Servicing earnings prop up Pennymac’s Q3 performance

Pennymac announced on Thursday a $92.87 million net income in the third quarter

The servicing segment drove most of Pennymac Financial Services’s earnings in the third quarter of 2023, just like its peers, Mr. Cooper and Rithm Capital

Profits at the California-based lender increased by 60% from July to September, compared to the prior quarter, with originations also boosting performance. 

Pennymac announced on Thursday a $92.87 million net income in Q3 2023, up from $58.2 million in the previous quarter but down from $135 million in Q3 2022, per Securities and Exchange Commission (SEC) filings. 

David Spector, chairman and CEO, told analysts that the company had “outstanding results” even as mortgage rates neared 8% in Q3.

According to Spector, many of the borrowers who are locked in a low, fixed-rate mortgage are incentivized to stay in their homes. This has led to an “extremely low inventory of homes for sale, driving expectations for the lowest unit origination volume since 1990.” 

“Though the current origination market remains constrained, mortgage banking companies with large servicing portfolios are better positioned to offset the decline in profitability that has resulted from these lower origination volumes,” Spector said. 

In servicing, Pennymac delivered a pretax income of $101.2 million in Q3 2023, up from $46.5 million in Q2 2023. However, the profits were down from $145.2 million in the same period a year ago.

Pennymac’s servicing portfolio grew to $589.4 billion in unpaid principal balance (UPB) as of Sept. 30, up 2% from June 30. The increase happened because production volumes more than offset prepayment activity, which is low due to higher mortgage rates.

As of Sept. 30, nearly 20% of the company’s servicing portfolio consisted of mortgages with rates over 5%. Executives see opportunities for the consumer-direct channel to offer customers refinances when interest rates fall.

Loan production

Spector told analysts that the company’s multichannel approach to production enables consistent access to the origination market in the current high-rate environment. 

In the production segment, Pennymac had a $25.2 million pretax income from July to September, compared to $24.4 million in the prior quarter and $38.6 million in the same period of 2022. 

Pennymac’s total loan acquisitions and originations reached $25.1 billion in UPB in Q3 2023, up 0.8% from the previous quarter but down 4% from the same quarter last year. 

The correspondent channel continues to be the most relevant for Pennymac, with the number of sellers increasing to 829 at the end of the quarter, compared to 800 on June 30, 2023. 

In this channel, the company reached $23.9 billion in UPB in Q3 2023, compared to $21.6 billion in the previous quarter and $23 billion in the same period last year. 

Spector said banks are stepping back from the correspondent channel amid expectations of increasing capital requirements through the Basel III rules. Also, the channel tends to represent a larger percentage of total industry originations in a low-volume environment because liquidity becomes relevant for many sellers.  

Consumer-direct, interest-rate lock commitments (IRLCs) came in at $1.7 billion in UPB, down from $2.2 billion in the previous quarter and $3.8 billion from the third quarter of 2022. 

Dan Perotti, senior managing director and chief financial officer, told analysts that volumes in consumer direct remained low, “but margins increased meaningfully from the prior quarter due to a greater proportion of closed-end second liens, which have lower average balances.” 

Meanwhile, in the broker-direct channel, Pennymac’s commitments were at $3 billion in Q3 2023, up 7.1% quarter over quarter and 57.9% from the same period in 2022. 

Pennymac’s strategy has been to position itself as a “strong alternative” to the top leaders in the channel – United Wholesale Mortgage and Rocket Pro TPO

Spector told analysts that the company doesn’t see margins under severe pressure amid “more rational prices” in the market, which means he expects profitability in production in Q4 2023. 

Pennymac estimates that it represents 21.2% of the correspondent channel, 4.2% of the loan servicing market, 3.1% of the broker-direct space and 0.6% of the consumer-direct segment. 

PFSI’s stock closed Thursday at $64.09, down 1.73% from the previous day. The share remained unchanged in the after-market hour. 

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