An Interview with Pennymac TPO Chief Kim Nichols

The Future of Multi-Channel Mortgage Lending

Join industry stalwart Kim Nichols, who joined Pennymac in 2011 to build what is now America's largest correspondent investor, and more recently built Pennymac TPO into one of America's top wholesale lenders. In this discussion, you'll learn how Pennymac runs their multi-channel strategy, why brokers have gained so much market share, the unique technology challenges in each channel, and what vendors can do to stay relevant to lenders and servicers.

Transcription: 
Transcripts are generated using a combination of speech recognition software and human transcribers, and may contain errors. Please check the corresponding audio for the authoritative record. 

Heidi Patalano (00:08):
So it's my pleasure today to be sitting with Kim Nichols, Chief Production Officer of TPO at PennyMac. PennyMac TPO—sorry about that. I'm really glad to have you here today. I have a couple stats that I want to talk about first just to give context about PennyMac. Top 20 originator in 2024, and also top five servicer and correspondent lender among the top servicers in 2024 in the JD Power Survey on mortgage servicer satisfaction. Certainly there's a lot to talk about here specifically to do with TPO. I saw in your Q2 broker production rose to 7.2 billion from 5.5 billion the quarter before. So it's a growing segment. We're really excited to talk to you about it. But first I wanted to just have you give everyone a bit of your history in the field and talk about where you started in mortgage and how that brought you to where you are today.

Kim Nichols (01:18):
Thank you again for having me. It's such a great opportunity to get out here and talk to everyone about how we're executing today, what our future plans are, and also to hear from some of my peers in the industry and some of the things that we're mutually experiencing. Just to go back to your question, Heidi, my career actually started in a closet in mortgage. I actually got a part-time temp job photocopying loan files all day in a copy room that was converted from a closet. So that's where it all started. After I stepped out of the closet, really my foundation in this industry is in secondary marketing and capital markets. That provided just an awesome foundation for understanding the economics of this industry and how we make money, how you manage margins, how you hedge price trade, and really those were building blocks for me in my career.

(02:20):
From there, I pivoted off of that into various sales channels. I worked in the MI industry for 10 years, which really brought me a great understanding of credit and credit loan performance. That was a great education around that. Then I pivoted into correspondent or conduit sales. I worked for GMAC RFC for a while, and then I went to work for Countrywide right before the acquisition by Bank of America and managed a lot of the largest institutional relationships that we had in the correspondent division and warehouse division at Bank of America. From there, I saw the opportunity presented to me at PennyMac, and I went from a big behemoth Bank of America global company and sat down with the founders of the company. It was one of those things where I said to myself, "I don't think I want to be on the outside looking in a year or two years from now." And here we are. We were the number two producer of mortgages this past year. We've maintained that position. We're number one in the delegated correspondent channel. I originally came in to help start the delegated correspondent channel at PennyMac, and that's how I got in the door.

Heidi Patalano (03:41):
Well, that's what I wanted to ask you next. Regarding the evolution of PennyMac from when you first got there to where it is now, how would you say things have changed over that period?

Kim Nichols (03:55):
For my first six years, I worked on the delegated correspondent channel. We were amassing a lot of market share and we started to talk about what our divergent strategy would be. We already had a small consumer direct division that was doing our portfolio retention as we amassed servicing and grew that segment of the business. Then we said, "Where do we want to go? Do we want to go into distributed retail and hire LOs and build branches and things like that?" We thought to ourselves, our delegated correspondent clients do an amazing job at that. Let's leave that to them and continue with those partnerships to support them in the way we have by offering liquidity, great pricing, and competitive structures into the correspondent division. Let's stick with our expertise in B2B. So we chose the broker or TPO channel, as we call it. That's the direction we picked and we're now number three in this space. I can tell you it's been a fun journey and I think it's actually getting to be more fun for some of the reasons that we're all in the room today—just learning about technology and what it can do for our space. But it's also been the most challenging thing I've tackled in my multi-decade career in this industry.

Heidi Patalano (05:17):
No doubt. I wondered if you could talk in terms of making that decision to lean further into TPO. Could you talk more about PennyMac's overall multi-channel strategy and how you're doing that to navigate these cyclical changes that we're going through, especially over the last couple of years?

