Mr. Cooper is backing income with funding associated to Ginnie Mae

Mr. Cooper's recent gains show that the company has been able to remain profitable by using origination to offset lost service and prepare for future risks.

The mortgage company posted net income of $ 214 million for the third quarter, partially reflecting a record $ 438 million pre-tax profit on incarnation and a pre-tax net loss of $ 32 million. This can be seen in a section of the company's income statement that has some unaudited and non-GAAP figures.

That net income is nearly three times its net income of $ 73 million in the second quarter. During this period, the company had slightly less pre-tax income from originations of $ 434 million and a lower net loss of $ 251 million from service.

The company's latest results show that its service unit's assets have changed from the previous year, when that division posted pre-tax earnings of $ 9 million.

For the third quarter of 2019, Mr. Cooper's total net income was $ 83 million, lower than in the third quarter of this year. The company's pre-tax origination income for the third quarter of 19 was also lower, at $ 178 million.

Aware of the fact that there is a large service operation vulnerable to the tolls that prepayments for refinance and forbearance could bring, Mr. Cooper has increased its cash resources in case future challenges arise, Chairman and CEO Jay Bray said.

"We have further strengthened our liquidity by receiving a two-year committed line on Ginnie Mae advances," he said during the company's call for profits on Thursday. A private company provided the financing line.

"We were the first service company to receive this type of funding and it has been a real pioneer for us," added Bray. “That brings our unused capacity to $ 1.5 billion. We believe this positions us for a very adverse economic scenario should one occur. And when it doesn't, it provides dry powder for future Ginnie Mae acquisitions. "

Mr. Cooper serves mortgages with a collective unpaid principal of $ 588 billion. The company borrowed $ 15.6 billion in the quarter, up 45% from $ 10.7 billion in the previous quarter and $ 11.9 billion in the same period last year.

Some market watchers worry about the continued ability of service providers to grapple with a surge of distressed borrowers and financial stress amid the pandemic. Whether government interventions will continue to be sufficient is an open question.

Preliminary third quarter results for the business’s other major publicly traded service provider, Ocwen Financial, fell into the red but improved their liquidity position over the period. Ocwen plans to release final third quarter results in early November.

There has long been concern that the traditional pricing regime to compensate servicers may not be appropriate given the cost of the highly regulated business. These costs are particularly high in the distressed maintenance area.

Mr. Cooper had a 6.1% forbearance rate as of October 25, compared to a high of 7.2%, said Chris Marshall, executive vice president and chief financial officer, during the company's earnings call.

Demand for up-front financing was relatively low in the period just before the pandemic, as most borrowers paid and service providers very little advanced payments for borrowers who failed to make them.

But now that more progress is being made, there is greater demand for this type of funding and more forms of it have been introduced.

The new funding Mr. Cooper has will help ease the demands that prepayments might place on his liquidity.

“In the past, we have had no way of funding Ginnie Mae's progress. Now we have a facility of $ 900 million, which is a really significant amount of funding capacity. This means that in the event of an adverse scenario, our discretionary cash flow burden would be limited to the haircut on advances, ”said Marshall.

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