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Servicer Evaluation: Pennymac Loan Services LLC

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Servicer Evaluation: Pennymac Loan Services LLC

Ranking Overview
Subrankings
Servicing category Overall ranking Management and organization Loan administration Ranking outlook
Residential primary ABOVE AVERAGE ABOVE AVERAGE ABOVE AVERAGE Stable
Residential special ABOVE AVERAGE ABOVE AVERAGE ABOVE AVERAGE Stable
Financial position
SUFFICIENT

Rationale

S&P Global Ratings' rankings on PennyMac Loan Services LLC (Pennymac) are ABOVE AVERAGE as a residential mortgage primary and special servicer. On July 13, 2022, we upgraded the overall rankings (see "PennyMac Loan Services LLC Residential Mortgage Servicer Rankings Raised To ABOVE AVERAGE; Ranking Outlooks Stable," published July 13, 2022). As part of the ranking action, we raised the management and organization subrankings to ABOVE AVERAGE from AVERAGE. The ranking outlook on each ranking is stable.

Our rankings reflect Pennymac's:

  • Seasoned and well-experienced senior management team;
  • Sound risk management and internal control framework, including structured independent oversight, to monitor and detect risk;
  • Training program with resources to support new-hire and existing employee training;
  • Effective systems and technology that are well-integrated to promote process automation;
  • Continued focus on process automation and proactive borrower communication practices to push information to borrowers;
  • Servicing performance metrics that are generally competitive with similarly ranked primary servicer peers, except for call center metrics and staff turnover in call center areas, which were elevated; and
  • Sophisticated default and special servicing capabilities to manage and resolve distressed loans.

The ranking upgrades are attributable to a combination of Pennymac's risk management framework that has developed over time and seasoning of its proprietary servicing system that it launched in 2019. Its risk management framework encompasses sound governance practices, independent risk monitoring, and business controls and quality assurance testing. Key components include executive oversight committees, periodic risk assessments, comprehensive quality control and compliance testing that is independent of the operations, quality assurance testing within the operations, and the use of applications to support risk management programs such as a governance, risk, and compliance application (GRC). Combined, these broad components provide an infrastructure on par with other ABOVE AVERAGE servicers that we rank.

Additionally, Pennymac transitioned to an internally developed servicing system in October 2019. In our prior review, we noted the risk associated with transitioning to a new servicing system that warranted seasoning. Since that time, Pennymac has demonstrated the servicing system's effectiveness in supporting the primary and special servicing requirements.

Since our prior review (see " Servicer Evaluation: PennyMac Loan Services LLC ," published Feb. 6, 2020), the following changes and/or developments have occurred:

  • The chief risk officer retired and was replaced by the promotion of the former chief credit officer.
  • An information technology compliance team was established under the enterprise risk management division.
  • Optical character recognition (OCR) technology was introduced to automate certain processes.
  • Pennymac transitioned from a proprietary solution to an industry-recognized application to manage its quality control testing program.
  • A verbal complaint response team was established to manage and resolve verbal complaints.
  • An electronic disbursement option was implemented to reimburse borrowers for escrow and payoff overages.
  • Offshore work was expanded with a vendor relationship in the Philippines to handle some of the basic customer service calls.
  • Processing and posting procedures for most payoffs was automated.
  • Pennymac transitioned to a new claim management solution.
  • A proprietary attorney portal application was launched to manage foreclosure and bankruptcy processes and attorney workflow.

The stable ranking outlooks reflect our base-case expectation that Pennymac will continue performing as an effective primary and special servicer. Pennymac is supported by its experienced senior leadership team, effective technology, and sound control framework. The company continues to invest in personnel and drive technology development and enhancements to further its scalability, which supports its growing servicing portfolio in a controlled manner. We expect that the special servicing portfolio will continue to decrease in size as it is not a key growth strategy at this time. However, while the company focuses on automation, we also expect Pennymac to maintain strategies and capabilities to effectively service its special servicing portfolio.

In addition to conducting an on-site meeting with servicing management, our review includes current and historical Servicer Evaluation Analytical Methodology data through Dec. 31, 2021, as well as other supporting documentation provided by the company.

