PennyMac Financial Services (NYSE:PFSI) may be the torchbearer of the next great mortgage crisis, according to Roddy Boyd at the Foundation for Financial Journalism. Indeed the mortgage lender has been recognized as a potential source of a major mortgage default that may well send the entire housing market — and the greater economy — into a spiral. So, what do you need to know about PFSI stock?
Well, this morning Boyd released an exposé detailing why PennyMac may be retreading the same cautionary grounds as Lehman Brothers, Bear Sterns and company did in 2008. The mortgage broker, valued at $2.3 billion, has been identified as an “existential threat of delinquencies.” Boyd has identified the company as a potential short opportunity.
Reasonably so, of the lenders’ portfolio of roughly 1.1 million loans, 5% of loans worth $11.9 billion were late on payments in August. This, in some sense, mirrors the collapse of mortgage-backed securities (MBS) and collateralized debt obligations (CDO) that sent major banks into default in 2008.
Boyd points out that, as a result of the Federal Reserve’s aggressive rate hikes over the year, PennyMac has suffered brutal losses in revenue and net income. As default rates continue to climb, pricy default servicing may force the lender into further debt:
When a Ginnie Mae system borrower is delinquent, the lender must immediately use one of two approaches to address the situation. In the first, the lender leaves the delinquent loan in its Ginnie Mae MBS pool and assumes the loan’s scheduled principal and interest payments… The former means PennyMac must step in to make loan payments for a growing number of delinquent borrowers; the latter requires it to make an increasing number of large, lump-sum transactions, each of which will now entail a loss.
PFSI Stock Faces Debilitating Losses as Delinquencies Pile Up
PennyMac is the second largest issuer of Ginnie Mae MBS. As such, rising delinquencies come as a startling sign that mortgage loans aren’t as stable as some economists have decried.
Mortgage applications are at the lowest level in 22 years. As fewer Americans pursue mortgages, PennyMac will have difficulty coming up with the capital necessary to service its delinquent loans. As rates continue to rise, PennyMac faces a one-two punch of both limited access to risk management tools that allow the company to move delinquent loans off its balance sheet, and reduced funding to maintain said loans.
Ginnie Mae loan issuers have historically profited from selling nonperforming loans via early buyouts (EBO), the most common risk mitigation methodology. In fact, from January 2020 through June 30 of this year, more than 50% of PFSI’s profit came via EBOs. Unfortunately for PennyMac, the party may be over.
Rising lending rates have made EBO an unprofitable debt servicing measure, forcing PennyMac to retain delinquent loans on its balance sheet, coughing up principal and interest payments from its own cash pool. Unfortunately, PFSI’s free cash has shrunk in recent years as a result of roughly $1.5 billion in stock buybacks.
While PFSI’s delinquency levels aren’t at global crisis levels yet, analysts have clearly sniffed out trouble afoot. Despite the bearish reports, PFSI stock is up about 2% heading into the afternoon.
On the date of publication, Shrey Dua did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
