PennyMac Financial Services reported some green shoots in its origination business, part of a larger earnings recovery that was somewhat dampened by hedging losses.

The California mortgage giant posted a $39.3 million profit in the first quarter, following a $36.8 million net loss to close 2023. The rebound, also a 29% improvement from the same time last year, was driven in part by far smaller settlement obligations to technology rival Black Knight. 

The multichannel lender recorded slight  quarter-over-quarter declines in production pretax net income, coming in at $35.9 million, and overall volume of $21.7 billion. Its correspondent and broker gain-on-sale margins ticked up however, with the broker direct channel leaping from 79 basis points to close 2023 to 103 in the recent period. Its consumer direct lock volume was also up 35% quarterly. 

The company said it counts over 4,000 brokers, up 36% from the same time last year. PennyMac Chairman and CEO David Spector attributed the broker margin and population gains to his firm’s technology and more jumbo home loan activity, among other reasons.

“There was a period of time a year or two back when there was irrational pricing taking place in this part of the market, and I think we’ve seen a kind of a return to more rational pricing,” he said, appearing to refer to the wholesale pricing wars of yesteryear.

The firm’s servicing operations recorded $4.9 million in pretax net income in the first quarter, up from a $95.5 million loss in the last three-month stretch. PennyMac also saw $170 million in mortgage servicing rights fair value gains, a figure offset by $294.6 million in hedging declines for a $125 million total decline. 

Executives, responding to analyst questions about the hedging loss, said the company had an increased exposure to interest rate volatility and cited the inverted yield curve. 

“We were seeing pretty significant potential costs for maintaining our typical hedge position,” said Daniel Perotti, senior managing director and chief financial officer. “We needed to identify if we wanted to accept those hedge costs or open up certain exposures.” 

Company leaders said PennyMac has since repositioned its hedge in the second quarter to a “more traditional profile.”

PennyMac’s revenue meanwhile wavered at $305.7 million ending March, down from the fourth quarter’s $361.9 million mark and slightly up from $302.8 million at the same time last year. 

Spector and Perotti also addressed the company’s Department of Veterans Affairs loan profile in speaking on the upcoming VA Servicing Purchase program, or VASP. The initiative is a successor to the VA’s pandemic-era partial claim for its distressed borrowers.

PennyMac counts 4,700 VA loans in a deep delinquency position, or $1.2 billion of unpaid principal balance among its vast servicing portfolio. Executives appeared cautiously optimistic when asked about VASP.

“Where we have potential concern today is around the moral hazard and how that could eventually play out,” said Perotti.