PennyMac is tapping the securitization market again to fund its growing portfolio of mortgage servicing rights.

Last week, the real estate investment trust launched an offering of $450 million of five-year bonds from its master trust backed by rights to service loans acquired by Fannie Mae. The notes, which will pay a floating rate of interest linked to one-month Libor and have a stated maturity of April 15, 2023, are provisionally rated BBB- by Kroll.

The maturity can be extended, one time, for two years. In the case of an extension, the interest rate on the notes will increase by 1%.

There are currently $1 billion of variable funding notes issued by the trust outstanding with a stated maturity of Dec. 20, 2020, that pay Libor plus 3.25%, according to Kroll.

The trust can issue additional series of notes, which may include variable funding notes, term notes or a combination thereof, in the future without the consent of any noteholder.

Generally, term notes issued under the master trust pay only interest, and no principal, for their entire terms. However, certain events trigger early amortization. These include a decline in the unpaid balance of a loans to be serviced for Fannie Mae falling below $20 billion; the market value of the 12.5 basis points servicing fee falls below $45 million; an increase above a certain threshold in the percentage of loans more than 90 days behind on payments; or unresolved representation and warranty claims exceeding certain thresholds.

When the latest notes are issued, PennyMac will have borrowed against 80% of the collateral in the master trust. Should the value of the mortgage servicing rights decrease, PennyMac will be required to pay down the principal of the outstanding variable funding in an amount sufficient to restore leverage to an 80% advance rate.

One of the key risks the transaction, according to Kroll, is the possibility that Fannie Mae could terminate PennyMac's rights to service the government sponsored agency’s loans, with or without cause.

However, Fannie Mae has consented to the securitization of the servicing rights, and this agreement gives the securitization trust 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.

And while PennyMac is only rated BB+, Kroll believes that the REIT's "broad expertise servicing Fannie Mae mortgage loans," and its "size and significance to Fannie Mae as a seller/servicer" provide Fannie Mae with a disincentive to effectuate a servicing transfer even in the event that PennyMac's servicing operations should underperform, putting it at risk of falling out of compliance with covenants under the Fannie Mae Lender Contract.

“Historically, Fannie Mae servicer terminations due to events of default have been rare and termination without cause even more so,” Kroll notes in the presale report.

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