Mr. Cooper Group Inc. (COOP) Earnings Call Transcript & Summary

Good afternoon. Thank you for joining us. I'm Barclays' consumer finance analyst, Mark DeVries. And I'm pleased to be joined by Mr. Cooper Group's CEO, Jay Bray; and CFO, Chris Marshall. We'll be conducting a fireside chat, but we'll break it up with some polling of the audience. And also leave time for any questions that come up from the audience during this session. If you'd like to ask a question, you should have an option to enter it on the upper left-hand side of your screen, or you can try to e-mail it directly to me, and we'll do our best to address your questions in the time we have today. Before my first question for management, I'd like to lead off with a question for the audience. To participate, please click-through to the polls on the left side of your screen. After you respond, you should be able to toggle back to the video of the discussion. Turning to the first question for the audience, what do you view is the biggest catalyst for Mr. Cooper over the next year? Better-than-expected origination volume, gain on sale margins holding at elevated levels, improved servicing margin or other? [Voting]

With that out of the way, let's turn to the Q&A discussion.

Leading off, could you just discuss I think maybe summarize some of the takeaways from your 8-K today around what you're seeing from a volume margin perspective across your businesses?

Sure. The 8-K was just an update on the guidance we shared after the earnings conference last quarter, where we said we expected about $14 billion of fundings with about $9 billion of it coming out of our DTC channel and about $5 billion out of correspondent. We've seen both of those channels improve on that. And so we're now forecasting that one in the quarter was about $16 billion, about $10 million out of DTC and about $6 billion out of correspondent. Margin is -- has performed largely in line with what we expected. Margin last quarter, obviously, didn't have any correspondent and was upward of 3%. I think we said it could approach 2%. And that's just -- all that is, is the mix changing from no correspondent to now 30% or 40% correspondent at much lower margins, obviously. But margin has remained very strong. We've seen no signs certainly in the DTC channel that there's really been any erosion in our margin. And we really don't see any erosion in the production levels. I would expect to see us continue to produce at these levels, maybe a little bit of softness -- seasonal softness in the fourth quarter we'll see. Didn't have any last year. But there's no reason to think that at these rate levels, our production will not remain this strong well through 2021, maybe through the end of 2022. So we feel good about it, and that's what we were really pointing out in the 8-K was originations is even better than we expected, and we expected a strong quarter. So it's -- the third quarter should be very, very good.

Yes. And I would say, Mark, this is Jay, if you look at the macro environment, we remain very bullish as well. When you think about the overall market, I think the MBA is projecting $3 trillion for this year. And obviously, that's a record year for at least in the last decade, I think. So it's very, very strong. And I think the trends you're seeing, we expect to continue. I mean, look, the nonbanks are continuing to grow share. And then when you think about take that a level down to the nonbanks, I think you're seeing a lot of the stronger players are going to continue to take share as well. I mean, if you think about the platforms that have invested in technology, they've built products, they've built digital tools for their customers on how to engage. I think that's going to remain a competitive advantage, and we'll talk more about this later. But clearly, we're in that camp. We've made a lot of investments in a number of tools, both on the origination and servicing side that are really delivering a better customer experience and take one second just to really brag about our teammates. If you look at across the Mr. Cooper franchise, we've got 95% of our teammates working from home, which a lot of companies do. And we just went through our great place to work survey process. And once again, this year, we're -- we've been certified as a great place to work. With frankly, scores that exceeded every score from last year. So we had a higher participation rate, higher vote of the, we think Mr. Cooper is a great place to work. So I think that says a lot about the team, a lot about their level of engagement and a lot about what we can expect to come because we're very excited to achieve those results and excited to see what's possible in '20 and certainly, '21 and '22.

Okay. That's helpful. And I think you guys had indicated you were kind of recommitting and focusing on the correspondent business. It's reflected in the volumes you've seen. Our sense is that others have done the same, margins have come down correspondingly. Just what are your thoughts on that business here going forward? Do you still like it at the margins you're seeing? And should we expect you to continue to take share in correspondent?

