PennyMac Mortgage Investment Trust (PMT), Two Harbors Investment Corp (TWO): Why This Mortgage REIT Can Do What No Others Dare

After a brutal earnings season during which most mortgage REITs reported second-quarter declines in book value, PennyMac Mortgage Investment Trust (NYSE:PMT) swam against the tide. In addition to beating revenue estimates, the company reported an actual gain in book value from the previous quarter, of 1.6%. With that victory under its belt, the company is embarking on a secondary offering of 11.3 million shares, with an option for its underwriters of almost 1.7 million additional shares.

Diversification was key
How did PennyMac Mortgage Investment Trust (NYSE:PMT) achieve such a triumph in the current climate? Much like Two Harbors Investment Corp (NYSE:TWO), which reported lower book value damage than most of its peers, PennyMac Mortgage Investment Trust (NYSE:PMT) owes its success to a varied business stream — particularly its correspondent lending business, which contributed revenues that increased by 42% from the first quarter.

Mortgage servicing income was robust in the second quarter, as well. Fees jumped from $6.6 million in the first quarter to $7.9 million, and PennyMac Mortgage Investment Trust (NYSE:PMT) notes that mortgage servicing rights are positioned well for the rising interest rate environment because of a drop in prepayments.

One of PennyMac Mortgage Investment Trust (NYSE:PMT)’s specialties is the acquisition of pools of distressed loans. The company purchases these assets at a discount, then either liquidates them, or returns these mortgages to profitability through loan modifications. Troubled loans engender higher servicing fees, as well — another feather in PennyMac Mortgage Investment Trust (NYSE:PMT)’s lucrative cap.

The jumbo-loan business is taking off
PennyMac Mortgage Investment Trust (NYSE:PMT), like Two Harbors, is moving into the jumbo market, including securitization activity. During Q2, the trust agreed to buy $393 million of prime jumbo loans, which it plans to blend with jumbos it purchases through its correspondence channel — which it will securitize and sell sometime during the third quarter.

PennyMac Mortgage Investment Trust (NYSE:PMT) considers jumbo securitization a profitable opportunity for the company, and it seems to be catching on with mREITs. Two Harbors participated in a prime jumbo securitization earlier this year and has plans to do so again very soon.

Annaly Capital Management, Inc. (NYSE:NLY)Even Annaly Capital Management, Inc. (NYSE:NLY), which was a pristine agency-only player for so many years, has recently revealed an interest in securitization and jumbo loans – though, at least for now, as separate activities. With its recent acquisition of CreXus, Annaly Capital Management, Inc. (NYSE:NLY) and CEO Wellington Denahan acknowledged plans to securitize some of its corporate debt, and the company noted that, sometime in the future, it will likely be originating jumbo loans through one of its affiliates, Shannon Funding.

Flexibility will protect yields
PennyMac Mortgage Investment Trust (NYSE:PMT) proves that variety is the stuff of profits, and it looks like other mortgage REITs are finding the same to be true. As the unstable economic environment continues to rock the sector, it seems obvious that the mREITs that are willing to change and adjust will deliver the best value to their investors.

Fool contributor Amanda Alix has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned.

Copyright © 1995 – 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.

Comments
Insider Monkey Small Cap Strategy
Insider Monkey Small Cap Strategy

Insider Monkey beat the market by 52 percentage points in 24 months. Our beta is only 1.2 (don't click this link if beating the market isn't important to you).

Lists

The Highest Grossing Musicals on Broadway

The Most Successful Reality TV Stars

Cheapest Cities to Visit in the US

Most Expensive Summer Camps

Most Expensive Animals in the World

Most Expensive Specialty Crops in the World

Movies That Took Ages to Make

The Longest Hollywood Films Ever Made

Most Expensive Concert Stages

The Richest Bands of all Time

10 Most Corrupt Countries 2013 List

10 Countries with the Highest Quality of Life Index

Most Expensive Mattresses in the World

5 Smallest Countries by Land Area

The Ultimate Heartbreak Songs

Richest Teenagers in the World

10 Most Haunted Places in America

10 Best Places to Retire in Florida East Coast

Top 10 Places to See Before You Die

Top 8 Countries in the World Where Justice Prevails

10 Richest States in America

15 Wealthiest Countries in the World

Richest Singers in the World

Most Expensive Tasting Menu in New York City

Most Expensive Baby Items in the World

Most Expensive Hotel Suites in Vegas

Most Expensive Brunch in New York City

Most Expensive Beef Cuts in the World

25 Best Colleges to Get a Job

Top 10 US Supermarkets

The 25 Most Dangerous Cities in the World to Visit

Most Expensive Xbox Games

Top 11 Cities Where Billionaires Live

Top 10 Most Charitable Companies in America

Most Expensive Seafood in the World

The 10 Wildest Conspiracy Theories

The 10 Best Job Markets in the US

Top 10 Accounting Scandals of All Time

The 25 Biggest Cities in the World

Top 10 Best Paying Virtual Jobs

Most Expensive Leather Shoes in the World

Top 6 Things to Buy in March

The 10 Most Stressful Jobs in America – 2014 List

Top 10 Jobs for Introverted People

Top 10 Honeymoon Destinations in the World

Top 10 Highest Paying Jobs in the World

Most Expensive Day-Care in New York City

The 10 Cheapest Places to Retire Abroad

Top 10 Most Expensive Luxury Cars in the World – 2014

Killer Small Business Ideas

Subscribe

Enter your email:

Delivered by FeedBurner

X

Thanks! An email with instructions is sent to !

Your email already exists in our database. Click here to go to your subscriptions

Insider Monkey returned 47.6% in its first year! Wondering How?

Download a complete edition of our newsletter for free!