UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
Form 10-Q
(Mark One)
☒
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2023
Or
☐
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number: 001-34416
PennyMac Mortgage Investment Trust
(Exact name of registrant as specified in its charter)
Maryland
27-0186273
(State or other jurisdiction of
incorporation or organization)
(IRS Employer
Identification No.)
3043 Townsgate Road, Westlake Village, California
91361
(Address of principal executive offices)
(Zip Code)
(818) 224-7442
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class
Trading Symbol (s)
Name of Each Exchange on Which Registered
Common Shares of Beneficial Interest, $0.01 Par Value
PMT
New York Stock Exchange
8.125% Series A Cumulative Redeemable PreferredShares of Beneficial Interest, $0.01 Par Value
PMT/PA
8.00% Series B Cumulative Redeemable PreferredShares of Beneficial Interest, $0.01 Par Value
6.75% Series C Cumulative Redeemable PreferredShares of Beneficial Interest, $0.01 Par Value
PMT/PB
PMT/PC
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer”, “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
Accelerated filer
Non-accelerated filer
Smaller reporting company
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act): Yes ☐ No ☒
Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date.
Class
Outstanding at May 2, 2023
Common Shares of Beneficial Interest, $0.01 par value
87,556,352
PENNYMAC MORTGAGE INVESTMENT TRUST
FORM 10-Q
March 31, 2023
TABLE OF CONTENTS
Page
Special Note Regarding Forward-Looking Statements
1
PART I. FINANCIAL INFORMATION
4
Item 1.
Financial Statements (Unaudited)
Consolidated Balance Sheets
Consolidated Statements of Operations
6
Consolidated Statements of Changes in Shareholders’ Equity
7
Consolidated Statements of Cash Flows
8
Notes to Consolidated Financial Statements
10
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
52
Our Company
Results of Operations
55
Net Investment Income
56
Expenses
65
Balance Sheet Analysis
68
Asset Acquisitions
Investment Portfolio Composition
69
Cash Flows
72
Liquidity and Capital Resources
Off-Balance Sheet Arrangements and Aggregate Contractual Obligations
75
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
76
Item 4.
Controls and Procedures
77
PART II. OTHER INFORMATION
78
Legal Proceedings
Item 1A
Risk Factors
Unregistered Sales of Equity Securities and Use of Proceeds
Defaults Upon Senior Securities
Mine Safety Disclosures
Item 5.
Other Information
Item 6.
Exhibits
79
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q (this “Report”) contains certain forward-looking statements that are subject to various risks and uncertainties. Forward-looking statements are generally identifiable by use of forward-looking terminology such as “may,” “will,” “should,” “potential,” “intend,” “expect,” “seek,” “anticipate,” “estimate,” “approximately,” “believe,” “could,” “project,” “predict,” “continue,” “plan” or other similar words or expressions.
Forward-looking statements are based on certain assumptions, discuss future expectations, describe future plans and strategies, contain financial and operating projections or state other forward-looking information. Examples of forward-looking statements include the following:
Our ability to predict results or the actual effect of future events, actions, plans or strategies is inherently uncertain. Although we believe that the expectations reflected in such forward-looking statements are based on reasonable assumptions, our actual results and performance could differ materially from those set forth in the forward-looking statements. There are a number of factors, many of which are beyond our control that could cause actual results to differ significantly from management’s expectations. Some of these factors are discussed below.
You should not place undue reliance on any forward-looking statement and should consider the following uncertainties and risks, as well as the risks and uncertainties discussed elsewhere in this Report and the section entitled “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2022, filed with the Securities and Exchange Commission (“SEC”) on February 24, 2023.
Factors that could cause actual results to differ materially from historical results or those anticipated include, but are not limited to:
2
Other factors that could also cause results to differ from our expectations may not be described in this Report or any other document. Each of these factors could by itself, or together with one or more other factors, adversely affect our business, results of operations and/or financial condition.
Forward-looking statements speak only as of the date they are made, and we undertake no obligation to update any forward-looking statement to reflect the impact of circumstances or events that arise after the date the forward-looking statement was made.
3
Item 1. Financial Statements
PENNYMAC MORTGAGE INVESTMENT TRUST AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
March 31,
December 31,
2023
2022
(in thousands, except share information)
ASSETS
Cash
$
118,672
111,866
Short-term investments at fair value
292,153
252,271
Mortgage-backed securities at fair value ($4,616,580 and $4,462,601 pledged to creditors, respectively)
4,629,004
4,462,601
Loans acquired for sale at fair value ($3,117,294 and $1,801,368 pledged to creditors, respectively)
3,143,518
1,821,933
Loans at fair value ($1,499,117 and $1,510,148 pledged to creditors, respectively)
1,502,471
1,513,399
Derivative assets ($2,883 and $1,262 pledged to creditors, respectively)
89,285
84,940
Deposits securing credit risk transfer arrangements pledged to creditors
1,297,917
1,325,294
Mortgage servicing rights at fair value ($3,926,160 and $3,962,820 pledged to creditors, respectively)
3,975,076
4,012,737
Servicing advances ($76,664 and $100,888 pledged to creditors, respectively)
138,716
197,972
Due from PennyMac Financial Services, Inc.
—
3,560
Other ($3,554 and $3,297 pledged to creditors, respectively)
170,417
134,991
Total assets
15,357,229
13,921,564
LIABILITIES
Assets sold under agreements to repurchase
8,114,108
6,616,528
Notes payable secured by credit risk transfer and mortgage servicing assets
2,790,958
2,804,028
Exchangeable senior notes
547,003
546,254
Asset-backed financing of variable interest entities at fair value
1,403,080
1,414,955
Interest-only security payable at fair value
23,205
21,925
Derivative and credit risk transfer strip liabilities at fair value
138,469
167,226
Unsettled securities trades
12,424
Accounts payable and accrued liabilities
152,793
160,212
Due to PennyMac Financial Services, Inc.
35,166
36,372
Income taxes payable
129,882
151,778
Liability for losses under representations and warranties
39,407
39,471
Total liabilities
13,386,495
11,958,749
Commitments and contingencies ─ Note 17
SHAREHOLDERS’ EQUITY
Preferred shares of beneficial interest, $0.01 par value per share, authorized 100,000,000 shares, issued and outstanding 22,400,000, liquidation preference $560,000,000
541,482
Common shares of beneficial interest—authorized, 500,000,000 common shares of $0.01 par value; issued and outstanding, 88,385,614 and 88,888,889 common shares, respectively
884
889
Additional paid-in capital
1,940,297
1,947,266
Accumulated deficit
(511,929
)
(526,822
Total shareholders’ equity
1,970,734
1,962,815
Total liabilities and shareholders’ equity
The accompanying notes are an integral part of these consolidated financial statements.
Assets and liabilities of consolidated variable interest entities (“VIEs”) included in total assets and liabilities (the assets of each VIE can only be used to settle liabilities of that VIE) are summarized below:
(in thousands)
Loans at fair value
1,498,923
1,509,942
Derivative assets at fair value
2,883
1,262
Deposits securing credit risk transfer arrangements
Other—interest receivable
4,287
4,343
2,804,010
2,840,841
Asset-backed financings at fair value
129,808
160,553
Accounts payable and accrued liabilities—interest payable
1,560,380
1,601,776
5
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
Quarter ended March 31,
(in thousands, except per common share amounts)
Net investment income
Net gains (losses) on investments and financings
125,804
(229,095
Net loan servicing fees:
From nonaffiliates
Contractually specified
164,214
146,885
Other
3,943
9,114
168,157
155,999
Change in fair value of mortgage servicing rights
(137,444
303,721
Mortgage servicing rights hedging results
(54,891
(163,802
(24,178
295,918
From PennyMac Financial Services, Inc.
485
8,260
(23,693
304,178
Net gains on loans acquired for sale:
5,145
2,657
1,328
1,296
6,473
3,953
Loan origination fees
7,706
14,774
Net interest expense:
Interest income
153,019
51,063
Interest expense
179,137
63,514
Net interest expense
(26,118
(12,451
Results of real estate acquired in settlement of loans
230
138
250
90,366
81,839
Earned by PennyMac Financial Services, Inc.:
Loan servicing fees
20,449
21,088
Loan fulfillment fees
11,923
16,754
Management fees
7,257
8,117
Loan origination
2,178
2,842
Compensation
1,539
1,437
Professional services
1,523
4,025
Safekeeping
1,116
2,395
Loan collection and liquidation
579
3,177
5,001
3,946
Total expenses
51,565
63,781
Income before (benefit from) provision for income taxes
38,801
18,058
(Benefit from) provision for income taxes
(21,896
37,187
Net income (loss)
60,697
(19,129
Dividends on preferred shares
10,455
Net income (loss) attributable to common shareholders
50,242
(29,584
Earnings (losses) per common share
Basic
0.56
(0.32
Diluted
0.50
Weighted average common shares outstanding
88,831
94,146
113,388
Dividends declared per common share
0.40
0.47
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY (UNAUDITED)
Quarter ended March 31, 2023
Preferred shares
Common shares
Number
Additional
of
Par
paid-in
Accumulated
shares
Amount
value
capital
deficit
Total
(in thousands, except per share amounts)
Balance at December 31, 2022
22,400
88,889
Net income
Share-based compensation
135
589
590
Dividends:
(10,455
Common shares ($0.40 per share)
(35,349
Repurchase of common shares
(638
(6
(7,558
(7,564
Balance at March 31, 2023
88,386
Quarter ended March 31, 2022
Balance at December 31, 2021
94,897
949
2,081,757
(256,670
2,367,518
Cumulative effect of adoption of ASU 2020-06
(50,347
9,394
(40,953
Balance at January 1, 2022
2,031,410
(247,276
2,326,565
Net loss
84
506
507
(10,454
Common shares ($0.47 per share)
(43,722
(1,974
(20
(31,809
(31,829
Balance at March 31, 2022
93,007
930
2,000,107
(320,581
2,221,938
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Cash flows from operating activities
Adjustments to reconcile net income (loss) to net cash (used in) provided by operating activities:
Net (gains) losses on investments and financings
(125,804
229,095
137,444
(303,721
54,891
163,802
Net gains on loans acquired for sale
(6,473
(3,953
Accrual of unearned discounts and amortization of purchase premiums on mortgage-backed securities, loans at fair value, and asset-backed financings
1,289
1,526
Amortization of debt issuance costs
3,762
4,140
(56
(230
Share-based compensation expense
1,156
1,029
Purchase of loans acquired for sale at fair value from nonaffiliates
(20,417,078
(23,072,430
Purchase of loans acquired for sale at fair value from PennyMac Financial Services, Inc.
(259,038
Sale to nonaffiliates and repayment of loans acquired for sale
5,587,266
11,985,961
Sale of loans acquired for sale to PennyMac Financial Services, Inc.
13,451,031
13,160,768
Repurchase of loans subject to representation and warranties
(19,199
(24,234
Decrease in servicing advances
58,919
70,949
Decrease (increase) in due from PennyMac Financial Services, Inc.
(4,609
Repurchase of real estate previously sold as loans acquired for sale
(442
Increase in other assets
(36,963
(230,332
(Decrease) increase in accounts payable and accrued liabilities
(7,110
22,601
Decrease in due to PennyMac Financial Services, Inc.
(1,206
(12,369
(Decrease) increase in income taxes payable
37,199
Net cash (used in) provided by operating activities
(1,276,212
1,747,025
Cash flows from investing activities
Net increase in short-term investments
(39,882
(68,469
Purchase of mortgage-backed securities at fair value
(2,772,168
(661,774
Sale and repayment of mortgage-backed securities at fair value
2,694,450
70,276
Repurchase of loans at fair value
(119
Repayment of loans at fair value
22,182
51,081
Net settlement of derivative financial instruments
(3,352
2,688
Distribution from credit risk transfer arrangements
42,709
207,014
Transfer of mortgage servicing rights relating to delinquent loans to Agency
835
Sale of real estate acquired in settlement of loans
760
2,893
(Increase) decrease in margin deposits
(68,158
199,719
Net cash used in investing activities
(122,743
(196,572
Statements continued on the next page
Cash flows from financing activities
Sale of assets under agreements to repurchase
33,465,001
30,883,776
Repurchase of assets sold under agreements to repurchase
(31,968,132
(32,463,483
Issuance of mortgage loan participation purchase and sale agreements
416,243
999,031
Repayment of mortgage loan participation purchase and sale agreements
(416,243
(983,296
Issuance of notes payable secured by credit risk transfer and mortgage servicing assets
10,000
125,001
Repayment of notes payable secured by credit risk transfer and mortgage servicing assets
(24,578
(225,927
Issuance of asset-backed financings at fair value
382,423
Repayment of asset-backed financings at fair value
(21,493
(49,764
Payment of debt issuance costs
(794
(1,715
Payment of dividends to preferred shareholders
Payment of dividends to common shareholders
(35,658
(44,797
Payment of vested share-based compensation tax withholdings
(567
(522
(7,563
Net cash provided by (used in) financing activities
1,405,761
(1,421,556
Net increase in cash
6,806
128,897
Cash at beginning of quarter
58,983
Cash at end of quarter
187,880
Supplemental cash flow information
Payments (refunds), net:
Income taxes
(11
Interest
189,351
62,903
Non-cash investing activities:
Receipt of mortgage servicing rights as proceeds from sales of loans
100,618
194,596
Retention of subordinate mortgage-backed securities in loan securitizations
23,485
Recognition of loans at fair value resulting from initial consolidation of variable interest entities
405,908
Transfer of loans and advances to real estate acquired in settlement of loans
797
Non-cash financing activities:
Recognition of asset-backed financings resulting from initial consolidation of VIEs
Dividends declared, not paid
35,349
43,689
9
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Note 1—Organization
PennyMac Mortgage Investment Trust (“PMT” or the “Company”) is a specialty finance company, which, through its subsidiaries (all of which are wholly-owned), invests primarily in residential mortgage-related assets. The Company operates in four segments: credit sensitive strategies, interest rate sensitive strategies, correspondent production, and corporate:
The Company primarily sells the loans it acquires through its correspondent production activities to government-sponsored entities ("GSEs") such as the Federal National Mortgage Association (“Fannie Mae”) and the Federal Home Loan Mortgage Corporation (“Freddie Mac”) or to PLS for sale into securitizations guaranteed by the Government National Mortgage Association ("GinnieMae"). Fannie Mae, Freddie Mac and Ginnie Mae are each referred to as an “Agency” and, collectively, as the “Agencies.”
The Company conducts substantially all of its operations and makes substantially all of its investments through its subsidiary, PennyMac Operating Partnership, L.P. (the “Operating Partnership”), and the Operating Partnership’s subsidiaries. A wholly-owned subsidiary of the Company is the sole general partner, and the Company is the sole limited partner, of the Operating Partnership.
The Company believes that it qualifies, and has elected to be taxed, as a real estate investment trust (“REIT”) under the Internal Revenue Code of 1986, as amended. To maintain its tax status as a REIT, the Company is required to distribute at least 90% of its taxable income in the form of qualifying distributions to shareholders.
Note 2—Basis of Presentation
The Company’s consolidated financial statements have been prepared in compliance with accounting principles generally accepted in the United States (“GAAP”) as codified in the Financial Accounting Standards Board’s Accounting Standards Codification for interim financial information and with the Securities and Exchange Commission’s instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, these financial statements and notes do not include all of the information required by GAAP for complete financial statements. This interim consolidated information should be read together with the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2022.
These unaudited consolidated financial statements reflect all normal recurring adjustments necessary to present fairly the financial position, results of operations, and cash flows for the interim periods presented, but are not necessarily indicative of the results of operations that may be anticipated for the full year. Intercompany accounts and transactions have been eliminated.
Preparation of financial statements in compliance with GAAP requires the Company to make estimates and judgments that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements, and revenues and expenses during the reporting period. Actual results will likely differ from those estimates.
The Company held no restricted cash during the periods presented. Therefore, the consolidated statements of cash flows do not include references to restricted cash.
Note 3—Concentration of Risks
As discussed in Note 1 – Organization above, PMT’s operations and investing activities are centered in residential mortgage-related assets, including CRT arrangements, subordinate MBS, Agency and senior Non-Agency MBS and MSRs. CRT arrangements and subordinate MBS are more sensitive to borrower credit performance than other mortgage-related investments such as traditional
loans and Agency MBS. Fixed-rate Agency and senior non-Agency MBS are sensitive to changes in market interest rates. MSRs are sensitive to changes in prepayment rate activity and expectations.
Credit Risk
Note 6 – Variable Interest Entities details the Company’s investments in CRT arrangements whereby the Company sold pools of loans into Fannie Mae guaranteed loan securitizations which became reference pools underlying the CRT arrangements. Fannie Mae transferred interest-only (“IO”) ownership interests and recourse obligations based upon securitized reference pools of loans subject to the CRT arrangements into the trust entities, and the Company acquired the IO ownership interest and assumed the recourse obligations in the CRT arrangements.
