remainder of the Year, we'd expect the total portfolio to be flat plus or minus is we stick to our pricing discipline and work on integration planning with rocket.
Mike: if you'll turn to slide 5, let's talk about servicing income, which came in at 30032 million up to 15% year-over-year,
in operating leverage, which you can see in revenues up, 13% year-over-year, tracking significant, portfolio growth, especially in sub-servicing while operating expenses were up only 6%,
Mike: What you're seeing here is not only the benefits of our growing scale but our teams Relentless focus on process improvements, which is the secret sauce behind providing the best possible customer experience in driving incremental, efficiency.
According to the latest data from the 2024 MBA Benchmark survey, our cost to serve is now nearly 50% below the industry, average with the gap. Having expanded considerably from the year before. And these numbers do not include the incremental scale benefits reflected in our 2025 results.
A key benefit at scale is having the resources to invest in innovation?
Mike: And as you know, we're continuing to invest in and Implement new AI Solutions. Since this technology is uniquely suited for optimizing large, call center operations,
Last quarter, we shared some color on our proprietary agent IQ application, which helps team members with customer calls by interpreting the questions, tracking sentiment in real time, putting explanatory material and customer information that agents fingertips in generating call summaries.
With the first version of agent IQ now fully rolled out. We're moving forward to beta test. True, agentic features where the system will execute simple tasks on the tone, like answering questions, and fetching data and chat, engagements subject, of course to rigorous quality control including human supervision.
Mike: Let's move on to slide 6 and talk about originations where we generated 64 million in pre-tax income and 9.4 billion in funding.
Is Jay mentioned, the DTC channel is enjoying very strong momentum.
Mike: Volumes were up roughly, 40% sequentially with home, equity and cash, Outreach, and answers together. Making up, nearly 60% of the Nexus quarter as we continue to help customers responsibly access the equity in their homes.
We successfully completed 2 home equity securitizations during the quarter and received very favorable feedback from investors who appreciate the power of our loss mitigation capabilities and our long track record of keeping customers in their homes.
Mike: We believe there's a very substantial opportunity with home equity loans. Our customers have in total more than 900 billion and available equity, which represents a massive multi-year ramp of business for our DTC team.
We view home equity as a mainstream consumer product, representing the easiest and most cost-effective manner for homeowners to access the equity for a wide variety of uses.
Mike: Turning to rate and term. Refinances the opportunity. In the current environment is obviously somewhat limited, but I point out the 22% of our customers have no rates above 6%, which positions us for sizable volumes whenever rates next rally. Even if it's only briefly,
I'd like to get a shout out to the team for staying laser focused on operations.
Mike: Thanks to your tireless, work turn times measure from Lock to funding or 6 days. Faster on the second quarter than a year ago which is a substantial improvement with 68% higher volumes.
Mike: I'll wrap up with a quick comment on the corresponding Channel where our team continues to do a fantastic job bringing value to our Sellers and fine-tuning our pricing and Capital Market strategies to optimize execution.
Mike: Over the last year, we become a consistent top 5 player in this Channel and we expect the power of our platform to drive further. Share, gains subject, of course to maintaining margin discipline.
Kurt: With that, I'll turn the call over to Kurt.
Kurt: Thank you. Thanks, Mike and good morning everyone. I'll start on the slide 7 and provide some additional commentary around the second quarter of financials.
Kurt: To summarize. Net income was 198 million, which included 269 million pre-tax offering income, a 30 million positive Mark. And net of Hedges offset by 15 million in adjustments and 7 million in intangible amortization. Let me start by unpacking the adjustments.
Kurt: This quarter, we had approximately 9 million in costs related to the rocket merger and 4 million associated with Flagstar.
Kurt: other miscellaneous adjustments, which added to million dollars include losses associated, with Equity Investments,
Kurt: Legal fees related to the fund launched, a vendor expense write-off, and an offsetting Reserve release within the homepoint portfolio.
Kurt: Full details are as always listed in the appendix.
In terms of operating results, Mike covered both serving and originations and I'll mention that the corporate segment incurred 48 million in expenses.
Kurt: For the third quarter of 25, we anticipate corporate expenses remaining at this level due to it Investments, which we are continuing to make in our servicing platform, including projects like the agentic applications like mentioned as well as additional investments in our correspondent Channel.
Kurt: Turning to the market market line interest rate volatility with relatively muted this quarter.
We marked up the MSR by 59 million, to reflect Rising interest rates and lower cprs, as well as non-interest rate related factors, like cost to serve and OAS spreads.
Kurt: These changes resulted in a quarter end, valuation of 156 basis points of upv or a 5.4 multiple of the base service. Extremely
Kurt: Offsetting, the gain were 29 million in hedge losses, and our Target hedge ratio remains 75%.
Kurt: Turning to slide 8, I'll briefly touch on asset quality which is a strategic Focus for us.
Kurt: As you can see from the chart, our high quality portfolio continues to perform extremely well with MSR building with used down by 6 basis points in the quarter to 1%
Kurt: Low delinquencies, reflect our thoughtful portfolio construction, evident the high FICO scores and low, LTV ratios for our customers, as well as our loss mitigation capabilities, which we believe are best in class.
Kurt: As we've commented in the last few quarters, we're closely monitoring the genie. May sector especially FHA, where delinquencies have increased although they remain well below peers.
Kurt: Due to our conservative risk appetite with limited FHA, Loans to 15% of our MSR portfolio. In addition, we've largely avoided, the 2023 and 2024 vintages which we regard as posing higher risk.
FHA recently, tightens the standards for its loan modification programs. Limiting availability to once every 24 months.
Kurt: We view this as a prudent move by FHA to prevent recidivism and what are otherwise extremely helpful programs for customers struggling with financial hardship.
Having said that the change will reduce the population of delinquent, customers who qualify for these programs. Additionally, as you probably heard the end of the student loan moratorium has led to our rise in student loan delinquencies.
In our portfolio, roughly 16% of customers have student loans.
Kurt: and we did see elevated student loan delinquencies, as high as 8.7% in April before settling down to 7.9% in June,
Kurt: We are closely watching our FHA customers who also have student loans. But for us, this population represents, only 3 and a half percent of our total portfolio and is largely associated with customers with significant Equity positions.
Kurt: Therefore, we do not believe this portfolio opposes. A material risk to our performance.
Kurt: Turning the slide 9. I'll end my remarks with an update on our key balance sheet metrics.
Kurt: Primarily due to the timing of a bulk MSR portfolio acquisition, write a quarter end.
Kurt: Looking ahead, we anticipate continued strong operating, cash flow, supporting a robust liquidity position throughout the remainder of the Year, our Capital ratio as measured by tangible, net worth to assets and that the quarter of 26.6% up from 24.4% a year end, thanks to strong earnings and the absence of stock repurchases during the quarter, which we suspended to the rocket transaction.
As Jay mentioned, if you normalize our Capital ratio, we'd be earning in the upper end of our guidance range, which we believe reflects exceptional performance for a mortgage company. At this point in the cycle.
Kurt: Looking ahead to the third quarter, we guide you to expect continued consistent performance.
Kurt: With that. I'd like to wrap up by thanking you for your interest in Mr. Cooper.