A Westlake Village-based mortgage firm is taking broad strides to insulate itself from the cyclical swings that were its early bread and butter.

Launched at the height of the 2008 financial crisis, Pennymac Financial Services started out by buying heavily discounted mortgage assets at risk of default and helping borrowers restructure their loans.

“When we started the company … we felt that we had an opportunity to build a mortgage bank to help stabilize the housing market by keeping people in their homes,” said Chief Executive David Spector, one of Pennymac’s founders.

The past 15 years have witnessed the company’s transformation from a niche distressed-debt player to a leading mortgage lender and servicer on the cusp of a portfolio in excess of $1 trillion in unpaid principal.

Pennymac was the brainchild of former executives at Countrywide Financial, the country’s largest mortgage lender at the time, whose reliance on risky subprime loans hastened its collapse when markets turned. Naturally, in its early days, concerns sprang up that the firm had swooped in to fix the problems its leadership had a hand in creating.

But consumer advocates’ skepticism did little to dampen Pennymac’s race to sector dominance. It now ranks among the largest mortgage lenders and servicers in the U.S. by volume, having served more than 5 million homeowners. That top-dog status comes with heavy exposure to the headwinds facing the housing market.

Amid volatile mortgage rates, investor pressure has mounted on the publicly traded firm to stabilize earnings and perform in a competitive market. On the come up from a 24% share price tumble over the last six months, Pennymac is pushing into its next chapter of reinvention and growth.

With its first-ever acquisition, the firm is betting on scale and bringing its total portfolio above $1 trillion in unpaid principal balance – the amount of loan principal left to be paid on a mortgage.

In the year’s second half, the firm is set to buy leading mortgage subservicer Cenlar Capital Corp. for $172.5 million upfront and up to $85 million more over three years.

After the deal closes, Pennymac will service loans for roughly 4 million borrowers and rank second nationally among residential mortgage servicers, trailing Rocket Mortgage, whose acquisition of Texas-based subservicer Mr. Cooper in October sent its UPB north of $2 trillion.

Pennymac’s move broadens its roster of subservicing clients – mostly credit unions and banks outsourcing the paperwork of collecting payments. It also marks a capital commitment to a largely countercyclical side of the mortgage business.

“(The acquisition) allows us to further help reduce the volatility of earnings in the company,” said Spector said. “When rates go up and production slows down, we have this subservicing income that’s really valuable to us.”

Multi-channel approach

Managing third-party loans provides insulation when rates climb, as they did in late March, and revenue coming from new or refinanced loans takes a hit.

A multi-channel approach rests on the hope that when prospective homeowners are hesitant, the fees Pennymac charges to manage existing mortgages keep rolling in, said Sung Won Sohn, economist and former chief economic officer at Wells Fargo.

“More and more companies are getting into subservicing for two reasons: to acquire a source of earnings and to de-risk earnings volatility,” said Won Sohn, who now teaches finance at Loyola Marymount University and runs consulting firm SSE Economics.

By the end of 2025, subservicers in the U.S. handled an estimated $4.25 trillion in servicing volume, about a third of the country’s total mortgage debt and up 7.3% from a year prior, Inside Mortgage Financing reported.

Subservicing also serves as a buffer when rates fall. While lower rates boost loan origination, they also prompt borrowers to refinance high-interest mortgages, hurting servicing.

Weak labor market data and Federal Reserve rate cuts caused mortgage rates to dip last fall, and Pennymac saw a $120 million drop in fourth-quarter servicing income on the loans it owned. The result sent the company’s stock down 33% on Jan. 30, the day the firm reported its quarterly earnings, to close at $99.92 per share.

To smooth out ups and downs, Pennymac will split its time between subservicing for Cenlar’s clients and servicing its own originated mortgages.

Sheltering from economic swings also means diversifying loan sourcing, Spector said.

While Pennymac buys most of its loans from other lenders – a moderately rate-sensitive way to source – it also uses a mix of home-purchase and refinancing channels to keep business steady when rates change. Servicing is a major source of direct loan originations, he said.