The Company also invests in subordinate MBS which are among the first beneficial interests in the related securitizations to absorb credit losses on the underlying loans.
The Company’s retention of credit risk through its investment in CRT arrangements and subordinate MBS subjects it to risks associated with delinquency and foreclosure similar to the risks of loss associated with owning the underlying loans, which is greater than the risk of loss associated with selling such loans to Fannie Mae without the retention of such credit risk in the case of CRT arrangements and investing in senior mortgage pass through securities in the case of subordinate MBS.
CRT Agreements are structured such that loans that reach a specific number of days delinquent (including loans in forbearance which also includes those subject to the forbearance provided in the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”)) trigger losses chargeable to the CRT Agreements based on the size of the loan and a contractual schedule of loss severity. Therefore, the risks associated with delinquency and foreclosure may in some instances be greater than the risks associated with owning the related loans because the structure of the CRT Agreements provides that the Company may be required to absorb losses in the event of delinquency or foreclosure even when there is ultimately no loss realized with respect to such loans (e.g., as a result of a borrower’s re-performance). In contrast, the structure of the Company’s investment in CRT strips requires PMT to absorb losses only when the reference loans realize losses.
Fair Value Risk
The Company is exposed to fair value risk in addition to the risks specific to credit and, as a result of prevailing market conditions or the economy generally, may be required to recognize losses associated with adverse changes to the fair value of its investments in MSRs, CRT arrangements, and MBS:
Note 4—Transactions with Related Parties
The Company enters into transactions with subsidiaries of PFSI in support of its operating, investing and financing activities as summarized below.
Operating Activities
Correspondent Production Activities
The Company is provided fulfillment and other services by PLS under an amended and restated mortgage banking services agreement. The Company does not hold the Ginnie Mae approval required to issue securities guaranteed by Ginnie Mae MBS and act as a servicer. Accordingly, under the agreement, PLS currently purchases loans saleable in accordance with the Ginnie Mae MBS Guide “as is” and without recourse of any kind from the Company at cost less any administrative fees paid by the correspondent to the Company plus accrued interest and a sourcing fee, which generally ranges from one to two basis points based on the average number of calendar days loans are held by the Company before purchase by PLS. The Company may also sell conventional loans to PLS under the same arrangement subject to mutual agreement between the parties.
11
Fulfillment and sourcing fees are summarized below:
The mortgage banking services agreement expires, unless terminated earlier in accordance with its terms, on June 30, 2025, subject to automatic renewal for additional 18-month periods, unless terminated in accordance with its terms.
The Company may purchase newly originated conforming balance non-government insured or guaranteed loans from PLS under a mortgage loan purchase and sale agreement.
Following is a summary of correspondent production activity between the Company and PLS:
Loan fulfillment fees earned by PLS
UPB of loans fulfilled by PLS
6,628,810
9,769,262
Sourcing fees received from PLS included in Net gains on loans acquired for sale
UPB of loans sold to PLS:
Government guaranteed or insured
9,213,712
12,747,779
Conventional conforming
4,062,874
13,276,586
Purchases of loans acquired for sale from PLS
259,038
Tax service fees paid to PLS
1,410
2,342
December 31, 2022
Loans included in Loans acquired for sale at fair value pending sale to PLS
416,162
159,671
Loan Servicing
The Company, through its Operating Partnership, has a loan servicing agreement with PLS (the “Servicing Agreement”) pursuant to which PLS provides subservicing for the Company's portfolio of MSRs, loans held for sale, loans held in VIEs (prime servicing) and its portfolio of residential loans purchased with credit deterioration (special servicing). The Servicing Agreement provides for servicing fees earned by PLS that are established at a fixed per loan monthly amount based on the delinquency, bankruptcy and/or foreclosure status of the serviced loan or real estate acquired in settlement of loans (“REO”). The Servicing Agreement expires on June 30, 2025, subject to automatic renewal for additional 18-month periods, unless terminated earlier in accordance with its terms.
12
Prime Servicing
The base servicing fees for prime loans subserviced by PLS on the Company’s behalf are $7.50 per month for fixed-rate loans and $8.50 per month for adjustable-rate loans.
To the extent that these prime loans become delinquent, PLS is entitled to an additional servicing fee per loan ranging from $10 to $55 per month and based on the delinquency, bankruptcy and foreclosure status of the loan or $75 per month if the underlying mortgaged property becomes REO.
PLS is also entitled to customary ancillary income and certain market-based fees and charges, including boarding and deboarding fees, liquidation and disposition fees, assumption, modification and origination fees and certain fees for COVID-19 pandemic-related forbearance and modification activities it provides as required by the CARES Act.
Special Servicing
The base servicing fee rates for loans purchased with credit deterioration (distressed loans) range from $30 per month for current loans up to $95 per month for loans in foreclosure proceedings. The base servicing fee rate for REO is $75 per month. PLS also receives a supplemental servicing fee of $25 per month for each distressed loan.
PLS receives activity-based fees for modifications, foreclosures and liquidations that it facilitates with respect to distressed loans, as well as other market-based refinancing and loan disposition fees.
MSR Recapture Agreement
The Company has an MSR recapture agreement with PFSI. Pursuant to the terms of the MSR recapture agreement, if PFSI refinances mortgage loans for which the Company previously held the MSRs, PFSI is generally required to transfer and convey to the Company cash in an amount equal to:
The “recapture rate” means, during each month, the ratio of (i) the aggregate unpaid principal balance of all recaptured loans, to (ii) the aggregate unpaid principal balance of all mortgage loans for which the Company held the MSRs and that were refinanced or otherwise paid off in such month. PFSI has further agreed to allocate sufficient resources to target a recapture rate of at least 15%.
The MSR recapture agreement expires, unless terminated earlier in accordance with its terms, on June 30, 2025, subject to automatic renewal for additional 18-month periods, unless terminated in accordance with its terms.
Following is a summary of loan servicing fees earned by PLS:
Loan servicing fees:
Loans acquired for sale at fair value
285
264
120
210
MSRs
20,044
20,614
Average investment in loans:
Acquired for sale at fair value
2,359,044
2,129,668
At fair value
1,510,606
1,559,939
Average MSR portfolio UPB
230,812,774
217,692,169
Management Fees
The Company has a management agreement with PCM pursuant to which PMT pays PCM management fees as follows:
13
The performance incentive fee is equal to the sum of: (a) 10% of the amount by which “net income” for the quarter exceeds (i) an 8% return on “equity” plus the “high watermark”, up to (ii) a 12% return on “equity”; plus (b) 15% of the amount by which “net income” for the quarter exceeds (i) a 12% return on “equity” plus the “high watermark”, up to (ii) a 16% return on “equity”; plus (c) 20% of the amount by which “net income” for the quarter exceeds a 16% return on “equity” plus the “high watermark”.
For the purpose of determining the amount of the performance incentive fee:
“Net income” is defined as net income or loss attributable to the Company’s common shares of beneficial interest (“Common Shares”) calculated in accordance with GAAP, and adjusted to exclude one-time events pursuant to changes in GAAP and certain other non-cash charges after discussion between PCM and the Company’s independent trustees and after approval by a majority of the Company’s independent trustees.
“Equity” is the weighted average of the issue price per Common Share of all of the Company’s public offerings, multiplied by the weighted average number of Common Shares outstanding (including restricted share units) in the rolling four-quarter period.
“High watermark” is the quarterly adjustment that reflects the amount by which the “net income” (stated as a percentage of return on "equity") in that quarter exceeds or falls short of the lesser of 8% and the average Fannie Mae 30-year MBS yield (the "target yield") for the four quarters then ended. The “high watermark” starts at zero and is adjusted quarterly. If the “net income” is lower than the target yield, the “high watermark” is increased by the difference. If the “net income” is higher than the target yield, the “high watermark” is reduced by the difference. Each time a performance incentive fee is earned, the “high watermark” returns to zero. As a result, the threshold amounts required for PCM to earn a performance incentive fee are adjusted cumulatively based on the performance of PMT’s “net income” over (or under) the target yield, until the “net income” in excess of the target yield exceeds the then-current cumulative “high watermark” amount.
The base management fee and the performance incentive fee are both payable quarterly in arrears. The performance incentive fee may be paid in cash or a combination of cash and the Company’s Common Shares (subject to a limit of no more than 50% paid in Common Shares), at the Company’s option.
In the event of termination of the management agreement between the Company and PCM, PCM may be entitled to a termination fee in certain circumstances. The termination fee is equal to three times the sum of (a) the average annual base management fee, and (b) the average annual performance incentive fee earned by PCM, in each case during the 24-month period before termination.
Following is a summary of management fee expenses:
Base management
Performance incentive
Average shareholders' equity amounts used to calculate base management fee expense
1,962,105
2,212,304
Expense Reimbursement
Under the management agreement, PCM is entitled to reimbursement of its organizational and operating expenses, including third-party expenses, incurred on the Company’s behalf, it being understood that PCM and its affiliates shall allocate a portion of their personnel’s time to provide certain legal, tax and investor relations services for the direct benefit of the Company. PCM is reimbursed $165,000 per fiscal quarter, such amount to be reviewed annually and to not preclude reimbursement for any other services performed by PCM or its affiliates.
The Company is required to pay PCM and its affiliates a portion of rent, telephone, utilities, office furniture, equipment, machinery and other office, internal and overhead expenses of PCM and its affiliates required for the Company’s and its subsidiaries’ operations. These expenses are allocated based on the ratio of the Company’s and its subsidiaries’ proportion of gross assets compared to all remaining gross assets managed or owned by PCM and/or its affiliates as calculated at each fiscal quarter end.
14
Following is a summary of the Company’s reimbursements to PCM and its affiliates for expenses:
Reimbursement of:
Expenses incurred on the Company’s behalf, net
5,661
5,357
Common overhead incurred by PCM and its affiliates
1,821
1,864
165
7,647
7,386
Payments and settlements during the year (1)
32,384
39,764
Financing Activities
PFSI held 75,000 of the Company’s Common Shares at both March 31, 2023 and December 31, 2022.
Amounts Receivable from and Payable to PFSI
Amounts receivable from and payable to PFSI are summarized below:
Due from PFSI-Miscellaneous receivables
Due to PFSI:
Correspondent production fees
8,325
6,835
Allocated expenses and expenses and costs paid by PFSI on PMT’s behalf
7,610
11,447
7,307
6,791
6,740
Fulfillment fees
5,183
4,043
The Company has also transferred cash to PLS to fund loan servicing advances and REO property acquisition and preservation costs on its behalf. Such amounts are included in various balance sheet items as summarized below:
Balance sheet line including advance amount
Loan servicing advances
Real estate acquired in settlement of loans
3,291
3,479
142,007
201,451
Note 5—Loan Sales
The following table summarizes cash flows between the Company and transferees in transfers of loans that are accounted for as sales where the Company maintains continuing involvement with the loans:
Cash flows:
Proceeds from sales
Loan servicing fees received
15
The following table summarizes for the dates presented collection status information for loans that are accounted for as sales where the Company maintains continuing involvement:
UPB of loans outstanding
231,507,353
229,858,573
Collection status (UPB) (1)
Delinquency:
30-89 days delinquent
1,556,305
1,903,007
90 or more days delinquent:
Not in foreclosure
839,807
880,841
In foreclosure
66,275
70,921
Bankruptcy
132,238
123,239
Delinquent loans in COVID-19 pandemic-related forbearance:
30-89 days
144,897
176,346
90 days or more
404,288
464,694
Custodial funds managed by the Company (2)
2,347,138
1,783,157
Note 6—Variable Interest Entities
The Company is a variable interest holder in various VIEs that relate to its investing and financing activities.
Credit Risk Transfer Arrangements
The Company has previously entered into certain loan sales arrangements pursuant to which it accepted credit risk relating to the loans sold in exchange for a portion of the interest earned on such loans. These arrangements absorb scheduled or realized credit losses on such loans and include CRT Agreements, and other CRT securities.
The Company, through its subsidiary, PennyMac Corp. (“PMC”), entered into CRT arrangements with Fannie Mae, pursuant to which the Company sold pools of loans into Fannie Mae-guaranteed securitizations while retaining recourse obligations as part of the retention of IO ownership interests in such loans and include:
The Company placed Deposits securing CRT arrangements into the subsidiary trust entities to secure its recourse obligations. The Deposits securing CRT arrangements represent the Company’s maximum contractual exposure to claims under its recourse obligations and are the sole source of settlement of losses under the CRT arrangements.
The Company’s exposure to losses under its recourse obligations was initially established at rates ranging from 3.5% to 4.0% of the UPB of the loans sold under the CRT arrangements. As the UPB of the underlying loans subject to each CRT arrangement is reduced through repayments, the percentage exposure of each CRT arrangement will increase to maximums ranging from 4.5% to 5.0% of outstanding UPB, although the total dollar amount of exposure to losses does not increase.
The Company has concluded that the subsidiary trust entities holding its CRT arrangements are VIEs and the Company is the primary beneficiary of the VIEs as it is the holder of the primary beneficial interests which absorb the variability of the trusts’ results of operations. For CRT Agreements, the Company recognizes its IO ownership interests and recourse obligations on the consolidated balance sheets as CRT Derivatives in Derivative assets and Derivative and credit risk transfer strip liabilities. For other CRT securities, the Company recognizes its IO ownership interests and recourse obligations as CRT strips which are also included on the consolidated balance sheet in Derivative and credit risk transfer strip liabilities. Gains and losses on the derivatives and strips (including the IO ownership interest sold to nonaffiliates) included in the CRT arrangements are included in Net gains (losses) on investments and financings in the consolidated statements of operations.
16
Following is a summary of the CRT arrangements:
Net investment income:
Net gains (losses) on investments and financings:
CRT Derivatives and strips:
CRT derivatives
Realized
3,030
21,201
Valuation changes
8,096
(27,049
11,126
(5,848
CRT strips
12,304
17,763
24,128
(41,758
36,432
(23,995
(1,280
(5,780
46,278
(35,623
Interest income — Deposits securing CRT arrangements
14,212
222
60,490
(35,401
Net payments made (recoveries received) to settle losses (recoveries) on CRT arrangements
1,257
(15,973
Carrying value of CRT arrangements:
Derivative and credit risk transfer strip assets (liabilities), net
(13,860
(22,098
(113,065
(137,193
(126,925
(159,291
Deposits securing CRT arrangements
CRT arrangement assets pledged to secure borrowings:
Derivative assets
Deposits securing CRT arrangements (1)
UPB of loans underlying CRT arrangements
24,824,362
25,315,524
Collection status (UPB):
Delinquency (2)
Current
24,277,884
24,673,719
322,328
409,049
90-180 days delinquent
107,982
112,286
180 or more days delinquent
91,892
93,717
Foreclosure
24,276
26,753
57,676
54,395
Delinquent loans in COVID-19 pandemic-related forbearance plans:
23,358
35,388
29,352
39,033
29,052
35,588
17
Subordinate Mortgage-Backed Securities
The Company retains or purchases subordinate MBS in transactions sponsored by PMC or a nonaffiliate. Cash inflows from the loans underlying these securities are distributed to investors and service providers in accordance with the contractual priority of payments and, as such, most of these inflows must be directed first to service and repay the senior securities.
The rights of holders of the subordinate securities to receive distributions of principal and/or interest, as applicable, are subordinate to the rights of holders of the senior securities. After the senior securities are repaid, substantially all cash inflows will be directed to the subordinate securities, including those held by the Company, until they are fully repaid.
The Company’s retention or purchase of subordinate MBS exposes PMT to the credit risk in the underlying loans because the Company’s beneficial interests are among the first beneficial interests to absorb credit losses on those assets. The Company’s exposure to losses from its investments in subordinate MBS is limited to its recorded investment in such securities.
Whether the Company concludes that it is the primary beneficiary of the VIEs issuing the subordinate MBS and therefore consolidates these entities is based on its exposure to losses that could be significant to the VIEs and its power to direct activities that most significantly impact the VIEs’ economic performance:
The Company recognizes the interest income earned on the loans owned by the VIEs and the interest expense attributable to the asset-backed securities issued to nonaffiliates by its consolidated VIEs on its consolidated statements of operations.
Following is a summary of the Company’s investment in subordinate mortgage-backed securities held in consolidated VIEs:
Fair value changes:
11,017
(96,564
(10,160
89,174
15,166
12,849
12,353
11,027
Subordinate MBS retained at fair value pledged to secure Assets sold under agreements to repurchase
84,866
84,044
Note 7— Fair Value
The Company’s consolidated financial statements include assets and liabilities that are measured at or based on their fair values. Measurement at or based on fair value may be on a recurring or nonrecurring basis depending on the accounting principles applicable to the specific asset or liability and whether the Company has elected to carry the item at its fair value as discussed in the following paragraphs.
The Company groups its assets and liabilities at fair value in three levels, based on the markets in which the assets and liabilities are traded and the observability of the inputs used to determine fair value. These levels are:
18
As a result of the difficulty in observing certain significant valuation inputs affecting “Level 3” fair value assets and liabilities, the Company is required to make judgments regarding these items’ fair values. Different persons in possession of the same facts may reasonably arrive at different conclusions as to the inputs to be applied in valuing these assets and liabilities and their fair values. Such differences may result in significantly different fair value measurements. Likewise, due to the general illiquidity of some of these assets and liabilities, subsequent transactions may be at values significantly different from those reported.
