Pennymac Financial Services earned a profit of $98.3 million in second-quarter 2024, more than double the $39.3 million it raked in during the prior quarter. And the company is getting its ducks in a row to seize on opportunities when interest rates fall, relying on its scale and servicing portfolio to outmuscle competitors.
The California-based lender generated production revenue of $202.6 million from April through June, up 10% from the prior quarter and 19% higher than in second-quarter 2023. Higher revenues drove more income for its loan production channel, which rose to $41.3 million in Q2 2024, compared to $35.9 million in Q1 2024 and $24.4 million in Q2 2023.
The company has previously touted the strength of its servicing business and that sentiment was backed up by the $88.5 million in pretax income for the channel in Q2 2024. By comparison, servicing generated $4.9 million in pretax income in the prior quarter and $46.5 million in Q2 2023.
“PennyMac Financial generated strong earnings in the second quarter with an annualized operating return on equity of 16%,” chairman and CEO David Spector said in prepared remarks. “Our large and growing servicing business continues to drive revenue and cash flow in this higher interest rate environment and notably, our per loan servicing expenses were at record low levels as we continue to leverage our proprietary technology and operational scale.
Pennymac’s loan acquisition and origination volumes totaled $27 billion in the second quarter, up 25% from the first quarter. This drove growth in its servicing portfolio, which totaled $632.7 billion in unpaid principal balance (UPB) at the end of June, up 2% on a quarterly basis and up 10% on a yearly basis. This was “driven by production volumes which more than offset prepayment activity,“ its earnings report stated.
“Our multifaceted approach to mortgage production and our position as one of the largest producers in the country provide us with unique access to acquire newly originated mortgages in the current market, driving the continued growth of our servicing portfolio,“ Spector told analysts during an earnings call on Tuesday.
Spector went on to say that the company believes that the “origination market is resetting“ and lenders like Pennymac are poised to benefit if they can capture the “strong, pent-up demand from key homebuying demographics.“ The company estimates that in recent years, about $2.5 trillion in mortgages have been originated with a note rate of 6% or higher.
“It is our belief that when interest rates do decline, many of these borrowers will undoubtedly look to lower their mortgage rates, driving refinance volumes higher and total originations up to more normalized levels,“ he said.
The company’s growth in servicing revenue and profits are tied to technological efficiencies. Spector told analysts that Pennymac expects to be the first servicer to successfully incorporate the requirements of the Veterans Affairs Servicing Purchase (VASP) program through the U.S. Department of Veterans Affairs.
“This management team has done a tremendous job developing our proprietary servicing system, which has the flexibility to rapidly adjust for regulatory changes and incorporate new and emerging technologies, including artificial intelligence, to drive operating efficiencies,“ Spector said.
In May, Pennymac announced a private offering of $650 million in senior notes that will come due in November 2030. The notes are priced at an annual rate of 7.125%. The company explained that the proceeds will go toward repaying debt that was taken on in securing its mortgage servicing rights (MSRs) facilities, other unspecified debts and “other general corporate purchases.”
“This transaction reflects our continued focus on the strength and flexibility of our liquidity and capital structure as the new notes have extended the duration of our liabilities and enhanced our overall liquidity position,“ Pennymac chief financial officer Daniel Perotti said during the earnings call.
In response to an investor question about lower employee headcounts across the mortgage industry, Spector indicated that Pennymac was well positioned to weather any further downturns or capitalize on any near-term opportunities.
“In our consumer direct channel, one of the main reasons we came out with our closed-end second product was to keep capacity in place for our consumer direct channel if rates were to pivot down. And I think that’s something we’re already seeing taking place,“ he said.
“Similarly, we’ve been very, very active in modeling out what we would need in certain interest rate environments while maintaining excess capacity, so we don’t take 30 to 60 days to seize on an opportunity. We have three large classes of LOs already in the queue. They’re going to be up and trained and ready to go. Even if rates stay where they are, we believe there’s value there, given the high note rate servicing that we have and given the fact that you can’t really start to refinance those loans until they’re seasoned six months.“
