PennyMac – The Daily Tearsheet

Vital Statistics:

	Last	Change
S&P futures	3331	-13.6
Oil (WTI)	41.63	-0.52
10 year government bond yield		0.53%
30 year fixed rate mortgage		2.85%

Stocks are lower this morning after the jobs report. Bonds and MBS are flat.

Jobs report data dump:

Nonfarm payrolls up 1.7 million
Unemployment rate 10.2%
Average hourly earnings up 0.2% MOM / 4.8% YOY

Overall, it shows the job market is on the mend, although it is probably taking longer than people would like. At this point, smaller businesses (especially restaurants and retail) are folding.

Rocket Mortgage priced its IPO yesterday after it was downsized by 43%. The stock performed reasonably well, popping 20% on the day. With the stock trading here, Quicken is valued at $43 billion, with a P/E of 47 and a price to book of almost 12. I guess the question here is how much you are willing to pay for the steak and how much for the sizzle. Last year Quicken originated $145 billion in loans, while PennyMac Financial originated. $118 billion. Quicken earned 62 basis points on that origination to PennyMac’s 33 bps. Yet Quicken’s market cap is almost 11 times PennyMac’s. There are some companies that trade at huge premiums to their competitors: Tesla versus Ford, Amazon.com versus Barnes and Noble back in the day. A huge multiple doesn’t necessarily imply a lousy investment. But you are paying up for the sizzle here. When the Fed starts hiking rates, Quicken will suffer a drop in volume just like everyone else will.

Intercontinental Exchange (the parent company of the New York Stock Exchange) just bought Ellie Mae from private equity firm Thomas Brave for $11 billion. ICE also owns MERS and Simplifile, so this continues the company’s expansion into the mortgage space.

Twenty years after we founded Intercontinental Exchange to provide a transparent trading platform for the energy industry, and following two decades of providing continued innovation to help customers navigate global markets, we are pleased to announce the acquisition of Ellie Mae, which will help us similarly transform the mortgage marketplace,” said Jeffrey C. Sprecher, Founder, Chairman and CEO of Intercontinental Exchange. “Our planned acquisition represents a one-of-a-kind opportunity to add an extraordinary enterprise with great leadership to our family. It will also enhance ICE’s growth strategy in mortgage technology, with complementary products and a wide array of customers and stakeholders who will benefit from our core and proven expertise in operating networks and marketplaces.

PennyMac Financial reported second quarter earnings yesterday, with production increasing to $37.6 billion. Earnings per share increased from $0.92 in the second quarter of 2019 to $4.39 a share. The company also hiked its dividend by 25%.

While forbearances in general are falling, Ginnie Mae forbearances are still rising.

Vital Statistics:

	Last	Change
S&P futures	3074	4.25
Oil (WTI)	56.97	-0.24
10 year government bond yield		1.83%
30 year fixed rate mortgage		3.97%

Stocks are higher this morning on no real news. Bonds and MBS are up.

Mortgage Applications fell 0.1% last week as purchases decreased 3% and refis increased 2%. “U.S. Treasury yields once again exhibited some intraweek volatility before declining sharply toward the end of the week,” said Joel Kan, MBA Associate Vice President of Economic and Industry Forecasting. “As a result, mortgage rates decreased, with the 30-year fixed rate falling below 4 percent again. In response to the lower rates, refinance applications climbed 2 percent, as homeowners with larger loan balances helped to keep the average refinance loan size elevated. Purchase applications fell slightly last week but remained almost 7 percent higher than a year ago.”

Job openings ticked down in September, according to the JOLTS survey. The quits rate fell to 2.3%, although it was lowest (1.7%) in the Northeast. The rest of the country was in the mid-2s. The Fed keeps a close eye on the quits rate as often presages an increase in wage growth. Construction job openings remain elevated, as does the quits rate for the sector.

The ISM non-manufacturing survey came in much better than expectations. Business is “brisk” and a shortgage of workers remains one of the biggest headaches. Whatever late-summer fears about an impending recession or business slowdown appear to have abated.

Productivity fell in the third quarter, according to BLS, as output increased 2.1% and hours worked increased 2.4%. Unit labor costs rose 3.3%, reflecting a 3.6% increase in compensation and the 0.3% drop in productivity. Manufacturing has been a weak spot, as decreasing demand has lowered output.

PennyMac has filed an antitrust lawsuit against Black Knight alleging that “Black Knight uses its market-dominating LoanSphere® MSP mortgage loan servicing system to engage in unfair business tactics that both entrap its licensees and create barriers to entry that stifle competition.” Basically Pennymac developed their own servicing infrastructure and Black Knight is suing them. Separately, Black Knight reported better than expected earnings this morning.

The government is getting worried about shadow banks (read independent mortgage bankers) and their market share in the mortgage origination business. Independent mortgage banks were the subject of a Brookings paper which points out they are vulnerable to financial shocks given that they rely on short-term funding in the money markets to fund their business. Note this isn’t only an origination issue – it is a servicing issue and the revolves around advances. For FHA and VA servicing these advances can spin out of control. This is probably what is behind the government’s recent moves to curb the use of the False Claims Act, which basically drove the big banks out of the FHA / VA business. Nonbanks currently originate 90% of all GNMA loans.

Tag: PennyMac

The rocket launches

Morning Report: Brookings frets about non-bank origination market share