Kim Nichols (05:36):
We talk a lot about that. A multi-channel business creates what we talk to investors about as our balanced business model. I think we all know the pain of 2023 when you saw the precipitous drop in mortgage origination volume; our servicing business was the star. We really have four main revenue channels at PennyMac and then some ancillary businesses. Delegated correspondent, in which we're number one in that space. We have our TPO channel. We have our consumer direct business, which does portfolio retention primarily. Then we have our servicing business, which generates a lot of income for us. We have over 700 billion in servicing. We service for over two and a half million consumers, and we recently launched a sub-servicing business. We're really looking at balancing out the cyclicality of mortgage production. Mortgage origination goes down, the value of servicing goes up, and prepay is slow. We get some benefits from holding escrow accounts. So it's a nicely balanced business model and it helps with that variability of income and earnings that investors and publicly traded companies don't love very much, let's just say.

Heidi Patalano (07:00):
Well, one thing I wanted to ask in terms of leaning into the wholesale market and TPO today: it's really heating up. Obviously we heard Dan Sogorka talking about Rocket Pro as well. What are the factors that are driving this segment of the market to be so hot right now?

Kim Nichols (07:20):
I would say for sure that technology has been a huge accelerant and critical in the growth of the channel. We are seeing that continue because what we can do in the TPO space is empower that local, small mortgage broker with the tools and the value of scale that a large lender provides. They're getting the benefits of a very scaled lender, a scaled platform, and leading technology, but they're doing it in their own neighborhood and can be hyper-focused and independent. Technology has definitely fueled that growth and it's going to continue to enable that channel to grow.

Heidi Patalano (08:11):
Of course, we've heard about your major competitors in this space. I know from your last quarter's earnings you have about a 5% share of the wholesale market, aiming for 10% by the end of next year. Can you talk about how you guys are doing that with technology in particular?

Kim Nichols (08:33):
Right. During my tenure in growing TPO, we've given birth to two TPO portals, and we're on our second iteration of that. We have built a very intuitive interface. We can offer all the training sessions you want, but most LOs don't attend those. They just want to get their loan into the system. We had to make it very intuitive. For example, in the portal, the fee section follows the flow of an LE, so they don't have to learn a different structure. We've thought about things throughout the process. We have provided a concierge level service where we have an open Zoom room during business hours so our partners can go in for their first loan into the portal. They're probably stressed out—maybe they only have two loans that month and they're giving us a try.

(09:32):
Not only do we have to have intuitive technology, we have to have that human focus and do a little bit of handholding in the process by hopping into a Zoom room. We've got mortgage specialists standing by who can help them out. "Yes, you're doing these fees right," screen share, and that first submission to PennyMac is successful. That's just an example. We say we're tech-forward plus human-focused, and we have not forgotten about the human side of this, which will be critically important as we start to embrace all of these advanced technology tools. We've also built a very tenured and technically skilled sales team and we've continued to grow that. They are just very, very good at building strong partnerships with the brokers and TPO partners in our community. One more thing that's fueled our growth, again along the lines of technology, is that we launched a full-service non-delegated platform earlier this year.

(10:33):
That has really taken off. If you want to be a banker and use your own warehouse line, you can leverage the technology tools that PennyMac has in our system platform. You're going to generate disclosures in your own name as the lender, but you're doing it within our framework so you get compliance support. We have guardrails in there so these smaller bankers can have good support around compliance, credit, and structuring loans from the onset. We offer docs and disclosures in the name of our client, and they're really controlling the flow of that process. They're controlling the cadence and the pace of it, but they're working within our system and using our tools and leveraging our support.

Heidi Patalano (11:22):
Well, to go back to what you were saying about the Zoom meetings with the TPO people, would you say that your differentiator in the space among the top TPO providers is that personal touch—having a face-to-face with your staff? And can you tell me about staffing up to serve the brokers that are coming to PennyMac?

Kim Nichols (11:45):
Yes. You're talking about the human focus part of that. We have been investing forward in capacity, preparing ourselves for the growth in market size, channel size, and our market share growth. We are staffing up on the operations side as well. The other differentiator that we have is that we actually retain servicing on our TPO loans. Our clients really love that because it gives the broker the peace of mind that the client will get continuity of service and good service after the closing table. We have a special concierge group that helps if there's any kind of challenge. If the borrower is concerned, they call the broker, and they can go right to our TPO resource to make sure that anything around escrows or insurance is addressed. There's really good peace of mind: "If I'm closing that mortgage with PennyMac, that loan stays with PennyMac, and I know where it is." That ensues other benefits down the road as well.