The Company reclassifies its assets and liabilities between levels of the fair value hierarchy when the inputs required to establish fair value at a level of the fair value hierarchy are no longer readily available, requiring the use of lower-level inputs, or when the inputs required to establish fair value at a higher level of the hierarchy become available.
Fair Value Accounting Elections
The Company identified all of PMT’s non-cash financial assets and MSRs to be accounted for at fair value. The Company has elected to account for these assets at fair value so such changes in fair value will be reflected in income as they occur and more timely reflect the results of the Company’s performance.
The Company identified PMT’s asset-backed financings of VIEs and interest only security payable to be accounted for at fair value to reflect the generally offsetting changes in fair value of these borrowings to changes in fair value of the assets at fair value collateralizing these financings. For other borrowings, the Company has determined that historical cost accounting is more appropriate because under this method debt issuance costs are amortized over the term of the debt facilities, thereby matching the debt issuance cost to the periods benefiting from the availability of these facilities.
19
Financial Statement Items Measured at Fair Value on a Recurring Basis
Following is a summary of financial statement items that are measured at fair value on a recurring basis:
Level 1
Level 2
Level 3
Assets:
Short-term investments
Mortgage-backed securities at fair value
3,133,409
10,109
3,548
Derivative assets:
Call options on interest rate futures purchase contracts
13,508
Put options on interest rate futures purchase contracts
6,570
Forward purchase contracts
16,477
Forward sale contracts
7,711
MBS call options
1,832
MBS put options
3,573
Interest rate lock commitments
9,952
Total derivative assets before netting
20,078
29,593
12,835
62,506
Netting
26,779
Total derivative assets after netting
Mortgage servicing rights at fair value
312,231
9,290,929
4,001,568
13,631,507
Liabilities:
Derivative and credit risk transfer strip liabilities:
5,302
Forward sales contracts
86,918
2,004
16,743
1,403
Total derivative liabilities before netting
94,224
18,146
112,370
(86,966
Total derivative liabilities after netting
25,404
Credit risk transfer strips
113,065
Total derivative and credit risk transfer strip liabilities
131,211
1,497,304
154,416
1,564,754
20
1,811,225
10,708
3,457
2,906
8,130
418
43,435
2,783
3,877
11,036
46,636
5,139
62,811
22,129
263,307
7,830,404
4,032,041
12,147,881
Derivative liabilities and credit risk transfer strips:
15,196
17,279
23,360
4,355
32,475
27,715
60,190
(30,157
30,033
137,193
164,908
1,447,430
186,833
1,604,106
21
The following is a summary of changes in items measured at fair value on a recurring basis using Level 3 inputs that are significant to the estimation of the fair values of the assets and liabilities at either the beginning or end of the periods presented:
Assets (1)
Loans acquiredfor sale
Loans at fairvalue
Interest ratelockcommitments
CRTstrips
Mortgage servicing rights
Balance, December 31, 2022
(478
3,867,133
Purchases and issuances
3,495
119
(7,687
(4,073
Repayments and sales
(3,767
(2,888
(12,304
(18,979
Amounts received pursuant to sales of loans
Changes in fair value included in results of operations arising from:
Changes in instrument - specific credit risk
Other factors
(327
452
27,032
(62,729
Transfers of:
Loans to REO
(460
Interest rate lock commitments to loans acquired for sale (2)
(10,318
Mortgage servicing rights relating to delinquent loans to Agency
(835
Balance, March 31, 2023
8,549
3,870,357
Changes in fair value recognized during the year relating to assets still held at March 31, 2023
161
(8
(96,518
Liabilities
Interest-only security payable:
1,280
Changes in fair value recognized during the year relating to liability outstanding at March 31, 2023
22
Loans atfairvalue
CRTderivatives
Interestrate lockcommitments
Mortgageservicingrights
Balance, December 31, 2021
30,129
4,161
18,964
2,451
(26,837
2,892,855
2,921,723
24,105
(28,144
(4,039
(29,498
(654
(21,165
(17,763
(69,080
(411
442
(118,799
155,110
Transfers:
121,027
Balance, March 31, 2022
24,325
3,949
(8,049
(23,465
(68,595
3,391,172
3,319,337
Changes in fair value recognized during the quarter relating to assets still held at March 31, 2022
(229
66
211,286
10,593
5,780
16,373
Changes in fair value recognized during the quarter relating to liability outstanding at March 31, 2022
23
Financial Statement Items Measured at Fair Value under the Fair Value Option
Following are the fair values and related principal amounts due upon maturity of loans accounted for under the fair value option (including loans acquired for sale, loans held in consolidated VIEs, and distressed loans):
Fair value
Principalamount dueupon maturity
Difference
Loans acquired for sale at fair value:
Current through 89 days delinquent
3,140,761
3,089,597
51,164
1,819,551
1,795,445
24,106
2,551
3,449
(898
1,666
1,927
(261
206
300
(94
716
809
(93
2,757
3,749
(992
2,382
2,736
(354
3,093,346
50,172
1,798,181
23,752
Loans at fair value:
Held in consolidated VIEs:
1,498,108
1,766,772
(268,664
1,508,540
1,788,911
(280,371
815
1,077
(262
1,231
1,642
171
226
(55
1,402
1,868
(466
1,767,849
(268,926
1,790,779
(280,837
Distressed:
480
714
(234
498
682
(184
1,404
2,561
(1,157
1,230
2,964
(1,734
1,664
2,575
(911
1,729
2,728
(999
3,068
5,136
(2,068
2,959
5,692
(2,733
5,850
(2,302
6,374
(2,917
1,773,699
(271,228
1,797,153
(283,754
Following are the changes in fair value included in current period results of operations by consolidated statement of operations line item for financial statement items accounted for under the fair value option:
Net loanservicing fees
Net gains onloans acquired for sale
Net interestexpense
78,218
(1,956
76,262
15,315
11,468
126
11,594
MSRs at fair value
126,118
(1,830
2,159
(542
(10,702
(11,440
(11,982
24
(186,525
(1,411
(187,936
(227,266
(96,121
(949
(97,070
(306,641
(2,360
(232,546
(834
88,340
83,394
82,560
Financial Statement Item Measured at Fair Value on a Nonrecurring Basis
Following is a summary of the carrying value of assets that were remeasured during the period based on fair value on a nonrecurring basis:
325
1,292
The following table summarizes the fair value changes recognized during the periods on assets held at period end that were remeasured at fair value on a nonrecurring basis:
Real estate asset acquired in settlement of loans
73
(148
The Company remeasures its REO based on fair value when it evaluates the REO for impairment. The Company evaluates its REO for impairment with reference to the respective properties’ fair values less costs to sell. REO may be revalued after acquisition due to the Company receiving greater access to the property, the property being held for an extended period or receiving indications that the property’s fair value may not be supported by developing market conditions. Any subsequent change in fair value to a level that is less than or equal to the property’s cost is recognized in Results of real estate acquired in settlement of loans in the Company’s consolidated statements of operations.
Fair Value of Financial Instruments Carried at Amortized Cost
Most of the Company’s borrowings are carried at amortized cost. The Company’s Assets sold under agreements to repurchase, Mortgage loan participation purchase and sale agreements, Notes payable secured by credit risk transfer and mortgage servicing assets and Exchangeable senior notes are classified as “Level 3” fair value liabilities due to the Company’s reliance on unobservable inputs to estimate these instruments’ fair values.
The Company has concluded that the fair values of these borrowings other than Notes payable secured by credit risk transfer and mortgage servicing assets and Exchangeable senior notes approximate the agreements’ carrying values due to the borrowing agreements’ variable interest rates and short maturities.
Following are the carrying and fair values of the Notes payable secured by credit risk transfer and mortgage servicing assets and Exchangeable senior notes:
Instrument
Carrying value
2,763,386
2,721,391
496,073
471,781
25
The Company estimates the fair value of the Notes payable secured by credit risk transfer and mortgage servicing assets and Exchangeable senior notes using indications of fair value provided by nonaffiliate brokers.
Valuation Governance
Most of the Company’s assets, its Asset-backed financings at fair value, Interest-only security payable at fair value and Derivative and credit risk transfer strip liabilities at fair value are carried at fair value with changes in fair value recognized in current period results of operations. A substantial portion of these items are “Level 3” fair value assets and liabilities which require the use of unobservable inputs that are significant to the estimation of the fair values of the assets and liabilities. Unobservable inputs reflect the Company’s own judgments about the factors that market participants use in pricing an asset or liability and are based on the best information available under the circumstances.
Due to the difficulty in estimating the fair values of “Level 3” fair value assets and liabilities, the Company has assigned responsibility for estimating the fair value of these assets and liabilities to specialized staff and subjects the valuation process to significant senior management oversight:
With respect to the non-IRLC “Level 3” valuations, the FAV group reports to PFSI’s senior management valuation committee, which oversees the valuations. The FAV group monitors the models used for valuation of the Company’s “Level 3” fair value assets and liabilities other than IRLCs, including the models’ performance versus actual results, and reports those results to PFSI’s senior management valuation committee. PFSI’s senior management valuation committee includes the Company’s chief financial, risk, credit, and capital markets officers as well as other senior members of the Company’s finance, capital markets and risk management staffs.
The FAV group is responsible for reporting to PFSI’s senior management valuation committee on the changes in the valuation of the non-IRLC “Level 3” fair value assets and liabilities, including major factors affecting the valuation and any changes in model methods and inputs. To assess the reasonableness of its valuations, the FAV group presents an analysis of the effect on the valuation of changes to the significant inputs to the models and, for MSRs, comparisons of its estimates of fair value and of key inputs to those procured from nonaffiliated brokers and published surveys.
Valuation Techniques and Inputs
The following is a description of the techniques and inputs used in estimating the fair values of “Level 2” and “Level 3” fair value assets and liabilities:
Mortgage-Backed Securities
The Company categorizes its current holdings of securities accounted for as MBS as “Level 2” fair value assets. Fair value of these MBS is established based on quoted market prices for the Company’s MBS holdings or similar securities. Changes in the fair value of MBS are included in Net gains (losses) on investments and financings in the consolidated statements of operations.
Loans
Fair value of loans is estimated based on whether the loans are saleable into active markets:
26
Derivative and Credit Risk Transfer Strip Assets and Liabilities
CRT Derivatives
The Company categorizes CRT derivatives as “Level 3” fair value assets and liabilities. The fair value of CRT derivatives is based on indications of fair value provided to the Company by nonaffiliated brokers for the certificates representing the beneficial interests in the trusts holding the Deposits securing credit risk transfer arrangements pledged to creditors, the recourse obligations and the IO ownership interests. Together, the recourse obligation and the IO ownership interest comprise the CRT derivative. Fair value of the CRT derivatives is derived by deducting the balance of the Deposits securing credit risk transfer arrangements pledged to creditors from the fair value of the certificates.
The Company assesses the fair values it receives from nonaffiliated brokers using the discounted cash flow approach. The significant unobservable inputs used by the Company in its review and approval of the valuation of CRT derivatives are the discount rate, voluntary and involuntary prepayment speeds and the remaining loss expectations of the reference loans. Changes in fair value of CRT derivatives are included in Net gains (losses) on investments and financings in the consolidated statements of operations.
Following is a quantitative summary of key unobservable inputs used in the Company’s review and approval of broker-provided fair values for CRT derivatives:
(dollars in thousands)
CRT derivatives:
Assets
UPB of loans in reference pools
5,865,196
5,972,060
Key inputs (1)
Discount rate
Range
8.3% – 10.0%
8.7% – 11.1%
Weighted average
9.9%
10.8%
Voluntary prepayment speed (2)
7.3% – 8.4%
7.5% – 8.3%
7.6%
Involuntary prepayment speed (3)
0.5% – 1.2%
0.5% – 1.3%
0.6%
Remaining loss expectation
0.4% – 0.6%
0.4% – 0.7%
Interest Rate Lock Commitments
The Company categorizes IRLCs as “Level 3” fair value assets and liabilities. The Company estimates the fair value of IRLCs based on quoted Agency MBS prices, the probability that the loans will be purchased under the commitments (the “pull-through rate”) and the Company’s estimate of the fair value of the MSRs it expects to receive upon sale of the loans.
27
The significant unobservable inputs used in the fair value measurement of the Company’s IRLCs are the pull-through rates and the estimated MSRs attributed to the mortgage loans subject to the commitments. Significant changes in the pull-through rate or the MSR component of the IRLCs, in isolation, may result in a significant change in the IRLCs’ fair value. The financial effects of changes in these inputs are generally inversely correlated as increasing interest rates have a positive effect on the fair value of the MSR component of an IRLC’s fair value, but also increase the pull-through rate for the loan principal and interest payment cash flow component that has decreased in fair value. Changes in fair value of IRLCs are included in Net gains on loans acquired for sale in the consolidated statements of operations.
Following is a quantitative summary of key unobservable inputs used in the valuation of IRLCs:
Fair value (in thousands) (1)
Committed amount (in thousands)
1,806,398
1,484,384
Key inputs (2)
Pull-through rate
42.0% – 100%
54.8% – 100%
86.7%
92.1%
MSR fair value expressed as
Servicing fee multiple
1.5 – 7.4
1.9 – 7.1
4.4
4.7
Percentage of UPB
0.5% – 3.1%
0.7% – 3.1%
1.9%
Hedging Derivatives
Fair value of derivative financial instruments actively traded on exchanges are categorized by the Company as “Level 1” fair value assets and liabilities. Fair values of derivative financial instruments based on observable interest rates, volatilities and prices in the MBS or other markets are categorized by the Company as “Level 2” fair value assets and liabilities. Changes in the fair value of hedging derivatives are included in Net gains (losses) on investments and financings, Net loan servicing fees – from nonaffiliates – Mortgage servicing rights hedging results, or Net gains on loans acquired for sale, as applicable, in the consolidated statements of operations.
Credit Risk Transfer Strips
The Company categorizes CRT strips as “Level 3” fair value assets or liabilities. The fair value of CRT strips is based on indications of fair value provided to the Company by nonaffiliated brokers for the securities representing the beneficial interests in the trusts holding the Deposits securing credit risk transfer arrangements pledged to creditors, the IO ownership interest and recourse obligation. Together, the IO ownership interest and the recourse obligation comprise the CRT strip.
Fair value of the CRT strips is derived by deducting the balance of the Deposits securing credit risk transfer arrangements pledged to creditors from the fair value of the securities derived from indications provided by the nonaffiliated brokers. Through December 31, 2021, the Company applied adjustments to the fair value derived from these indications to account for contractual restrictions limiting PMT’s ability to sell certain of the certificates. During the quarter ended March 31, 2022, the contractual restrictions on the Company’s ability to sell the certificates were removed. The Company recognized the effect of the removal of this restriction in Net gains (losses) on investments and financing during the quarter ended March 31, 2022.
The Company assesses the indications of fair value it receives from nonaffiliated brokers using the discounted cash flow approach. The significant unobservable inputs used by the Company in its review and approval of the valuation of the CRT strips are the discount rate, voluntary and involuntary prepayment speeds and the remaining loss expectations of the reference loans. Changes in fair value of CRT strips are included in Net gains (losses) on investments and financings in the consolidated statements of operations.
28
Following is a quantitative summary of key unobservable inputs used in the Company’s review and approval of the adjusted broker-provided fair values used to derive the fair value of the CRT strip liabilities:
UPB of loans in the reference pools
18,959,166
19,343,464
6.6% – 10.3%
4.3% – 11.3%
9.8%
10.5%
7.7% – 7.9%
7.7%
0.5% – 1.5%
0.6% – 2.0%
0.8%
0.7% – 2.0%
0.9%
Mortgage Servicing Rights
The Company categorizes MSRs as “Level 3” fair value assets. The Company uses a discounted cash flow approach to estimate the fair value of MSRs. The fair value of MSRs is derived from the net positive cash flows associated with the servicing agreements. The Company receives a servicing fee based on the remaining UPB of the loans subject to the servicing agreements and generally has the right to receive other remuneration including various mortgagor-contracted fees such as late charges and collateral reconveyance charges, and is generally entitled to retain any placement fees earned on funds held pending remittance of mortgagor principal, interest, tax and insurance payments.
The key inputs used in the estimation of the fair value of MSRs include the applicable pricing spreads, the prepayment speeds of the underlying loans, and the annual per-loan cost to service the loans, all of which are unobservable. Significant changes to any of those inputs in isolation could result in a significant change in the MSR fair value measurement. Changes in these key inputs are not directly related. Changes in the fair value of MSRs are included in Net loan servicing fees – From nonaffiliates – Change in fair value of mortgage servicing rights in the consolidated statements of operations.
