PennyMac Rides Rising Mortgage Momentum

PennyMac Financial Services Inc. is on a roll – and it looks as though it will remain in high gear. David Spector, chief executive of the Westlake Village mortgage lender and manager of mortgage investments, is confident that the strong performance of the company will continue into next year. In a conference call on Aug. 6 to discuss second-quarter earnings, Spector said that PennyMac’s investments in people, technology systems and infrastructure since its founding in 2008 have positioned it to address a large opportunity in the mortgage market. “I am proud of the role this company continues to play in the economic recovery and while prospects for the U.S. economy remain uncertain, given the present market environment, we expect (PennyMac’s) exceptional financial performance to persist into 2021,” Spector said on the call. The company reported net income of $353 million ($4.39 a share) for the quarter ending June 30, compared with net income of $72.7 million (92 cents) in the same period a year earlier. Revenue increased by 171 percent to $822 million. Since the beginning of the year, the share price for PennyMac has increased by 54 percent, from $33.08 to $50.99, as of Sept. 3. The stock price closed at $52.98 on Sept. 9. Analysts who follow the company also supported Spector’s optimism. Henry Coffey, an analyst with Wedbush Securities Inc., titled his research report on PennyMac from Aug. 27, “2021 Is Going to Be Another Strong Year.” “While the primary prognosticators around mortgage volumes are calling for a down year in 2021, individual companies such as PennyMac are going to be able to keep significant portions of their strength going by continuing to build share in new origination channels and harvesting value off of their servicing portfolio, particularly GNMA EBO (Ginnie Mae early buyout) loans,” Coffey said in the report. Ginnie Mae is the Government National Mortgage Association, an agency of the U.S. Department of Housing and Urban Development that buys mortgages from banks and pools them, selling the pools as mortgage-backed securities.  Mark DeVries, an analyst with Barclays Capital Inc., was just as upbeat, titling his Aug. 7 research report “Firing on All Cylinders.” He noted the company’s quarterly performance beat another record of origination volumes. High margins PennyMac produced record margins across its origination channels during the second quarter with the momentum continuing into July as the company worked its way through the large pool of refinance eligible borrowers, he added. “After the correspondent market slowed early in the pandemic, volumes quickly returned in the latter half of the quarter and hit record high margins before tapering slightly to end the quarter,” DeVries said in the note. Spector said during the conference call that economic forecasts pin the mortgage origination market at $3 trillion this year, and at $2.3 trillion for next year, an amount similar to 2019. “These forecasts are supported by all-time low mortgage rates, which continue to drive robust refinance and purchase mortgage demand. Forecasts for purchase mortgage originations have also increased recently as a result of higher demand, including in suburban areas,” Spector said. “Additionally, sales of previously owned homes posted their largest ever monthly increase in June and sales of new homes have been above consensus expectations.” In the second quarter, the lender originated $5.1 billion in unpaid principal balance of loans in its direct-to-consumer business segment, an increase of 161 percent from the second quarter of the prior year. The broker direct business segment originated $2.6 billion in unpaid principal balance in loans for the quarter, an increase of 210 percent from the same period a year ago. In total, including correspondent originated loans, PennyMac originated $37.6 billion in loans for the second quarter, wrote Barclay’s DeVries in his research note, an increase of 53 percent year-over-year. “Management indicated that margins could stay elevated over the coming quarters with (direct-to-consumer) being the most likely to persist at elevated levels,” DeVries added in the note. Doug Jones, chief mortgage banking officer at PennyMac, said on the call the strong growth in volumes in the direct-to-consumer business can be attributed to investments made to scale the platform, an efficient and low-cost structure in the channel and successful implementation of PennyMac’s work-from-home plan, which allows it to continue hiring loan officers. “We expect these loan officers to contribute additional revenue in future periods as they complete training and their tenure increases,” Jones said.