Rationale

S&P Global Ratings' rankings on PennyMac Loan Services LLC (PennyMac) are ABOVE AVERAGE as a residential mortgage primary and special servicer. On Aug. 5, 2024, we affirmed the overall rankings (see "PennyMac Loan Services LLC ABOVE AVERAGE Residential Mortgage Loan Servicer Rankings Affirmed; Ranking Outlooks Stable," published Aug. 5, 2024). The ranking outlook on each ranking is stable.

Our rankings reflect PennyMac's:

• Management team's experience and depth, along with the continued volume growth of its servicing portfolio;
• Solid training program, with governance standards to promote training consistency in the organization;
• Risk management and control framework, with three well-structured lines of defense to monitor and detect risk;
• Effective and well-integrated technology environment to support its primary and special servicing operations;
• Sound loan administration practices that are generally consistent with similarly ranked servicers and include a level of automation to manage its large servicing portfolio;
• Borrower self-service loss mitigation features that improve the scalability of much of the loan resolution process, which would become critical in a rising delinquency environment; and
• Track record resolving delinquent loans through its default and special servicing capabilities.

Since our prior review (see "Servicer Evaluation: PennyMac Loan Services LLC," published July 26, 2022), the following changes and/or developments have occurred:

• The head of performing loans (i.e., core loan administration functions, customer service, etc.) and head of internal audit retired, both of whom were replaced internally.
• PennyMac created a new chief digital officer role and promoted internally to fill the position.
• It created a cyber business team and cyber executive management team focused on addressing cyber security risks.
• A new leadership training program and a skills development program for existing staff were added to its training program.
• It implemented a new application to host and view procedures as well as manage changes to policies and procedure documents.
• It implemented a new speech analytics application to provide real-time call analysis and provide call center agents with informational alerts based on call context.
• It added a second lockbox provider, which provides operational redundancy.
• Skill-based call routing was implemented to better direct borrower calls according to an agent's skill level.

The ranking outlook is stable for both rankings. The stable outlooks reflect our base case that PennyMac will continue to operate as an effective primary and special residential mortgage loan servicer. Its experienced senior leadership team continues use technology to improve controls and efficiency consistent with its near-term growth strategy. While its special servicing loan portfolio will likely continue to decline in size, we expect it to continue to maintain existing loss mitigation and loan resolution capabilities to manage its special servicing loan portfolio.

In addition to conducting an on-site meeting with servicing management, our review includes current and historical Servicer Evaluation Analytical Methodology data through the second half of 2023, as well as other supporting documentation provided by the company.

Profile

PennyMac, established in 2008, operates as a subsidiary of Private National Mortgage Acceptance Co. (PNMAC), which is a holding company owned by PennyMac Financial Services Inc. The non-bank mortgage company is an approved Freddie Mac, Fannie Mae, Veterans Administration, and U.S. Department of Agriculture servicer and an approved Ginnie Mae issuer. In addition, PennyMac provides services for prime agency and distressed whole loans on behalf of PennyMac Mortgage Investment Trust and private clients.

PennyMac's primary mortgage servicing sites are in Moorpark, Calif.; Fort Worth and Plano, Texas; and Summerlin, Nev. It has grown its loan servicing portfolio primarily through the correspondent lending business, as well as by originating loans through its retail lending and broker direct channels. The company also participates in bulk mortgage servicing rights (MSRs) transactions.

PennyMac services approximately 2.4 million prime and special servicing loans, with an unpaid principal balance of over $606 billion (see table 1). The servicing portfolio increased 7% by loan count between Dec. 31, 2022, and year-end 2023, with agency loans comprising the vast majority of the servicing portfolio (see table 3). Management indicated that the company's strategy is to continue growing the servicing portfolio organically by acquiring prime loans through its multiple lending channels and supplementing that with opportunistic MSR acquisitions.

Table 1

PennyMac services a nationwide loan portfolio with well-diversified geographic distribution, limiting concentration risk (see table 2).

