Last week was tumultuous for mortgage originators as the 10-year bond yield fell from 1.16% to 0.77%. This drop in yields was directly attributable to fears about the novel coronavirus pandemic and the Fed's drastic half-point cut in the federal funds rate. For mortgage originators like PennyMac Financial Services (NYSE: PFSI), the dramatic drop in yields has a push-pull effect on its business and balance sheet.
Is the drop in rates good or bad for mortgage originators? Read on to find out.
PennyMac Financial Services is one of the top non-bank mortgage originators in the United States. The company buys loans from smaller mortgage originators and then sells them to PennyMac Investment Trust (NYSE: PMT), which is a real estate investment trust (REIT) that holds mortgages as an investment. PennyMac Financial services earns fees and a gain on sale when it sells the mortgages to PennyMac Investment Trust. PennyMac Financial Services holds the mortgage servicing right (MSR), which is the right to collect payments from the borrower. These two businesses react differently to changes in interest rates. The idea is that the company will still perform well no matter what happens to interest rates.