Well, we like it. The margins have compressed a little bit from second quarter levels. But we still like it. It's a very attractive way for us to put capital to work by retaining those MSRs. And that's our opportunity to acquire new customers. So yes, we like it. We'll see where margins go. We don't like it at any price, but where it is right now, we think we can continue to expand the business at least to the levels of our DTC channel, if not significantly higher than that.

And if you look at -- I mean, for us, really, to Chris' point, it is an opportunity to acquire customers, we think, at attractive levels. And really, it's a B2B channel that then we can leverage our B2C channel. And clearly, our -- we think our direct-to-consumer channel is certainly best-in-class and when you look at the performance there, the margins there. And so we want to take those correspondent customers and keep them for life. And so I think it's an attractive way to acquire customers and then enable our marketing and technology takeover in the direct-to-consumer channel and really -- and in servicing and take care of those customers for a long time.

Okay. One interesting consequence of this environment where everybody's, to certain degrees, are seeing strong volumes and margins is that there's a lot of excess capital being created. Is that creating a bit of a seller's market versus buyer's market here around MSRs, where we could see margins continue to compress as long -- in correspondent as long as they remain so strong in the lines across other channels?

I'm not sure that's the case. I think there are certain pools that are very rich refinance pools. And clearly, they've seen some pretty rich bids. But I think more than anything, it's been the scarcity of pools coming to market. Prices are so low compared to historical norms, that people have been retaining their servicing waiting for prices to improve. And I think, if anything, you're starting to see, maybe not the biggest pools, but the smaller pools and those holders start to capitulate a little bit. I know just for us, we bought 2 pools, modest size pool, $2 billion pools in the last 3 or 4 weeks. At attractive prices. And so I think you're going to see a lot more of that product come into market. And we see every pool, I don't care how big or small it is, I think you'll see pricing react accordingly when that supply starts to tick up. Now with the biggest pools, there have been some rich prices. And quite honestly, we would not be a buyer at those levels. But fortunately, there have been 2 pools that traded in the last, I guess, 3 months. One we lost out, on the other, we didn't bid on because we knew what indicative pricing was, but we ended up partnering with a financial buyer that did buy it. And so we'll subservice it for them. And they chose us because they view us as having best-in-industry recapture capability, and that certainly enhances the returns that they're going to get. So we think we'll see growth one way or another as this stuff comes to market.

And there's really 2 -- I'll add one other comment, there's 2 components of the margin, right? There's clearly revenue and then the expense piece. And we are investing heavily in the operations. And we'll talk about a couple of those projects in a minute, but we have significant dollars that we've spent -- or significant dollars we have and will spend in improving our factory. So we are looking to take costs out in both kind of correspondent fulfillment as well as in the origination -- as well as in direct-to-consumer. So even if I think you see some compression, and to your point, it's a seller's market, competition is fierce, we are just as focused on becoming a more efficient platform and making the investments to do that.

Okay. That's helpful. The MBA's Mortgage Credit Availability Index fell to the lowest level since 2014. Can you just talk about availability of mortgage credit in the market broadly, it's probably hard for you observe, given how strong refi is, but any thoughts on how that might be impacting overall volumes?

I mean I think it's -- look, we're a government completely GSE and FHA, Ginnie lender. And our focus is to take care of our existing customers. And when you look at our correspondent box, credit box, if you will, I think it's pretty wide open, and we don't have a lot of overlays there. So for us, personally, I feel like credit availability is strong. And from the market overall, yes, I think it's an issue, and I think it's going to continue to be an issue. And I think it will play out depending on how November plays out and what the different motivations of the GSEs, FHFA and FHA and Ginnie, how they want to move in that direction. But I think from a macro standpoint, it's definitely an issue. We've spoken about that on numerous occasions. For us, we kind of -- we play in our lanes and frankly, try to take care of all of our customers.

