PennyMac Financial Services reported some green shoots in its origination business, part of a larger earnings recovery that was somewhat dampened by hedging losses.
The California mortgage giant posted a profit of $39.3 million in the first quarter
The multichannel lender posted a slight quarter-over-quarter decline in pre-tax production, to $35.9 million, and total volume of $21.7 billion. However, correspondent and broker profit-on-sales margins rose, with the direct broker channel rising from 79 basis points last period to 103 basis points at the end of 2023. Direct consumer closing volumes also rose 35% quarter-on-quarter.
The company said it has more than 4,000 brokers, up 36% from the same time last year. PennyMac Chairman and CEO David Spector attributed broker margins and population growth in part to his company’s technology and increased home lending activity.
“There was a period of time a year or two ago where irrational pricing was happening in this part of the market, and I think we’ve seen a sort of return to more rational pricing,” he said, appearing to refer to the
The company’s maintenance business posted a pretax net profit of $4.9 million in the first quarter, compared with a loss of $95.5 million in the previous three months. PennyMac also saw a $170 million increase in the fair value of mortgage liens, a figure offset by $294.6 million in hedging declines, for a total decline of $125 million.
Executives, responding to analyst questions about the hedging loss, said the company had greater exposure to interest rate volatility and cited the inverted yield curve.
“We saw quite significant potential costs for maintaining our typical hedge position,” said Daniel Perotti, senior managing director and chief financial officer. “We had to determine whether we wanted to accept these hedging costs or take certain risks.”
Company executives said PennyMac has since repositioned its hedge in the second quarter to a “more traditional profile.”
PennyMac’s revenue, meanwhile, hovered at $305.7 million at the end of March, down from $361.9 million in the fourth quarter and up slightly from $302.8 million in the same period last year.
Spector and Perotti also touched on the company’s Department of Veterans Affairs loan profile when talking about the upcoming VA Servicing Purchase program, or VASP. The initiative is a successor to the
PennyMac counts 4,700 VA loans in deep delinquency, or $1.2 billion in unpaid principal, in its extensive servicing portfolio. Executives seemed cautiously optimistic when asked about VASP.
“What we might be concerned about today is moral hazard and how that might ultimately play out,” Perotti said.