“Typically, you engage with homeowners when … they’re going through a rough patch, and they need a modification or forbearance, or rates decline, and they want to refinance the loan,” Spector said.

A strategic shift

Without Cenlar, Pennymac’s subservicing portfolio consists of fewer than 10 business-to-business clients and loans that represent roughly 5% of its total UPB.

Soon, the firm will bring on 100-some clients and an additional million borrowers to form what Cenlar Chief Executive David Schneider said will be the “strongest subservicing platform in the industry.”

“I am incredibly proud of what the Cenlar team has achieved and look forward to this next chapter as we collectively deliver superior scale, technology and care to the millions of homeowners we serve,” Schneider said in a news release.

The acquisition shoots Pennymac’s subservicing book up to a level that would’ve taken five to seven years to reach from scratch, Spector said.

Servicing and subservicing are scale businesses, Won Sohn said, with high fixed costs for technology and compliance that only decrease when volume is turned up.

“​One of the reasons why some of the mortgage originators – it could be a medium-sized bank – don’t want to service them and they simply hire subservices is because they don’t have economies of scale,” the economist said.

Barriers to entry into servicing include at least $100 million to build a best-in-class platform, Spector estimated, and about a year or two to stand up operations. Pennymac spent that cash around the time it started servicing non-performing loans in the late 2000s and early 2010s.

The firm will migrate Cenlar’s clients onto its existing platform following the acquisition. The deal brings Pennymac immediate subservicing scale, lower costs and the promise of stronger pricing power, Spector said.

“The (servicing) revenue stream is not large, and so you have to be able to really operate efficiently, and you have to be the low-cost provider,” he said.

To guide the firm through a transformative time, Pennymac brought on Chief Strategy Officer Kevin Ryan last summer. Ryan has been “deeply engrossed” in the Cenlar deal, his first and preeminent priority, among others.

“As we think about new business growth areas, changes to our balance sheet, or go-to-market technology investments we may make, I’ll be involved in all of those types of things,” said Ryan, who previously served as chief financial officer for Better.com, a digitally native mortgage lender.

The tech ‘arms race’

Aside from dotting the i’s and crossing the t’s to get Cenlar’s employees and clients integrated, Pennymac’s “overarching largest focus” is keeping pace with the industry’s technological developments, Ryan said – and developing native artificial intelligence tools.

“We believe there’s an arms race amongst the bigger players like ourselves to really figure out what that best technology is and how to implement it,” he said, “and how to pass on the benefits to your consumers and your shareholders.”

One key step was launching online self-service tools that handled 90% of Pennymac’s forbearances during the Covid-19 pandemic.

Use cases for the AI Pennymac and its counterparts that are now being developed in-house are wide-ranging.

Paralleling the rise of AI agents in other fields, like Culver City-based Altruist’s Hazel AI wealth adviser, major mortgage players are leaning into agentic loan review and defect reduction.

Last fall, Rocket Mortgage launched a conversational agent, Digital Assistant, designed to help pull borrowers’ credit, present personalized rates and support them with payments and loan status checks.

Pennymac’s investor reporting area has been a focus of its agentic buildout, enabling automated bank reconciliations. The firm also expects to introduce a natural-language virtual assistant that’ll field customer calls.

“If they have inquiries on whether their taxes have been paid, or insurance has been paid, or if their payments have been received, they’ll be able to speak to a virtual agent,” Spector said. “If they want to speak to a human, they’ll be able to ask to speak to a human and be directed to one.”

For a firm using scale as a moat against volatility, tech-driven efficiency is key – especially in an increasingly competitive subservicing market.

“When you get into subservicing, you have to bid for it,” Won Sohn said. “That means it is not as profitable as it used to be … I think pricing is becoming tighter and tighter.”

Compared to the pandemic-time rush when Pennymac’s focus was on processing one loan after another, higher rates have given the firm time to work on its competitive advantage and chart its path to stability, Ryan said.

“It will be a very successful deal with Cenlar, in my estimation, regardless of the interest rate cycle,” he said.