Okay. It's helpful. I want to shift track here and move back to a question for the audience. Audience, if you could weigh in on this question. What is the biggest risk to shares you see here? Weaker-than-expected gain on sale margins, weaker than forecast purchase volumes. Weaker than forecast refi volumes, increased regulatory scrutiny or other? [Voting]

Shifting back to management. What impact do you expect this new loan level pricing adjustment on refinances at Fannie and Freddie, to have on the market?

I think it's a modest even negligible impact. Now the 50 basis points translates into 12 or 15 basis points of rate adjustment to the borrower. And if you think about where rates are and just what's happened quarter-to-date, rates have drifted down about 20 basis points. So even with the 50 basis point fee, rates are actually below where they were when we started the quarter. So I don't think that's really going to be a big issue.

Okay. That's helpful. Can you provide an update on just forbearance activities and delinquencies in your portfolio, any kind of implications for liquidity quarter-to-date? And also kind of levels of defaults that you think you could ultimately support?

Yes. Forbearance, it continues to dwindle in line with our forecast. I think when we last spoke, we were at about 7%. We're a little bit under 6.5% today, 6.4%, I think as of yesterday. So forbearance levels are performing just as we expected. And fortunately, with regard to what our liquidity can support, it's -- I don't think there's any realistic scenario, no matter how direr you may want to paint one that we're not prepared to handle that. We went out and secured financing from our bank partners when the pandemic first started, and we had really no way to know what levels of forbearance we would see. And so we solved for a 20% level, and we thought we could see that as early as May. And so we lined up billions of dollars of additional financing. And as of today, we have, I think, $2.7 billion of committed advanced financing and only $700 million of that is drawn, which is the normal amount we had pre pandemic. So advances have really not been impacted to date because of the high prepayment levels. So again, I think it's highly unlikely there's any scenario where we're not going to be prepared to handle that from a liquidity point of view. You may have noticed, Mark, that just recently, we announced a new facility for Ginnie Mae. And that's the one area where most servicers have had difficulty at providing or obtaining long-term financing for Ginnie Mae advances. And I think we're the first company to get a large multiyear facility for Ginnie Mae advances. So we've got a $900 million fungible facility that can be used to finance MSR and advances, and it's fully committed for the next 2 years. So I think we're in very, very good shape. And I don't see anything that could happen in any realistic scenario that would say our liquidity wouldn't be sufficient.

Yes. And I think if you drill down into the forbearance levels, there's still a large number that are performing. So even today, close to 30% of the folks that are on forbearance are still making their payments. And obviously, that's a good sign. And we were paying close attention to August because you had a lot of the stimulus ending at the consumer level, and we actually saw overall roll rates a little better than July. And we did not see any real increase in the forbearance level. So I think -- and I think that trend is continuing into September as well. And when you look at people that are -- customers that are rolling off of the forbearance in the GSE investors, most of those are moving into deferrals. Which, again, I think, is another positive statement because it tells you they're going to continue to make their existing payment. So I agree with Chris. I think it's a positive trend. And I think the other thing that people may or may not realize, having lived through the last crisis. When you look at the ease of the forbearance and for consumers to move into that, we did that. We built digital tools for that. We've built digital tools for the post forbearance plans as well. And you're seeing a 60%, 70% of customers that are using the digital tools for these solutions. And it is so much easier than the last crisis where you had a HAMP mod, you had a lot of paperwork, you had a trial payments. I mean it's all these solutions, they just have to -- hats off to what the GSEs have done and the FHA and Ginnie have done to make it a consumer-friendly process. And then to our team for really taking that a step further and utilizing the digital tools to make it pretty seamless. So I think we're optimistic that we have the solutions built, be a friction-free process for customers. And we'll see. You could see a second wave. Obviously, you never know what's going to happen with unemployment. But right now, things are performing in line with our current forecast and better than we originally expected.

