The California-based Pennymac Financial Services executives rightsized the company and invested in its servicing portfolio amid a shrinking market in 2022.

Despite their efforts, profits still dropped to $475.5 million last year, down from $1 billion in 2021, the company reported on Thursday. In Q4 2022, the net income came in at $37.6 million, declining from $135 million in Q3 2022 and $173 million in Q4 2021.

“Pennymac’s decline in profitability from Q3 2022 is credit negative,” Warren Kornfeld,  Moody’s senior vice president, said. “However, the company was able to report a profit in an extremely difficult operating environment for residential mortgage originators in addition to seasonally low purchase origination volumes in Q4.”

Kornfeld added that Pennymac’s profitability is the strongest among its rated non-bank mortgage peers now — just as it was in the previous downturn in 2018.

“Therefore, its results portend a challenging quarter for the non-bank mortgage sector,” Kornfeld said. 

Looking ahead, Pennymac’s executives expect the market to decline even further this year as overcapacity remains. And, to navigate the challenging landscape, they will stick to the same strategy. 

“The most recent third-party forecasts for 2023 originations range from $1.6 trillion to $1.9 trillion, down meaningfully from 2022,” said David Spector, Pennymac chairman and CEO, in a recorded earnings message. “While many industry participants have taken the appropriate steps to reduce capacity, it has been happening slowly, and we believe overcapacity still remains.” 

According to Spector, companies like Pennymac, with large servicing portfolios and diversified business models, are better positioned to offset the decline in origination profitability that has resulted from lower volume. 

And, the company is ready to rightsize again if needed. 

“While we believe the majority of expense management activities have been completed, we remain disciplined, continuing to rapidly adjust capacity levels relative to the size of the origination market, whether growing or contracting,” Spector said. 

Capitalizing on competitor exits 

Pennymac, the country’s largest correspondent aggregator, also has small wholesale and direct-to-consumer businesses. Through the three channels, the company’s loan production came in at $109 billion in the unpaid principal balance (UPB) last year, down 54% compared to the previous year.

Pennymac’s loan acquisitions and originations were $23 billion in UPB in the fourth quarter, down 12% from the prior quarter and 51% from the same period last year.

The company’s market share in the correspondent channel declined from 16.7% in 2021 to 15.3% in 2022. Meanwhile, the consumer direct share fell from 1.6% to 1.2%, and the broker direct channel share declined from 2.4% to 2.0%.  

Executives told HousingWire that Pennymac will try to capitalize on Wells Fargo and other competitors exiting the correspondent space.

“The scale we have achieved in our correspondent business, combined with our low-cost structure and operational excellence in the channel, allow us to operate efficiently through the volatile market environment, even as other participants have exited or retreated from the channel,” Doug Jones, president and chief mortgage banking officer, said in a recorded message. 

Servicing to the rescue 

The firm’s earnings were driven mainly by its servicing portfolio, which grew to $551 billion in unpaid balances in 2022, up 8% from December 31, 2021. 

Pennymac’s servicing segment generated $75.6 million in pretax income in the fourth quarter, down from $145.3 million in the previous quarter and $126.1 million in the fourth quarter of 2021 

“Even as interest rates increased, the UPB of our production volume on a quarterly basis consistently represented 4 to 5% of the total servicing portfolio balance,” Spector said. “As we continue to add significant volumes of servicing to our portfolio at current market rates, we will continue to build significant refinance opportunities in the future for our consumer direct division if mortgage rates decline.” 

PFSI’s stock closed Thursday at $72.55, up 5.21%. The stocks declined 13% in the aftermarket following the earnings publication.