2Q profit more than 1Q, but 91.7% down from last year's comparable period
In the corporate equivalent of looking at the glass as either half empty or half full, Pennymac Financial Services (PFSI) posted respectable second-quarter earnings amid market volatility of $58.3 million – a 91.7% increase from its first quarter, but a 54.8% drop from last year’s comparable period.
Company officials also lay claim to a new milestone, touting its newfound status as the nation’s largest producer of mortgage loans in the country. During an earnings call, Pennymac’s chairman and CEO, David Spector, showcased bolstered production volumes and profitability from the first quarter and touted substantive contributions from the firm’s enlarging service portfolio. But such gains were partially offset by net valuation-related losses blamed on volatile interest rates.
“PFSI’s balanced business model continues to distinguish itself, with production returning to profitability due to higher volumes and margins, and strong operating performance in its servicing segment,” Spector said. “I am proud to announce that in the first quarter, Pennymac was the largest producer of mortgage loans in the country; and total production volumes in the second quarter, including acquisitions made by PMT, were $24.9 billion dollars in unpaid principal balance, up 9% from the prior quarter.”
Citing prepayment speeds at multi-year lows, Spector noted those volumes continued to drive the organic growth of the company’s servicing portfolio, which ended the quarter at more than $576 billion in unpaid principal balance.
Inflationary market blamed for quarterly performance
Spector blamed the various inflation-induced dynamics for the lowered gains from last year: “With mortgage rates currently near 7%, the most recent third-party forecasts for 2023 originations range from $1.6 [trillion] to $1.8 trillion, still well below normalized levels. While industry origination volume in the second quarter was meaningfully higher than the first quarter, higher mortgage rates are driving borrowers to remain in their homes, leading to low inventory levels and continued home price appreciation.”
Adding to the woes, unit originations in 2023 are projected to total just five million – the lowest level since 1990, he added, “indicating the potential for industry consolidation if market conditions persist.”
“While 2024 originations are expected to approach $2 trillion, we expect the competitive environment to continue given unit origination volume will likely remain constrained. As you can see from our recent financial performance, mortgage banking companies with large servicing portfolios and diversified business models are better positioned to offset the decline in profitability that has resulted from low origination volumes,” Spector said.
Company’s growing portfolio was a hedge against losses
He credited the company’s growing portfolio with buoying financial performance in the most recent quarter: “The primary contributor to PFSI’s strong financial performance in recent periods has been its large and growing servicing portfolio. We have demonstrated that even in a challenging origination environment, our large servicing portfolio, multi-channel production capabilities and balanced business model have positioned the company well to continue making progress towards achieving its long term goals. Pennymac Financial’s servicing portfolio is a critically important asset and has driven much of the success that we have enjoyed.”
Success in the broker channel is contingent on providing the technology, tools and products brokers need to best serve their communities, Spector noted. To that end, he noted Pennymac TPO recently announced a partnership with ARIVE, an origination platform for independent mortgage brokers. “Several prominent participants have recently exited the broker channel and we believe our continued commitment is driving more partnerships, higher volumes and a meaningful increase in market share in recent periods,” Spector said.
Correspondent channel growth touted
Dan Peroti, senior managing director and chief financial officer, cited another one of PennyMac’s strengths – its growing correspondent channel. “Pennymac maintained its leadership position in correspondent lending as our strong capital position and consistent commitment to the channel provide our partners with the stability and support they need to successfully navigate the challenging mortgage market,” Peroti said.
“We estimate that over the past 12 months we represented approximately 19% of the channel overall, and we believe our market share has been meaningfully higher in more recent periods as correspondent sellers seek high-quality partners like Pennymac. Pennymac also stands to benefit as banks step back from the channel and increased capital requirements are introduced by bank regulators,” Peroti said.
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