Mortgage – HousingWire

Lawsuit pits PLS industry against CFPB
Pennymac notches a profitable Q1 due to servicing segment
Guild Mortgage reports a $208M profit in Q1

Posted: 06 May 2022 02:24 PM PDT

A ruling late last year by a U.S. District Court judge in Wilmington, Delaware, put the structured-finance industry on high alert because of the serious legal and financial implications it poses for the private-label securities (PLS) market.

The fate of the litigation is now in the hands of the U.S. Court of Appeals for the Third District, however. The federal appeals court, based in Philadelphia, this week decided to weigh in on the major arguments in the case by agreeing to hear a rare interlocutory appeal filed by the defendants — a group of student-loan securitization trusts.

Normally, parties to a case cannot appeal until the lower court enters a final judgement. If a case raises important legal questions, however, they can seek permission to appeal early, while the case is still pending, via an interlocutory appeal.

In the litigation, "Consumer Financial Protection Bureau v. National Collegiate Master Student Loan Trust et al.," a group of 15 student loan trusts stand accused by the CFPB of being liable for the deeds of loan servicers that were acting on behalf of the securitization trusts. Those services filed multiple allegedly flawed lawsuits in state courts to pursue loan defaults against borrowers.

The servicers allegedly "executed and notarized deceptive affidavits" and "filed … collections lawsuits lacking" important evidence, according to pleadings in the federal case — pending since 2017 in U.S. District Court for the District of Delaware.

"The Third Circuit Court's decision to hear the appeal allows the trusts' appeal to be docketed and the issues will now be fully briefed over the coming months, effectively pausing the [lower-court] legal proceedings against the trusts, pending the Third Circuit's review," the Structured Finance Association (SFA) stated in an email alert sent to its members. "SFA will continue its advocacy on the matter and closely monitor any developments in the case.

"Additionally, SFA will seek to submit an amicus [friend of the court] brief to inform the court on the negative impact that a finding of trusts as 'covered persons' would undoubtedly have on the securitization market."

The 15 trusts being sued by the CFPB were set up to securitize a total of 800,000 student loans, according to the original complaint filed by the federal watchdog agency. The trusts are administrative entities sans employees, so they collect and service the debt in the securitized loan pools through third-party servicers. Mortgage securitizations in the PLS market have a similar structure.

The trusts say the CFPB lacks authority to sue them because they are not 'covered persons' under the Consumer Financial Protection Act," U.S. District Court Judge Stephanos Bibas wrote in his precedent-setting ruling issued in December 2021. "But they 'engaged in' servicing loans and collecting debt through their contractors [the loan servicers], so they fall within the statute. I must thus let the CFPB's case proceed."

The questions that are now being considered in the recently accepted interlocutory appeal of Bibas' ruling, according to the court pleadings, are whether the student loan securitization trusts — and by extension PLS trusts — can be considered "covered persons," subject to the authority of the CFPB.

The other question on appeal is whether the statute of limitations has run out on the CFPB's lawsuit because it was initially filed "while the [CFPB's] director was improperly insulated from presidential removal."

That second question stems from a constitutional controver sy settled by the U.S. Supreme Court during the waning months of the Trump administration that reversed a congressional restriction on the president's power to remove the CFPB director. The CFPB's lawsuit against the trusts was approved by CFPB leadership and filed in federal court prior to the U.S. Supreme Court's ruling in 2020. A new CFPB director, removable by the president, later ratified the lawsuit to cure any potential statute-of-limitations defect — a move now being challenged on appeal.

Michael Bright CEO of the Structured Finance Association, added that if the lower-court judge's ruling is allowed to stand, the PLS market would have to "adapt pretty substantially."

"Investors will need to quantify and charge for the risk that they will be held accountable for [with respect to] the acts of third-party servicers…," Bright said. "It completely upends the construct of securitization."

How long the Third Circuit Court of Appeals will take to issue its final opinion on whether or how the case should proceed is not clear. It's ruling for now is simple, according to the pleadings: "The Court of Appeals has granted a petition for leave to appeal in this matter."

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Pennymac notches a profitable Q1 due to servicing segment

Posted: 06 May 2022 12:05 PM PDT

California-based nonbank mortgage lender Pennymac Financial Services' net income dropped more than 50% in the first quarter from the same period in 2021, driven by lower profits from its production segment due to surging mortgage rates and a shrinking origination market. However, the company still reported a pretax net income of $234.5 million in the first quarter, essentially unchanged from the prior quarter.

The firm's earnings were driven by its servicing portfolio and about $520 billion in unpaid principal balance, said David Spector, chairman and chief executive officer of PennyMac in an earnings call.

Pennymac's servicing portfolio grew to $518 billion in unpaid balance, up 2% from Dec. 31, 2021, and 16% from March 31, 2021, led by production volumes which more than offset prepayment activity, according to Spector.

"The unprecedented increase in mortgage rates resulted in lower overall industry origination volumes and left originators and aggregators who still hold excess operational capacity competing for a much smaller population of loans," Spector said.

The production segment pretax income was $9.3 million, down from $106.5 million in the last quarter of 2021 and $362.9 million in the first quarter that year.