Profile

Servicer Profile
Servicer Pennymac Loan Services LLC
Primary servicing location Moorpark, Calif.
Primary servicing system Servicing Systems Environment

Pennymac, established in 2008, operates as a subsidiary of Private National Mortgage Acceptance Co. (PNMAC), which is a holding company owned by Pennymac Financial Services. The non-bank mortgage company is an approved Freddie Mac, Fannie Mae, Veterans Administration, and U.S. Department of Agriculture servicer and an approved Ginnie Mae issuer. In addition, Pennymac provides services for prime agency and distressed whole loans on behalf of the Pennymac Mortgage Investment Trust and private clients.

Pennymac's primary mortgage servicing sites are in Moorpark, Calif.; Fort Worth and Plano, Texas; and Summerlin, Nev. It has grown its loan servicing portfolio primarily through the correspondent lending business, as well as by originating loans through its retail lending and broker direct channels. The company also participates in bulk mortgage servicing rights (MSRs) transactions.

In aggregate, Pennymac services approximately 2.1 million prime and special servicing loans combined, with an unpaid principal balance of over $508 billion (see table 1). The servicing portfolio increased 11% by loan count between Dec. 31, 2020, and year-end 2021, with government-sponsored entity (GSE) loans comprising an increased share of the servicing portfolio compared to 2019 (see table 3). Management indicated that the company's strategy is to continue growing the servicing portfolio organically by acquiring prime loans through its multiple lending channels and supplementing that with opportunistic MSR acquisitions.

Table 1

Portfolio Volume
Prime Special
Units (no.) Volume (mil. $) Units (no.) Volume (mil. $)
Dec. 31, 2021 2,138,718 508,036.42 3,974 542.49
Dec. 31, 2020 1,930,001 425,735.54 4,473 632.70
Dec. 31, 2019 1,770,307 367,784.32 5,033 751.90
Dec. 31, 2018 1,483,540 297,642.46 7,113 1,320.81
Dec. 31, 2017 1,238,092 243,528.57 10,794 2,386.63

Pennymac services a nationwide loan portfolio with well-diversified geographic distribution limiting concentration risk (see table 2).

Table 2

Portfolio Distribution By State
Prime Special
Top five states Units (%) Unpaid principal balance (%) Top five states Units (%) Unpaid principal balance (%)
California 9.37 13.22 Texas 14.92 10.56
Texas 8.90 8.25 Georgia 5.46 4.80
Florida 8.89 8.87 New Jersey 5.13 7.88
Virginia 5.02 6.17 New York 5.08 8.81
Georgia 4.76 4.23 Illinois 4.81 5.44
Other 63.06 59.26 Other 64.60 62.51
Total 100.00 100.00 Total 100.00 100.00

Management And Organization

The management and organization subrankings are ABOVE AVERAGE for primary and special servicing.

Organizational structure, staff, and turnover

We believe Pennymac's organizational structure effectively addresses operational needs. It has a well-experienced senior management team. Overall management and staff turnover is manageable. Key experience, company tenure, and turnover metrics include the following:

  • Senior and middle managers have an average of 20 years and 12 years of industry experience, respectively. Both are in the same range as its peer averages.
  • Company tenure averages for senior and middle managers (eight and five years, respectively) are both slightly lower compared to peer averages.
  • Management's lower company tenure averages can be attributed to the new managers added to support the organization's recent growth.
  • The management turnover rate is 8%, which is similar to the peer average.

Pennymac's onshore staff levels have increased 24% since the end of 2019. It also leverages an offshore vendor for certain business processing functions and some customer service calls. Its overall staff turnover rate (35%) is, in large part, a function of turnover in call-center roles. While we commonly observe call-center turnover as a predominant contributor to overall turnover, the overall rate is higher than its peer average.

Training

Pennymac has a sound training program to support learning and development for new and existing employees. A dedicated team oversees the design and facilitation of the servicing training programs and includes a specialized trainer for each business unit. A training governance framework ensures that departmental on-the-job (OTJ) training is consistent throughout servicing. Like many servicers we rank, Pennymac transitioned to virtual training due to the COVID-19 pandemic, and training remains mostly virtual. Other key aspects of the training program include:

  • New customer service staff receive an aggregate of eight weeks of training.
  • New collections staff receive five weeks of training.
  • New single-point-of-contact (SPOC) staff receive three weeks of training.
  • New customer-facing employees must pass an assessment before moving to OTJ training.
  • New hires are given weekly assessments and an end-of-training assessment.
  • OTJ coaches complete a 16-hour certification program, which we believe promotes formality and consistency in the OTJ training.
  • All servicing employees complete annual regulatory compliance training.
  • Offshore resources receive the same training as onshore employees.
  • In 2021, it launched a learning library of all servicing training available on-demand to all employees.
  • A career development program provides formal career pathing with designated prerequisites for key milestones.
  • Leadership development courses are available for supervisors and next-level management.
Systems and technology

We believe Pennymac has effective technology to meet its primary and special servicing requirements. The company largely leverages its proprietary systems in addition to industry-recognized software as a service (SaaS) systems. It maintains technology resources to support its internally developed systems. The company also has well-designed data backup routines and disaster recovery preparedness.