MSRs are generally subject to loss in fair value when mortgage interest rates decrease, when returns required by market participants (pricing spreads) increase, or when annual per-loan cost of servicing increases. Reductions in the fair value of MSRs affect income primarily through recognition of the change in fair value.
29
Following are the key inputs used in determining the fair value of MSRs at the time of initial recognition:
(MSR recognized and UPB of underlying loans amounts in thousands)
MSR recognized
UPB of underlying loans
5,549,325
11,929,172
Weighted average annual servicing fee rate (in basis points)
41
31
Pricing spread (2)
5.5% – 8.7%
5.8% – 7.8%
5.8%
6.6%
Prepayment speed (3)
13.1% – 21.8%
6.0% – 9.0%
13.2%
8.4%
Equivalent average life (in years)
2.8 – 6.6
4.0 – 8.4
6.5
8.0
Annual per-loan cost of servicing
$69 – $69
$80 – $80
$69
$80
30
Following is a quantitative summary of key inputs used in the valuation of MSRs as of the dates presented, and the effect on the fair value from adverse changes in those inputs:
(Fair value, UPB of underlying loansand effect on fair value amounts in thousands)
231,615,214
229,971,035
Weighted average note interest rate
3.5%
4.9% – 8.9%
4.9% – 8.8%
5.7%
Effect on fair value of (3):
5% adverse change
$(52,336)
$(52,004)
10% adverse change
$(103,357)
$(102,727)
20% adverse change
$(201,628)
$(200,497)
Prepayment speed (4)
5.2% – 18.4%
5.1% – 17.4%
6.7%
6.3%
3.3 – 9.1
3.5 – 9.3
8.7
8.9
$(53,572)
$(51,044)
$(105,425)
$(100,544)
$(204,325)
$(195,201)
$68 – $69
$(17,640)
$(17,629)
$(35,279)
$(35,258)
$(70,559)
$(70,515)
Real Estate Acquired in Settlement of Loans
REO is measured based on its fair value on a nonrecurring basis and is categorized as a “Level 3” fair value asset. Fair value of REO is established by using a current estimate of fair value from either a broker’s price opinion, a full appraisal, or the price given in a pending contract of sale.
REO fair values are reviewed by PLS staff appraisers when the Company obtains multiple indications of fair value and there is a significant difference between the indications of fair value. PLS staff appraisers will attempt to resolve the difference between the indications of fair value. In circumstances where the staff appraisers are not able to generate adequate data to support a fair value conclusion, the staff appraisers obtain an additional appraisal to determine fair value. Recognized changes in the fair value of REO are included in Results of real estate acquired in settlement of loans in the consolidated statements of operations.
Note 8— Mortgage-Backed Securities
Following is a summary of activity in the Company’s investment in MBS:
Balance at beginning of quarter
2,666,768
Purchases
2,784,592
661,774
Sales
(2,629,540
Repayments
(64,910
(70,276
Changes in fair value included in income arising from:
Amortization of net purchase premiums (discounts)
(1,957
Valuation adjustments
76,261
Balance at end of quarter
3,070,330
Fair value of mortgage-backed securities pledged to secure Assets sold under agreements to repurchase
4,616,580
Following is a summary of the Company’s investment in MBS:
Principalbalance
Unamortizednet purchasepremiums (discounts)
Accumulatedvaluationchanges
Fair value (1)
Agency fixed-rate pass-through securities
4,419,508
607
(10,064
4,410,051
Subordinate credit-linked securities
197,313
(180
(431
196,702
Senior non-Agency securities
27,814
(865
(4,698
22,251
4,644,635
(438
(15,193
4,693,045
30,423
(460,966
4,262,502
184,620
(6,774
177,898
28,103
(876
(5,026
22,201
4,905,768
29,599
(472,766
32
Note 9—Loans Acquired for Sale at Fair Value
Following is a summary of the distribution of the Company’s loans acquired for sale at fair value:
Loan type
GSE eligible (1)
2,717,247
1,651,554
Held for sale to PLS — Government insured or guaranteed (2)
Home equity lines of credit
2,174
2,424
Repurchased pursuant to representations and warranties
7,935
8,284
Loans pledged to secure Assets sold under agreements to repurchase
3,117,294
1,801,368
Note 10—Loans at Fair Value
Loans at fair value are comprised primarily of loans held in VIEs securing asset-backed financings as discussed in Note 6 –Variable Interest Entities – Subordinate Mortgage-Backed Securities.
Following is a summary of the distribution of the Company’s loans at fair value:
Loans in VIEs:
Agency-conforming loans secured by investment properties
1,449,070
1,459,160
Fixed interest rate jumbo loans
49,853
50,782
Distressed loans
Loans at fair value pledged to secure:
Asset-backed financings at fair value (1)
194
1,499,117
1,510,148
Note 11—Derivative and Credit Risk Transfer Strip Assets and Liabilities
Derivative and credit risk transfer assets and liabilities are summarized below:
Derivative liabilities
Credit risk transfer strip liabilities
The Company records all derivative and CRT strip assets and liabilities at fair value and records changes in fair value in current period results of operations.
33
Derivative Activities
The Company holds and issues derivative financial instruments in connection with its operating, investing and financing activities. Derivative financial instruments are created as a result of certain of the Company’s operations and the Company also enters into derivative transactions as part of its interest rate risk management activities.
Derivative financial instruments created as a result of the Company’s operations include:
The Company engages in interest rate risk management activities in an effort to reduce the variability of earnings caused by the effects of changes in interest rates on the fair value of certain of its assets and liabilities. The Company bears price risk related to its mortgage production, servicing assets and MBS financing activities due to changes in market interest rates as discussed below:
To manage the price risk resulting from these interest rate risks, the Company uses derivative financial instruments with the intention of moderating the risk that changes in market interest rates will result in unfavorable changes in the fair value of the Company’s MBS, inventory of loans acquired for sale, IRLCs and MSRs.
The Company records all derivative and CRT strip assets and liabilities at fair value and records changes in fair value in current period results of operations. The Company does not designate and qualify any of its derivative financial instruments for hedge accounting.
Cash flows from derivative financial instruments relating to hedging of IRLCs and loans acquired for sale are included in Cash flows from operating activities in Sale to nonaffiliates and repayment of loans acquired for sale at fair value. Cash flows from derivative financial instruments relating to hedging of MSRs are included in Cash flows from investing activities.
34
Derivative Notional Amounts and Fair Value of Derivatives
The Company had the following derivative assets and liabilities recorded within Derivative assets and Derivative and credit risk transfer liabilities and related margin deposits recorded in Other assets on the consolidated balance sheets:
Notional
Derivative
amount (1)
assets
liabilities
Hedging derivatives subject to master netting arrangements (2):
1,325,000
1,950,000
2,775,000
1,785,000
4,121,991
3,929,833
11,511,964
11,661,925
750,000
1,050,000
Bond futures
1,212,800
867,900
Other derivatives not subject to master netting arrangements:
Total derivative instruments before netting
Margin deposits placed with derivative counterparties included in derivative balances above, net
113,744
52,286
Derivative assets pledged to secure:
(1)Notional amounts provide an indication of the volume of the Company’s derivative activity.
(2) All hedging derivatives are interest rate derivatives that are used as economic hedges.
Netting of Financial Instruments
The Company has elected to net derivative asset and liability positions, and cash collateral placed with or received from its counterparties when such positions are subject to a legally enforceable master netting arrangement and the Company intends to set off. The derivative financial instruments that are not subject to master netting arrangements are CRT derivatives and IRLCs. As of March 31, 2023 and December 31, 2022, the Company was not a party to any reverse repurchase agreements or securities lending transactions that are required to be disclosed in the following tables.
35
Derivative Assets, Financial Instruments and Collateral Held by Counterparty
The following table summarizes by significant counterparty the amount of derivative asset positions after considering master netting arrangements and financial instruments or cash pledged that do not meet the accounting guidance qualifying for setoff accounting.
Net amount
Gross amounts
of assets
not offset in the
presented
consolidated
in the
balance sheet
balance
Financial
collateral
Net
sheet
instruments
received
amount
RJ O’Brien & Associates, LLC
Bank of America, N.A.
19,982
14,666
Morgan Stanley & Co. LLC
17,169
33,703
Goldman Sachs & Co. LLC
9,315
2,789
Citigroup Global Markets Inc.
6,276
Wells Fargo Securities, LLC
6,980
Credit Suisse Securities (USA) LLC
5,827
Barclays Capital Inc.
2,013
J.P. Morgan Securities LLC
110
3,630
2,677
Derivative Liabilities, Financial Liabilities and Collateral Pledged by Counterparty
The following table summarizes by significant counterparty the amount of derivative liabilities and assets sold under agreements to repurchase after considering master netting arrangements and financial instruments or cash pledged that do not meet the accounting guidance to qualify for setoff accounting. All assets sold under agreements to repurchase represent sufficient collateral or exceed the liability amount recorded on the consolidated balance sheet.
of liabilities
(1)
pledged
1,991,349
(1,991,349
1,605,813
(1,605,813
1,242,211
(1,241,372
839
1,115,265
(1,115,265
1,085,013
(1,085,013
1,239,293
(1,239,293
951,279
(949,955
1,324
262,512
(262,512
Atlas Securitized Products, L.P.
895,137
(895,137
675,639
(675,639
BNP Paribas
378,785
(378,785
153,220
(153,220
Daiwa Capital Markets
376,627
(376,317
310
439,089
(439,089
RBC Capital Markets, L.P.
335,303
(335,303
268,581
(268,581
Amherst Pierpont Securities LLC
262,183
(262,093
90
283,928
(283,294
634
246,508
(246,508
197,229
(195,807
1,422
193,012
(193,012
156,952
(156,952
Mizuho Financial Group
81,569
(80,066
1,503
76,031
(76,031
218,730
(218,730
Nomura Holdings America, Inc
4,567
(4,567
4,444
(4,444
3,192
262
8,140,912
(8,115,508
6,648,672
(6,618,639
36
Following are the net gains (losses) recognized by the Company on derivative financial instruments and the consolidated statements of operations line items where such gains and losses are included:
Derivative activity
Consolidated statements of operations line
Net gains on loans acquired for sale (1)
9,027
(25,916
Hedged item:
Interest rate lock commitments and loans acquired for sale
(20,744
251,899
Net loan servicing fees
Note 12—Mortgage Servicing Rights
Following is a summary of MSRs:
MSRs resulting from loan sales
Transfer to Agency of mortgage servicing rights relating to delinquent loans
Changes in fair value:
Due to changes in inputs used in valuation model (1)
(45,771
392,640
Other changes in fair value (2)
(91,673
(88,919
Fair value of mortgage servicing rights pledged to secure Assets sold under agreements to repurchase and Notes payable secured by credit risk transfer and mortgage servicing assets
3,926,160
3,962,820
Servicing fees relating to MSRs are recorded in Net loan servicing fees – from nonaffiliates on the Company’s consolidated statements of operations and are summarized below:
Contractually-specified servicing fees
Ancillary and other fees:
Late charges
759
612
3,184
8,502
Average MSR servicing portfolio
MSR recapture fees
UPB of loans recaptured
95,191
1,580,805
37
Note 13— Other Assets
Other assets are summarized below:
Derivative margin deposits
59,191
51,463
Interest receivable
40,231
31,027
Servicing fees receivable
13,149
15,727
Correspondent lending receivables
8,063
8,967
Other receivables
22,781
7,657
8,270
7,734
18,732
12,416
Real estate acquired in settlement of loans pledge to secure Assets sold under agreements to repurchase
3,554
3,297
Note 14— Short-Term Debt
The borrowing facilities described throughout these Notes 14 and 15 contain various covenants, including financial covenants governing the Company and its subsidiaries’ net worth, debt-to-equity ratio, and liquidity. Management believes that the Company was in compliance with these covenants as of March 31, 2023.
Assets Sold Under Agreements to Repurchase
Following is a summary of financial information relating to assets sold under agreements to repurchase:
Weighted average interest rate (1)
5.55
%
1.06
Average balance
7,242,478
4,999,896
Total interest expense
100,267
15,571
Maximum daily amount outstanding
9,107,074
7,405,436
March 31, 2023 and 2022, respectively.
38
Carrying value:
Unpaid principal balance
8,115,508
6,618,639
Unamortized debt issuance costs
(1,400
(2,111
Weighted average interest rate
5.80
5.03
Available borrowing capacity (1):
Committed
41,308
217,279
Uncommitted
3,253,455
4,762,056
3,294,763
4,979,335
Margin deposits placed with (received from) counterparties included in Other assets (Accounts payable and accrued liabilities), net
17,399
(13,630
Assets securing agreements to repurchase:
Mortgage-backed securities
Securities retained in asset-backed financings
Distressed
446,574
455,552
Mortgage servicing rights (2)
2,045,372
2,092,794
Servicing advances
76,664
100,888
Following is a summary of maturities of outstanding advances under repurchase agreements by maturity date:
Remaining maturity at March 31, 2023 (1)
Unpaidprincipal balance
Within 30 days
4,405,227
Over 30 to 90 days
2,837,245
Over 90 days to 180 days
424,998
Over 180 days to 1 year
Over 1 year to 2 years
448,038
Weighted average maturity (in months)
2.0
39
The amount at risk (the fair value of the assets pledged plus the related margin deposit, less the amount advanced by the counterparty and interest payable) and maturity information relating to the Company’s assets sold under agreements to repurchase is summarized by pledged asset and counterparty below as of March 31, 2023:
Loans, REO and MSRs
Weighted-average maturity
Counterparty
Amount at risk
Advances
Facility
33,622
May 6, 2023
June 5, 2024
Citibank, N.A.
18,609
May 31, 2023
April 26, 2024
48,065
June 2, 2023
November 13, 2024
3,745
June 5, 2023
December 23, 2023
JPMorgan Chase & Co.
11,598
May 30, 2023
June 17, 2024
61,683
June 9, 2023
May 31, 2024
14,178
June 13, 2023
November 17, 2023
BNP Paribas Corporate & Institutional Banking
14,908
June 18, 2023
November 30, 2024
12,112
June 6, 2023
February 10, 2024
4,082
June 19, 2023
January 27, 2025
Securities
Weighted average maturity
19,928
April 23, 2023
32,022
May 24, 2023
56,559
April 14, 2023
52,383
April 19, 2023
28,870
April 6, 2023
Daiwa Capital Markets America Inc.
10,772
April 24, 2023
7,831
April 21, 2023
4,173
1,707
April 3, 2023
CRT arrangements
57,379
54,539
July 3, 2023
96,233
May 23, 2023
Mortgage Loan Participation Purchase and Sale Agreement
One of the borrowing facilities secured by loans acquired for sale is in the form of a mortgage loan participation purchase and sale agreement. Participation certificates, each of which represents an undivided beneficial ownership interest in a pool of loans that have been pooled with Fannie Mae or Freddie Mac, are sold to the lender pending the securitization of such loans and the sale of the resulting security. The commitment between the Company and a nonaffiliate to sell such security is also assigned to the lender at the time a participation certificate is sold.
The purchase price paid by the lender for each participation certificate is based on the trade price of the security, plus an amount of interest expected to accrue on the security to its anticipated delivery date, minus a present value adjustment, any related hedging costs and a holdback amount. The holdback amount is based on a percentage of the purchase price and is not required to be paid to the Company until the settlement of the security and its delivery to the lender.
40
The mortgage loan participation purchase and sale agreement is summarized below:
Average balance (1)
17,107
35,809
Weighted average interest rate (2)
6.20
1.64
293
176
90,531
88,633
Note 15— Long-Term Debt
Notes Payable Secured By Credit Risk Transfer and Mortgage Servicing Assets
CRT Arrangement Financing
The Company, through various wholly-owned subsidiaries, issued secured term notes (the “CRT Term Notes”) to qualified institutional buyers under Rule 144A of the Securities Act of 1933, as amended (the “Securities Act”). All of the CRT Term Notes rank pari passu with each other.
Following is a summary of the CRT Term Notes outstanding:
Unpaid
Annual interest rate
Maturity date
Termnotes
Issuance date
Issuance amount
principalbalance
Index
Spread
Stated
Optional extension (1)
2021 1R
March 4, 2021
659,156
292,216
LIBOR (2)
2.90
February 28, 2024
February 27, 2026
2020 1R
February 14, 2020
350,000
56,576
LIBOR
2.35
February 27, 2025
(3)
2019 3R
October 16, 2019
375,000
53,134
2.70
October 29, 2024
2019 2R
June 11, 2019
638,000
176,190
2.75
May 29, 2023
May 29, 2025
578,116
Fannie Mae MSR Financing
The Company, through a subsidiary, PMT ISSUER TRUST-FMSR, finances MSRs and ESS pledged or sold by PMC through a combination of repurchase agreements and term financing.
The repurchase agreement financing for Fannie Mae MSRs is effected through the issuance of a Series 2017-VF1 Note dated December 20, 2017 (the "FMSR VFN") by PMT ISSUER TRUST-FMSR to PMC which is then sold to qualified institutional buyers under an agreement to repurchase. The amount outstanding under the FMSR VFN is included in Assets sold under agreements to repurchase in the Company’s consolidated balance sheets. The FMSR VFN has a committed borrowing capacity of $700 million and matures on May 31, 2024.