Table 2

Management And Organization

The management and organization subrankings are ABOVE AVERAGE for all rankings.

Organizational structure, staff, and turnover

PennyMac's organizational structure effectively addresses operational needs with its servicing operations and enterprise support for support functions such as technology and internal audit. It has a well-experienced senior management team. Overall management turnover is low and consistent with its peer average. Key experience, company tenure, and turnover metrics include:

• Senior and middle managers have an average of 22 years and 15 years of industry experience, respectively. Both are similar to peer averages.
• Company tenure averages for senior and middle managers (nine and seven years, respectively) are both slightly lower than peer averages, which can be attributed to new managers who were added to support the organization's growth over the last several years.
• The management turnover rate is 7%, which is similar to the peer average.

The servicing executive management team has remained largely stable for the last several years. Key changes since our last review are a new managing director of performing loans replacing the predecessor that retired and a new executive vice president of customer contact replacing the previous leader that left the company. In addition, PennyMac created a new chief digital officer role and promoted a new chief information officer. All new appointees were promoted internally.

PennyMac's onshore staff levels have remained generally stable during 2023. It also leverages an offshore vendor for certain business processing functions and a portion of its customer service and collections calls. Its overall staff turnover rate (16%) improved compared to the prior-year period and is in a similar range as the peer average.

Training

PennyMac has a sound training program to support learning and development for new and existing employees. A dedicated team oversees the design and facilitation of the servicing training programs. Its training governance ensures that departmental on-the-job (OTJ) training is consistent throughout servicing and is more robust than we typically observe among similarly ranked servicers. Other key aspects of the training program include:

• PennyMac's training resources include dedicated trainers located in all servicing sites, instructional designers, and governance and reporting analysts.
• It uses a learning management system to deliver training content and track completion.
• New customer service staff receive an aggregate of eight weeks of training, which we consider solid and which is more training time than the peer average.
• New collections staff receive five weeks of training.
• New single-point-of-contact (SPOC) staff receive three weeks of training.
• New hires are given weekly assessments and an end-of-training assessment.
• OTJ coaches complete a 16-hour certification program, which we believe promotes formality and consistency in the OTJ training.
• All servicing employees complete annual regulatory compliance training.
• Offshore resources receive the same training as onshore employees.
• In 2023, it launched a skills development website and training program available to all employees.
• It created a new leadership development program that provides a structured training for new and existing managers.

Systems and technology

We believe PennyMac has effective technology to meet its primary and special servicing requirements. The company largely leverages its proprietary systems in addition to industry-recognized software as a service (SaaS) systems. It maintains technology resources to support its internally developed systems. The company also has well-designed data-backup routines and disaster-recovery preparedness.

Servicing system applications 

PennyMac's servicing system consists of a suite of integrated applications modules that support their respective servicing functions. The company's systems and functionality include:

• There is a user interface for customer-facing staff with an application that provides access to loan-level information and prompts to agents that are based on call context to address borrower requests.
• A call documentation system automatically documents what the call center agents point to and click on.
• A report inventory management system provides an innovative approach to managing, organizing, and accessing data.
• PennyMac's website allows borrowers to self-serve for many activities. The website also displays an inventory of documents received, documents outstanding, and the status of loan modification reviews.
• There is a mobile application that mirrors many website features.
• Email and text notifications are sent to customers when predefined events have occurred.
• Its proprietary application supports the loan modification process, and a vendor application is used for short sale processing.
• It has a proprietary application to manage foreclosure and bankruptcy administration.

