Cenlar has a working environment with 740 billion dollars in unpaid principal balance (UPB) and 2 million loans to 100 customers, generating about 460 billion in revenue by 2025. But the $307 billion in UPB won’t shift to Pennymac because other customers — notably UWM — bring jobs in-house.
Pennymac committed a portion of the acquisition cost — $85 million in contingent consideration payable over three years — to customer retention.
Cenlar is profitable, Ryan said, and has a modest 17% market share, with banks and credit unions making up 70% of its customers. Pennymac expects fees to account for 10% of revenue by 2027 – and its services business to become the second largest in the country, with a $1 trillion portfolio.
Ryan spoke with HousingWire on Thursday about what the deal means for Pennymac and Cenlar.
Editor’s note: This interview has been edited for clarity and length.
Flávia Furlan Nunes: What is the reason for the proposed agreement?
Kevin Ryan: We set a strategy two years ago when we said we want to increase subservicing. We love that – it’s income and doesn’t require a lot of money. We do not receive any MSRs from this transaction. This is a service fee only, and the service is to service the loans of MSR holders and MSR originators on behalf of their clients.
We feel that we have built the best service provider in the industry, both from a workflow perspective and from a service delivery technology perspective. There is potential to work as a financial matter and measurable benefits as a matter of performance, just by adding more loans to that service plan.
For those reasons, hosting services was the perfect business for us as we contemplated growth. At that time, we only worked for REIT, PMT (Pennymac Mortgage Investment Trust), which is important and big, but the two are different public companies.
That’s not at all like what we’re doing here, where we’re buying a company with over 100 institutional customers. It also suits us because we are an institutional business. We have 800 correspondents and we do TPO, so most of our business is done through institutional relationships.
FN: From Cenlar’s perspective, how much did the 2021 consent order with the Office of the Comptroller of the Currency (OCC) influence the sale decision, and what happens to the consent order once the transaction closes?
KR: For Cenlar, (it’s about having) a partner of scale – a partner that can continue to invest in technology. They firmly believe that technology will continue to shape and evolve the supply chain. Then there is the stability of our capital of over $4 billion. They made great progress in their business by applying for a permit with the OCC, and they wanted to start scaling again. We bring them technology, capital and scale.
Consent order, they will work on that with the OCC as part of the work. They will restore the bank charter, so they will no longer be the bank where we found the company. What ultimately happens with a consent order is a legal question. I will leave it to the lawyers. But we won’t get a legitimate business under license, and the company feels very happy with the progress it’s making.
FN: How much is Pennymac really profiting from – especially servicing contracts, customer relations and operational infrastructure?
KR: What we really buy are contracts, customer relationships and people (1,693 full-time employees), because we keep their employees so they can pay off the outstanding loan. They will just change uniforms, but they will be doing the same work for us as they did for Cenlar – in the same buildings, with the same managers and the same customers. All of their call center and office leases go through us. Think of it as taking one company under another.
FN: Before offering M&A deals, some subordinates have lost customers – for example, the experience of Mr. Cooper through UWM, which also decided to end its contract with Cenlar. Does Pennymac anticipate similar risks, and how does it plan to mitigate customer attrition?
KR: Some of their existing clients have come forward to seek home services. We write down this agreement in its entirety assuming that all those loans are transferred to the house, where they end by the end of 2025 – not because of this agreement.
We spoke to their client group before signing the deal, just to ask that specific question, and we feel very good about it. We run a journalist business where we assure them that we will not take their clients back. This is an income-only deal. We do not buy MSRs. Let’s look at the evolution of the feed.
I can’t really talk about why customers would leave the deal of Mr. Cooper behind Rocket, but I will say that this deal is not a backdoor to growing our startup business. We love the subservicing business and believe we will do much better in it by partnering with Cenlar.
FN: Is borrower retention an important factor? How does the job support maintenance operations?
KR: To be clear: We want to keep customers as support customers, where we do all the back office work. As for the funds, those stay with the customers, and we won’t interfere with that — it’s not our business. This agreement is about growing our support business and supporting our customers. We do not intend to share data and have no intention of trying to win customers through these contact points.
FN: What retention metric is associated with $85 million in contingent consideration paid over three years?
KR: There is an additional purchase price that we pay depending on the amount of loans in the subservicing portfolio in different areas. We are both motivated to retain customers. They sell the company at a high price where there is always a lot of debt, and we will get more upside, profits, income as the owner of the company. The income is arranged as a win-win.
FN: More broadly, why did Pennymac change its strategy to include M&A?
KR: I don’t think we’ve changed our strategy, for example. This is the company’s first M&A deal. But if you think about it, two years ago we said we want to increase subservicing. We’ve hired people to build that business and we’ve had some success, but we haven’t added 100 customers — it’s going to take years.
It is very difficult for companies to change subservices; they have a lot of work. What we did was a well-planned, low-risk deal where the purchase price matched customer retention. This one felt like it ticked all the boxes that it would actually justify doing something about M&A, when the company’s history is clearly growing organically.
FN: Pennymac has taken a holistic approach – as a multi-channel lender, servicer and subservicer – while other companies in the industry have added a real estate arm. What can we expect next from the company?
KR: We are truly multichannel. We feel that we are the most well-balanced business model in the industry when you consider the origins in all three channels, serving our portfolio, REIT management and growing expatriates.
We are trying to build an ecosystem around mortgage banking. We will think about M&As in an ethical, strategic way. What we are going to do now is put our heads down and put this deal together. We are managers at our core. We don’t get it in our mind.