Great. Could you just discuss the opportunity you see here on early buyouts of Ginnie Mae loans?

Yes. I think we have obviously a large government portfolio that we service. And if you look at the waterfall within coming off of the forbearance plans, really, the first piece of that waterfall is reinstatement and then partial claim and then a streamlined mod and so in the streamlined mod cat -- so clearly, we're going to follow that waterfall, and we're going to work with the customer to try to find the best solution. And if ultimately, a streamlined mod is the best solution, then we'll definitely move forward with that. And I think there will be buyout opportunities. We're going to be -- we're going to -- we've been using models for years on the buyout process and how to be smart and efficient with that. And so we'll do the same here. I don't expect us to clearly buy out every loan. I think we'll continue to be disciplined in that, continue to use our models and look at what the opportunity is. I think there will be opportunity, and just like there's been in the past, just like there is today on buyouts. And we've actually secured billions of dollars in additional financing if and when that opportunity presents itself. So we think there will be opportunity, but we'll be very measured and disciplined and first, to do the right thing for the customer and then use our models and to make sure we're doing the right thing.

Okay. My next question was around the outlook for servicing profitability in the second half of the year. It sounds like refi volumes in the origination business has been even stronger. I'm guessing that kind of has negative implications for servicing here, but you're more than offsetting it with profitability in the origination side, is that kind of the right way to think about it?

Yes. I think that's exactly the way to think about it, Mark, it's -- we've got a very balanced business, fortunately. But clearly, speeds have actually elevated since the beginning of the quarter as the -- as rates have continued to drift down. I think a year ago, no one would have thought we'd be looking at CPRs of 25 plus percent. So that's adding pressure to servicing. Now we expect to see -- as Jay said, we do see -- expect to see some opportunity for buyouts that will come through or streamline mods that will come through the originations side of the business. We'll see -- we do think that's a big opportunity. As Jay just said, we added $2.5 billion of capacity to our lines just in the last 30 days. We expect to see some mod fees start to come through. But I think, overall, the rest of this year, we think originations is going to outperform and servicing is going to be pressured.

Okay. That's helpful. You hinted at project flash on your 2Q call to drive growth and market share gains in your origination business. Can you just discuss some of the key initiatives and goals coming out of that project?

Yes. I think it's a -- there's really 2 overarching goals. One is closing loans faster, delivering a better customer experience; and then two, doing it in a more efficient way. And so if you look at the origination process, there's a lot of -- there's just lot of steps from lock, processing, underwriting, closing. And we've really peeled the onion back and doing a lot of process mapping and process improvement work to see where can -- where are the bottlenecks. Like what ultimately is causing delays in the origination process and how do we correct those. And so it's really just building now, I would say, a better factory. And it's taking every single process and breaking it down and then determining what's the best way to execute that process. And so we have teams now that are just focused on one specific task. And they can do it in a more efficient manner, that moves to the next step in the process, et cetera. So I think, ultimately, we think in some of the products and the first phase of the flash will be completed. Obviously, this year, we think we'll be able to take out $1,000 per loan from a cost standpoint. And then I think as we continue to roll it out to the complete -- or the entire platform, you'll just see more and more cost takeout. And you'll see the time line to close condensed. And I think that to me is personally, that's just as important to me because I want to deliver a great customer experience. And I think closing that time line, derisks the entire portfolio. But we've got great teams working on it, and we're investing dollars there. And we've already made enough progress that we're convinced it's going to make -- be very meaningful from a cost standpoint.