Servicing system applications 

Pennymac fully transitioned to an internally developed servicing system in October 2019. Its servicing system consists of a suite of integrated applications modules that support their respective servicing functions. Technology systems and functionality include the following:

  • A user interface for customer-facing staff with an application that has innovative functionality compared to many servicers that we rank.
  • A call documentation system that automatically documents what the call center agents point to and click on.
  • A report inventory management system that provides an innovative approach to manage, organize, and access data.
  • A website allowing borrowers to self-serve for many activities. The website also displays an inventory of documents received, documents outstanding, and the status of loan modification reviews.
  • A mobile application that mirrors many website features.
  • Email and text notifications to customers when predefined events have occurred.
  • A proprietary application that supports the loan modification process, and a vendor application that is used for short sale processing.
  • A proprietary foreclosure and bankruptcy administration application launched in late 2021.

Business continuity and disaster recovery 

Pennymac maintains a comprehensive business continuity (BC) and disaster recovery (DR) plan, which senior leaders review and approve at least annually. An industry-recognized system is used to design, manage, and store BC and recovery processes. We reviewed a summary report of its most recent partial disaster recovery exercise completed in 2022, which indicated that there were no material recoverability issues. Key BC and DR components include the following:

  • Business impact analyses are updated annually.
  • Many of the key servicing functions are performed at multiple sites.
  • The company deploys a virtual desktop infrastructure that provides additional work location flexibility.
  • Cloud-based virtual servers with real-time replication and daily snapshots for data recovery.
  • Satisfactory recovery-time objectives for critical processes.
  • The plans are tested at least annually, with information technology disaster recovery performed at least quarterly.

Cybersecurity 

The company has a cybersecurity and incident response program that is governed by the enterprise technology committee and reviewed annually. Cybersecurity practices include the following:

  • An annual cyber-risk assessment.
  • Industry standard malware detection and firewalls.
  • An industry-recognized security information and events management solution to monitor and analyze threats.
  • Vulnerability scanning.
  • A data loss prevention solution.
  • Internal penetration testing as well as annual external network penetration testing by a third-party firm.
  • Required annual information security awareness training for employees.
  • An annual phishing email simulation exercise.
  • An annual security incident response tabletop exercise with more frequent exercises performed by the incident response team.
Internal controls

Pennymac has a sound governance and risk management framework. Its three lines of defense model incorporates multiple levels of measures and controls to monitor and detect risk. Executive-level committees oversee the risk at the enterprise level, and there is appropriate levels of coordination and communication between the different lines. It uses a GRC tool which links (maps) risks to associated processes and controls that provide substantial benefits such as improving management's risk visibility and mitigating change management risk. There are appropriate systems to track issues and issue remediation.

Policies and procedures 

Policy and procedure administration and document governance is managed by a centralized team. Version control is tracked through a system. Procedures are reviewed at least annually, with appropriate managerial parameters of approval. Its letter library is housed in a letter management system with version control. New letters require legal and compliance approval, and there is a semiannual certification of letter templates.

Quality assurance (and call monitoring) 

The first line of defense includes the quality assurance teams within the business units, as well as the servicing compliance team. The quality assurance teams perform in-line and postmortem testing as well as use exception reporting to ensure procedures are operating as expected. Centralized oversight by the servicing compliance team ensures appropriate governance and issue reporting. The servicing compliance team also performs some centralized quality assurance testing, coordinates change management, and manages issue resolution, among other activities for the servicing organization.