The consumer direct interest rate lock commitments (IRLCs) were $9.1 billion in unpaid principal balance, down 36% from the previous quarter and 32% from the first quarter of 2021. Broker direct IRLCs declined (38%) at a steeper rate than government sponsored IRLCs (27%) from the same period last year.

Total loan acquisitions and originations were $33.3 billion in unpaid balance, down 29% from the previous quarter and 50% from the first quarter of 2021.

Among its multi-channel production business, Pennymac's consumer direct market rose from 1.6% of total originations in 2021 to 1.7% this year, according to Spector. He expects the company to grow market share in that channel as it leverages "servicing portfolio, new technology and advanced data analytics capabilities," without mentioning further details.

The correspondent channel had the largest market share across Pennymac's business at 15.8% in the first quarter. Loan servicing followed at 4.1% and broker direct channel trailed at 2.2%.

Pennymac's servicing segment pretax income was $225.2 million in the first quarter, up from $126.1 million in the previous quarter and $141.7 million in the same period in 2021.

The firm’s servicing and subservicing fees rake in more than $1 billion in revenue annually, according to Doug Jones, the firm's president and chief mortgage banking officer. Jones added Pennymac began to work with home protection insurance firm Hippo Holdings to offer homeowners insurance and the firm is evaluating other potential partnerships to offer additional products without mentioning details.

In January 2021, the firm launched a new technology platform in its wholesale channel and rebranded its broker division from PennyMac Broker Direct to Pennymac TPO.

While Spector said the company's first-quarter earnings was "solid," he noted mortgage rates rose faster than predicted and Pennymac has taken steps to better align its expenses.

Pennymac announced layoffs of 236 employees in six different California offices in March. Most of the positions that were affected by the announcement were home loan specialists, including those with expertise in refinancing.

The firm's return on equity was 20% in the first quarter of this year and is projected to trend lower before returning to its pre-pandemic range, according to Spector. Pennymac's ROE was 61% in 2020 and 29% in 2021.

The company continued to buy back shares of its stock. It repurchased about $141 million dollars worth of stock in the first quarter, down from $257.3 million in stock buybacks from the previous quarter.

"The pace of share repurchases was down from last quarter as we believe it is prudent to retain capital during periods of greater volatility," Spector said.

PFSI's stock closed Thursday at $48.38 following the earnings publication, down 4.6% from market opening. The stocks fell 1.1% on Friday to $47.84 at around 2:40 pm.

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Guild Mortgage reports a $208M profit in Q1

Posted: 06 May 2022 09:18 AM PDT

Add Guild Mortgage to the list of lenders with profitability propelled by the servicing portfolio in the first quarter — a trend that will continue in the coming months, as pressure on origination margins will remain, executives believe.

The California-based nonbank mortgage lender reported a $208 million net income from January to March, an increase of 393% quarter over quarter and 29% year over year.

“Origination volumes and gain on sale margins were compressed compared to prior quarters, consistent with broader industry trends,” Mary Ann McGarry, Guild’s CEO, said during a call with analysts on Friday morning. “Our servicing platform acted as a hedge, with strong growth in servicing fees, as well as sizable gains in the underlying value of the MSRs.”

The main contribution for the quarterly earnings came from adjustments in the fair value of the mortgage servicing rights (MSR), which brought in $184.6 million in net revenues in the period, compared to a negative $17 million in Q4 2021 and $35.7 million in Q1 2021.

MSR values tend to initially increase as mortgage rates rise and borrowers are less likely to refinance. “Going forward, assuming interest rates continue to trend higher, slower prepayment speeds will likely persist, thereby driving further measured markups in the underlying value of our MSR assets on our balance sheet,” Terry Schmidt, Guild’s president, said to analysts.

In total, Guild ended the first quarter with $73.2 billion in unpaid principal balance, up 3% quarter over quarter and 16% year over year. The net income attributed to the servicing segment was $226.8 million, compared to $27.3 million in the previous quarter and $67.1 million in the same quarter of 2021.

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Guild, a purchase-focused lender with a distributed retail model, registered a deterioration in the origination business. The company reported $6 billion in origination volume, down 31% from the previous quarter and 38% from the same period of 2021, with purchases representing 66% of the total.

The gain-on-sale margin on pull-through adjusted locked volume declined from 4.80% in the first quarter of 2021 to 3.94% in the fourth quarter of 2021 and 3.34% in the first quarter of 2022.

Executives believe margin compression will remain for the second quarter. “The margin on unadjusted locked volume in the first quarter is more indicative of the trajectory in the short term,” Amber Kramer, Guild’s CFO, said during the conference call. “We’re just not seeing from a competitive pricing standpoint that we’re necessarily near the bottom.”

The origination segment’s net income was $63.4 million in Q1 2022, compared to $53.4 million in the previous quarter, a 19% increase due to adjustments made to reflect changes in the fair value of contingent liabilities related to acquisitions. Compared to the first quarter of 2021, the origination segment profit declined 60%.

Guild had $243 million in cash and $1.9 billion of unutilized loan funding capacity as of March 31, 2022. The liquidity, according to executives, may support mergers and acquisitions and a $20 million share repurchase program approved by the board on Thursday.

Guild’s share were trading on Friday afternoon at $9.10, up 5.81% from the previous day.

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