Heidi Patalano (12:57):
Well that's great. I'm glad you're teeing that up because that was something I was going to ask about. Another thing from the most recent earnings was that 25% of your portfolio contains mortgages at about 6%, and 90% of those came from the correspondent channel. Those are the borrowers that your direct channel will pursue in the refi environment. But then I wanted to ask about the brokers, because there's always that tension regarding whether you are going to swallow up those customers they had the first point of contact with. I know that you have an 18-month non-solicitation with those customers. Is that right? But would that change if, let's say, the federal funds rate gets cut and you all of a sudden have this incredible refi market? Are you going to change that strategy?

Kim Nichols (13:49):
Maybe not in the way you're thinking. By the way, channel conflict is real, especially when you retain servicing. It's that thought of, "Are you going to solicit my clients?" So we put out as a standard 18 months of servicer "hands off," non-solicitation. During that time, we offer a program called Partner Signals, which gives our client—the LO and the channel—a heads-up if we think that consumer is in the market for their next mortgage. That Partner Signals program will definitely get bolstered by some of the AI tools that we see emerging. That will get really exciting in terms of the intelligence that we can bring our partners.

(14:31):
The fact that we give that heads-up and have a servicer non-solicit is super compelling in terms of our value proposition. Then we think about recapture. Recapture is a team sport. I think one of the big challenges in the broker space is that, broad-brushing this, they're not great at recapture. You can see maybe some of the larger scaled brokers that run call centers—they're paid assassins. They know they've got their call list every day they go after because they've got the infrastructure for that. But your independent mortgage broker—I met with someone last week and shared with them that in the last 18 months, they had 53 payoffs that did not go back to them as the broker and did not come back to us. We have to get that dialed in. We have to help our clients really create an ecosystem around past-client recapture. That's hard when we've got 30,000 LOs in our ecosystem and none of them report to us. So how do we bring to bear the tools and education they need to excel in that realm?

Heidi Patalano (15:45):
Talk more about your plans for developing things like that with the brokers to help them with that recapture.

Kim Nichols (15:53):
Again, it's continuing our Partner Signals program. Right now it's really based on: is there a credit inquiry? Is there a home-listed alert? Did that consumer request a payoff demand? We're starting to study consumer behaviors within our portal and then leveraging data tools outside of our own ecosystem to say, "We think this borrower is really starting to engage around maybe their next purchase or a refinance." Also, bringing to bear tools—brokers are not always great at the cash-out offer. They know how to take your rate down, but let's look at your outstanding debt and your current interest rate. Let's formulate a plan and be consultative to that client other than just saying, "Okay, rate and term." Let's look at the full financial picture on a second mortgage. That's another opportunity in the home equity space that brokers have not tapped into to the degree that we would expect. That's something we're trying to educate them on—putting analytical tools in their hands to help them serve more borrowers in that space as well.

Heidi Patalano (17:05):
That's interesting. Can you tell us more about other ways you're using AI in the TPO space, particularly regarding your internal operations?

Kim Nichols (17:18):
I'll talk about how we're initially going to use AI. I don't know about other people in this room, but I have AI FOMO every day because first thing in the morning, I get my coffee and look at National Mortgage News. Someone out there is saying, "Oh my God, we're using AI for this and that." Then I go on Instagram and there's all this stuff about how I personally should be using AI. It is overwhelming. I think the most important thing we can do at the executive level is force some discipline around picking our spots initially. If you go in too many different directions and you don't weave them together, it's probably not going to work out very well.

(18:07):
We have picked some initial spots for TPO, which I'm really excited about. One of them is purely internal, and our clients will feel it, but they won't see it. That is using sentiment analysis in our settlement agent portal. In our settlement agent portal, you see titles going back and forth with our client, us, and our closing department, tying out fees and balancing CDs. If we look at all of the conversations within the portal, you can start to see if something's escalating, if our client's getting frustrated, or if somebody's asking for something too many times. We're going to use AI to "listen" to what's going on so we can get in front of closing issues before they're really an emergency. That's going to enhance the client experience and head off any closing challenges or potentially delayed closings before they get escalated or before our client or a settlement agent is just super frustrated. The other lane that we're going down is point of sale. When you think about point of sale, though, there are so many aspects of it.