Compliance and quality control 

The second line of defense includes the corporate compliance and risk management divisions, which are independent of servicing and report to the enterprise chief risk officer. The compliance team provides support and oversight and leads the regulatory change management program. Under the risk management division, the quality control team performs transaction-level reviews along with statistical quality control analysis to ensure compliance with regulatory and investor requirements. Key factors of the compliance and risk management programs include the following:

  • Risk assessments are reviewed annually with quarterly reporting to the board.
  • It maintains a database of state regulatory requirements.
  • A well-structured change management framework identifies regulatory and investor changes and monitors associated process changes within the operations.
  • It transitioned from a proprietary system to an industry-recognized, vendor-based quality control management application for quality control testing.
  • The scope of quality control testing is thorough, canvasing all major servicing functions.
  • The quality control team also uses data driven testing in certain areas, which it has expanded since our last review. This allows it to evaluate an entire population rather than a sample, which largely eliminates the human element. This approach is becoming increasingly utilized in the industry as access to data improves.
  • Quality control reporting and trending is provided to management monthly.
  • Identified issues are tracked and managed in an internal system.
  • It implemented a vendor module to analyze fair servicing compliance.

Internal and external audits  

Internal audit (IA) is the third line of defense. The IA team is well-credentialed and experienced, with the audit executive reporting to the board. IA utilizes its own risk assessment to develop a three-year rotational audit plan with high-risk processes audited every 12 to 18 months. The audit findings are risk-rated as high, medium, or low, and ultimately determine the audit rating. Issues are appropriately reported to executive management and the board of directors. In addition to risk-based reviews, IA also performs advisory reviews.

Since our last review, IA elongated the audit review frequency for its high, medium, and low risk areas, although the extended frequencies remain generally consistent with similarly ranked servicers. It implemented a new vendor-based internal audit management application in 2020 to support its planning, risk assessments, workpapers, and issue tracking. It also augmented its audits to assess and report on any gaps within the second line of defense.

We reviewed 2020, 2021, and year-to-date 2022 IA reports. The audit reports were detailed. We considered most of them to be satisfactory; there were some issues identified that it rated high risk, but management resolved the issues within established timeframes while others were in process of remediation. Audit management indicated there were no open high- or medium-risk issues that are aged. A review of the 2021 Regulation AB report showed no material instances of noncompliance. We also reviewed the 2021 SSAE18 SOC1, which exhibited no control exceptions.

Complaint management

Pennymac has robust protocols in place to manage customer complaints. Written complaints are tracked in a workflow management system, along with pertinent details such as the person making the complaint, the complaint type, and the topic. Verbal complaints are documented in the servicing system's complaint-tracking module, which includes workflow functionality for complaints that require additional research. In 2021, it created a verbal complaint response team to research and respond to verbal complaints unable to be resolved in the initial call.

A quality control team reviews all complaint responses before they are sent, and management and legal review all priority complaints. Complaint trends, top complaint categories, and root causes are reported to the executive compliance committee. It added a quality manager role to focus on root-cause analysis and work with the business lines to review trends and help identify process improvement opportunities. Pennymac reported acknowledging complaints within an average of three days of receipt. Its average complaint resolution time improved year over year to eight days, which is better than its peer average.

Vendor management

A centralized team within servicing manages and oversees the vendor management program for servicing vendors. The team follows the enterprise vendor management framework established by the enterprise risk management group. The framework encompasses key components such as procurement, due diligence, annual reviews, and ongoing vendor performance monitoring. Pennymac uses an industry-recognized application to facilitate the due diligence and ongoing oversight of vendors. We view this as a positive factor because it automates key processes and improves risk visibility. Key aspects of the vendor management framework include:

  • An established framework to determine a vendor's risk tier as well as annual assessments to ensure vendors continue to meet policy standards.
  • Designated internal subject matter experts to review compliance with financial and information security policy requirements.
  • Annual business continuity reviews on all critical tiered vendors.
  • Periodic scorecards and on-site reviews monitor ongoing vendor performance. The scorecard frequency is based on risk tier, and on-site reviews are completed as determined by the assigned relationship manager for vendors in the highest risk tiers.
  • Vendor performance is reported to the vendor management subcommittee monthly, and a watch-list to monitor vendors whose performance falls below standards.
Insurance and legal proceedings

Pennymac has represented that its directors, officers, and errors and omissions insurance coverage are in line with the requirements of its portfolio size. As of the date of this report, there were no material pending litigation items related to the company's servicing of customer loans.

Loan Administration – Primary and Special Servicing

The loan administration subrankings are ABOVE AVERAGE for primary and special servicing.