The Company’s term financing for Fannie Mae MSRs through PMT ISSUER TRUST – FMSR is effected through the issuance of term notes (the “FT-1 Notes”) to qualified institutional buyers under Rule 144A of the Securities Act.
The FT1 Notes and the FMSR VFN are secured by certain participation certificates relating to Fannie Mae MSRs and rank pari passu with each other.
Following is a summary of the term financing of the Company’s Fannie Mae MSRs:
FT-1 Note
June 28, 2022
305,000
SOFR (2)
4.19%
June 25, 2027
2021
March 30, 2021
3.00%
March 25, 2026
March 27, 2028
2018
April 25, 2018
450,000
2.35%
April 25, 2023
April 25, 2025
1,105,000
Freddie Mac MSR Financing
The Company, through PMC and PMH, finances certain MSRs (including any related excess servicing spread) relating to loans pooled into Freddie Mac securities through various credit agreements. The total loan amount available under the agreements is $1.6 billion, bearing interest at an annual rate equal to SOFR plus a spread as defined in each agreement, with a weighted average maturity of June 2024. The total loan amount available under the agreements may be reduced by other debt outstanding with the counterparties. Advances under the credit agreements are secured by MSRs relating to loans serviced for Freddie Mac guaranteed securities.
On March 16, 2023, the Company and its subsidiaries consented to assignments of all of the credit facilities provided to the Company by Credit Suisse First Boston Mortgage Capital LLC, as administrative agent and Credit Suisse AG, Cayman Islands Branch, as a buyer or purchaser, and Alpine Securitization LTD, as a buyer or purchaser. All of the credit facilities were assigned to Atlas Securitized Products, L.P., Atlas Securitized Products Investments 3, L.P., Atlas Securitized Products Funding 2, L.P., and Nexera Holding LLC.
Following is a summary of financial information relating to notes payable secured by credit risk transfer and mortgage servicing assets:
2,802,691
2,438,773
7.69
3.14
54,947
20,366
2,812,694
2,601,767
Unpaid principal balance:
CRT Term Notes
592,694
FT-1 Notes
Freddie Mac credit agreements
1,115,000
2,798,116
(7,158
(8,666
7.84
7.30
Assets securing notes payable:
Mortgage servicing rights (1)
CRT Agreements:
851,343
869,742
42
Exchangeable Senior Notes
On March 5 and March 9, 2021, PMC issued $345 million aggregate principal amount of exchangeable senior notes (the “2026 Exchangeable Notes”) due 2026 in a private offering. The 2026 Exchangeable Notes will mature on March 15, 2026 unless repurchased or exchanged in accordance with their terms before such date. The 2026 Exchangeable Notes bear interest at a rate of 5.50% per year, payable semiannually.
On November 7 and November 19, 2019, PMC issued $210 million aggregate principal amount of exchangeable senior notes due 2024 (the “2024 Exchangeable Notes” and, together with the 2026 Exchangeable Notes, the “Exchangeable Notes”) in a private offering. The 2024 Exchangeable Notes will mature on November 1, 2024 unless repurchased or exchanged in accordance with their terms before such date. The 2024 Exchangeable Notes bear interest at 5.50% per year, payable semiannually.
The 2026 Exchangeable Notes and the 2024 Exchangeable Notes are fully and unconditionally guaranteed by the Company and are exchangeable for Common Shares, cash, or a combination thereof, at PMC’s election, at any time until the close of business on the second scheduled trading day immediately preceding the maturity date, subject to the satisfaction of certain conditions if the exchange occurs before December 15, 2025 and August 1, 2024, respectively. The exchange rates are equal to 46.1063 and 40.101 Common Shares per $1,000 principal amount of the 2026 Exchangeable Notes and 2024 Exchangeable Notes, respectively, and are subject to adjustment upon the occurrence of certain events, but will not be adjusted for any accrued and unpaid interest.
Following is financial information relating to the Exchangeable Notes:
546,511
529,542
5.66
5.84
8,380
8,320
UPB
555,000
(7,997
(8,746
Asset-Backed Financing of Variable Interest Entities at Fair Value
Following is a summary of financial information relating to the asset-backed financings of VIEs at fair value described in Note 6 ‒ Variable Interest Entities ‒ Subordinate Mortgage-Backed Securities:
1,411,990
1,460,610
3.70
3.29
1,659,916
1,681,410
3.22
The asset-backed financings are non-recourse liabilities and are secured solely by the assets of consolidated VIEs and not by any other assets of the Company. The assets of the VIEs are the only source of funds for repayment of the certificates.
43
Maturities of Long-Term Debt
Contractual maturities of long-term debt obligations (based on final maturity dates) are as follows:
Twelve months ended March 31,
2024
2025
2026
2027
2028
Thereafter
Notes payable secured by credit risk transfer and mortgage servicing assets (1)
918,406
1,224,710
210,000
345,000
Asset-backed financings at fair value (2)
Interest-only security payable at fair value (2)
5,036,237
1,434,710
695,000
1,683,121
Note 16—Liability for Losses Under Representations and Warranties
Following is a summary of the Company’s liability for losses under representations and warranties:
Balance, beginning of quarter
40,249
Provision for losses:
Pursuant to loan sales
940
1,317
Reduction in liability due to change in estimate
(616
(1,165
Losses incurred
(388
(176
Balance, end of quarter
40,225
UPB of loans subject to representations and warranties at end of quarter
230,035,290
217,466,262
Note 17—Commitments and Contingencies
Commitments
The following table summarizes the Company’s outstanding contractual commitments:
Commitments to purchase loans acquired for sale
Litigation
From time to time, the Company may be involved in various legal and regulatory proceedings, claims and legal actions arising in the ordinary course of business. The amount, if any, of ultimate liability with respect to such matters cannot be determined, but despite the inherent uncertainties of litigation, management believes that the ultimate disposition of any such proceedings and exposure will not have, individually or taken together, a material adverse effect on the financial condition, results of operations, or cash flows of the Company.
Cessation of the LIBOR Index
The Company historically used a LIBOR index to establish the applicable interest rates in lending and financing transactions. One-week and two-month United States Dollar LIBOR rates were discontinued as of December 31, 2021 and non-U.S. Dollar LIBOR settings have ceased to be representative. The principal United States Dollar LIBOR tenors (overnight and one, three, six and 12 months) will cease to be published by any administrator or will no longer be representative as of June 30, 2023. The Company services LIBOR-based adjustable rate mortgages and other financial arrangements that may incorporate fallback provisions or replacement provisions related to the LIBOR transition.
The discontinuation of LIBOR could affect the Company’s interest expense and earnings, cost of capital, and the fair value of certain of its assets and the instruments used to hedge their fair value. Furthermore, the transition away from widely used benchmark
44
rates like LIBOR could result in customers or other market participants challenging the determination of their interest or dividend payments, disputing the interpretations or implementation of contract or instrument “fallback” provisions and other transition related changes.
Note 18—Shareholders’ Equity
Preferred Shares of Beneficial Interest
Preferred shares of beneficial interest are summarized below:
Dividends per share
Preferred
Shareseries
Description (1)
Numberof shares
Liquidationpreference
Issuancediscount
Carryingvalue
Fixed-to-floating rate cumulative redeemable
(in thousands, except dividends per share)
A
8.125% Issued March 2017
4,600
115,000
3,828
111,172
0.51
B
8.00% Issued July 2017
7,800
195,000
6,465
188,535
Fixed-rate cumulative redeemable
C
6.75% Issued August 2021
250,000
8,225
241,775
0.42
560,000
18,518
The Company’s Series A Fixed-to-Floating Rate Cumulative Redeemable Preferred Shares of Beneficial Interest (the “Series A Preferred Shares”) pay cumulative dividends at a fixed rate of 8.125% per year based on the $25.00 per share liquidation preference to, but not including, March 15, 2024. From, and including, March 15, 2024 and thereafter, the Company will pay cumulative dividends on the Series A Preferred Shares at a floating rate equal to three-month LIBOR as calculated on each applicable dividend determination date plus a spread of 5.831% per year based on the $25.00 per share liquidation preference.
The Company’s Series B Fixed-to-Floating Rate Cumulative Redeemable Preferred Shares of Beneficial Interest (the “Series B Preferred Shares”) pay cumulative dividends at a fixed rate of 8.00% per year based on the $25.00 per share liquidation preference to, but not including, June 15, 2024. From, and including, June 15, 2024 and thereafter, the Company will pay cumulative dividends on the Series B Preferred Shares at a floating rate equal to three-month LIBOR as calculated on each applicable dividend determination date plus a spread of 5.99% per year based on the $25.00 per share liquidation preference.
The Company’s Series C Fixed Rate Cumulative Redeemable Preferred Shares of Beneficial Interest (the “Series C Preferred Shares” together with the Series A Preferred Shares and Series B Preferred Shares, the “Preferred Shares”) pay cumulative dividends at a fixed rate of 6.75% per year based on the $25.00 per share liquidation preference.
The Series A Preferred Shares, the Series B Preferred Shares and Series C Preferred Shares will not be redeemable before March 15, 2024, June 15, 2024 and August 24, 2026, respectively, except in connection with the Company’s qualification as a REIT for U.S. federal income tax purposes or upon the occurrence of a change of control. On or after the date the Preferred Shares become redeemable, or 120 days after the first date on which such change of control occurred, the Company may, at its option, redeem any or all of the Preferred Shares at $25.00 per share plus any accumulated and unpaid dividends to, but not including, the redemption date.
The Preferred Shares have no stated maturity, are not subject to any sinking fund or mandatory redemption and will remain outstanding indefinitely unless redeemed or repurchased by the Company or converted into Common Shares in connection with a change of control by the holders of the Preferred Shares.
45
Common Shares of Beneficial Interest
“At-The-Market” (“ATM”) Equity Offering Program
The Company periodically enters into ATM equity offering programs allowing it to offer and sell securities on an as-and-when-needed basis through designated broker-dealers. On June 15, 2021, the Company entered into a new ATM equity offering program allowing it to offer up to $200 million of its Common Shares, all of which were available for issuance as of March 31, 2023.
Common Share Repurchase Program
The Company has a Common Share repurchase program. On October 24, 2022, the Company’s board of trustees approved an increase to PMT's Common Share repurchase authorization from $400 million to $500 million before transaction fees.
The following table summarizes the Company’s Common Share repurchase activity:
Cumulative
total (1)
Common Shares repurchased
638
1,974
27,329
Cost of Common Shares repurchased (2)
7,564
31,829
406,303
Note 19— Net Gains (Losses) on Investments and Financings
Net gains (losses) on investments and financings are summarized below:
From nonaffiliates:
Held in VIEs
451
443
46
Note 20— Net Gains on Loans Acquired for Sale
Net gains on loans acquired for sale are summarized below:
Cash losses:
Sales of loans
(72,945
(439,788
Hedging activities
(52,116
338,102
(125,061
(101,686
Non-cash gains:
Receipt of MSRs in mortgage loan sale transactions
Provision for losses relating to representations and warranties provided in loan sales:
Pursuant to loans sales
(940
(1,317
Reduction of liability due to change in estimate
616
1,165
(324
(152
Changes in fair value of loans and derivatives
(10,487
22,018
Hedging derivatives
31,372
(86,203
29,912
(90,101
130,206
104,343
Total from nonaffiliates
From PFSI ‒ cash gains
Note 21—Net Interest Expense
Net interest expense is summarized below:
Interest income:
Cash and short-term investments
6,311
403
51,139
14,400
36,988
19,248
Held in consolidated variable interest entities
(7
174
Placement fees relating to custodial funds
28,920
3,709
290
58
Interest expense:
Mortgage loan participation purchase and sale agreements
Interest shortfall on repayments of loans serviced for Agency securitizations
7,042
Interest on loan impound deposits
1,343
1,012
525
47
Note 22—Share-Based Compensation
The Company has adopted an equity incentive plan (“2019 Plan”) which provides for the issuance of equity based awards based on PMT’s Common Shares that may be made by the Company to its officers and trustees, and the members, officers, trustees, directors and employees of PCM, PFSI, or their affiliates and to PCM, PFSI and other entities that provide services to PMT and the employees of such other entities.
The 2019 Plan is administered by the Company’s compensation committee, pursuant to authority delegated by PMT’s board of trustees, which has the authority to make awards to the eligible participants referenced above, and to determine what form the awards will take, and the terms and conditions of the awards.
The 2019 Plan allows for the grant of restricted and performance-based share and unit awards.
The shares underlying award grants will again be available for award under the 2019 Plan if:
Restricted share units have been awarded to trustees and officers of the Company and to other employees of PFSI and its subsidiaries at no cost to the grantees. Such awards generally vest over a one- to three-year period.
The following table summarizes the Company’s share-based compensation activity:
Grants:
Restricted share units
128
Performance share units
123
99
288
227
Grant date fair value:
2,134
2,006
1,581
1,551
3,715
3,557
Vestings:
129
Performance share units (1)
48
177
Forfeitures:
Compensation expense relating to share-based grants
Shares expected to vest:
Number of units (in thousands)
261
217
Grant date average fair value per unit
14.43
14.53
Note 23—Income Taxes
The Company’s effective tax rate was (56.4)% with consolidated pretax income of $38.8 million for the quarter ended March 31, 2023. The Company’s taxable REIT subsidiary (“TRS”) recognized a tax benefit of $21.8 million on a pretax loss of $90.1 million for the quarter ended March 31, 2023. For the same period in 2022, the TRS recognized a tax expense of $37.9 million
on pretax income of $272.8 million. The Company’s reported consolidated pretax income was $18.1 million for the quarter ended March 31, 2022. The primary difference between the Company’s effective tax rate and the statutory tax rate is generally attributable to nontaxable REIT income resulting from the dividends paid deduction.
The Company assesses the available positive and negative evidence to estimate whether sufficient future taxable income will be generated to permit use of the existing deferred tax assets. On the basis of this evaluation, as of March 31, 2023, the valuation allowance remains zero. The conclusion was primarily based on the fact that the TRS has reported cumulative GAAP income over the last three-year period ending March 31, 2023. The amount of deferred tax assets considered realizable could be adjusted in future periods based on future income.
In general, cash dividends declared by the Company will be considered ordinary income to the shareholders for income tax purposes. Some portion of the dividends may be characterized as capital gain distributions or a return of capital. For tax years beginning after December 31, 2017, the 2017 Tax Cuts and Jobs Act (subject to certain limitations) provides a 20% deduction from taxable income for ordinary REIT dividends.
Note 24—Earnings Per Common Share
The Company grants restricted share units which entitle the recipients to receive dividend equivalents during the vesting period on a basis equivalent to the dividends paid to holders of Common Shares. Unvested share-based compensation awards containing non-forfeitable rights to receive dividends or dividend equivalents (collectively, “dividends”) are classified as “participating securities” and are included in the basic earnings per share calculation using the two-class method.
Under the two-class method, all earnings (distributed and undistributed) are allocated to Common Shares and participating securities based on their respective rights to receive dividends. Basic earnings per share is determined by dividing net income available to common shareholders (net income reduced by preferred dividends and income attributable to the participating securities) by the weighted average Common Shares outstanding during the period.
The following table summarizes the basic and diluted earnings per share calculations:
(in thousands except per share amounts)
Effect of participating securities—share-based compensation awards
(140
(104
50,102
(29,688
Interest on Exchangeable Notes, net of income taxes
6,352
Income attributable to participating securities
Diluted net income (loss) attributable to common shareholders
56,462
Weighted average basic shares outstanding
Dilutive securities:
Shares issuable pursuant to exchange of the Exchangeable Notes
24,328
Shares issuable under share-based compensation plan
229
Diluted weighted average shares outstanding
Basic earnings (loss) per share
Diluted earnings (loss) per share
Calculation of diluted earnings per share requires certain potentially dilutive shares to be excluded when the inclusion of such shares would be anti-dilutive. The following table summarizes the potentially dilutive shares excluded from the diluted earnings per share calculation as inclusion of such shares would have been antidilutive:
133
Shares issuable pursuant to exchange of the Exchangeable Senior Notes
49
Note 25—Segments
The Company operates in four segments as described in Note 1 ‒ Organization.
The Company’s reportable segments are identified based on PMT’s investment strategies. The Company’s chief operating decision maker is its chief executive officer. The following disclosures about the Company’s business segments are presented consistent with the way the Company’s chief operating decision maker organizes and evaluates financial information for making operating decisions and assessing performance.
