Key Takeaways:
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1. Mortgage servicers benefit from high rates and a slow housing market.
2. Mr. Cooper’s stock has soared 36% annually since 2022.
3. Rate cuts might challenge servicers but could also boost origination revenues.
What Happened?
High interest rates have battered new mortgage originations and refinancing, yet mortgage servicers are thriving. Mr. Cooper’s stock has surged with an annualized total return of 36% since 2022, compared to the S&P 500’s 7% return.
Nonbank servicers like Mr. Cooper, PennyMac, and Rithm Capital have outperformed the broader market. Mr. Cooper recently acquired mortgage-servicing and origination businesses from New York Community Bancorp’s Flagstar Bank, adding over $350 billion to its servicing portfolio, which now totals $1.2 trillion. This acquisition sent Mr. Cooper’s stock up by nearly 7%.
Why It Matters?
You might wonder why mortgage servicers are thriving in a high-rate environment. When rates rise, mortgage holders keep their loans longer, increasing the value of mortgage servicing rights. Additionally, servicers earn more interest on escrow accounts.
With banks exiting the servicing business due to regulatory changes, nonbank entities have filled the gap. These shifts have positioned companies like Mr. Cooper to capitalize on the current market dynamics. “Returns on equity could increase,” analysts at KBW noted, highlighting the sector’s resilience.
What’s Next?
As the Fed considers cutting interest rates, the future of mortgage servicers hangs in the balance. Lower rates could spur refinancing and home sales, potentially decreasing the value of servicing rights and interest income. However, servicers like Mr. Cooper use hedges to mitigate this volatility and benefit from increased mortgage originations.
A significant drop in rates might boost large servicers if it rejuvenates the mortgage market. As KBW analysts suggest, a soft economic landing could further stabilize the sector, ensuring servicers remain profitable amidst market shifts.