New-loan boarding

Pennymac has an effective loan setup function to board loans to its system and manage servicing transfers. A servicing transfer management team oversees all servicing transfer activities and uses a procedural checklist to track and ensure all required boarding tasks are completed. The company has multiple pre- and post-boarding routines in place to confirm that the loan data on the system is accurate. Before the loan goes live, call center staff can access certain loan-level and prior servicer historical data to help answer customer questions and take payments to limit interruption during a servicing transfer. Loan boarding metrics, controls, and customer experience initiatives include:

  • The boarding process for newly originated loans is mostly automated with a daily data feed with a one-day average loan boarding time.
  • A document-to-system check is completed on 3% of loans. This includes a daily sampling of a set number of all correspondent and retail-originated loans. For bulk transactions, the sample size is based on the transaction size and the company's experience with the prior servicer.
  • Reporting is used for system-to-system data reviews for new loans.
  • A post-boarding team performs reconciliation on 100% of transferred loans, and a dedicated group within the default area holds weekly meetings with the transferring servicer to coordinate and board in-flight loss mitigation activities.
  • Inbound calls from new customers are routed to a specific queue to ensure proper handling.
  • A new post-boarding customer survey measures customer satisfaction with the transfer process.
Payment processing

Pennymac has an efficient cash management operation with appropriate controls to mitigate risk of error. It incorporates a level of automation for high volume transactions. It also expanded cash management staff 58% since our prior review to manage the increased number of transactions from its growing portfolio. Key factors we considered in our analysis include the following:

  • Payment processing is handled between two geographically dispersed offices mitigating business disruption risk.
  • Processing payoffs meeting certain parameters are automated.
  • Most payments (93%) are processed electronically.
  • Its system automates insufficient funds processing and initiates a second presentment.
  • An online tool addresses lockbox exceptions faster.
  • Daily monitoring of suspense funds and weekly reporting to management address aging suspense funds.
  • A proprietary application locates transaction matches for misapplied checks, and a system that analyzes payments presented on the electronic file determines customer payment intent.
  • A debit card and biweekly payment option is offered.
  • A quality review of a percentage of payment transactions posted is conducted.
Investor reporting

Pennymac's reporting, remittance, and bank account reconciliation functions are appropriately segregated. Similar to other administration areas, there are investor reporting staff in multiple offices. Its system can handle all remittance types, as required by investors, with most of the servicing portfolio comprising agency loans (see table 3). We factored the following practices and metrics into our analysis:

  • Pennymac maintains a 100% electronic reporting and remitting rate.
  • Clearing accounts are reconciled daily, and custodial accounts are reconciled monthly.
  • The company reported that there were minimal open account reconciling items aged over 60 days and no items aged over 90 days, which is better compared to its prime and special servicing peer averages and demonstrates a good track record of promptly addressing reconciliation issues.
  • Investor accounting staff turnover is 22%, which is higher relative to its peer averages.

Table 3

Portfolio Breakdown By Investor (%)
Investor Prime Special
Fannie Mae 25.38 0.00
Freddie Mac 19.25 0.00
Ginnie Mae 50.19 70.41
Mortgage-backed securities investor 0.07 0.00
Portfolio 1.47 1.48
Other investor 3.64 28.11
Total 100.00 100.00
Escrow administration

Most of the portfolio is escrowed for taxes and/or insurance. The company leverages industry-recognized vendors for insurance administration and tax reporting, with a good level of oversight of its vendors. Pennymac has historically managed the bulk of its tax administration internally for properties in most states. It insourced the remaining states in mid-2019 and now manages taxes for properties in all states. The insource strategy is uncommon among servicers we rank, where tax administration is traditionally outsourced due to its complexity. Its non-reimbursable tax penalty per loan ($0.06) is similar to its peer average indicating satisfactory processes and controls to mitigate errors that result in penalties from taxing authorities. Key controls and metrics we considered in our analysis include:

  • It implemented electronic deposit for escrow overages, which we view as innovative.
  • The procedures and workflows used to communicate research items and tax and insurance data to the vendors.
  • A dedicated insurance team provides oversight of the insurance vendor.
  • The insurance vendor's average speed of answer (ASA) and abandonment rates of 31 seconds and 0.79%, respectively, are solid.
  • The monthly review of five insurance vendor calls and weekly call calibration sessions aligns to performance expectations.
  • The weekly audits used to monitor vendor service-level agreements that cover over 35 metrics and call monitoring. The audits typically cover 10% of the reported transactions, and the results are included in the monthly vendor scorecard.
  • Borrowers can file loss draft claims from a mobile device and perform claim inspections virtually.
  • Exception reporting identifies potential escrow analysis issues related to new construction.
  • The company reported 13% staff turnover in the escrow department, which we consider manageable and is similar to its peer average.
Mortgage reconveyance

Pennymac leverages an industry-known vendor for lien release processing, which provides the ability to scale during periods of high payoff volume. The company monitors status and aging inventory through daily reporting. Pennymac reported that less than 1% of reconveyances are processed out of statutory compliance, which is similar to its peers. The reconveyances rejection rate is 0%, and it compares favorably to the peer average.

