Pennymac is cutting jobs and accelerating automation after its mortgage production business swung to a third-quarter loss, even as servicing income kept the company profitable.
The lender reported $29 million in net income for the quarter, but its production segment posted a $7 million pretax loss, reversing a $38 million profit in the second quarter and a $123 million profit a year earlier.
Production revenue fell 28% sequentially to $175 million, while expenses declined 11% to $182 million. Total loan acquisitions and originations dropped 30% to $24.4 billion.
Now Pennymac is targeting $160 million in annualized expense reductions between the second quarter of 2026 and the first quarter of 2027, combining staffing reductions with technology-driven efficiencies.
Chairman and CEO David Spector acknowledged the workforce reductions during the company's Oct. 29 earnings call, describing a smaller origination market and improvements in automation as drivers of the restructuring.
"By automating labor-intensive fulfillment workflows, we are permanently lowering our cost to produce and uncoupling platform capacity from staffing requirements," Spector told investors.
The company expects a modest reduction in expenses during the fourth quarter, followed by a more substantial decline in early 2027 as the restructuring takes full effect.
AI Moves Deeper Into Production
Pennymac's cost-cutting strategy comes as the lender expands its use of AI across mortgage production.
The company reported that 37% of its identified production workflows are now live with automation, with another 28% in development and expected to be completed by year-end.
Pennymac has deployed 22 proprietary AI agents, which have completed more than 205,000 automated executions and 200,000 document reviews. Another 17 agents are in development.
Its AI voice agent also contributed to more than 1,600 rate locks during the third quarter, according to management.
The technology push builds on changes already underway.Pennymac reduced operational origination costs by 25% and improved loan officer productivity by approximately 50% after implementing Vesta's loan origination system, before activating AI agents.
Pennymac is also expanding its partnership with Amazon Web Services to deploy conversational AI for borrower engagement and modernize its servicing technology.
Pennymac was already reporting measurable efficiency gains before its latest restructuring. Management is now seeking further savings through automation while reducing staffing to match current production demand.
Broker Volume Falls As Technology Rollout Approaches
Fallout-adjusted broker-direct locks declined 28% sequentially to $4.7 billion, while consumer-direct locks fell 37% to $2.8 billion. Correspondent locks dropped 24% to $15.6 billion.
Pennymac plans to extend its AI agents into broker direct as the channel transitions to Vesta's loan origination system.
That rollout could eventually affect processing speed, fulfillment costs, and Pennymac's ability to handle additional volume without rebuilding staffing at the same pace.
The immediate challenge is volume. Pennymac's production revenue fell considerably faster than expenses during the quarter, despite reductions in headcount already reflected in its results.
The lender continues to invest in its broker and correspondent channels. In October, Pennymac expanded VantageScore 4.0 across its retail, broker, and correspondent businesses, adding another qualifying option for eligible loans.
Servicing Provides The Cushion
While originations struggled, Pennymac's servicing business generated $99 million in pretax income, helping offset the production loss.
Its total servicing portfolio reached $737 billion in unpaid principal balance at quarter-end, including $496 billion in owned servicing.
Pennymac also announced an agreement to sell approximately $29 billion in unpaid principal balance of low-coupon conventional mortgage servicing rights, a transaction expected to generate roughly $490 million in proceeds. The company plans to use the proceeds primarily to reduce higher-cost debt.
The sale comes as another major lender, United Wholesale Mortgage, pursues its own servicing-rights sale of $70 billion to $80 billion.
Meanwhile, Pennymac now expects its acquisition of Cenlar's subservicing business to close in the first quarter of 2027. The transaction would significantly expand its servicing platform.
A Leaner Operation Heading Into 2027
Pennymac is also preparing for leadership changes. President and Chief Mortgage Banking Officer Doug Jones plans to retire June 30, 2027, while Chief Strategy Officer Kevin Ryan will become chief financial officer Jan. 1, succeeding Dan Perotti.
The company's restructuring reflects a broader challenge facing mortgage lenders: maintaining the capacity to respond when origination demand improves without carrying the same expense base through a weaker market.
Pennymac's third-quarter results illustrate the pressure. Even after reducing production expenses, declining revenue pushed the segment into the red.
Management is betting that automation and a smaller operating structure will allow the company to recover profitability without rebuilding costs at the same rate as loan volume.
For now, servicing is providing the earnings support while Pennymac reshapes its origination business for 2027.
