Mortgage originators have fared relatively well during the COVID-19 crisis. The initial weeks were difficult as a lack of liquidity in the mortgage markets and margin calls besieged the industry. But as April turned to May, the origination business took off.

PennyMac Financial (NYSE:PFSI) has been a stellar performer in what has been a very volatile year for many companies, and it's one of the few financial stocks that can claim that. 

For mortgage originators, 2020 has been special

PennyMac Financial just reported second-quarter earnings, which soared on record origination volume. Net revenue rose 171% to $822 million, and earnings per share increased from $0.92 to $4.39.

Loan production growth drove the increase. With the Federal Reserve pushing down interest rates back around the 0% level and supporting the mortgage-backed securities market via purchases in the secondary market, 30-year fixed mortgage rates are running comfortably below 3%. Fannie Mae forecasts that refinance origination alone will hit $1.8 trillion this year, which would eclipse 2012 -- the best year in recent memory.  

A mortgage document, keys, and a calculator.

Image source: Getty images.

For mortgage servicers, 2020 has been a year of rising costs

The other side of the refinance wave is servicing, which is a big segment for PennyMac. Servicing has been a difficult area since COVID-19. Loan servicers collect the mortgage payment from borrowers and ensure that taxes, insurance, and bondholders are paid. In a normal environment, it is a boring business, but the past four months have been anything but boring. The CARES Act government relief package mandated forbearance for all mortgages, and that has vastly increased the cost to service a loan.

The Mortgage Bankers Association estimates there are over 4 million borrowers in forbearance. In addition, falling interest rates encourage people to refinance their mortgages, negatively impacting the value of mortgage servicing rights. During the quarter, PennyMac Financial collected $243 million in servicing fees, but it had to take a mark-to-market loss of $205 million on the portfolio. 

2020 estimates are probably too low

PennyMac also made an opportunistic adjustment to the capital structure in June by repurchasing 7 million of common stock (approximately 9% of total shares outstanding) from The BlackRock Foundation at $34 per share. It was a nice trade. PennyMac also increased its dividend by 25% to $0.15 per share. This works out to a 1.2% dividend yield, but unlike its partner PennyMac Mortgage Investment Trust (NYSE:PMT), it isn't known as a dividend stock. PennyMac is expected to earn $10.78 per share this year. Given that PennyMac already has $8.12 EPS in the bag from the first and second quarters, we should see EPS revisions over the next few weeks. 

How long will the party last?

The big question for PennyMac will be how long this lasts. The refinance wave will have some legs, but will eventually crash, as refinancing waves always do. Everyone eventually takes advantage of the lower rates. This time around, we have the exodus from the cities as COVID-19 and political unrest make the suburbs more attractive. In the earnings release, CEO David Spector said that PennyMac expects its "exceptional financial performance to persist into 2021." That is probably a fair bet. Mortgage originators are at capacity right now, and there is a lot of demand.

Eventually, the Fed will start raising interest rates, and that will put an end to the party. At that stage, mortgage servicing assets will begin to increase in value. But in the meantime, PennyMac is trading at a sub-5 multiple to expected 2020 earnings per share, and has already earned three-fourths of that yearly expected earnings number as of June 30.