Business continuity and disaster recovery 

PennyMac maintains a comprehensive business continuity (BC) and disaster recovery (DR) plan, which a senior management committee reviews and approves at least annually. We considered the following key BC and DR components:

• PennyMac uses a SaaS application to design, manage, and store BC and DR processes.
• Business impact analyses are updated annually.
• Many of the key servicing functions are performed at multiple sites, somewhat mitigating business disruption risk.
• The company deploys a virtual desktop infrastructure that provides additional work location flexibility.
• It uses cloud-based virtual servers with real-time replication and daily snapshots (write once, read many) for data recovery.
• Its recovery-time objectives for critical processes are satisfactory.
• The plans are tested at least annually for critical business processes, with IT disaster recovery being performed at least quarterly.
• We reviewed a summary report of its most recent partial disaster recovery exercise completed in February 2024, which indicated that there were no material recoverability issues.

Cyber security 

The company has a cyber security program and incident response plan that are governed by the enterprise technology committee and reviewed annually. Cyber security practices include the following:

• It uses industry-standard malware detection and firewalls.
• It uses a security information and events management solution to monitor and analyze threats.
• There is a dedicated security operations center (SOC) team and a SOC application to triage and assess threats.
• It performs vulnerability scanning.
• It uses a data loss prevention solution.
• There is internal penetration testing as well as annual external network penetration testing by a third-party firm.
• Employees are required to take annual information security awareness training.
• It performs a phishing email simulation exercise annually, which is less frequent than we observe among similarly ranked servicers.
• It performs an annual cyber-risk assessment and an annual security incident response tabletop exercise, with more frequent exercises being performed by the incident response team.

Despite servicers' significant expenditure on cyber security staff and systems to support their programs, these preventative measures are only effective if the program is successfully implemented and maintained. Notwithstanding, even the best preventative measures will be continuously challenged by the ever-increasing sophistication of attacks.

Internal controls

PennyMac has a sound governance and risk management framework. Its three lines of defense model incorporates multiple levels of measures and controls to monitor and detect risk. Executive-level committees oversee the risk at the enterprise level, and there is appropriate coordination and communication between the different lines. It uses a governance, risk, and compliance tool which maps risks to associated processes and controls that provide substantial benefits, such as improving management's risk visibility and mitigating change-management risk. There are separate systems to track issues and issue remediation.

Policies and procedures 

Policy and procedure (P&P) administration and document governance are managed by a centralized team. P&P version control is tracked through a system. Procedures are reviewed at least annually, with appropriate managerial parameters of approval. Its letter library is housed in a letter management system with version control. New letters require legal and compliance approval, and there is a semiannual certification of letter templates.

Quality assurance and call monitoring 

The first line of defense includes the quality assurance teams within the servicing business units, as well as the servicing compliance team. The quality assurance teams perform in-line and postmortem testing as well as using exception reporting to ensure procedures are operating as expected. Centralized oversight by the servicing compliance team ensures appropriate governance and issue reporting. The servicing compliance team also performs some centralized quality assurance testing, coordinates change management, and manages issue resolution, among other activities, for the servicing organization.

Compliance and quality control 

The second line of defense includes the corporate compliance and risk management divisions, which are independent of servicing and report to the enterprise chief risk officer. The compliance team provides support and oversight and leads the regulatory change management program. Under risk management, the quality control team performs transaction-level reviews along with statistical quality control analysis to ensure compliance with regulatory and investor requirements. Key factors of the compliance and risk management programs include:

• Its risk assessments are reviewed annually, with quarterly reporting to the board.
• It maintains a database of state regulatory requirements.
• Its well-structured change management framework identifies regulatory and investor changes and monitors associated process changes within the operations.
• Quality control testing is performed using an industry-recognized, vendor-based quality control management application.
• The scope of quality control testing is thorough, encompassing all major servicing functions.
• The quality control team also uses data-driven testing in certain areas, which it has expanded since our last review. This allows it to evaluate an entire population rather than a sample, which largely eliminates the human element. This approach is becoming increasingly utilized in the industry as access to data improves.
• Quality control reporting and trending is provided to management monthly.
• Identified issues are tracked and managed in an internal system.
• It uses a vendor module to analyze fair servicing compliance.

