California-based Pennymac Financial Services delivered an increased profit in the third quarter of 2022, mainly due to the performance of its servicing portfolio.
However, the company has been looking at the challenges ahead and has started to estimate the impacts of a recession on its businesses while monitoring the need for more cost savings initiatives.
Profits came in at $135 million from July to September, up 4% quarter-over-quarter, but down 46% year-over-year, the company reported Thursday.
“In the current environment, our servicing portfolio is contributing the majority of PFSI’s earnings while also providing significant cash flow to support investments across our businesses,” said David Spector, chairman and chief executive officer, in a recorded earnings message.
“Importantly, I believe the growth of our servicing portfolio will continue to differentiate PFSI from its competition, serving as an increasingly important asset while the origination landscape remains challenging.”
Cutting costs
Amid surging mortgage rates, Pennymac’s total loan acquisitions and originations came in at $26 billion in the third quarter, down 3% from the prior quarter and 56% from the same period last year.
The company received $38.6 million in pretax income from loan production during the quarter, up from $9.7 million in the prior quarter, but down tremendously from $330.6 million in the third quarter of 2021.
How are higher mortgage rates affecting servicing?
Acra Lending’s Eric Friedman said the servicing business right now is a “delicate balance between complying with regulations and servicing a loan for investors.”
Presented by: Acra Lending
“We believe the challenging environment will continue in upcoming quarters as higher rates persist,” Dan Perotti, chief financial officer, said. “That said, we expect the decline in PFSI’s production revenue to be largely offset by disciplined expense management activities.”
HousingWire reported Wednesday the company laid off 90 employees in California following 32 jobs cut in July, a workforce reduction of 236 employees in March, and the layoff of another 207 staff members in May.
Perotti said the company implemented meaningful expense savings and capacity reductions early this year and will continue to monitor the market for additional adjustments.
Pennymac is the country’s largest correspondent aggregator, but the lender also has smaller wholesale and direct-to-consumer businesses. Pennymac’s market share in the correspondent channel declined from 16.7% in the second quarter to 14.1% in the third quarter.
Consumer direct fell from 1.6% to 1.4%,while broker direct declined from 2.4% to 2.2%. Earlier in October, the company launched Power Plus, a new platform for brokers. The loan servicing market share held steady at 4.1%.
Recession on the horizon
The firm’s third-quarter earnings were driven by its servicing portfolio, which grew to $539 billion in unpaid balances, up 2% from June 30, 2022, and 9% from September 30, 2021.
The company netted $237.2 million in mortgage servicing rights (MSR) fair value gains in the third quarter, as higher mortgage rates resulted in lower prepayment activity expectations. However, the result was partially offset by $164.7 million in fair value decreases from hedging transactions due to surging interest rates.
Pennymac’s servicing segment generated $145.3 million in pretax income in the third quarter, down from $167.6 million in the previous quarter, and up from $8 million compared to the same period in 2021.
Executives for the company said that according to top economists, the probability of a recession has increased in recent periods. However, risks are mitigated by the fact that consumers are in a strong financial position due to the equity built up in their homes over the last couple of years and the current low levels of unemployment.
Pennymac reported projected needs for servicing advances in adverse scenarios. In the event of a recession with increasing delinquencies, servicers are required to advance funds for expenses such as property taxes, insurance, principal and interest payments.
When the worst-case scenario delinquency rate reaches almost 14%, advances peak at $1.9 billion.
“With total available liquidity of 2.8 billion dollars as of September 30 and the ability to borrow up to 600 million dollars against Ginnie Mae servicing advances, we believe PFSI is well-positioned to address the potential impact servicing advances may present in a recessionary environment,” Perotti said.
However, the landscape may change the lender’s strategy regarding buying back shares of its stock. It repurchased about $100 million worth of stock in the third quarter.
“In the near term, we expect the pace of share repurchases to trend lower to maintain our flexibility to address potential risks and opportunities in the evolving market environment,” Spector said.
PFSI’s stock closed Thursday at $47.22, stable from the market opening. The stocks rose 5% in the aftermarket following the earnings publication.