Financial highlights by operating segment are summarized below:
Credit
Interest rate
sensitive
Correspondent
strategies
production
Corporate
54,388
71,416
21,394
92,083
36,927
2,615
17,803
125,168
35,132
1,034
3,591
(33,085
1,795
7,844
7,900
58,035
14,638
16,112
Expenses:
Loan fulfillment and servicing fees payable to PFSI
20,372
32,372
636
2,408
7,603
11,936
713
21,661
14,331
14,860
Pretax income (loss)
57,322
(7,023
1,781
(13,279
Total assets at end of quarter
1,620,576
10,110,650
3,196,705
429,298
(44,905
(184,190
(4
3,957
2,058
29,110
19,181
10,128
41,685
11,560
141
(8,070
(12,575
7,621
573
14,966
15,254
(52,691
107,413
26,544
59
21,029
37,842
3,211
2,175
5,212
7,224
17,822
3,270
23,204
21,966
15,341
(55,961
84,209
4,578
(14,768
1,747,763
8,387,313
1,812,210
440,229
12,387,515
50
Note 26—Regulatory Capital and Liquidity Requirements
The Company, through PMC, is subject to financial eligibility requirements established by the Federal Housing Finance Agency for sellers/servicers eligible to sell or service mortgage loans with Fannie Mae and Freddie Mac. The eligibility requirements include:
The Agencies’ capital and liquidity amounts and requirements, are summarized below:
Net worth (1)
Tangible net worth / total assets ratio (1)
Liquidity (1)
Fannie Mae and Freddie Mac
Actual
Required
1,100,753
593,721
385,500
79,946
1,138,331
586,436
343,286
79,372
In August 2022, the Agencies issued revised capital and liquidity requirements. The requirements will be effective at various dates beginning September 30, 2023, for seller/servicers of mortgage loans to Fannie Mae and Freddie Mac. The Company believes it was in compliance with the Agencies’ revised requirements as of March 31, 2023.
Noncompliance with the Agencies’ capital and liquidity requirements can result in the Agencies taking various remedial actions up to and including removing the Company’s ability to sell loans to and service loans on behalf of the Agencies.
Note 27—Subsequent Events
Management has evaluated all events and transactions through the date the Company issued these consolidated financial statements. During this period, all agreements to repurchase assets that matured before the date of this Report were extended or renewed.
51
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis of financial condition and results of operations should be read with the consolidated financial statements and the related notes of PennyMac Mortgage Investment Trust (“PMT”) included within this Quarterly Report on Form 10-Q (this “Report”).
Statements contained in this Report may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements involve known and unknown risks, uncertainties and other factors, which may cause actual results to be materially different from those expressed or implied in such statements. You can identify these forward-looking statements by words such as “may,” “will,” “should,” “expect,” “anticipate,” “believe,” “estimate,” “intend,” “plan” and other similar expressions. You should consider our forward-looking statements in light of the risks discussed under the heading “Risk Factors,” as well as our consolidated financial statements, related notes, and the other financial information appearing elsewhere in this Report and our other filings with the United States Securities and Exchange Commission (“SEC”). The forward-looking statements contained in this Report are made as of the date hereof and we assume no obligation to update or supplement any forward-looking statements.
The following discussion and analysis provides information that we believe is relevant to an assessment and understanding of our consolidated results of operations and financial condition. Unless the context indicates otherwise, references in this Report to the words “we,” “us,” “our” and the “Company” refer to PMT and its affiliates.
We are a specialty finance company that invests primarily in mortgage-related assets. Our objective is to provide attractive risk-adjusted returns to our investors over the long-term, primarily through dividends and secondarily through capital appreciation. A significant portion of our investment portfolio is comprised of mortgage-related assets that we have created through our correspondent production activities, including mortgage servicing rights (“MSRs”), subordinate mortgage-backed securities (“MBS”), and credit risk transfer (“CRT”) arrangements, which include CRT Agreements (“CRT Agreements”) and CRT strips that absorb credit losses on certain of the loans we sold. We also invest in Agency MBS, subordinate credit-linked MBS and senior non-Agency MBS. We have also historically invested in distressed mortgage assets (distressed loans and real estate acquired in settlement of loans (“REO”)), which we have substantially liquidated.
We are externally managed by PNMAC Capital Management, LLC (“PCM”), an investment adviser that specializes in and focuses on U.S. mortgage assets. Our loans and MSRs are serviced by PennyMac Loan Services, LLC (“PLS”). PCM and PLS are both indirect controlled subsidiaries of PennyMac Financial Services, Inc. (“PFSI”), a publicly-traded mortgage banking and investment management company.
During the quarter ended March 31, 2023, we purchased newly originated prime credit quality residential loans with fair values totaling $20.4 billion as compared to $23.3 billion for the quarter ended March 31, 2022, in our correspondent production business. To the extent that we purchase loans that are insured by the U.S. Department of Housing and Urban Development through the Federal Housing Administration, or insured or guaranteed by the U.S. Department of Veterans Affairs or U.S. Department of Agriculture, we and PLS have agreed that PLS will fulfill and purchase such loans, as PLS is a Government National Mortgage Association (“Ginnie Mae”) approved issuer and we are not. This arrangement has enabled us to compete with other correspondent aggregators that purchase both government and conventional loans. During the quarter ended March 31, 2023, we sold $4.1 billion, in UPB of conventional loans to PLS in order to optimize our use and allocation of capital.
Our purchase volume included $13.5 billion and $13.2 billion of loans we sold to PLS during the quarters ended March 31, 2023 and 2022, respectively. We receive a sourcing fee from PLS based on the unpaid principal balance (“UPB”) of each loan that we sell to PLS under such arrangement, and earn interest income on the loan for the period we hold it before the sale to PLS. During the quarter ended March 31, 2023, we received sourcing fees totaling $1.3 million, relating to $13.3 billion, in UPB of loans that we sold to PLS.
We operate our business in four segments: Correspondent production, Interest rate sensitive strategies, Credit sensitive strategies and our Corporate operations as described below:
The Company primarily sells the loans it acquires through its correspondent production activities to government-sponsored entities ("GSEs") such as the Federal National Mortgage Association (“Fannie Mae”) and the Federal Home Loan Mortgage Corporation (“Freddie Mac”) or to PLS for sale into securitizations guaranteed by Ginnie Mae or the GSEs. Fannie Mae, Freddie Mac and Ginnie Mae are each referred to as an “Agency” and, collectively, as the “Agencies.”
Our Investment Activities
Correspondent Production
Our correspondent production activities involve the acquisition and sale of newly originated prime credit quality residential loans. Correspondent production has served as the source of our investments in MSRs, private label non-Agency securitizations and CRT arrangements. Our correspondent production and resulting investment activity are summarized below:
Sales of loans acquired for sale:
To nonaffiliates
To PennyMac Financial Services, Inc.
19,038,297
25,146,729
Investment activities resulting from correspondent production:
Receipt of MSRs as proceeds from sales of loans
Retention of interests in securitizations of loans secured by investment properties, net of associated asset-backed financings
Interest Rate Sensitive Investments
Our interest rate sensitive investments include:
March 31, 2023.
$142.7 million Agency fixed-rate pass-through securities and non-Agency senior MBS, net of sales during the quarter ended March 31, 2023. We held Agency fixed-rate pass-through securities and non-Agency senior MBS with fair values totaling approximately $4.4 billion at March 31, 2023.
Credit Sensitive Investments
CRT Arrangements
We held net CRT-related investments (comprised of deposits securing CRT arrangements, CRT derivatives, CRT strips and an interest-only security payable) totaling approximately $1.1 billion at March 31, 2023.
Subordinate Credit-Linked Mortgage-Backed Securities
Subordinate credit-linked MBS provide us with a higher yield than senior securities. However, we retain credit risk in the subordinate credit-linked MBS since they are the first securities to absorb credit losses relating to the underlying loans. We purchased approximately$12.4 million of subordinate credit-linked MBS during the quarter ended March 31, 2023. We held subordinate credit-linked MBS with fair values totaling approximately $196.7 million at March 31, 2023.
As the result of the Company’s consolidation of the variable interest entities that issued the subordinate MBS as described in Note 6 – Variable Interest Entities – Subordinate Mortgage-Backed Securities to the consolidated financial statements included in this Report, we include loans underlying these and similar transactions with unpaid principal balances (“UPB”) totaling approximately $1.8 billion on our consolidated balance sheet as of March 31, 2023.
53
Taxation
We believe that we qualify to be taxed as a REIT and as such will not be subject to federal income tax on that portion of our income that is distributed to shareholders as long as we meet applicable REIT asset, income and share ownership tests. If we fail to qualify as a REIT, and do not qualify for certain statutory relief provisions, our profits will be subject to income taxes and we may be precluded from qualifying as a REIT for the four tax years following the year we lose our REIT qualification.
A portion of our activities, including our correspondent production business, is conducted in our taxable REIT subsidiary (“TRS”), which is subject to corporate federal and state income taxes. Accordingly, we make a provision for income taxes with respect to the operations of our TRS. We expect that the effective rate for the provision for income taxes may be volatile in future periods. Our goal is to manage the business to take full advantage of the tax benefits afforded to us as a REIT.
We evaluate our deferred tax assets quarterly to determine if valuation allowances are required based on the consideration of all available positive and negative evidence using a “more-likely-than-not” standard with respect to whether deferred tax assets will be realized. Our evaluation considers, among other factors, taxable loss carryback availability, expectations of sufficient future taxable income, trends in earnings, existence of taxable income in recent years, the future reversal of temporary differences, and available tax planning strategies that could be implemented, if required. The ultimate realization of our deferred tax assets depends primarily on our ability to generate future taxable income during the periods in which the related deferred tax assets become deductible.
Non-Cash Investment Income
A substantial portion of our net investment income is comprised of non-cash items, including fair value adjustments and recognition of the fair value of assets created and liabilities incurred in loan sale transactions. Because we have elected, or are required by accounting principles generally accepted in the United States (“GAAP”), to record certain of our financial assets (comprised of MBS, loans acquired for sale at fair value, and loans at fair value), our derivatives and CRT strips, our MSRs, and our asset-backed financings and interest-only security payable at fair value, a substantial portion of the income or loss we record with respect to such assets and liabilities results from non-cash changes in fair value.
The amounts of net non-cash investment (loss) income items included in net investment income are as follows:
Loans:
Held in variable interest entities
384
32,224
(68,807
110,471
(268,118
Net loan servicing fees‒MSR valuation adjustments (2)
(183,705
347,554
56,972
183,779
Non-cash items as a percentage of net investment income
63
225
We receive or pay cash relating to:
54
Overview
Due to significant inflationary pressures, the U.S. Federal Reserve continued to raise the federal funds rate during the quarter ended March 31, 2023 and continues to reduce the federal government’s overall holdings of Treasury and mortgage-backed securities. Increasing interest rates and a slowing economy are expected to continue to reduce the size of the mortgage origination market from an estimated $2.2 trillion in 2022 to a projected range from $1.6 trillion to $1.8 trillion for 2023 according to leading economists.
Lower projected mortgage transaction volumes and increasing interest rates have caused a decrease in mortgage production activities and increased competition in the mortgage production business, while also leading to a reduction in prepayment speeds in our mortgage servicing portfolio from the same time in the prior year. Rising interest rates have increased the costs of floating rate borrowings and have generated greater interest income from our placement fees on deposits and loans held for sale. We have also increased our sales of conventional loans to PLS.
At a macroeconomic level, increasing interest rates may also lead to a reduction in economic activity and slowing home price growth or depreciation, which could lead to increasing mortgage delinquencies or defaults and increased losses. If these effects are realized, they could negatively affect the performance of our credit-sensitive assets such as CRT or subordinate credit-linked notes. However, many of the loans underlying our assets have favorable credit characteristics and low loan-to-value ratios which are likely to help offset the negative effects of credit performance in an economic downturn.
Due to certain capital rules, Fannie Mae and Freddie Mac have higher capital requirements to guarantee loans delivered by loan aggregators and may charge higher fees for third party originated loans that we aggregate and deliver to the Agencies as compared to individual loans delivered by mortgage lenders directly to the Agencies’ cash windows without the assistance of a loan aggregator. To the extent the Agencies increase the number of cash window purchases and sales for their own accounts, our business and results of operations could be materially and adversely affected. The competitive landscape for our correspondent business has also been affected by the exit of several large entities, which may present an opportunity for growth of our share in that business.
We intend to continue to sell conventional loans to PLS in the second quarter of 2023 to optimize our use and allocation of capital.
The following is a summary of our key performance measures:
(dollar amounts in thousands, except per common share amounts)
Pretax income
Pretax income (loss) by segment:
Credit sensitive strategies
Interest rate sensitive strategies
Correspondent production
Annualized return on average common shareholder's equity
13.9
(6.8
)%
Dividends per common share
Book value per common share
15.96
15.78
Closing price per common share
12.33
12.39
Our results of operations increased by $79.8 million during the quarter ended March 31, 2023, as compared to the quarter ended March 31, 2022, reflecting the effect of increased gains on MBS, increased valuation of CRT-related investments and a tax benefit, offset by the fair value performance of our MSR investments. The increase in pretax results is summarized below:
Our net investment income is summarized below:
Net loan origination fees
Net Gains (Losses) on Investments and Financings
The increase in net gains on investments for the quarter ended March 31, 2023, as compared to the same period in 2022, was caused primarily by increased gains from our investments in MBS and CRT arrangements as interest rates decreased and credit spreads tightened while the reverse occurred in the same period in 2022.
During the quarter ended March 31, 2023, we recognized net valuation gains of $78.2 million, as compared to valuation losses of $186.5 million for the same period in 2022. The gains recognized reflect a larger portfolio of assets and interest rate decreases along with credit spread tightening during the quarter ended March 31, 2023, as compared to the effect of increasing interest rates on fair value during the quarter ended March 31, 2022.
Loans at fair value – Held in VIEs and Asset-Backed Financings at Fair Value
Loans at fair value held in VIEs and Asset-backed financings at fair value recorded a net gain of $857,000 during the quarter ended March 31, 2023, as compared to a net loss of $7.4 million during the quarter ended March 31, 2022. The net gain during the quarter ended March 31, 2023, reflects the effect of decreasing interest rates during the period.
The activity in and balances relating to our CRT arrangements are summarized below:
57
The performance of our investments in CRT arrangements during the quarter ended March 31, 2023 reflects credit spread tightening (a decrease in the interest rate premium demanded by investors for instruments over those that are considered “risk free”) for CRT securities in the credit markets. This contrasts with CRT investments' fair value losses during the quarter ended March 31, 2022, when credit spreads widened.
Net Loan Servicing Fees
Our net loan servicing fees have two primary components: fees earned for servicing loans and the effects of MSR valuation changes, net of hedging results, as summarized below:
Effect of MSRs and hedging results
(191,850
148,179
Following is a summary of our loan servicing fees:
Loan servicing fees relate to our MSRs which are primarily related to servicing we provide for loans included in Agency securitizations. These fees are contractually established at an annualized percentage of the UPB of the loans serviced and we collect these fees from borrower payments. Other loan servicing fees are comprised primarily of borrower-contracted fees such as late charges, reconveyance fees and fees charged to correspondent lenders for loans repaid by the borrower shortly after purchase.
The change in contractually-specified fees during the quarter ended March 31, 2023, as compared to the same period in 2022, is due primarily to increased servicing fees resulting from the growth in our loan servicing portfolio.
The changes in other loan servicing fees during the quarter ended March 31, 2023, as compared to the same period in 2022, is due to a decrease in the volume of fees charged to correspondent lenders for loans paid off shortly after purchase, reflecting the effect of increasing interest rates on refinancing activity.
We have elected to carry our servicing assets at fair value. Changes in fair value have two components: changes due to realization of the contractual servicing fees and changes due to changes in inputs used to estimate the fair value of such items. We endeavor to moderate the effects of changes in fair value primarily by entering into derivatives transactions.
Changes in fair value of MSRs and hedging results are summarized below:
Change in fair value of MSRs
Realization of cash flows
Changes in valuation inputs used in valuation model
Hedging results
Total change in fair value of mortgage servicing rights and hedging results
(192,335
139,919
Recapture income from PFSI
Average balance of mortgage servicing rights
3,983,193
3,158,711
Changes in realization of cash flows are influenced by changes in the level of servicing assets and liabilities and changes in estimates of remaining cash flows to be realized. During the quarter ended March 31, 2023, realization of cash flows increased primarily due to the significant growth of our investment in MSRs as compared to the quarter ended March 31, 2022.
Changes in fair value due to changes in valuation inputs used in our valuation model during the quarter ended March 31, 2023 reflect the decrease in interest rates during such period, resulting in a downward fair value adjustment due to higher projected prepayments during the quarter ended March 31, 2023, as compared to the sharp increase in interest rates during the quarter ended March 31, 2022, causing the fair value of MSRs to significantly increase as future prepayment expectations decreased materially.
Hedging results reflect valuation losses in hedges against interest rates during the quarter ended March 31, 2023, during which interest rates decreased, as compared to the same period in 2022 when hedge losses were attributable to the sharp increase interest rates and elevated hedge costs. The loss from hedging activities decreased during the quarter ended March 31, 2023, as compared to the same period in 2022, since interest rates increased in 2023 while decreasing in 2022. The primary driver of the loss in the hedge in the period ended March 31, 2023 was the cost of the hedge, which was elevated in the period due to high interest rate volatility and an inverted yield curve.