Internal and external audits  

Internal audit (IA) is the third line of defense. The IA team is well credentialed and experienced, with the audit executive reporting to the board. IA performs its own its own risk assessment, which is used to develop a three-year risk-based audit plan. It audits high-risk processes every 12 to 18 months and medium-risk processes every 24 to 36 months. The audit frequencies are generally consistent with similarly ranked servicers. The audit findings are risk-rated as high, medium, or low and ultimately determine the audit rating. Issues are appropriately reported to executive management and the board of directors. In addition to risk-based reviews, IA also performs advisory reviews.

PennyMac uses a vendor-based internal audit management application to support its planning, risk assessments, workpapers, and issue tracking. Its audits also assess and report on any gaps within the second line of defense.

We reviewed 2023 and 2024 year-to-date IA reports. The audit reports were detailed. We considered audit results to be satisfactory. Audit management indicated there were no open high- or medium-risk issues that are aged. A review of the 2023 Regulation AB report showed no material instances of noncompliance. We also reviewed the 2023 SSAE18 SOC1, which exhibited no control exceptions.

Complaint management

PennyMac has robust protocols in place to manage customer complaints. Written complaints are tracked in a workflow management system, along with pertinent details such as the person making the complaint, the complaint type, and the topic. Verbal complaints are documented in the servicing system's complaint-tracking module, which includes workflow functionality for complaints that require additional research. It has separate verbal complaint response teams to research and respond to non-default-related and default-related verbal complaints, respectively, that are unable to be resolved in the initial call.

A quality control team reviews all complaint responses before they are sent, and management and legal review all priority complaints. Complaint trends, top complaint categories, and root causes are reported to the executive compliance committee. A quality manager focuses on root-cause analysis and works with the business lines to review trends and help identify process improvement opportunities. PennyMac reported acknowledging all complaints within the regulatory required timeframe. Its average complaint resolution time of six days is better than its peer average.

Vendor management

A centralized team within servicing manages and oversees the vendor management program for servicing vendors. The team follows the enterprise vendor management framework established by the enterprise risk management group. The framework encompasses key components such as procurement, due diligence, annual reviews, and ongoing vendor performance monitoring. PennyMac uses an industry-recognized application to facilitate the due diligence and ongoing oversight of vendors. We view this as a positive factor because it automates key processes and improves risk visibility. Key aspects of the vendor management framework include:

• It has an established framework to determine a vendor's risk tier as well as annual assessments to ensure vendors continue to meet policy standards.
• There are designated internal subject-matter experts to review compliance with financial and information security policy requirements.
• It performs annual business continuity reviews on all critical tiered vendors.
• It uses periodic scorecards to monitor ongoing vendor performance. The scorecard frequency is based on risk tier.
• It performs virtual and on-site reviews as determined by the assigned relationship manager for vendors in the highest risk tiers. Although it performed on-site reviews of certain vendors it considers high-risk in 2023, conducting onsite reviews on a situational basis is more subjective than we typically observe among our similar and higher-ranked servicers.
• There is a formal watchlist to monitor underperforming vendors and associated corrective action plans.
• Vendor performance is reported to the vendor management subcommittee monthly, and there is a watchlist to monitor vendors whose performance falls below standards.

Insurance and legal proceedings

PennyMac has represented that its directors, officers, and errors and omissions insurance coverage are in line with the requirements of its portfolio size. As of the date of this report, there were no material pending litigation items related to the company's servicing of customer loans.

Loan Administration--Primary And Special Servicing

The loan administration subrankings are ABOVE AVERAGE for primary and special servicing.

