Between fears of a global economic slowdown and a global rotation into safer assets due to coronavirus, interest rates have taken a tumble this year, with the 10-year Treasury closing at 1.51% at one point. This is good news for homebuyers as it improves affordability and for homeowners who might find they can cut their monthly mortgage payment by refinancing their mortgage. This means it is also good news for mortgage originators, particularly PennyMac Financial Services (PFSI +0.96%).
Fourth quarter earnings capped a great year for PennyMac
PennyMac reported fourth-quarter earnings of $1.88 per share, which increased 25% on a sequential basis and 200% year over year. The mortgage banking business had its best year since the immediate aftermath of the Great Recession, when aggressive stimulus out of the Fed drove a refinancing boom. For the year, PennyMac reported earnings per share of $4.89, up 89% from 2018. Can the good times last? It looks like they may.
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The refinanceable universe approaches 9.5 million mortgages
Black Knight, a vendor of mortgage-related data, reported recently that the population of refinancing candidates is approaching 9.5 million homeowners. The company defines this group as "30-year-mortgage holders in good standing who have at least 20% equity in their homes, credit scores of 720 or higher and who could cut their current interest rate by at least 0.75% by refinancing." This represents a massive opportunity for mortgage bankers in general, and PennyMac is one of the largest nonbank mortgage lenders out there.
To put 9.5 million homeowners into perspective, last year PennyMac originated $117.6 billion in loans. Assuming a rough average of $360,000 per loan, that works out to be 327,000 loans. Given the Mortgage Bankers Association's 2019 origination forecast of $2.06 trillion, it looks like PennyMac has about a 5.7% market share; 5.7% of 9.5 million homeowners is over half a million loans. That is a lot of opportunity. With homebuilders also seeing ramped-up orders, 2020 looks like it could be even better than 2019.
PennyMac has been increasing its market share as it battles with other nonbank lenders Quicken and United Wholesale. The mortgage business is highly competitive, and PennyMac is known more as a correspondent lender (or aggregator), which means it buys loans that have been originated by smaller lenders. It will then hold the mortgage servicing right (which is the right to earn a fee collecting mortgage payments) and sell the actual mortgage to its partner PennyMac Investment Trust. PennyMac claims in its earnings release that it has become the largest aggregator of mortgage loans in the United States.
A meaningful hike in interest rates doesn't appear likely
Whether you look at the Fed dot plot or the Fed Funds futures, both are signaling steady or lower rates through 2020. As a general rule, the Fed is loath to do anything close to a presidential election for fear of being accused of trying to influence the outcome. With gross domestic product growth steady at 2% and inflation below target, the Fed has every reason to sit on its hands until 2021. This should mean clear sailing ahead for the mortgage originators and banks in general.