(19:34):
Point of sale could be best execution. That's an area where, again, I think our broker partners need the help. Every day we scan our locks and we'll say, "Oh my gosh, there was a better execution for that loan for our broker partners." There was a lower note rate with a better price, but they didn't find it or the pricing engine didn't tell them. So we come forth and say, "Hey, let's reduce the interest rate on the Jones loan, and you get a better price as well." Right now, jumbo is a better execution than agency high-balance in some cases. So we're offering up a jumbo solution and maybe saving 30 basis points—and on a million dollar loan, that's a lot. I know point of sale can take on a lot of different flavors. We're in the process of evaluating what at point of sale we will start with, but that will create a lot of efficiencies for us downstream if our partners can really nail it up front and have a loan that is eligible for PennyMac with all the right documentation for potentially a one-touch clear-to-close.

Heidi Patalano (20:52):
I'm glad you brought up the product choices because I know that PennyMac is also going to be launching some non-QM products imminently. I wondered if you could talk about the decision to roll them out and tell us what's happening with the implementation of it.

Kim Nichols (21:09):
Sure. The non-QM space just continues to grow. We're projecting that it's a hundred billion in mortgage origination volume this year, and we want to be part of that. Our initial rollout has been announced for the delegated correspondent channel. Then in Q4, we will follow in the TPO channel. We're offering DSCR, bank statements, asset depletion, and non-warrantable condos. When you think about it, the gig economy is not going away; actually, we're seeing gains in that. This mirrors what's happening in society and the employment world. There are also opportunities to build investment property portfolios for investors. The DSCR is nicely aligned to that. We're going to compete at the higher echelons of credit. So far, the reception has been great that PennyMac can bring a lot of additional liquidity and scaling to the space. We're excited about it.

Heidi Patalano (22:19):
Can you talk more about the non-warrantable condos product? We've certainly covered that quite a bit—that there's a rise in the need for that. Tell us more about the thinking on getting that out.

Kim Nichols (22:36):
It's something that we get requests for every day in the TPO channel: "Do you have non-warrantable condos?" I think something like 15% of all properties in the US are condos. So it makes sense to be able to serve that. There are some real credit-worthy borrowers and loan structures that make sense in that realm that are not GSE-eligible today.

Heidi Patalano (22:59):
Right. We've certainly done a lot of reporting on tracking that with the buildings that are covered or not covered, and that's always evolving. All right. Well, one thing I'd like to just close it out with is asking something I like to ask most people that have had a great career in the field. What is your advice to people in the field today in terms of growth and success? What would be your advice for someone who's starting out or mid-career?

Kim Nichols (23:32):
For someone early-career in this business, I would say amass all of the technical knowledge you can. This is an industry where you need to be a constant learner, a perpetual student. There are a lot of spots that you could delve into, but identify what's interesting to you. Pick that spot, learn as much as you can, and be an expert in something. That establishes your credibility. The other thing I would say is network. Your network will propel you in ways you haven't even thought about. That's not just your next employer; maybe it's your next customer. By being here today—I don't know how many early-career people we have in the room—but this is a great start. Nurturing those connections is key. When you make a connection, it's not just a LinkedIn connection. You have to stay in touch. If you say, "Hey, let's do lunch sometime," go do lunch. Those are the meaningful relationships and partnerships that will help you grow your career. One last thing is you've got to put in the work. Work ethic is everything. You can't just build relationships and be smart and be successful. Grind is a thing and we all have to do it if you want to rise to the top. That's my advice to someone starting out in this amazing business.

Heidi Patalano (25:08):
The grind—it's so true. One other thing: you mentioned using AI yourself personally. Which AI tools do you use?

Kim Nichols (25:18):
It's very limited right now. I would love to talk to some of you about the tools you're using. I love ChatGPT. We are on a Google Gemini platform. What's good about Gemini is that when I'm doing proprietary PennyMac work, it's within our own firewalls, so there are no privacy concerns. We use Gemini a lot. I've used it for deep research when I'm trying to dig into guidelines or opportunities. That's been really powerful. On a day-to-day basis, sometimes it's just settling a bet with a family member over whether or not you think certain animals exist in a certain part of the country, or what year a song came out. That's how I'm using it today. But it's part of my life every single day now.

Heidi Patalano (26:15):
It really is. It's amazing how fast that happened. It's just stunning. Well, thank you so much for joining us here today. It was a lovely conversation. We're going to break for networking so you can follow through on Kim's advice and make new connections. We'll be back here shortly thereafter. Thank you so much.