New-loan boarding

PennyMac has an effective loan setup function to board loans to its system and manage servicing transfers. A servicing transfer management team oversees all servicing transfer activities and uses a procedural checklist to track and ensure all required boarding tasks are completed. The company has multiple pre- and post-boarding routines in place to confirm that the loan data in the system is accurate. It also has recent experience boarding loans with electronic notes. Loan boarding metrics, controls, and customer experience initiatives include:

• The boarding process for newly originated loans is mostly automated, with a daily data feed and a same-day average loan boarding time.
• Before the loan goes live, call center staff can access certain loan-level and prior servicer historical data to help answer customer questions and take payments to limit interruption during a servicing transfer.
• A document-to-system check is completed on 3% of flow loans boarded to its system. This includes a daily sampling of a set number of all correspondent and retail-originated loans. It does not perform a system data-to-document check for bulk transactions, which increases data accuracy risk, given the reliance on the prior servicer's electronic data.
• Reporting is used for system-to-system data reviews for new loans.
• Inbound calls from new customers are routed to a specific queue to ensure proper handling.
• A new post-boarding customer survey measures customer satisfaction with the transfer process.

Payment processing

PennyMac has an efficient cash management operation with appropriate controls to mitigate the risk of error. It incorporates a level of automation for high-volume transactions. It added a second lockbox provider to mitigate single-vendor dependency risk. Key factors we considered in our analysis include:

• Payment processing is handled between two geographically dispersed offices, mitigating business disruption risk.
• There is a controlled-access payment processing area for handling physical checks.
• Processing payoffs meeting certain parameters are automated.
• Most payments (approximately 94%) are received and processed electronically.
• The percentage of recurring automated clearinghouse payments (34%) has remained largely stable year over year and is similar to the peer averages of primary and special servicers.
• PennyMac received 35% of payments through its website, which is up marginally year over year and compares favorably to the primary and special servicer peer averages.
• Its system automates insufficient funds processing and initiates a second presentment.
• An online tool addresses lockbox exceptions faster than could be done manually.
• Daily monitoring of suspense funds and weekly reporting to management address aging suspense funds.
• A proprietary application locates transaction matches for misapplied checks, and a system that analyzes payments presented on the electronic file determines customer payment intent.
• Debit card and biweekly payment options are offered.
• A quality review of a percentage of payment transactions posted is conducted.
• There was no staff turnover within the payment processing department.

Investor reporting

PennyMac's reporting, remittance, and bank account reconciliation functions are appropriately segregated. Similar to other administration areas, there are investor reporting staff in multiple offices. Its system can handle all remittance types, as required by investors, with most of the servicing portfolio comprising agency loans (see table 3). We factored the following practices and metrics into our analysis:

• PennyMac maintains a 100% electronic reporting and remitting rate.
• Clearing accounts are reconciled daily, and custodial accounts are reconciled monthly.
• It added a new team and vice president role to perform reviews of its account reconciliations.
• The company reported that there were minimal open account reconciling items aged between 60 days and 89 days, which is generally consistent with the primary servicer peer average and better than the special servicer peer average.
• It reported no reconciling variances aged over 90 days, which is better than its prime and special servicing peer averages and demonstrates a good track record of promptly addressing account reconciliation variances.
• Investor accounting staff turnover is 5%, which is similar to its peer averages.

Table 3

Escrow administration

Most of the portfolio is escrowed for taxes and/or insurance. PennyMac leverages industry-recognized vendors for insurance administration and tax reporting, with a good level of oversight of its vendors. The company has historically managed the bulk of its tax administration internally. The insource strategy is uncommon among servicers we rank, where tax administration is traditionally outsourced due to its complexity. Its non-reimbursable tax penalty per loan of $0.06 indicates satisfactory processes and controls to mitigate errors that result in penalties from taxing authorities. Key controls and metrics we considered in our analysis include:

