PennyMac Mortgage Investment Trust company profile
PennyMac Mortgage Investment Trust is a financial service company that originates loans, services mortgages, and purchases and sells securitized mortgage backed securities (MBS) in the secondary mortgage market. Unlike equity REITs that acquire, develop, and manage commercial or residential assets, PennyMac Mortgage Investment Trust, like other mortgage REITs, doesn't own any physical real estate. Instead, it earns money by loaning money to borrowers by collecting interest, charging servicing fees, or trading loans through credit risk transfer (CRT), all of which is secured by real estate.
PennyMac is the fourth-largest producer of conventional conforming mortgages with market shares beating out even the biggest banks, like Wells Fargo (NYSE: WFC) and Chase Bank (NYSE: JPM). Beyond mortgage originations, the company earns income by charging servicing fees on the total unpaid balance of loans held in its portfolio, which includes loan originations and mortgages purchased in the secondary market. The bigger its portfolio is, the more income it can collect through its mortgage servicing rights (MSR) servicing fees.
PennyMac also participates in Fannie Mae's credit risk transfer, which allows originated loans to be packaged, securitized, and sold on the secondary market, transferring the risk of the loans to the buying investors. It uses CRT for selling loans it originates and purchasing loans in the marketplace.
PennyMac uses strategic management and servicing agreements with PNMAC Capital Management LLC (PCM) and PennyMac Loan Services LLC (PLS), subsidiaries of PennyMac Financial Services Inc. (NYSE: PFSI), to maintain and operate its portfolio. Its partnerships allow it to focus on its core revenue sources while the subsidiaries handle all the business activities related with servicing and owning loans, which can include loss mitigation, reviews of loan data, collection activities, foreclosures, loan reporting, and more.
Currently PMT operates only in the U.S. residential mortgage market.
PennyMac Mortgage Investment Trust news
PMT had a really strong second quarter for 2020. Having been one of the few lenders to continue lending as the coronavirus pandemic started to unfold helped it beat out a lot of its competitors in terms of production. In 2020, PennyMac has produced $52.3 billion in loans year to date, including mortgage refinancing and newly originated loans. It's also created $452 million in new mortgage servicing rights.
As of Q2 2020, PMT has $81 billion of CRT assets in its portfolio, of which, 5.2% are in forbearance. While there has been a positive trend in the number of forbearance loans that have since become current, roughly 59% of forbearance plans established in April of 2020 have been extended, and this definitely is a hit for the company. Luckily, an increased number of homeowners wishing to refinance has led to early payoffs, helping offset some losses in CRT. The exact numbers for how much this offset CRT fair value losses will be available in PennyMac's Q3 2020 earnings statement.
As of June 30, 2020, 7.3% of its portfolio was 60 days or more delinquent. If 7% of the portfolio reaches 180 days or more delinquency, PMT will suffer an approximately $90 million dollar loss. The company doesn't have any debt maturities until 2022, both of which have the opportunity for an additional two-year extension. As of Q2 2020 it has $1.4 billion in liquidity with $100 million in minimum liquidity covenants.
Right now PennyMac's growth prospects depend heavily on new production and increased MSRs. The company is projecting an even larger year for origination in 2021. The market supports this for the time being, but there's no guarantee the housing market will continue to climb as it is today.
It's also important to note that low interest rates aren't ideal for the mortgage industry. Borrowers who are paying off their loans early are often doing so because they are refinancing at a lower interest rate. This provides a surge in capital that the mortgage REIT has to then reinvest, but at lower rates. That coupled with the extension of current governmental policies like foreclosure moratoriums or the introduction of new government regulations places a lot of uncertainty as to how PMT will ultimately be affected.
PennyMac Mortgage Investment Trust stock price
In Q2 2020 PMT increased their dividend by 60% to $0.40 per quarter and has maintained that dividend for Q3 2020. This increase provides investors with nearly a 10% return. Price to book value is .83 at the time of this writing, which means the REIT is trading slightly below value.
When compared to other mREITs, PMT has continued to outperform the competition, providing a 9.7% annualized return to shareholders over a three-year average while the FTSE Nareit U.S. Mortgage REIT Total Return Index provided a -8% return. But its portfolio and investment strategy carries quite a bit of risk with it, especially in the given economic climate.
The bottom line on PennyMac Real Estate Mortgage Investment Trust
I think the company has a competitive advantage in the current market, which is favoring loan originations and refinancing. However, I see a lot of risk and potential downside for the mortgage industry in the next few years. No one knows whether delinquencies will improve or get worse. I think investors who have a high risk tolerance and are willing to take a chance hoping the trend continues upward could be rewarded handsomely. But it's not without unknowns and volatility.