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PennyMac plans 'programmatic' MSR securitization

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New kinds of bonds that PennyMac issued this year to finance its growing portfolio of mortgage servicing rights have been a big hit with investors.

In February, the real estate investment trust issued $400 million of three-year notes that pay a spread of 475 basis points over one-month Libor. In August, it followed up with another $500 million of five-year notes that pay Libor plus 400 basis points.

In a panel discussion at ABS East Tuesday, Vandy Fartaj, the firm’s chief capital markets officer, explained that the program’s novel structure is the ability to issue additional term notes as the portfolio grows.

“We are working on a platform that will allow us to be a regular issuer,” he said.

PennyMac has been buying MSRs in bulk, and it needs to have the ability to draw very quickly against their value. With the new program, “I don’t have to wait months to issue a new transaction,” Fartaj said.

Prior to the securitization, PennyMac had a $400 million warehouse facility with a single lender. As it bulked up assets, the advance rate, or the maximum amount it could borrow against the collateral, fell to 26%; the securitization brought this up to 60%. “We went from one-year financing to five- to six-year financing at no additional cost,” he said.

A key draw, according to Bill Greenberg, managing director at Two Harbors, an investor in the deal, was the fact that Credit Suisse will use the bonds as collateral for sale-and-repurchase agreements. He said this allows the firm to meet our investment return hurdle. It also allowed Two Harbors, which has its own portfolio of MSRs, to get more exposure to the asset class with “zero convexity” and without risks that "we as MSR owners, understand well,” such as prepayment risk and compliance and regulatory issues. “It’s a great REIT asset,” he said.

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