• PennyMac offers borrowers an electronic deposit for escrow overages, which we view as innovative.
• It implemented an automated process to re-analyze a borrower's escrow account when it identifies an escrow shortage over a specific dollar amount.
• It has procedures and workflows to communicate research items and tax and insurance data to the vendors.
• A dedicated insurance team provides oversight of the insurance vendor.
• It implemented text message communication to borrowers with lapsed insurance coverage.
• The insurance vendor's average speed of answer (ASA) and abandonment rates of 23 seconds and 0.46%, respectively, are solid.
• It reviews five insurance vendor calls and performs weekly call calibration sessions to align to performance expectations between the company and the vendor.
• It performs ongoing monitoring of vendor performance, and the results are included in the vendor scorecards.
• Borrowers can file loss draft claims from a mobile device and perform claim inspections virtually.
• Its insurance vendor provides a digital connection with many insurance carriers to retrieve claim information, which accelerates the release of funds to the borrower, in many cases.
• Exception reporting identifies potential escrow analysis issues related to new construction.
• The company reported no staff turnover in the escrow department, which compares favorably to peers.
• The process to terminate private mortgage insurance when required thresholds are met is automated.
• The company implemented a system questionnaire to assist call center staff when a borrower requests cancellation of their private mortgage insurance.

Mortgage reconveyance

PennyMac leverages an industry-known vendor for lien release processing, which provides the ability to scale during periods of high payoff volume. The company monitors status and aging inventory through daily reporting. PennyMac reported that less than 1% of reconveyances are processed out of statutory compliance, which is similar to its peers.

Special loans administration

For adjustable-rate loans, there is an independent secondary input and system check to verify index value following a change. PennyMac reviews its portfolio against the Department Of Manpower Data Center database periodically to identify borrowers protected under the Servicemembers Civil Relief Act. There are also pre- and post-foreclosure reviews to confirm the borrower is not protected by the regulation.

Customer service

PennyMac has multiple channels to address customer service inquiries. Its interactive voice response (IVR) system for the phone, along with its website and mobile application, provide self-service solutions for many of the common customer service requests. It offers virtual and live chat, the former which presents relevant information such as year-end statements to borrowers online. It has customer service phone staff in three cities, as well as offshore in the Philippines, all of which help mitigate business disruption risk.

The call center utilizes a proprietary system overlay that provides direct access to relevant customer information and other tools that, in aggregate, provide staff with pertinent information to handle customer inquiries and promote efficiency. In late 2023, it enhanced its website to add a page that describes escrow payment changes. The limited scalability of managing customer service calls, coupled with borrowers increasingly opting to self-serve, makes efficient call handling and self-service options increasingly important as the portfolio expands.

Customer service controls and metrics we considered in our analysis include:

• Calls are recorded with screen capture for 100% of those handled by new employees and for a percentage of all other calls.
• A minimum of 15 calls are monitored monthly per agent, which is more than peers.
• A speech analytics tool used in each call provides real-time alerts to agents based on call context and evaluates calls to ensure regulatory disclosures are provided.
• Surveys monitor borrower satisfaction.
• The system-user interface provides the number of calls in the past 30 days to raise repeat call awareness.
• The 42% voice response unit capture rate is lower than its peers'.
• The website is available in English and Spanish, and a reported 89% of borrowers are registered web users, which is a better penetration rate relative to its peer averages.
• The system provides call center staff a view of the website to assist users with website-related questions.
• There are text notifications for online transactions.
• The ASA and abandonment rates for customer service calls are unfavorable compared with peers and elevated relative to historical industry standards (see table 4).
• Its offshore vendor's 0.88% abandonment rate and 25-second ASA are solid.

Table 4

Our prior report noted high customer service staff turnover and the staff retention initiatives that the company put in place to retain staff. Since that time, customer service management turnover has improved and is now in the range of its peer average. Staff turnover, while meaningfully improved, remains elevated and worse than its peer average.

Default management

PennyMac has effective methodologies to identify loss mitigation opportunities and determine optimal solutions to cure loan defaults.

The prime portfolio continues performing well, with total delinquency increasing marginally year over year (see table 5). For the prime portfolio, roll rates to higher delinquency buckets increased some year-over-year, and we consider the transition rates to lower from higher delinquency buckets to be satisfactory. Overall delinquency for the special servicing portfolio remained generally stable as the loan count has decreased.