Special loans administration

For adjustable-rate loans, there is an independent secondary input and system check to verify index value following a change. Pennymac reviews its portfolio against the Department Of Manpower Data Center database periodically to identify borrowers protected under the Servicemembers Civil Relief Act. There are also pre- and post-foreclosure reviews to confirm the borrower is not protected by the regulation.

Customer service

Pennymac uses multiple channels to handle customer service inquiries. Its interactive voice response system (IVR) for the phone, along with its website, and mobile application provide self-service solutions for many of the common customer service requests. It has customer service phone staff in three cities, and it expanded to offshore for some of the basic customer service calls, all of which help mitigate business disruption risk.

The call center utilizes a proprietary system overlay that provides direct access to relevant customer information and other tools that, in aggregate, provide staff with pertinent information to handle customer inquiries and promote efficiency. The company has invested in furthering its self-service technology and implementing tools that proactively provide information to borrowers. For example, it began a pilot for online chat and it began presenting relevant information such as year-end statements to borrowers online. The limited scalability of managing customer service calls, coupled with borrowers increasingly opting to self-serve, makes efficient call handling and self-service options increasingly important as the portfolio expands.

Customer service controls and metrics we considered in our analysis include:

  • Calls are recorded with screen capture for 100% of those handled by new employees and for a percentage of all other calls.
  • A minimum of 20 calls are monitored monthly per agent, which is higher compared to peers.
  • The speech analytics tool identifies calls that could lead to potential complaints.
  • Surveys monitor borrower satisfaction.
  • The system-user interface provides the number of calls in the past 30 days to raise repeat call awareness.
  • The 37% voice response unit capture rate is lower compared to its peers'.
  • The website is available in English and Spanish, and a reported 73% of borrowers are registered web users, which is a similar penetration rate to its peer average.
  • The system provides call center staff a view of the website to assist users with website-related questions.
  • A language line is provided for individuals with limited English proficiency.
  • There are text notifications for online transactions.
  • The ASA and abandonment rates for customer service calls that are unfavorable compared with peers and elevated relative to historical industry standards (see table 4).
  • Its vendor's 1.5% abandonment rate and 30-second ASA are good and compare favorably to its peer averages.

Table 4

Average Speed Of Answer And Abandonment Rate
Average speed of answer (seconds) Abandonment rate (%)
Customer service 257.00 12.47
Collection 158.00 5.98
Loss mitigation N/A N/A

Our prior report noted elevated customer service staff turnover and the staff retention initiatives that the company put in place to retain staff. In our view, customer service management and staff turnover remain high. Management indicated it implemented further initiatives to improve staff retention.

Default management

Pennymac has effective methodologies to identify loss mitigation opportunities and determine optimal solutions to cure loan defaults.

The prime portfolio continues performing well, given the product mix has improved since the COVID-19 impacts of 2020 as borrowers have exited forbearance plans (see table 5). For the prime portfolio, roll rates to higher delinquency buckets were generally favorable compared to peer averages, and we consider the transition rates to lower from higher delinquency buckets to be good. The special servicing portfolio overall delinquency trend demonstrated improvement as the loan count has decreased.

Table 5

Prime Delinquency Rates
Year Total delinquency (%) 30-59 days delinquency (%) 60-89 days delinquency (%) 90+ days delinquency (%) Bankruptcy (%) Foreclosure (%) Real estate owned (no.)
Dec. 31, 2021 3.55 1.21 0.33 2.01 0.30 0.18 177
Dec. 31, 2020 7.89 1.39 0.62 5.89 0.43 0.27 26
Dec. 31, 2019 3.79 2.32 0.68 0.79 0.53 0.47 167
Dec. 31, 2018 3.65 2.31 0.65 0.69 0.47 0.49 337
Dec. 31, 2017 4.27 2.25 0.81 1.21 0.40 0.49 316

