Mr. Cooper is putting itself in position to absorb some mortgage business from depositories, anticipating that they'll stage a further retreat from housing finance due to proposed tightening of bank capital rules and other negative market trends.
The capital rule, which adds larger risk weightings for portfolio products with high loan-to-value ratios and mortgage servicing rights, could drive more sales of the latter, which Mr. Cooper may absorb. Banks also may look to the company to handle other housing finance operations given thin margins in the business, Vice President and President Chris Marshall said at a Barclays investor conference on Tuesday.
"I can see in the very near future that banks will be looking at us not just to handle their MSR but perhaps outsource all of their mortgage functions to us because, as we all know, banks really don't make any money off of mortgages, but we do," Marshall told attendees at the meeting.
Regional banks, in particular, have had difficulty generating profits from servicing, he noted.
"Those banks don't want to pay a higher capital charge on a non-earning asset," Marshall said.
The one mortgage-related asset some banks do have an appetite for are second liens, which Mr. Cooper has originated and sold to a small number of sizable depositories as part of its efforts to diversify lending, he said.
"We originate them on balance-sheet, we sell them to a couple of different large banks on a regular basis. We're funding them for less than 30 days generally so that at our current level is sustainable," said Marshall, noting that the company is selling the credit risk off on a flow basis.
Marshall added that Mr. Cooper has been monitoring which customers the loans are appropriate for carefully.
"We score every customer every day, so we know the customers that may have some challenges. We know the ones that have the most equity and we know the ones where it makes more sense to do a second lien than a refi," he said.
Mr. Cooper is keeping an eye on some performance concerns in other types of consumer finance but its single-family mortgage delinquencies have remained low.
"There will come a time when credit obviously will hit the mortgage space. It's not right now," said Marshall.
Education debt, which is undergoing a transition away from pandemic-related forbearance, is expected to strain credit for some borrowers.
"We are looking at that as student loan payments resume, and we are seeing a little bit of delinquency noise in credit cards and autos for our customers," said Marshall.
However, mortgage delinquencies are at a record low at the company, said Chief Financial Officer Kurt Johnson.
"If you were to see a turn from delinquency standpoint, we certainly have the capability and capacity to handle that," Johnson said, referencing previous acquisitions of special servicers Rushmore and Community Loan Servicing.
Mr. Cooper is ready for a shift in financing costs in addition to a change in the credit cycle, Johnson said, noting that the company has made some investments in streamlining its processes while also making them more user-friendly.
"We expect, when and if rates do come down, that we'll be more than ready from a capacity standpoint," he said.