Table 5

Table 6

PennyMac's default operations management and staff exhibit overall satisfactory industry experience (see table 7). Compared to its peers' averages, default management's average industry experience levels are mostly better, while company tenure averages are generally similar. Consistent with our prior review, default staff industry experience averages are more mixed relative to peers, with generally similar or better averages for loss mitigation, foreclosure, bankruptcy, and real-estate owned (REO), and lower averages for collectors.

Table 7

Collections

PennyMac has effective collection methodologies and technology, and experienced staff in place to engage and promote productive discussion with customers. For example, the company provides dynamic information to the collector, achieving the appropriate resolution; the information is based on historical loan activity and includes indicators to guide the collector's tone. In addition, a system-based interview model guides collectors through the borrower interview conversation to determine the best path to cure the default, considering investor rules. Borrowers can also complete the interview and begin the workout process online. To drive its outbound collections (i.e., borrower contact) strategy for borrowers owing one payment, it uses a risk score model to predict the likelihood of default. Other key collections metrics and practices we factored in our analysis include:

• The company uses email campaigns to contact borrowers that owe one payment.
• There are a variety of call campaigns, including dialer, manual, and risk-model driven.
• Skip tracing is used when necessary to locate a valid phone number to contact borrowers.
• The promise-to-pay (PTP) success rates for 30- and 60-day delinquencies are 70% and 71% for the primary servicing portfolio and 66% and 77% for special servicing, respectively. For both portfolios, the PTP success rates for 30-day delinquencies are similar to the peer averages, while the PTP success rate for the 60-day delinquencies compare favorably to the peer averages.
• The collections call abandonment rate compares favorably to its primary and special servicing peer averages. The ASA is generally comparable to its primary servicing peer average and unfavorable compared to the special servicing peer average (see table 4).
• It monitors a minimum of seven calls monthly for each agent.
• The collection staff turnover rate is higher than the peer averages.

Loss mitigation 

The company's loss mitigation and asset management strategies are more sophisticated than those of many similar-size primary and special servicers that we rank. This is mostly a product of its strategy team, which develops opportunities and leads targeted portfolio-specific loss mitigation and asset disposition initiatives for investors. The strategy team also plays a key role in PennyMac's early buyout strategies, which is meaningful considering that Ginnie Mae loans comprise roughly half of the servicing portfolio.

Key primary and special servicing strategies that we considered include:

• The portfolio strategy team monitors nonperforming loan portfolio performance through the loan default cycle.
• A designated loss mitigation team performs supplemental manual customer outreach to collect financial application documents.
• The company conducts monthly outreach to customers on forbearance plans to get updates and reinforce arrangements.
• Disaster response protocols identify and contact borrowers in affected natural disaster areas and monitor property condition and borrower impact.

PennyMac uses proprietary applications to manage the loss mitigation process and to underwrite loan modification solutions, and many key processes are automated. The workflow system tracks key milestones and manages documents throughout the process. For scenarios that require a full modification review, it offers borrowers a vendor service to aggregate income documentation and electronically sign applications online, which are common borrower pain points, in order to streamline the application process. It implemented email communication in 2023 to provide status updates and reminders regarding key steps in the loan modification process.

Loss mitigation controls and metrics include:

• There is a paperless modification underwriting process.
• Investor rules are managed with the underwriting system.
• Borrowers can upload application documents, view missing documents, and see their review status using the website.
• Borrowers can initiate and exit a forbearance plan online, in which the setup process is automated.
• Email campaigns routinely communicate with borrowers during the forbearance plan and direct borrowers to its website, where they can extend or select from a menu of solutions to exit the forbearance plan.
• Borrowers can make trial payments online as well as through the IVR.
• The percentage of failed trial plans (11% and 12%, respectively, for primary and special) is slightly better than its peer average.
• Its average time to reach workout decisions for its primary and special servicing portfolios are 16 and 17 days, respectively, which are generally similar to peer averages.
• There are multiple control mechanisms in place in the form of technology and in-line and quality testing. The default quality assurance team reviews all underwriting decisions, including income calculations, and all loan modification agreements and short-sale approval letters are reviewed for quality before mailing.
• PennyMac leverages reporting to monitor system changes and ensure the system reflects approved modification terms.
• Supervisors and the quality control team monitor a minimum of 10 calls monthly for each SPOC. They use scenario-specific scorecards (e.g., handling an active forbearance plan) to review the call, which is more advanced than we typically observe among similarly ranked servicers.

