Mr. Cooper records a profit for the second consecutive quarter
Mr. Cooper Group reported fourth-quarter net income of $461 million, aided by the recovery of its deferred tax asset and a positive mark-to-market on its servicing portfolio.
"The mark is largely based on interest rates, and in the fourth quarter, there was an approximately 10-basis-point rise in mortgage rates and a similar rise in the 10-year and five-year swap rates," Chris Marshall, vice chairman and chief financial officer, said in an interview. "We use all of those in our portfolio model. That's what drove the mark."
Mr. Cooper posted a net profit for the second consecutive quarter, after earning $83 million in the third quarter. A year ago, Mr. Cooper lost $136 million. A negative servicing valuation mark affected results in both periods.
But in the fourth quarter, Mr. Cooper had a $102 million positive mark-to-market on its servicing portfolio. Including that mark, the servicing segment had pretax income of $189 million, compared with $9 million in the third quarter, after an $83 million hit to the value of its MSRs. In the fourth quarter of 2018, there was a $188 million negative mark-to-market MSR valuation, which caused the segment to report a pretax loss of $100 million (without the mark, the segment would have had $88 million income).
Besides the mark-to-market change, Mr. Cooper recovered a $285 million DTA during the period.
This was Mr. Cooper's first full year of operations in its current form, as it was created on July 31, 2018 when shell company WMIH completed its purchase of Nationstar.
WMIH's primary asset was the $6 billion of net operating loss carry forwards it retained as the successor in interest to the failed Washington Mutual.
At the time of the merger, a reserve was booked because Mr. Cooper didn't think it could use those NOLs before they expired, Marshall said. With the company's improved profitability, it found it could use them to offset its tax bill and so it booked the DTA recovery.
Mr. Cooper made pretax income of $138 million in originations, compared with $178 million in the third quarter and $11 million in the fourth quarter of 2018.
It funded $12.6 billion in mortgages during the period, with $5.8 billion from the direct-to-consumer channel, $6.2 billion in correspondent purchases and $600 million in wholesale originations.
This compares with $11.9 billion in the third quarter and $5.4 billion for the prior year's fourth quarter.
Purchases made up just 32% of fourth-quarter volume, down from 39% in the third quarter and 58% during the fourth quarter of 2018.
"If you think of our business model — and layer on top of that the fact that the whole industry is capacity-constrained — we're focusing virtually all of our efforts on our existing customers," Marshall said. "Our mission is to help our customers achieve the dream of homeownership. And this is the best time for us to be able to do that by dedicating 100% of our capacity to helping our existing customers to refinance and lower their monthly payments."
The third operating segment, Xome, had $14 million in pretax income net of accounting items and amortization of intangibles, compared with $13 million of pretax income in the third quarter and $1 million in the fourth quarter last year.
Even before bond yields falling to all-time lows because of investor reactions to the coronavirus, the first quarter is shaping up to be another strong quarter for Mr. Cooper, Marshall said. "Even in the first few weeks in January, we had tremendously strong performance. And January is usually the low point of the year."