The decrease in loan recapture income from PFSI reflects the decrease in refinancing activity in our MSR portfolio during the quarter ended March 31, 2023, as compared to the same period in 2022. We have an agreement with PFSI that requires that when PFSI refinances a loan for which we held the MSRs, we receive a recapture fee. The MSR recapture agreement is summarized in Note 4 ‒ Transactions with Related Parties – Operating Activities to the consolidated financial statements included in this Report.
Following is a summary of our loan servicing portfolio:
60
Net Gains on Loans Acquired for Sale
Our net gains on loans acquired for sale are summarized below:
From non-affiliates:
Receipt of MSRs in loan sale transactions
Changes in fair value of financial instruments during the periods:
From PFSI—cash
Interest rate lock commitments issued on loans acquired for sale:
7,587,587
10,194,318
To PFSI
3,780,852
11,368,439
Acquisition of loans for sale (UPB):
6,628,809
13,524,332
12,730,330
20,153,141
22,499,592
The changes in gain on loans acquired for sale during the quarter ended March 31, 2023, as compared to the same period in 2022, reflect the effect of stabilizing gain on sale margins for mortgage loans.
Non-cash elements of gain on sale of loans:
Our net gains on sales of loans includes our estimates of gains or losses we expect to realize upon the sale of mortgage loans we have committed to purchase but have not yet purchased or sold. Therefore, we recognize a substantial portion of our net gains on sales before we purchase the loans. These gains are reflected on our balance sheet as IRLC derivative assets and liabilities. We adjust the fair value of our IRLCs as the loan acquisition process progresses until we complete the acquisition or the commitment is canceled. Such adjustments are included in our gains on sales of loans acquired for sale. The fair value of our IRLCs become part of the carrying value of our loans when we complete the purchase of the loans. The methods and key inputs we use to measure the fair value of IRLCs are summarized in Note 7 – Fair value – Valuation Techniques and Inputs to the consolidated financial statements included in this Report.
61
The MSRs and liability for representations and warranties we recognize represent our estimate of the fair value of future benefits and costs we will realize for years in the future. These estimates change as circumstances change, and changes in these estimates are recognized in our results of operations in subsequent periods. Subsequent changes in the fair value of our MSRs significantly affect our results of operations.
The methods we use to measure and update the measurements of our MSRs as well as the effect of changes in valuation inputs on MSR fair value are detailed in Note 7 – Fair value – Valuation Techniques and Inputs to the consolidated financial statements included in this Report.
Liability for Losses Under Representations and Warranties
We recognize a liability for losses we expect to incur relating to the representations and warranties we provide to purchasers in our loan sales transactions. The representations and warranties require adherence to purchaser and insurer origination and underwriting guidelines, including but not limited to the validity of the lien securing the loan, property eligibility, borrower credit, income and asset requirements, and compliance with applicable federal, state and local law.
We recorded a provision for losses relating to representations and warranties relating to current loan sales of $940,000 and $1.3 million for the quarters ended March 31, 2023 and 2022, respectively. The decrease in the provision relating to current loan sales reflects the decrease of our loan sales volume and reduced default and loss-given default assumptions.
In the event of a breach of our representations and warranties, we may be required to either repurchase the loans with the identified defects or indemnify the investor or insurer against credit losses attributable to the loans with indemnified defects. In such cases, we bear any subsequent credit loss on the loans. Our credit loss may be reduced by any recourse we have to correspondent sellers that, in turn, had sold such loans to us and breached similar or other representations and warranties. In such event, we have the right to seek a recovery of those repurchase losses from that correspondent seller.
Following is a summary of the indemnification and repurchase activity and loans subject to representations and warranties:
Indemnification activity (UPB):
Loans indemnified at beginning of quarter
8,108
2,782
New indemnifications
3,234
Less: Indemnified loans repaid or refinanced
748
Loans indemnified at end of quarter
10,594
Indemnified loans indemnified by correspondent lenders at end of quarter
2,149
1,112
UPB of loans with deposits received from correspondent sellers collateralizing prospective indemnification losses at end of quarter
213
Repurchase activity (UPB):
Loans repurchased
19,199
24,234
Less:
Loans repurchased by correspondent sellers
15,267
16,844
Loans resold or repaid by borrowers
3,901
11,172
Net loans repurchased (resolved) with losses chargeable to liability to representations and warranties
(3,782
Losses charged to liability for representations and warranties
388
At end of quarter:
Loans subject to representations and warranties
Liability for representations and warranties
62
The losses on representations and warranties we have recorded to date have been moderated by our ability to recover most of the losses inherent in the repurchased loans from the correspondent sellers. As the outstanding balance of loans we purchase and sell subject to representations and warranties increases, as the loans sold mature, as our investors’ and guarantors’ loss mitigation strategies change and as our correspondent sellers’ ability and willingness to repurchase loans change, we expect that the level of repurchase activity and associated losses may increase.
The method we use to estimate the liability for representations and warranties is a function of our estimates of future defaults, loan repurchase rates, severity of loss in the event of default and the probability of reimbursement by the correspondent loan seller. We establish a liability at our estimate of its fair value at the time loans are sold and review our liability estimate on a periodic basis.
The amount of the liability for representations and warranties is difficult to estimate and requires considerable judgment. The level of loan repurchase losses is dependent on economic factors, investor loss mitigation strategies, our ability to recover any losses inherent in the repurchased loan from the correspondent seller and other external conditions that change over the lives of the underlying loans. We may be required to incur losses related to such representations and warranties for several periods after the loans are sold or liquidated.
We record adjustments to our liability for losses on representations and warranties as economic fundamentals change, as investor and Agency evaluations of their loss mitigation strategies (including claims under representations and warranties) change and as economic conditions affect our correspondent sellers’ ability or willingness to fulfill their recourse obligations to us. Such adjustments may be material to our financial position and results of operations in future periods.
Adjustments to our liability for representations and warranties are included as a component of our Net gains on loans acquired for sale at fair value. We recorded a $616,000 reduction in liability for representations and warranties during the quarter ended March 31, 2023 due to the effects of certain loans reaching specified performance histories identified by the Agencies as sufficient to limit repurchase claims relating to such loans. We recorded a $1.2 million reduction in liability for representations and warranties during the quarter ended March 31, 2022 due to the effects of certain loans reaching specified performance histories identified by the Agencies as sufficient to limit repurchase claims relating to such loans.
Loan Origination Fees
Loan origination fees represent fees we charge correspondent sellers relating to our purchase of loans from those sellers. The decrease in fees during the quarter ended March 31, 2023, as compared to the same period in 2022, reflects a decrease in our purchases of loans with delivery fees.
Net Interest Expense
income/
Average
yield/
expense
cost %
538,073
4.76
241,963
0.67
4,464,996
4.64
2,815,409
2.05
6.36
3.62
Held by variable interest entities
1,507,128
4.08
1,555,874
3.30
3,478
-0.82
4,065
17.12
15,159
4.07
13,023
3.34
1,285,678
4.48
1,665,568
0.05
123,809
10,158,397
4.94
47,296
8,412,547
2.25
5.61
1.25
6.95
1.97
7.95
6.22
6.28
3.55
3.02
176,240
12,020,777
5.95
55,460
9,464,630
2.34
64
The effects of changes in the yields and costs and composition of our investments on our net interest expense are summarized below:
Quarter ended March 31, 2023 vs. Quarter ended March 31, 2022
Increase (decrease)due to changes in
Rate
Volume
4,913
995
5,908
24,945
11,794
36,739
15,472
2,268
17,740
2,740
(423
2,317
(159
(22
(181
2,581
(445
2,136
14,054
(64
13,990
61,965
14,548
76,513
25,211
232
101,956
74,940
9,756
84,696
Mortgage loan participation purchase and sale agreement
251
(134
117
31,134
3,447
34,581
(206
266
1,712
(386
1,326
107,831
12,949
120,780
(6,013
331
115,623
Increase in net interest expense
(45,866
1,599
(13,667
The increase in net interest expense during the quarter ended March 31, 2023, as compared to the same period in 2022, is due to an increase in the average balance of our financing that was not fully matched by the increase in our interest-earning assets, partially offset by an increase in placement fees relating to custodial funds we manage in our MSR portfolio.
Our expenses are summarized below:
Expenses decreased $12.2 million, or 19%, during the quarter ended March 31, 2023, as compared to the same period in 2022, as discussed below.
Loan Servicing Fees
Loan servicing fees payable to PLS are summarized below:
Loan servicing fees decreased by $639,000 during the quarter ended March 31, 2023, as compared to the same period in 2022. We incur loan servicing fees primarily in support of our MSR portfolio. The decrease in loan servicing fees is due to reductions in COVID-19 pandemic-related forbearance and modification activities, partially offset by growth in our MSR portfolio.
Loan Fulfillment Fees
Loan fulfillment fees represent fees we pay to PLS for the services it performs on our behalf in connection with our acquisition, packaging and sale of loans. Fulfillment fees decreased $4.8 million during the quarter ended March 31, 2023, compared to the same period in 2022. The decrease was due to a decrease in loan commitment volume. Our loan fulfillment fee structure is described in Note 4 – Transactions with Related Parties to the consolidated financial statements included in this Report.
Management fees payable to PCM are summarized below:
Base
Management fees decreased by $860,000 during the quarter ended March 31, 2023, as compared to the same period in 2022. This decrease reflects the decrease in our average shareholders’ equity during the quarter ended March 31, 2023, as compared to the quarter ended March 31, 2022.
Loan origination expenses decreased $664,000, or 23%, during the quarter ended March 31, 2023, as compared to the same period in 2022, primarily reflecting a decrease in our loan originations produced through our correspondent production activities.
Other Expenses
Other expenses are summarized below:
Common overhead allocation from PFSI
Technology
548
468
Bank service charges
496
565
Insurance
435
395
1,701
654
Income Taxes
We have elected to treat PMC as a taxable REIT subsidiary (“TRS”). Income from a TRS is only included as a component of REIT taxable income to the extent that the TRS makes dividend distributions of income to us. A TRS is subject to corporate federal and state income tax. Accordingly, a provision for income taxes for PMC is included in the accompanying consolidated statements of operations.
The Company’s effective tax rate was (56.4)% with consolidated pretax income of $38.8 million for the quarter ended March 31, 2023. The Company’s TRS recognized a tax benefit of $21.8 million on a pretax loss of $90.1 million for the quarter ended March 31, 2023. For the same period in 2022, the TRS recognized tax expense of $37.9 million on pretax income of $272.8 million, while the Company’s reported consolidated pretax income for the quarter ended March 31, 2022 was $18.1 million. The primary difference between the Company’s effective tax rate and the statutory tax rate is generally attributable to nontaxable REIT income resulting from the dividends paid deduction.
The Company assesses the available positive and negative evidence to estimate whether sufficient future taxable income will be generated to permit use of the existing deferred tax assets. On the basis of this evaluation, as of March 31, 2023, the valuation allowance remains zero as a result of cumulative GAAP income at the TRS for the three-year period ended March 31, 2022. The amount of deferred tax assets considered realizable could be adjusted in future periods based on future income.
The Inflation Reduction Act was signed into law on August 16, 2022 (the "Act"). Effective for tax years beginning after December 31, 2022, the Act imposes a 15% Alternative Minimum Tax ("AMT") on the adjusted financial statement income ("AFSI") of Applicable Corporations. The term "Applicable Corporations" does not include REITs but does include taxable REIT subsidiaries whose 3-year average AFSI exceeds $1 billion. Based on the current legislation and the definition of AFSI we do not expect that our TRS will be subject to this AMT in the foreseeable future.
67
Following is a summary of key balance sheet items as of the dates presented:
Investments:
Short-term
14,929,424
13,473,175
309,133
336,523
Debt:
Long-term
4,764,246
4,787,162
12,878,354
11,403,690
508,141
555,059
Shareholders’ equity
Total assets increased by approximately $1.4 billion, or 10%, during the period from December 31, 2022 through March 31, 2023, primarily due to an increase of $1.3 billion in Loans acquired for sale at fair value and $166.4 million in Mortgage-backed securities at fair value partially offset by decreases in MSRs of $37.7 million and Deposits securing credit risk transfer arrangements of $27.4 million.
Our asset acquisitions are summarized below.
Following is a summary of our correspondent production acquisitions at fair value:
Correspondent loan purchases:
Government-sponsored entity ("GSE") eligible (1)
10,755,072
10,197,961
Held for sale to PLS ‒ Government insured or guaranteed
9,661,960
13,133,460
Advances to home equity lines of credit
20,417,078
23,331,468
During the quarter ended March 31, 2023, we purchased for sale $20.4 billion in fair value of correspondent production loans as compared to $23.3 billion during the quarter ended March 31, 2022. The decrease in loan production reflects the effect of decreased loan demand as a result of the increasing interest rate environment during the quarter ended March 31, 2023, as compared to the same period in 2022.
Other Investment Activities
Following is a summary of our acquisitions of mortgage-related investments held in our credit rate sensitive strategies and interest rate sensitive strategies segments:
Credit sensitive assets:
Loans secured by investment properties, net of associated asset-backed financing
Interest rate sensitive assets:
Mortgage-backed securities (net of sales)
155,052
Mortgage servicing rights received in loan sales
255,670
856,370
879,855
Our acquisitions during the quarters ended March 31, 2023 and 2022 were financed through the use of a combination of proceeds from borrowings and liquidations of existing investments. We continue to identify additional means of increasing our investment portfolio through cash flow from our business activities, existing investments, borrowings, and transactions that minimize current cash outlays. However, we expect that, over time, our ability to continue our investment portfolio growth will depend on our ability to raise additional equity capital.
Following is a summary of our MBS holdings:
Fair
Life
Principal
(in years)
Coupon
Agency pass-through securities
6.9
5.1
10.1
3.5
4.1
11.8
4.6
11.2
14.3
2.5
Following is a summary of the composition of the loans underlying our investment in funded CRT arrangements:
(23,205
(21,925
1,147,787
1,144,078
UPB of loans subject to credit guarantee obligations
Following is a summary of the composition of the loans underlying our investment in CRT arrangements as of March 31, 2023:
Year of origination
2020
2019
2017
2016
2015
(in millions)
UPB:
Outstanding
11,528
3,024
2,549
2,071
651
24,824
Liquidations:
Balances
3.4
54.7
159.2
115.7
57.5
390.5
Losses
0.2
5.4
19.6
12.1
6.8
44.1
Modifications:
66.0
537.0
294.3
897.3
0.8
7.0
16.5
Original debt-to income ratio
<25%
1,032
1,730
278
322
70
3,742
25 - 30%
803
1,458
248
294
280
71
3,154
30 - 35%
1,764
352
393
357
98
3,848
35 - 40%
864
2,061
489
461
394
118
4,387
40 - 45%
862
2,490
650
543
5,438
>45%
556
2,025
941
429
187
4,255
33.4
35.8
38.9
36.5
35.0
31.3
35.6
Origination FICO credit score
600 - 649
164
330
650 - 699
1,089
390
253
130
2,747
700 - 749
1,183
3,381
1,072
866
199
7,355
750 or greater
3,525
6,862
1,238
1,259
1,145
311
14,340
Not available
764
754
736
745
751
742
753
Origination loan-to value ratio
<80%
2,352
4,080
971
825
9,329
80-85%
2,209
718
727
559
172
5,224
85-90%
327
131
114
1,398
90-95%
453
1,220
347
231
2,632
95-100%
1,030
3,369
850
555
328
109
6,241
80.7
83.3
83.5
82.5
81.0
82.4
Current loan-to value ratio (1)
4,956
11,402
2,992
2,545
24,617
89
147
>100%
56.6
56.3
53.5
48.3
41.4
53.8
(1) Based on current UPB compared to estimated fair value of the property securing the loan.
Geographic distribution
CA
510
370
265
391
2,771
FL
554
1,120
389
268
223
2,612
TX
605
1,004
243
219
263
101
2,435
VA
514
121
144
1,214
MD
195
482
136
137
1,130
2,875
7,292
1,776
1,532
913
274
14,662
Regional geographicdistribution (1)
Northeast
464
1,412
354
369
96
2,958
Southeast
3,978
1,085
880
653
202
8,499
Midwest
465
1,213
258
244
188
2,415
Southwest
1,314
2,560
577
499
392
5,479
West
1,057
2,365
750
557
575
169
5,473
Collection status
Delinquency
Current - 89 Days
4,982
11,414
2,966
2,529
649
24,601
90 - 179 Days
107
180+ Days
92
Our cash flows for the quarters ended March 31, 2023 and 2022 are summarized below:
Operating activities
Investing activities
Financing activities
Net cash flows
Our cash flows resulted in a net increase in cash of $6.8 million during the quarter ended March 31, 2023, as discussed below.