Table 8

Foreclosure and bankruptcy

PennyMac has sound practices and controls to manage its foreclosure and bankruptcy administration, allowing it to appropriately manage timelines during legal proceedings. It uses a proprietary web-based application to manage foreclosure and bankruptcy actions. The system has foreclosure timelines programmed in, with dynamic task due dates that update as key milestones are completed. It is also integrated with other key systems that provide automation for events. Examples include placing a foreclosure on hold for loss mitigation or upon a borrower filing bankruptcy, and the bid process automation is initiated when the property valuation is received. Foreclosure controls and metrics include:

• PennyMac uses a proprietary foreclosure module to perform pre-referral and presale reviews. The module includes a dynamic checklist that adapts to various state requirements, and it memorializes every completed review.
• A dedicated compliance team monitors compliance with first legal filing requirements and addresses any issues.
• Processes such as bids and presale reviews are automated, with a manual review of exceptions.
• PennyMac reported completing 90% of foreclosures within standard timelines for its primary servicing portfolio, which compares favorably to peers. It reported 67% of foreclosures completed within standard timelines for its special servicing portfolio, which is unfavorable relative to the peer average.
• Homeowners' association lien monitoring is performed internally.
• Weekly meetings are conducted with its two national property preservation vendors.
• It uses a vendor to manage vacant property registrations.
• It uses software as a service solution for claims management.
• A team performs loan reviews and loss analysis to identify the root cause of claim curtailments.

PennyMac utilizes its internal bankruptcy team for bankruptcy processing and case monitoring. It maintains its attorney network to prepare and file court documents. Bankruptcy controls and metrics include:

• A vendor performs daily portfolio scrubs to identify bankruptcy filings and changes in active cases.
• It uses optical character recognition to automate the receipt and triage of electronic bankruptcy notices.
• The bankruptcy system includes a pre- and post-petition payment ledger that provides visibility to the payment processing team for the posting of funds.
• All proof of claim and motion for relief notices are reviewed by the quality control team prior to filing.
• The company reported that no proofs of claim were rejected.
• Processes are in place to pursue loss mitigation solutions during bankruptcy.

REO

The company has procedures and technology in place to manage evictions, pre-marketing, and disposition of its real estate owned (REO) assets. It leverages an industry-recognized application that provides key milestone task tracking and document management functionality. Separate evictions, premarketing, and asset manager teams complete checklists as a control to confirm required process steps are completed.

Asset managers use a proprietary repair model to evaluate the economics of property repairs. Asset managers also review monthly broker status reports to determine marketing strategy adjustments and complete a real estate agent performance rating for each property. Key REO strategies and statistics include:

• REO staff have solid industry experience that compares favorably to its peers' (see table 7).
• Foreclosure bidding strategies are used to take advantage of opportunities where there is a potential positive economic position.
• Online auctions are used as a disposition channel.
• Gross sales-to-market-value average is 102% for prime loans and 103% for specially serviced loans, which we consider solid.

Financial Position

The financial position is SUFFICIENT.

Related Research

• PennyMac Loan Services LLC ABOVE AVERAGE Residential Mortgage Loan Servicer Rankings Affirmed; Ranking Outlooks Stable, Aug. 5, 2024
• Select Servicer List, May 17, 2024
• PennyMac Financial Services Inc., April 9, 2024
• Servicer Evaluation: PennyMac Loan Services LLC, July 26, 2022
• Servicer Category Descriptions Expanded And Revised, Feb. 28, 2022
• Analytical Approach: Global Servicer Evaluations Rankings, Jan. 7, 2019