California-based Pennymac Financial Services reported gains in its servicing portfolio that offset losses with its origination activity in the first quarter of 2023, allowing the company to deliver an overall profit in the period. 

However, Pennymac’s profitability declined compared to the previous quarter amid a still-challenging mortgage market. The company reported on Thursday its net income came in at $30.4 million in Q1 2023, down from $37.6 million in Q4 2022 and $173.5 million in Q1 2022.

Servicing “is a critically important asset and has driven much of the success that we have enjoyed in mortgage banking,” David Spector, chairman and CEO, said in a recorded earnings message. “Our large servicing portfolio provides strong and consistent cash flows, enabling us to remain profitable while also continuing to invest in the technology supporting our businesses.” 

The servicing segment pretax income was $57.4 million in Q1 2023, down from $75.6 million in the prior quarter and $225.2 million in the same period of 2022. Servicing portfolio grew to $564.5 billion in unpaid principal balance (UPB) as of March 31, up 2% from December 31. 

Pennymac had $90.3 million in mortgage servicing rights (MSR) fair value losses in the first quarter. This was partially offset by $47.2 million in hedging gains. 

“The fair value of PFSI’s MSR, before recognition of realization of cash flows, decreased by $90 million during the quarter, driven by lower market interest rate,” Dan Perotti, senior managing director and CFO, said in a recorded earnings message. “Hedge gains totaled $47 million and were impacted by $32 million in hedge costs, which were elevated due to significant interest rate volatility.”

Mortgage origination 

Regarding the origination segment, Pennymac had a $19.6 million pretax loss from January to March, compared to a $9 million loss in the prior quarter and a pretax income of $9.3 million in the same period of 2022. 

There are, however, signs of production improvements on the horizon, according to its executives. Originations in 2024 are currently expected to approach $2 trillion, compared to the $1.6 trillion to $1.8 trillion range for 2023.

“While many industry participants have taken the appropriate steps to reduce capacity, the pace of this reduction has been slow, and we believe overcapacity still remains,” Spector said. “That said, average quarterly origination forecasts for the remainder of 2023 are meaningfully higher than the industry’s estimated origination volumes in the first quarter, consistent with our own expectations as we move into the more typical home buying season.” 

Pennymac’s total loan acquisitions and originations reached $22.8 billion in UPB in Q1 2023, unchanged from the prior quarter and down 32% from Q1 2022. 

Consumer direct interest rate lock commitments (IRLCs) came in at $2.2 billion in UPB, up 31% quarter over quarter. Pennymac’s executives said that while volumes in this channel have been constrained recently, it provides opportunities when rates decline or are volatile. 

“We saw some of this activity late in the first quarter when interest rates declined due to stress on the regional banks, which drove the increase in lock volumes in this channel from the prior quarter,” Spector said. 

In the broker direct channel, Pennymac’s commitments were at $2.6 billion in Q1 2023, up 27% quarter over quarter. Meanwhile, the correspondent channel’s commitments reached $21.7 billion, down from $22.9 billion in the previous quarter. 

Pennymac is gaining market share when competitors are exiting channels. Last year, Wells Fargo, once the top U.S. correspondent lender, announced plans to exit the space, and loanDepot shut down its wholesale division. In April, Homepoint, number three in wholesale, sold its operations to The Loan Store. 

Pennymac estimates that it represents 17% of the correspondent channel, 4% of the loan servicing market, 2.2% of the broker direct space, and 0.8% of the consumer direct segment.  

PFSI’s stock closed Thursday at $65.92, up 2.98%. The stocks declined 1.40% in the aftermarket following the earnings publication.