Affiliates of Pennymac Financial Services Inc. (PFSI), which ranks as one of the top five mortgage lenders nationally, are seeking to raise more than $700 million in the debt markets through the sale of notes secured by mortgage servicing rights.

The transactions include a note offering of $305 million sponsored by PennyMac Mortgage Investment Trust, which is managed by PFSI. The offering is “secured by certain participation certificates relating to Fannie Mae mortgage servicing rights [MSRs],” states a recent filing by PFSI with the U.S. Securities and Exchange Commission (SEC).

Another affiliate of PFSI, PennyMac Loan Services LLC, issued a separate private-label issuance of participation certificates valued in total at $400 million. The notes are backed by Ginnie Mae mortgage-servicing rights, according to a presale report by Kroll Bond Rating Agency (KBRA). 

Both note offerings receive a BBB rating from KBRA. The notes issued in both deals pay interest only until maturity, according to KBRA.

The MSR market has been on a bit of a tear since the start of the year, with values rising rapidly and creating opportunities for many lenders to bolster their balance sheets.

PennyMac Mortgage Investment Trust, a real estate investment trust (REIT), recently issued $305 million in Fannie Mae MSR-backed notes to “qualified institutional buyers” via an offering dubbed Series 2022-FT1, PFSI’s SEC filing shows. The five-year notes bear an interest rate of 4.19% above the 30-day average Secured Overnight Financing Rate, or SOFR, according to the SEC document.

The presale report for the separate PennyMac Loan Services-sponsored offering of $400 million in Ginnie Mae MSR-backed participation certificates, called Series 2022-GTI, also involves five-year term notes. The KBRA report does not disclose the interest rate on the notes to be sold — other than indicating the rate, as in the REIT’s offering, will be set at some level above SOFR.  

The bond-rating reports for both offerings indicate that the agency MSRs serving as collateral do entail some risk. 

“For loans sold to, or guaranteed by, a government-sponsored enterprise or housing finance agency (such as Fannie Mae, Freddie Mac, or Ginnie Mae), the MSR asset is owned by the related servicer [PFSI or its subsidiaries in this case] but can be transferred away from the servicer by the agency due to the occurrence of a pre-determined set of infractions by the servicer,” KBRA bond rating reports on the offerings state. “Depending on the severity of the infraction and other considerations, the agency may attempt to facilitate an orderly transfer of servicing for reasonable consideration of the value of the MSRs. 

“However, a troubled servicer may have difficulty realizing market-rate bids for its portfolio given its distressed state and the fact that MSR markets can be illiquid.”

Mitigating that risk, however, according to KBRA, is the fact that both Fannie Mae and Ginnie Mae have pre-existing relationships with PFSI; the size and market share of each “create alignment of incentive”; and the agencies have consented to the securitization of the MSRs.

In the case of Fannie Mae, via an acknowledgement agreement, it has granted PFSI “the right to certain amounts based on sale proceeds, if the MSRs are sold by Fannie Mae, or appraised market value, if the MSRs are retained by Fannie Mae,” the KBRA bond-rating report states. Ginnie Mae’s agreement with PFSI, per KBRA, limits the agency’s ability to “extinguish MSRs” without giving PFSI or its affiliates a chance to first “cure any breach … under the Ginnie Mae contract.”

Monthly valuations of the MSRs for both offerings will be performed by Incenter Mortgage Advisors, KBRA reports. Incenter has managed more than $1.5 trillion in MSR sales and purchases, according to KBRA.

Tom Piercy, managing director of Denver-based Incenter Mortgage Advisors, explained in an interview for a prior story that as interest rates rise, the value of MSRs generally increases because the risk of early repayment of mortgages decreases. And fast-rising rates in 2022 have quelled the once-booming refinancing market, which is a major driver of mortgage prepayments.