All June long we’re going deeper on mortgage and title — looking at where the mortgage market is headed, how products are evolving and alternative financing options changing the game. Join us for Mortgage and Alternative Financing Month. And subscribe to Inman’s Extra Credit for weekly updates all year long.

Rising mortgage rates are putting a bigger-than-expected dent in loan servicing giant Mr. Cooper’s loan originations, prompting the company to lay off more than 400 additional workers and to warn investors that it expects only “break-even” second quarter net income.

Mr. Cooper’s main business is collecting mortgage payments from nearly 4 million borrowers. Rising mortgage rates make that business more profitable, since borrowers the company collects payments from are less likely to refinance their mortgage and potentially end up with another loan servicer.

But rising mortgage rates are also limiting the company’s ability to originate mortgages. As interest rates have soared, Mr. Cooper’s direct lending business — refinancing homeowners’ existing loans — has shrunk by 32 percent from a year ago, with $7.8 billion in loans refinanced during the first quarter of 2022.

Mr. Cooper’s shrinking originations business prompted the company to lay off 250 workers during the first quarter. On an April 28 earnings call, Mr. Cooper CEO Jay Bray warned that more layoffs were in the works.

The company has cut about 420 additional employees, most of whom work in loan originations, a spokesperson for Mr. Cooper confirmed to Inman. The layoffs, first reported on Thursday by an industry publication, Asset Securitization Report, represent about 5 percent of Mr. Cooper’s workforce, the spokesperson said.

“The mortgage industry is facing an environment of rapidly increasing interest rates and rising inflation, which has resulted in decreased originations volumes,” Mr. Cooper said in a statement provided to Inman. “It is with deep regret that we needed to eliminate positions as part of our efforts to manage costs and ensure we position the company for long-term success.”

At the end of 2021, Mr. Cooper had 8,200 employees, so the 670 announced layoffs to date mean the company has downsized by at least 8 percent since then.

In a May 25 regulatory filing, Mr. Cooper warned that due to higher mortgage rates, it now expects mortgage originations to generate $40 million to $50 million in pretax operating income during the second quarter, down from previous guidance of $65 million to $85 million.

As a result, Mr. Cooper “expects roughly break-even net income in the second quarter, excluding potential mark-to-market gains on its MSRs (mortgage servicing rights) and severance charges, reflecting pressure on volumes and margins in its originations segment,” the company disclosed.

In the meantime, Mr. Cooper’s loan servicing business is booming, since fewer borrowers have an incentive to refinance their loan, and potentially end up with another servicer. For every 1 percent improvement in the prepayment rate in Mr. Cooper’s favor, the company’s loan servicing segment stands to make an additional $15 million in pre-tax income each quarter, or $60 million a year, the company said in April 28 investor presentation.

In its May 25 regulatory filing, the company disclosed that prepayment speeds “have continued to decline so far in the second quarter.”

The prepayment rate on Mr. Cooper’s mortgage servicing portfolio was 23.7 percent during the first quarter of 2021, and 15.1 percent during the first three months of this year. Mr. Cooper said it now expects the prepayment rate will fall to an average of 11.8 percent during the second quarter, boosting second quarter pretax operating income to $25 million, with additional “strong growth in the third and fourth quarter due to higher interest income and lower amortization.”

A number of real estate companies are downsizing to adjust to this year’s rapid runup in mortgage rates, primarily mortgage lenders like Better, Guaranteed Rate, Keller Mortgage, LoanDepot, Pennymac, Rocket, Tomo and Wells Fargo, but also companies that provide services to lenders, like Blend and Doma.

Get Inman’s Extra Credit Newsletter delivered right to your inbox. A weekly roundup of all the biggest news in the world of mortgages and closings delivered every Wednesday. Click here to subscribe.

Email Matt Carter