Don't Expect Servicing to Bail Out Mr. Cooper Group in 2023
Last year was horrible for the mortgage space. The Federal Reserve hiked the fed funds rate in a series of aggressive steps from nearly 0% to 4.25%. This caused a collapse in mortgage origination and began a period of underperformance for mortgage-backed securities. In spite of that, Mr. Cooper Group (NASDAQ: COOP) has been one of the top performers in 2022 in the mortgage space. However, can that outperformance continue in 2023?
Mr. Cooper is a mortgage originator and mortgage servicer. Like most mortgage bankers, it was hit hard by rising interest rates, which eliminated the incentive for consumers to refinance their homes. If a borrower refinanced a home in 2020 with a 3.5% mortgage rate, there is no reason to refinance at 6.5%. It doesn't make financial sense. In addition, the home purchase market has taken a hit as rising rates and home prices have made housing much less affordable than a couple of years ago. The refinance market has virtually disappeared, and the purchase market is down some 35% compared with a year ago.
The bright spot for Mr. Cooper has been in mortgage servicing. Most mortgages are bundled into a mortgage-backed security and end up being held by a pension fund, by a mortgage real estate investment trust, or on the balance sheet of a bank. A mortgage servicer handles the administrative duties for a mortgage on behalf of the ultimate mortgage holder. The servicer sends out the monthly bill, collects and forwards the principal and interest payments, ensures property taxes are paid, and works with the borrower if he or she becomes delinquent. The mortgage servicer is paid 0.25% per year on the mortgage balance. So, if the mortgage is $400,000, the servicer gets paid $1,000 per year.
Source Fool.com