And I'd just add, it's cost and it's quality, it's eliminating rework. It's just a much better way, as Jay says, to run the factory. And flash is very impressive and the folks that are leading that deserve a lot of kudos. But that's just the latest of a long period of innovation and technology investment, not just in originations, but really throughout the company. And we have been investing in technology for years in originations. And when Jay says take $1,000 out of the cost of the loan, you got to step back and realize our cost to originate a loan is dramatically lower than that of the big banks. I mean we originate loans for 1/2 to 1/3 of what the biggest banks do. We've created a very significant competitive advantage. And there are a few of our competitors in the nonbank space that have done that as well. But what you see here is just a continuous refinement of those processes. And I think that is going to cause or continue the shift of mortgage share from the banks to the nonbanks. So I think we're in a great position. And we'll talk more about flash, but there'll be other initiatives in addition to that, that will continue to deliver efficiency improvements in 2021 and for the foreseeable future.

And it's really paid dividends for us already. I mean when you look at just the -- if you were to compare the number of loans per processor that we were at a year ago versus today. It's dramatically improved. So making these investments along the way have really prepared us for this current environment. And I think as we move into other environments, this efficiency, I think, will continue and these investments will continue to distance ourselves from the competition.

Okay. Could you provide a little more context around that $1,000? What does that represent as a percentage of your current cost to produce a loan? And what could that mean for kind of the returns?

I think it's close to 1/3, I think, in this particular product, overall reduction in cost. So -- and that will drop -- obviously, the majority of it will drop to the bottom line. Now we're initially starting with a particular product. So I wouldn't apply that across the entire platform. We wanted to prove it out within a specific area, and then we'll move it through the rest of the platform. But it's material, it's meaningful. And the other thing I would say that, again, I'm just -- we've taken the turn times there down considerably as well. I think we've knocked off 10 to 12 days from an overall turn time standpoint. So early indications are it's going to make a huge difference throughout the platform. But we -- just like anything, we wanted to get started with a smaller pilot subset, if you will, and then move it out to the rest of the platform.

Okay. You made some announcements about some pretty significant hiring that's happened year-to-date. Could you talk about what this means for the business on a go-forward basis? Do you -- is it a sign that you think you're taking share? Or is it just what you need to kind of support the strong overall growth in the market?

Yes. I think the -- we put a press release out a week ago, saying we're going to -- or 2 weeks ago, that we're going to hire an additional 2,000 people. And we've actually probably hired 500 of that group already. And that's really to supplement originations and to improve upon our already strong recapture. We're doing about 1,200 units a day in DTC. We think with that additional hiring, we may be up to 1,500 or so. So you should think of that hiring as being accretive almost from the time people start. And that's just -- that's loan officers, processors, underwriters and home advisers.

And then in addition, we're hiring -- a piece of that we'll be hiring in the title business within Xome because Xome is -- to Chris' point earlier, is frankly having an amazing year to hit their original plan with the foreclosure moratorium and the exchange business being effectively shut down. And that's really being driven by title. So a number of those hires are coming through the title channel and then -- and correspondent as well. And I think we're definitely taking share in correspondent. And we had our highest lock month in the history of the company in August. And so we -- like we talked about earlier, we see opportunity there. So lion's share are coming in through the direct consumer channel, but we've got other pockets in the company where we just frankly need more capacity, and that's where the team makes this all go.

If I could just build on that for a second. I'm glad you pointed out Xome. I should have mentioned that earlier. Xome, if you think about Xome at the beginning of the year, we thought they could do $50 million to $60 million of ET this year and then the moratorium hit and we had to shut down the auction platform, which has really been historically the profit engine of that business. And we're going to end up doing just about the same amount of EBT because title is outperforming, the company has taken some expense out, some of the holdover from the Assurant integration. And I think Xome is probably the least appreciated part of our company. It's not the biggest. It's not the sexiest, property press doesn't get a whole lot of headlines. But in this year, without the auction platform generating any revenue, we think we'll do 50 plus, maybe $50 million to $60 million of EBT in that business. And that just says 2021 is going to be incredibly strong. Whenever the moratorium lifts, we're going to have a lot of pent-up demand for auction. And I just think Xome because it doesn't translate into book value, and a lot of investors look at us and try to value us based on book value. And Xome at $50 million, $60 million, $70 million or $80 million of income a year that's really the -- an ingredient that doesn't get factored in enough when investors look at what this company should be valued at.

