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November 1, 2023 | Premium Service | In this edition of the Institutional Risk Analyst, we look in on PennyMac Financial (PFSI) for a sanity check on interest rates and mortgage credit. It is pretty clear that Uncle Jay and the gang on the FOMC have reached the limit of interest rate hikes, but credit in residential mortgages has yet to show any cracks. Net loss rates on bank owned loans are still barely positive after a decade in negative territory. Our latest portfolio also is shown below.
Even as foreclosures mount in the world of commercial real estate and WeWork prepares for bankruptcy, reports the Wall Street Journal, residential assets remain quiet – perhaps too quiet. And then there is the question of valuations for mortgage servicing assets. If we are marking balance sheet assets to actual market in the age of deflation, what of the heavily modeled world of mortgage servicing assets?
PFSI is an important benchmark for fiancials because the firm is the largest aggregator (i.e. buyer) of conventional residential mortgage loans in the US. It is also a large Ginnie Mae issuer and has a top-ten servicing portfolio. PennyMac Mortgage Investment Trust (PMT), is a passive REIT that contains all of the group's conventional exposures from Fannie Mae and Freddie Mac. PFSI holds all of the Ginnie Mae risk, of note, and manages the REIT.
Our mortgage equity surveillance list is shown below sorted by one-year total return. Notice that Mr.Cooper (COOP) and Guild Holdings (GHLD), which we own, have traded places with PFSI as the latter has lost ground in the mortgage equity group. And yes, the laggards Better Home (BETR) and Blend Labs (BLND) are at the very bottom of the list.