The mortgage industry has been on fire over the past year. Record low interest rates have created a surge in refinancing demand while new originations are reaching record highs. This is great news for mortgage real estate investment trusts (mREITs) like PennyMac Mortgage Investment Trust (NYSE: PMT), which originates, services, and purchases and packages mortgage-backed securities.
The company saw earnings per share (EPS) and net income increase over 300% in 2020, which pushed share prices up 66% over the past year. Their strong performance recently leaves investors to wonder where the company will be in five years. Here's how things could play out.
Continued momentum with possibility of a pullback
The only way for PennyMac to grow is to originate, service, and purchase and package more mortgages each quarter. Currently, PennyMac is the second-largest loan originator and the seventh-largest servicer in the United States, meaning there's room to grow.
Lower interest rates are helping drive new origination momentum, which to date is up 163% year over year for PennyMac as of year end 2020, but are also leading to far more prepayments. Early payoffs from refinancing or property sales leaves PennyMac with capital it must deploy, but in a lower-interest-rate environment. Right now it has excess liquidity amounting to $1.4 billion, which has been used for loan share repurchasing throughout the year, among other uses.
At the end of Q4 2020, 12.9% of PennyMac's total portfolio and serviced portfolio was 60 days or more delinquent, including loans in forbearance. This percentage has steadily decreased over the past few quarters, a good sign for the company, but that's still a significant portion of its portfolio that is uncollectable currently.
Continued economic stagnation means further financial pressure on other mortgage originators, servicing companies, and current borrowers. This could lead to an uptick in loan sales and servicing rights as other servicing companies feel operational pressures or regulatory capital constraints.
Where the company may be in five years
With new coronavirus strains and the government's struggle to distribute the necessary vaccines, it's unlikely we'll see interest rates start to increase until more economic recovery is achieved. This means PennyMac growth over the next year should fall in line with the performance achieved in 2020. I expect originations, new servicing clients, and revenues to taper off and return to more normalized levels in 2023 and 2024 as interest rates slowly increase.
The company has had inconsistent dividend returns in the past, mainly paying dividends when performance allowed for it. 2020 PennyMac initiated steady quarterly dividends which increased 33% as of the first quarter of 2021. I believe the company will maintain its dividend payout for the remainder of 2021 but lower its dividends to a more manageable level when activity returns to more normalized levels.