Tough originations market moves PennyMac toward mortgage servicing

Compass Point analysts cite common trend in mortgage firms

The PennyMac Financial Services' (PFSI) operating earnings released last week missed its target due to lower gains on sale margins and lower mortgage originations, analysts with Compass Point Research & Trading Group pointed out Monday.

The result of all the pressure on the mortgage originations side is a sudden switch to a focus on servicing within PennyMac, analysts Kevin Barker and Steven Seperson said. As the firm faced declining volume and profit margins, PFSI announced a headcount reduction to adjust to its current capacity levels.

"The headcount reductions did bring down the expense base which has been growing steadily over the past couple of years and we expect it to decline slightly in 4Q13 as the reductions are fully absorbed," Barker and Seperson said.

Executives at Nationstar Mortgage Holdings (NSM) are also moving more toward mortgage servicing. In its third-quarter earnings, Nationstar execs said they expect servicing to make up  70% of their total business in 2014. It's also exiting from some types of mortgage lending.

After the third quarter, PennyMac reportedly nabbed two bulk mortgage servicing portfolios with a total value of $21 billion. The first portfolio contained $10.3 billion in newly originated Fannie Mae MSRs, which closed on Nov. 1. The second contained $10.8 billion of legacy Ginnie Mae MSRs with an 11.8% delinquency rate, which is expected to close by the end of this year.  

The Compass Point analysts noted that PFSI will be the owner and servicer of the portfolio.

"We would expect the Fannie portfolio to be slightly accretive to earnings in 2014, but the Ginnie portfolio will take a year or two before it starts to show a material contribution to earnings," Seperson and Barker wrote. "However, the Ginnie portfolio may provide a decent boost to origination earnings given the weighted average coupon is well above the prevailing rate for 30-year fixed mortgages."

Compass Point adjusted its fourth-quarter earnings per share estimate to 30 cents a share, up from 28 cents a share, citing lower expenses within the firm and lowered its full-year 2014 estimate to $1.70 a share, down from $1.82 a share.

Any gains in earnings between fiscal 2014 and 2015 is highly contingent on the firm’s ability to keep its expenses low as it tries to build up its servicing portfolios in the wake of its weaker performance on the originations side, the analyst report noted.

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