Table 6

Special Delinquency Rates
Year Total delinquency (%) 30-59 days delinquency (%) 60-89 days delinquency (%) 90+ days delinquency (%) Bankruptcy (%) Foreclosure (%) Real estate owned (no.)
Dec. 31, 2021 25.35 9.25 3.98 12.12 6.65 8.57 40
Dec. 31, 2020 33.09 7.11 3.66 22.31 9.02 9.77 94
Dec. 31, 2019 29.99 13.57 6.74 9.68 10.67 11.65 310
Dec. 31, 2018 28.16 13.06 7.08 8.03 9.48 18.17 570
Dec. 31, 2017 23.80 10.21 5.34 8.24 11.29 26.49 869

Pennymac's default operations management and staff exhibit overall satisfactory industry experience (see table 7). Compared to its peer averages, default management's average industry experience levels are mostly better while company tenure averages are generally similar. Default staff industry averages are more mixed relative to peers with generally similar or better averages for loss mitigation, foreclosure, bankruptcy, and real-estate owned (REO), while lower for collectors. We consider the collections and REO staff turnover to be elevated.

Table 7

Experience And Tenure
Management Staff
Avg. industry experience (years) Avg. present employer experience (years) Turnover rate (%) Avg. industry experience (years) Avg. present employer experience (years) Turnover rate (%)
Collection 11.47 6.47 25.00 4.46 2.75 52.17
Loss mitigation 13.15 6.10 0.00 7.30 2.43 29.77
Foreclosure 14.13 5.14 28.57 7.33 3.47 18.65
Bankruptcy 18.05 5.82 0.00 14.54 3.79 5.19
Real estate owned 21.85 9.75 0.00 15.65 8.07 26.67
Collections

In our view, Pennymac has effective collection methodologies, technology, and experienced staff in place to engage and promote productive discussion with customers. For example, the company provides dynamic information to the collector, achieving the appropriate resolution; the information is based on historical loan activity and includes indicators to guide the collector's tone. In addition, a system-based interview model guides collectors through the borrower interview conversation to determine the best path to cure the default, considering investor rules. As an enhancement, the company added the interview tool to its borrower website allowing borrowers to begin the workout process online. To drive its outbound collections (i.e. borrower contact) strategy for borrowers owing one payment, it implemented a new risk score model to predict the likelihood of default replacing its prior model. Key collections metrics and practices we factored in our analysis include the following:

  • Email campaigns contact borrowers that are one-payment owing.
  • There are a variety of call campaigns, including dialer, manual and risk-model driven.
  • Skip tracing is used when necessary to locate a valid phone number to contact borrowers.
  • The promise-to-pay success rates for 30- and 60-day delinquencies are 85% and 92%, respectively. Both compare favorably to its primary and special servicing peer averages.
  • The collections call abandonment rate is similar to its primary and special servicing peer averages. The ASA is unfavorable compared to the peer averages (see table 4).
  • It monitors a minimum of seven calls monthly for each agent, which is a similar to its peer averages.

Loss mitigation 

The company's loss mitigation and asset management strategies are more sophisticated than those of many similarly sized primary and special servicers that we rank. This is mostly a product of its strategy team, which develops opportunities and leads targeted portfolio-specific loss mitigation and asset disposition initiatives for investors. The strategy team also plays a key role in Pennymac's early buyout strategies, which is meaningful considering Ginnie Mae loans comprise roughly half of the servicing portfolio.

Key primary and special servicing strategies that we considered include:

  • The portfolio strategy team monitors nonperforming loan portfolio performance through the loan default cycle.
  • A designated loss mitigation team performs supplemental manual customer outreach to collect financial application documents.
  • The company conducts monthly outreach to customers on forbearance plans to get updates and reinforce arrangements.
  • Disaster response protocols identify and contact borrowers in affected natural disaster areas and monitor property condition and borrower impact.
  • The company uses door-knock vendors in certain scenarios to improve engagement.

It uses proprietary applications to manage the loss mitigation process and to underwrite loan modification solutions, and many key processes are automated. The workflow system tracks key milestones and manages documents throughout the process. For scenarios that require a full modification review, it offers borrowers a vendor service to aggregate income documentation and electronically sign applications online, which are common borrower pain points, in order to streamline the application process.

