In a high-rate environment, Pennymac Financial Services delivered profits in 2023, mainly due to the performance of its servicing portfolio.
That’s despite a net loss in the last quarter of the year attributable to the resolution of a long-standing arbitration process with Black Knight regarding its servicing technology and losses in mortgage servicing rights (MSR) fair value.
“2023 was one of the more challenging origination markets in recent history, with industry volumes down approximately 40% from 2022 and unit originations at their lowest level since 1990,” David Spector, chairman and CEO, told analysts during a call on Thursday afternoon.
California-based Pennymac delivered a $144.7 million net income in 2023, down from $475.5 million in 2022, per Securities and Exchange Commission (SEC) filings. Last year’s net revenue came in at $1.4 billion, down from $2 billion the previous year.
Loan production was $99.4 billion in unpaid principal balance (UPB) in 2023, down 9% year over year. Meanwhile, the servicing portfolio was $607.2 billion in UPB at year-end, up 10% year over year.
However, in the last quarter of the year, the company lost $36.8 million, compared to a gain of $92.87 million in the previous quarter and $37.61 million in the same quarter of 2022.
A legal battle impacted fourth-quarter earnings.
HousingWire reported in December that an arbitrator awarded Black Knight $155.2 million in damages related to a breach of contract claim in a four-year dispute involving the companies. Black Knight accused Pennymac of copying its mortgage servicing platform, MSP, to create its Servicing Systems Environment (SSE) platform.
“While we disagree with the ruling, we’re very pleased with the arbitrator’s affirmation that SSE remains our own proprietary technology,” Spector said. “Since we launched the system in 2019, it has performed extremely well, meaningfully enhancing capabilities while helping to drive down costs. With this technology now free and clear of any restrictions on use or development, we believe there’s potential for additional opportunities for the company and stakeholders over time.”
Declining rates in the fourth quarter also affected the servicing portfolio. The company had a $370.7 million MSR fair value loss in the period, offset by $294.8 million in hedging gains.
Dan Perotti, senior managing director and chief financial officer, told analysts the performance was due to “a decline in mortgage rates, which drove expectations for increased prepayment activity in the future.”
Overall, the servicing segment’s pretax loss was $95.5 million in Q4 2023, compared to a pretax income of $101.2 million in the prior quarter and $75.6 million in the fourth quarter of 2022.
The origination business
A multichannel lender, Pennymac had a $39.4 million pretax income with the production segment from October to December, compared to $25.2 million in the prior quarter and a pretax loss of $9 million in the same period of 2022.
Pennymac’s total loan acquisitions and originations reached $26.7 billion in UPB in Q4 2023, up 6% from the previous quarter and 16% from the same quarter last year.
Spector said the expectation is for volumes in the market overall to recover in 2024, based on forecasts of interest rate reductions later this year. However, volume in the loan origination market will remain seasonally low in the first quarter of 2024.
“While we expect some seasonality in the first quarter, we expect to build on this profitability in future quarters as the origination market improves,” Spector said.
The correspondent channel continues to be the most relevant for Pennymac despite a decrease to 812 sellers as of Dec. 31, down from 829 as of Sep. 30.
In this channel, the company reached $23.9 billion in UPB in Q4 2023, flat compared to the previous quarter. In the same period in 2022, the production was $22.9 billion. Banks are stepping back from the correspondent channel amid expectations of increasing capital requirements through the Basel III rule, which brings opportunities to companies such as Pennymac.
Consumer-direct’s interest-rate lock commitments (IRLCs) came in at $1.6 billion in UPB, down from $1.7 billion in the previous quarter and $1.7 billion in the fourth quarter of 2022. The company saw in 4Q 2023 an increase in refinancing, which also pressured margins down in the channel.
According to executives, the consumer direct channel will allow the company to offer customers a new lower rate when it declines. At year-end, about 22% of the company’s servicing portfolio consisted of mortgages with note rates over 5%, they added.
Meanwhile, in the broker-direct channel, Pennymac’s commitments were at $2.8 billion in Q4 2023, down from $3 billion the previous quarter but up from $2 billion in the same period in 2022. Pennymac’s strategy has been to position itself as a “strong alternative” to the top leaders in the channel – United Wholesale Mortgage and Rocket Pro TPO.
The company estimates that it represents 22.2% of the correspondent channel, 4.3% of the loan servicing market, 3.6% of the broker-direct space and 0.6% of the consumer-direct segment.
PFSI’s stock closed Thursday at $89.02, up 2.06% from the previous day. The share was declining 1.31% after the market closed.