Cash used in operating activities totaled $1.3 billion during the quarter ended March 31, 2023, as compared to cash provided by our operating activities of $1.7 billion during the quarter ended March 31, 2022. Cash flows from operating activities are most influenced by cash flows from loans acquired for sale as shown below:
Operating cash flows from:
Loans acquired for sale
(1,397,980
1,791,027
121,768
(44,002
Cash flows from loans acquired for sale primarily reflect changes in the level of production inventory from the beginning to end of the periods presented. Our inventory of loans held for sale increased during the quarter ended March 31, 2023, as compared to a decrease during the same period in 2022.
Net cash used in our investing activities was $122.7 million for the quarter ended March 31, 2023, as compared to net cash used in our investing activities of $196.6 million for the quarter ended March 31, 2022, primarily due to purchases of our investments in MBS in excess of sales and repayments of such assets and an increase in margin deposits partially offset by repayments from our investments in CRT arrangements.
Net cash provided by our financing activities was $1.4 billion for the quarter ended March 31, 2023, as compared to net cash used in our financing activities of $1.4 billion for the quarter ended March 31, 2022. This change reflects increased financing requirements relating to loans acquired for sale.
As discussed below in Liquidity and Capital Resources, our Manager continually evaluates and pursues additional sources of financing to provide us with future investing capacity. We do not raise equity or enter into borrowings for the purpose of financing the payment of dividends. We believe that our cash earnings, are adequate to fund our operating expenses and dividend payment requirements. However, we manage our liquidity in the aggregate and are reinvesting our cash flows in new investments as well as using such cash to fund our dividend requirements.
Our liquidity reflects our ability to meet our current obligations (including the purchase of loans from correspondent sellers, our operating expenses and, when applicable, retirement of, and margin calls relating to, our debt and derivatives positions), make investments as our Manager identifies them, pursue our share repurchase program and make distributions to our shareholders. We generally need to distribute at least 90% of our taxable income each year (subject to certain adjustments) to our shareholders to qualify as a REIT under the Internal Revenue Code. This distribution requirement limits our ability to retain earnings and thereby replenish or increase capital to support our activities.
We expect our primary sources of liquidity to be cash flows from our investment portfolio, including cash earnings on our investments, cash flows from business activities, liquidation of existing investments and proceeds from borrowings and/or additional equity offerings. When we finance a particular asset, the amount borrowed is less than the asset’s fair value and we must provide the cash in the amount of such difference. Our ability to continue making investments is dependent on our ability to invest the cash representing such difference.
Debt Financing
Our current debt financing strategy is to finance our assets where we believe such borrowing is prudent, appropriate and available. We make collateralized borrowings in the form of sales of assets under agreements to repurchase, loan participation purchase and sale agreements and notes payable, including secured term financing for our MSRs and our CRT arrangements which has allowed us to more closely match the term of our borrowings to the expected lives of the assets securing those borrowings.
Our debt financing is summarized below:
Assets financed
Financing
MBS
CRT assets
MSRs (1)
REO
Borrowings
Short term
4,413,869
2,950,797
63,460
237,943
448,039
Long term
Notes payable secured by CRT arrangements and MSRs
576,808
2,214,150
Interest-only security payable
Total secured borrowings
1,466,540
837,956
2,662,189
12,331,351
Total borrowings
Shareholders' equity
Total financing
14,849,088
Assets pledged to secure borrowings
1,300,800
4,002,824
14,540,169
Debt-to-equity ratio:
Excluding non-recourse debt
5.8:1
6.5:1
Sales of Assets Under Agreements to Repurchase
Our repurchase agreements represent the sales of assets together with agreements for us to buy back the assets at a later date. Following is a summary of the activities in our repurchase agreements financing:
Average balance outstanding
Maximum daily balance outstanding
Ending balance
5,092,700
The difference between the maximum and average daily amounts outstanding is primarily due to timing of loan purchases and sales in our correspondent production business. The total facility size of our assets sold under agreements to repurchase was approximately $11.4 billion at March 31, 2023.
Because a significant portion of our current debt facilities consists of short-term borrowings, we expect to either renew these facilities in advance of maturity in order to ensure our ongoing liquidity and access to capital or otherwise allow ourselves sufficient time to replace any necessary financing.
As discussed above, all of our repurchase agreements, and mortgage loan participation purchase and sale agreements have short-term maturities:
Debt Covenants
Our debt financing agreements require us and certain of our subsidiaries to comply with various financial covenants. As of the filing of this Report, these financial covenants include the following:
Although these financial covenants limit the amount of indebtedness we may incur and impact our liquidity through minimum cash reserve requirements, we believe that these covenants currently provide us with sufficient flexibility to successfully operate our business and obtain the financing necessary to achieve that purpose.
PLS is also subject to various financial covenants, both as a borrower under its own financing arrangements and as our servicer under certain of our debt financing agreements. The most significant of these financial covenants currently include the following:
Many of our debt financing agreements contain a condition precedent to obtaining additional funding that requires us to maintain positive net income for at least one (1) of the previous two consecutive quarters, or other similar measures. For the most recent fiscal quarter, the Company is compliant with all such conditions. However, we may be required to obtain waivers from certain lenders in the future if this condition precedent is not met.
Our debt financing agreements also contain margin call provisions that, upon notice from the applicable lender at its option, require us to transfer cash or, in some instances, additional assets in an amount sufficient to eliminate any margin deficit. A margin deficit will generally result from any decline in the market value (as determined by the applicable lender) of the assets subject to the related financing agreement, although in some instances we may agree with the lender upon certain thresholds (in dollar amounts or percentages based on the market value of the assets) that must be exceeded before a margin deficit will arise. Upon notice from the applicable lender, we will generally be required to satisfy the margin call on the day of such notice or within one business day thereafter, depending on the timing of the notice.
74
Regulatory Capital and Liquidity Requirements
In addition to the financial covenants imposed upon us and PLS under our debt financing agreements, we and/or PLS, as applicable, are also subject to liquidity and net worth requirements established by the Federal Housing Finance Agency (“FHFA”) for Agency sellers/servicers and Ginnie Mae for single-family issuers. FHFA and Ginnie Mae have established minimum liquidity and net worth requirements for approved non-depository single-family sellers/servicers in the case of FHFA, and for approved single-family issuers in the case of Ginnie Mae, as summarized below:
We believe that we and PLS are currently in compliance with the applicable Agency requirements. In August 2022, the Agencies issued revised capital and liquidity requirements. The requirements will be effective at various dates beginning September 30, 2023, for issuers of securities guaranteed by seller/servicers of mortgage loans to Fannie Mae and Freddie Mac and issuers of Ginnie Mae securities. We believe that we and PLS were in compliance with the applicable Agencies’ revised requirements as of March 31, 2023.
Our Manager continues to explore a variety of additional means of financing our business, including debt financing through bank warehouse lines of credit, repurchase agreements, term financing, securitization transactions and additional equity offerings. However, there can be no assurance as to how much additional financing capacity such efforts will produce, what form the financing will take or that such efforts will be successful.
Off-Balance Sheet Arrangements
As of March 31, 2023, we have not entered into any off-balance sheet arrangements.
All debt financing arrangements that matured between March 31, 2023 and the date of this Report have been renewed, extended or replaced.
The amount at risk (the fair value of the assets pledged plus the related margin deposit, less the amount advanced by the counterparty and accrued interest) relating to our assets sold under agreements to repurchase is summarized by counterparty below as of March 31, 2023:
110,929
105,170
104,624
99,978
63,981
43,048
644,998
Critical Accounting Estimates
Preparation of financial statements in compliance with GAAP requires us to make estimates that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements, and revenues and expenses during the reporting period. Certain of these estimates significantly influence the portrayal of our financial condition and results, and they require us to make difficult, subjective or complex judgments. Our critical accounting policies primarily relate to our fair value estimates.
Our Annual Report on Form 10-K for the year ended December 31, 2022 contains a discussion of our critical accounting policies, which utilize relevant critical accounting estimates.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Market risk is the exposure to loss resulting from changes in interest rates, foreign currency exchange rates, commodity prices, equity prices, real estate values and other market-based risks. The primary market risks that we are exposed to are real estate risk, credit risk, interest rate risk, prepayment risk, inflation risk and market value risk.
Our primary trading asset is our inventory of loans acquired for sale. We believe that such assets’ fair values respond primarily to changes in the market interest rates for comparable recently-originated loans. Our other market-risk assets are a substantial portion of our investments and are primarily comprised of MSRs, CRT arrangements and MBS. We believe that the fair values of MSRs and MBS also respond primarily to changes in the market interest rates for comparable loans or yields on MBS. Changes in interest rates are reflected in the prepayment speeds underlying these investments and in the pricing spread (an element of the discount rate) used in their valuation. We believe that the primary market risks to the fair values of our investment in CRT arrangements are changes in market credit spreads and the fair value of the real estate securing the loans underlying such arrangements.
The following sensitivity analyses are limited in that they were performed at a particular point in time; only contemplate the movements in the indicated variables; do not incorporate changes to other variables; are subject to the accuracy of various models and assumptions used; and do not incorporate other factors that would affect our overall financial performance in such scenarios, including operational adjustments made by management to account for changing circumstances. For these reasons, the following estimates should not be viewed as earnings forecasts.
The following table summarizes the estimated change in fair value of our mortgage-backed securities as of March 31, 2023, given several hypothetical (instantaneous) changes in interest rates and parallel shifts in the yield curve:
Interest rate shift in basis points
-200
-75
-50
200
Change in fair value
246,425
103,163
70,413
(79,499
(122,922
(376,732
The following tables summarize the estimated change in fair value of MSRs as of March 31, 2023, given several shifts in pricing spread, prepayment speeds and annual per-loan cost of servicing:
Change in fair value attributable to shift in:
-20%
-10%
-5%
+5%
+10%
+20%
Pricing spread
223,452
108,805
53,697
(52,336
(103,357
(201,628
Prepayment speed
233,516
112,689
55,385
(53,572
(105,425
(204,325
70,559
35,279
17,640
(17,640
(35,279
(70,559
Following is a summary of the effect on fair value of various changes to the pricing spread input used to estimate the fair value of our CRT arrangements given several shifts in pricing spread:
Pricing spread shift in basis points
-100
-25
100
43,419
21,340
10,580
(10,403
(20,633
(40,589
Following is a summary of the effect on fair value of various instantaneous changes in home values from those used to estimate the fair value of our CRT arrangements given several shifts:
Property value shift in %
-15%
5%
10%
15%
(64,139
(37,009
(16,236
13,242
23,784
32,300
Item 4. Controls and Procedures
Disclosure Controls and Procedures
We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our reports filed under the Securities Exchange Act of 1934 (the “Exchange Act”) is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosures. However, no matter how well a control system is designed and operated, it can provide only reasonable, not absolute, assurance that it will detect or uncover failures within the Company to disclose material information otherwise required to be set forth in our periodic reports.
Our management has conducted an evaluation, with the participation of our Chief Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures as of the end of the period covered by this Report as required by paragraph (b) of Rules 13a-15 and 15d-15 under the Exchange Act. Based on our evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures were effective, as of the end of the period covered by this Report, to provide reasonable assurance that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the applicable rules and forms, and that it is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.
Changes in Internal Control over Financial Reporting
There have been no changes in our internal control over financial reporting during the quarter ended March 31, 2023 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Item 1. Legal Proceedings
From time to time, we may be involved in various legal actions, claims and proceedings arising in the ordinary course of business. As of March 31, 2023, we were not involved in any material legal actions, claims or proceedings.
Item 1A. Risk Factors
There are no material changes from the risk factors set forth under Item 1A. “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2022, filed with the SEC on February 24, 2023.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
There were no sales of unregistered equity securities during the quarter ended March 31, 2023.
The following table provides information about our repurchases of Common Shares of beneficial interest (“Common Shares”) during the quarter ended March 31, 2023:
Period
Totalnumber ofsharespurchased
Averageprice paidper share
Total number ofsharespurchased aspart of publiclyannounced plansor programs (1)
Amountavailable forfuture sharerepurchasesunder theplans orprograms (1)
(in thousands, except average price paid per share)
January 1, 2023 – January 31, 2023
12.63
101,517
February 1, 2023 –February 28, 2023
March 1, 2023 – March 31, 2023
11.80
94,244
Item 3. Defaults Upon Senior Securities
None
Item 4. Mine Safety Disclosures
Not applicable
Item 5. Other Information
Item 6. Exhibits
Incorporated by Reference from the
Below-Listed Form (Each Filed under
SEC File Number 001-34416)
Exhibit No.
Exhibit Description
Form
Filing Date
3.1
Declaration of Trust of PennyMac Mortgage Investment Trust, as amended and restated.
10-Q
November 6, 2009
3.2
Second Amended and Restated Bylaws of PennyMac Mortgage Investment Trust
8-K
March 16, 2018
3.3
Articles Supplementary classifying and designating the 8.125% Series A Fixed-to-Floating Rate Cumulative Redeemable Preferred Shares of Beneficial Interest.
8-A
March 7, 2017
Articles Supplementary classifying and designating the 8.00% Series B Fixed-to-Floating Rate Cumulative Redeemable Preferred Shares of Beneficial Interest.
June 30, 2017
Articles Supplementary classifying and designating the 6.75% Series C Cumulative Redeemable Preferred Shares of Beneficial Interest.
August 20, 2021
Omnibus Assignment, Assumption and Amendment, dated March 16, 2023, among Credit Suisse First Boston Mortgage Capital LLC, Credit Suisse AG, Cayman Islands Branch, Alpine Securitization LTD, Atlas Securitized Products, L.P., Atlas Securitized Products Investments 3, L.P., Atlas Securitized Products Funding 2, L.P., and Nexera Holding LLC, PennyMac Corp., PennyMac Holdings, LLC, PennyMac Operating Partnership, L.P., PMC REO Financing Trust, PMC REO Trust 2015-1, and PennyMac Mortgage Investment Trust.
March 17, 2023
10.2
Joint Assignment, Assumption and Amendment No. 7 to the Series 2017-VF1 Repurchase Agreement, Amendment No. 1 to the Series 2017-VF1 Pricing Side Letter, Amendment No. 3 to the Series 2017-VF1 Side Letter Agreement and Amendment No. 1 to the VFN Repo Guaranty, dated March 16, 2023, among Credit Suisse First Boston Mortgage Capital LLC, Credit Suisse AG, Cayman Islands Branch, Citibank, N.A., Atlas Securitized Products, L.P., Atlas Securitized Products Investments 3, L.P., Atlas Securitized Products Funding 2, L.P., Nexera Holding LLC, PennyMac Corp., and PennyMac Mortgage Investment Trust.
10.3
Joint Assignment, Assumption and Amendment No. 2 to Advance PC Repurchase Agreement, No. 2 to Amended and Restated Pricing Side Letter and Amendment No. 1 to the Advance PC Repo Guaranty, dated March 16, 2023, among Credit Suisse First Boston Mortgage Capital LLC, Credit Suisse AG, Cayman Islands Branch, Atlas Securitized Products, L.P., Nexera Holding LLC, PennyMac Corp., and PennyMac Mortgage Investment Trust.
10.4†
Separation Agreement and General Release date as of March 21, 2023.
8-K/A
March 24, 2023
31.1
Certification of David A. Spector pursuant to Rule 13a-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
*
31.2
Certification of Daniel S. Perotti pursuant to Rule 13a-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1**
Certification of David A. Spector pursuant to Rule 13a-14(b) and 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
**
32.2**
Certification of Daniel S. Perotti pursuant to Rule 13a-14(b) and 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
Interactive data files pursuant to Rule 405 of Regulation S-T: (i) the Consolidated Balance Sheets as of March 31, 2023 and December 31, 2022 (ii) the Consolidated Statements of Operation for the quarter ended March 31, 2023 and March 31, 2022, (iii) the Consolidated Statements of Changes in Stockholders’
Equity for the quarter ended March 31, 2023 and March 31, 2022, (iv) the Consolidated Statements of Cash Flows for the quarter ended March 31, 2023 and March 31, 2022 and (v) the Notes to the Consolidated Financial Statements.
101.INS
Inline XBRL Instance Document – the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.
101.SCH
Inline XBRL Taxonomy Extension Schema Document
101.CAL
Inline XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF
Inline XBRL Taxonomy Extension Definition Linkbase Document
101.LAB
Inline XBRL Taxonomy Extension Label Linkbase Document
101.PRE
Inline XBRL Taxonomy Extension Presentation Linkbase Document
104
Cover Page Interactive Data File (embedded within the Inline XBRL document)
* Filed herewith.
† Indicates management contract or compensatory plan or arrangement.
** The certifications attached hereto as Exhibits 32.1 and 32.2 are furnished to the SEC pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and shall not be deemed filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, nor shall it be deemed incorporated by reference in any filing under the Securities Act of 1933, as amended, except as shall be expressly set forth by specific reference in such filing.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Pennymac Mortgage Investment Trust
(Registrant)
Dated: May 4, 2023
By:
/s/ David A. Spector
David A. Spector
Chairman and Chief Executive Officer
(Principal Executive Officer)
/s/ Daniel S. Perotti
Daniel S. Perotti
Senior Managing Director and Chief Financial Officer
(Principal Financial Officer)
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