Since our last review, PLS implemented self-service options and system automation to manage the COVID-19 forbearance plan lifecycle. It made enhancements to its website, IVR, and internal systems to automate the setup and resolution of forbearance plans. It also used email campaigns to routinely communicate with borrowers during the forbearance plan and direct borrowers to its website to extend or select from a menu of solutions to exit the forbearance plan. Furthermore:

Loss mitigation controls and metrics include the following:

  • A paperless modification underwriting process.
  • Investor rules are managed with the underwriting system.
  • Borrowers can upload application documents, view missing documents, and see their review status using the website.
  • Borrowers can make trial payments online and use the IVR.
  • The percentage of failed trial plans (2.36%) is slightly better relative to its peer average.
  • Its average number of days to workout decision for its primary and special servicing portfolios are 16 and 11 days, respectively, which are better than the peer averages.
  • There are multiple control mechanisms in place in the form of technology and in-line and quality testing. The default quality assurance team reviews all underwriting decisions, including income calculations, and all loan modification agreements and short sale approval letters are reviewed for quality before mailing.
  • Pennymac leverages reporting to monitor system changes and ensure the system reflects approved modification terms.
  • Supervisors and the quality control team monitor a minimum of 10 calls monthly for each SPOC.

Table 8

Loss Mitigation Breakdown (%)
Resolution type Prime Special
Deed-in-lieu 0.01 0.00
Short sale 0.07 0.20
Repayment plan 5.91 2.92
Modification 35.55 39.56
Forbearance plan 58.46 57.32
Other 0.00 0.00
Total 100.00 100.00
Foreclosure and bankruptcy

Pennymac has sound practices and controls to manage its foreclosure and bankruptcy administration, allowing it to appropriately manage timelines during legal proceedings. In late 2021, it implemented a new proprietary web-based application to manage foreclosure and bankruptcy actions. The system has foreclosure timelines programmed in with dynamic task due dates that update as key milestones are completed. It is also integrated with other key systems that provide automation for events such as placing a foreclosure on hold for loss mitigation or upon a borrower filing bankruptcy and the bid process automation that is initiated when the property valuation is received. Furthermore:

  • It uses a proprietary foreclosure module to perform pre-referral and presale reviews. The module includes a dynamic checklist that adapts to various state requirements, and it memorializes every completed review.
  • A dedicated compliance team monitors compliance with first legal filing requirements and addresses any issues.
  • Processes such as bids and pre-sale reviews are automated, with a manual review of exceptions.
  • Pennymac reported completing 84% of foreclosures within standard timelines, which compares favorably to peers.
  • Homeowners' association lien monitoring is performed internally.
  • Weekly meetings are conducted with its national property preservation vendors.
  • It transitioned to a new claims management application at the end of 2021.
  • A team performs loan reviews to identify the root cause of claim curtailments.

Pennymac utilizes its internal bankruptcy team for bankruptcy processing and case monitoring. It maintains its attorney network to prepare and file court documents. Furthermore:

  • A vendor performs daily portfolio scrubs to identify bankruptcy filings and changes in active cases.
  • It implemented OCR to automate the receipt and triage of electronic bankruptcy notices.
  • The bankruptcy system includes a pre- and post-petition payment ledger that provides visibility to the payment processing team for posting of funds.
  • All proof of claim and motion for relief notices are reviewed by the quality control team prior to filing.
  • The company reported that no proofs of claim were rejected.
  • Processes are in place to pursue loss mitigation solutions during bankruptcy.
REO

Pennymac has procedures and technology in place to manage evictions, pre-marketing, and disposition of its REO assets. It leverages an industry-recognized application that provides key milestone task tracking and document management functionality. Separate evictions, premarketing, and asset manager teams complete checklists as a control to confirm required process steps are completed.

Asset managers use a proprietary repair model to evaluate the economics of property repairs. Asset managers also review monthly broker status reports to determine marketing strategy adjustments and complete a real estate agent performance rating for each property. Key REO strategies and statistics include:

  • REO staff have solid industry experience that compares favorably to its peers' (see table 7).
  • Foreclosure bidding strategies are used to take advantage of opportunities where there is a potential positive economic position.
  • Online auctions are used as a disposition channel.
  • Marketing time averages have decreased marginally to 101 days from 114 days.
  • Gross sales-to-market-value average is 109% for prime loans and 112% for specially serviced loans, which we consider solid.

Financial Position

The financial position is SUFFICIENT.

Related Research

Servicer Analyst:Jason Riche, Dallas + 1 (214) 468 3495;
jason.riche@spglobal.com
Secondary Contact:Leigh Stafford McLean, Dallas + 1 (214) 765 5867;
leigh.stafford@spglobal.com
Analytical Manager, Servicer Evaluations:Robert J Radziul, New York + 1 (212) 438 1051;
robert.radziul@spglobal.com

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