California-based Pennymac Financial Services increased its profits by 92% in the second quarter of 2023 from the prior quarter. Although the performance was propelled by its servicing portfolio – as occurred in previous quarters – mortgage production returned to profitability.
The company reported on Thursday its net income came in at $58.3 million in Q2 2023, up from $30.4 million in Q1 2023 but down from $129.1 million in Q2 2022, per Securities and Exchange Commission (SEC) filings.
“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,” David Spector, chairman and CEO, said in a recorded earnings message.
Spector added: “Strong operating performance was partially offset by net valuation-related losses that resulted from the inverted yield curve and elevated hedge costs driven by multi-year highs in interest rate volatility.”
The servicing segment pretax income was $46.5 million in Q2 2023, down from $57.4 million in the prior quarter and $167.7 million in the same period of 2022. Servicing portfolio grew to $576.5 billion in unpaid principal balance (UPB) as of June 30, up 2% from March 31.
“MSR fair value changes and hedging results were negative $36 million, compared to negative $43 million in the prior quarter,” Dan Perotti, senior managing director and chief financial officer, said.
Regarding the origination segment, Pennymac had $24.4 million in pretax income from April to June, compared to a $19.6 million loss in the prior quarter and a pretax income of $9.7 million in the same period of 2022.
Pennymac’s total loan acquisitions and originations reached $24.9 billion in UPB in Q2 2023, up 9% from the prior quarter but down 7% from the second quarter of 2022.
Consumer direct interest rate lock commitments (IRLCs) came in at $2.2 billion in UPB, down 2% quarter over quarter and 50% from the second quarter of 2022.
Meanwhile, in the broker direct channel, Pennymac’s commitments were at $2.8 billion in Q2 2023, up 11% quarter over quarter and 27% from the same period in 2022. Pennymac, which has a network of 3,300 approved brokers, said 90% of total originations in this channel during the second quarter were purchase loans.
The correspondent channel’s commitments reached $21.6 billion, down from $21.7 billion in the previous quarter. Executives said the channel tends to represent a larger percentage of total industry originations in a low-volume environment because liquidity becomes relevant for many sellers.
Throughout the quarter, Pennymac increased the number of approved correspondent seller relationships to 800, attracting sellers who had connections with commercial banks that pulled back from or recently exited the channel.
“Pennymac also stands to benefit as banks step back from the channel and increased capital requirements are introduced by bank regulators,” Perotti said.
Pennymac estimates that it represents 18.9% of the correspondent channel, 4.3% of the loan servicing market, 2.6% of the broker direct space, and 0.7% of the consumer direct segment.
Executives at Pennymac remain conservative with the market outlook, citing third-party forecasts for 2023 originations in the range of $1.6 trillion to $1.8 trillion, still well below normalized levels, as mortgage rates are currently near 7%.
“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,” Spector said. “Unit originations in 2023 are projected to total just 5 million, the lowest level since 1990, indicating the potential for industry consolidation if market conditions persist.”
In 2024, Spector expects the competitive environment to continue.
PFSI’s stock closed Thursday at $80.20, down 1.85%. The share remained unchanged in the aftermarket following the earnings publication.