Okay. Fair enough. Just looking back at the hiring you've done so far this year. Can you just talk about -- was it in the first half, was it more -- as more done towards the end of the last quarter? I'm just trying to think about the cadence of expenses across 2020?

Yes. I think you're probably referring to the 3,000 hires that were mentioned in the press release. That's really a little bit of an unusual set of circumstances. We hired a tremendous number of temporary workers, 105 -- could be 600 people for a very short period of time, just to be able to help during the early days of the pandemic before we got our technology in place so customers could elect for forbearance through the website. And so that was just to stabilize call center volumes and make sure our customers were taken care of. And then we also had a large facility on the West Coast that we closed, and we -- and it was run on -- it was part of an acquisition. It was run on a different platform, and we had always planned to close that. And we rehired in a different facility and different part of the country. So that was more than 1/3 of that hire. And then a lot of it was originations. We've added 600 or 700 people in the first half of the year. A lot of hiring was done in as part of the Home Advisor program that we've talked about, which is a new sort of hybrid loan officer. These are people that come in, a lot of them are fresh out, college graduates that come in and are trained on how to handle customer service calls, but then they go through our in-house training to get licensed nationally. And then they are put on the platform, and they take inbound customer service calls, but they're able to quickly pivot once they take care of our customers' needs to letting them know what kind of loan they might qualify for to help them save money. And that has been a real home run for us.

And I'd say the last piece of that is we've brought some items in-house. We're using outsourcers, and we brought -- we have a captive and we've brought those processes into the captive. And it's significantly lower cost than using third parties. And so we've taken -- we've always done that, but the captive is more mature, the captain -- captive continues to deliver results. And so we've actually moved stuff away from vendors at a higher cost and moved some stuff into the captive as well. So I think those are the 4 legs of the stool when you think about the overall hires.

Great. I have one last question for the audience before we move on with more questions for management. Last one, audiences, over the next year, would you expect your position Mr. Cooper to increase, decrease or remain the same? [Voting]

Turning back to management could you just update us on your estimate of like the pool of borrowers that are -- have an incentive to refinance here within your servicing book, and how have recapture rates trended in the quarter relative to 2Q and a year ago?

I heard the first part. Let me answer that just because I was just looking at the number, in terms of the folks that are in the money, so to speak. We look at our customers that can save more than $100 a month. And that's one category, $100 to $200 a month is -- represents 600,000 customers. And then customers that can save above $200 a month is an additional 840,000 customers. So nearly 1.5 million customers can save more than $100 a month, and more than half of those can save more than $200 a month. So I'd say that really is the reason we are so bullish that production levels are going to remain high for as long as rates remain where they are today.

I mean, if you really crystallize that into kind of the current locks that we're taking, you look at -- you kind of think about sizing that opportunity I mean realistically, it could run easily well into 2022 and potentially into early 2023, just with our existing customers on the -- with those numbers. So massive amounts of opportunity in the portfolio and which is another reason, like we're actually not thinking about next quarter. We're -- I'm personally trying to think 2 years from now, and we're -- how can we continue to differentiate ourselves and really build the best factory out there. And so that's why we're making those investments in flash. We're making the investments in the servicing platform. And we're making investments in the new IVR, omni system -- omnichannel system. So I think we're extremely, obviously well positioned today, tremendous scale, tremendous power, more experience than anybody from a servicing transfer standpoint. And then when you look at what's the opportunity in origination within our existing customer base, it's massive. And so I think making the investments we're making in the technology is just going to continue to allow us to keep those customers, hopefully, for the rest of their life.

Well, that's great. I think we're going to have to end on that note. But really appreciate your time and insights today. Thanks for joining us.

Thank you, Mark.

Thank you. I appreciate it.