PennyMac Financial Services admitted its second quarter results failed to meet expectations because of high interest rates, as well as funding the technology initiatives in artificial intelligence and automation.
"Although our operational execution remains solid, these results fell short of our expectations as interest rates increased and origination demand declined," Chairman and CEO David Spector said on the earnings call Wednesday. "To address these rate headwinds, we have already taken proactive steps to align our cost structure with current market conditions and the operational capabilities provided by recent enhancements to our technology platform."
Why Pennymac laid off staff
Earlier in the day, it was learned via a report in HousingWire that Pennymac recently undertook a round of layoffs.
The company confirmed the report but did not provide any additional details.
In June,
"Pennymac has executed well against a challenging backdrop, even as sustained high interest rates have reduced industry loan volumes and the size of the addressable market," the company statement about the most recent layoffs read. "As we align our operations accordingly, the organization has made the difficult decision to eliminate select positions within its lending and mortgage fulfillment operations."
The company added it is committed to supporting its team members through the transition, including providing severance support.
"As we move forward, Pennymac remains focused on building an even stronger organization, including continued investment in technology and automation to improve how we serve customers and support our people," the statement continued. "Together with our disciplined approach, these investments strategically position us to grow and create new opportunities as the market recovers."
Why Pennymac's earnings were lower
Second quarter net income at PFSI was $22 million. This was 74% below
Pennymac is seeing "a perfect storm," where it is investing a lot in the future with technology, combined with high interest rates, affecting its results, Spector said.
Annualized adjusted return on equity was 7% for the quarter, a range Spector expects it to remain at as Pennymac reduces its expense base. "The cost realignments we executed this month are expected to generate approximately $60 million of annualized cost savings, which will begin to be realized in the third quarter," he said.
How its origination business performed
It had a total of $34.9 billion of mortgage originations and acquisitions during the quarter, compared with $37 billion in the first quarter and $37.9 billion one year ago. This was
The correspondent business had $22.3 billion of acquisitions for both its own account and for sister company PennyMac Mortgage Investment Trust. This was down from $24.4 billion in the first quarter and $29.8 billion one year ago.
During the call, Pennymac management said the competitive landscape in the correspondent channel was responsible for the drop off and this is continuing into the current quarter.
"In July, correspondent volumes were down versus second quarter levels, reflecting our pricing discipline in a competitive environment and our continued focus on allocating capital to drive optimal returns," Dan Perotti, chief financial officer, said during the call.
Later in the call, Spector noted the increased competition for whole loans, including from the government-sponsored enterprises' cash window. "But I wouldn't read too much into the correspondent decline," he said.
While PMT will continue to acquire non-agency mortgages through the correspondent channel, in June it decided to stop purchasing agency-eligible paper, Perotti said.
The broker channel grew to $7 billion from $6.7 billion one quarter ago and $5.3 billion one year ago.
While consumer direct doubled year-over-year to $5.6 billion from $2.8 billion, it was down slightly from the first quarter when the channel did $6 billion.
Production segment pretax income was $38 million. This is down from $134 million in the prior quarter and $58 million a year ago.
How Pennymac's servicing business did
For the servicing business, pretax income of $22 million was up from $13 million in the prior quarter but down from $54 million in the second quarter of 2025. The most recent results include a $77 million decline in the fair value of its mortgage servicing rights, net of hedges and costs.
The company is in the process of acquiring Cenlar's subservicing business.
Pennymac is making moves to bring its technology expense down in a meaningful way, and it is even before adding the benefits from Cenlar, Spector said.
"As we bring the Cenlar clients onto our platform, we're going to get the efficiencies that come from being a higher cost platform to a lower cost platform," he continued.
How analysts viewed Pennymac's results
The company was pleased with the improvement in its recapture rate.
"Conventional first lien refinance recapture rates increased seven percentage points from the prior quarter to 29% while government first lien refinance recapture rates increased nine percentage points to 59%," Spector said.
Kyle Joseph, an analyst at Stephens, lowered his estimates on Pennymac for not just this year, but for 2027 and 2028 as well, because of the second quarter results. He still saw some bright spots.
"We view the improvement in recapture and overall outperformance of the production segment as a positive (while rates are not helping), the servicing segment trailed expectations on higher prepayment speeds and lower other income," said Joseph. We see the Cenlar transaction as a means of enhancing Servicing contributions/ efficiencies over time.
While initially BTIG did not revise its estimates, by Thursday afternoon this changed. For Pennymac, BTIG lowered earnings per share estimates to $7 (from $9.15) for 2026; $10 (from $11.55) for 2027; and $13.95 (from $14.85) for 2028, analyst Douglas Harter said, in a report where
For Pennymac, the change follows weaker than expected second quarter results and
Management's guidance on its ROE remaining in the high-single digits for the rest of the year is likely to impact the common stock price, wrote Bose George of Keefe, Bruyette & Woods.
"We would expect the shares to be weak on the reduced guidance and limited visibility on the path to mid-teens ROEs," he said, although any downside might be limited with the stock trading at 1.03 times tangible book value.
