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PennyMac Mortgage Investment Trust
PMT
#5925
Rank
$0.98 B
Marketcap
๐Ÿ‡บ๐Ÿ‡ธ United States
Country
$11.35
Share price
1.34%
Change (1 day)
-17.45%
Change (1 year)
๐Ÿ  Real estate๐Ÿ’ฐ Investment ๐Ÿ˜๏ธ REITs
Categories
  1. PennyMac Mortgage Investment Trust
  2. Quarterly Reports (10-Q)
  3. Financial Year FY2023 Q3

PennyMac Mortgage Investment Trust - 10-Q quarterly report FY2023 Q3


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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 September 30, 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 Preferred
Shares of Beneficial Interest, $0.01 Par Value

PMT PRA

New York Stock Exchange

8.00% Series B Cumulative Redeemable Preferred
Shares of Beneficial Interest, $0.01 Par Value

 

PMT PRB

 

New York Stock Exchange

6.75% Series C Cumulative Redeemable Preferred
Shares of Beneficial Interest, $0.01 Par Value

 

PMT PRC

 

New York Stock Exchange

8.50% Senior Note Due 2028

PMTU

New York Stock Exchange

 

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 October 30, 2023

Common Shares of Beneficial Interest, $0.01 par value

86,624,044

 

 

 

PENNYMAC MORTGAGE INVESTMENT TRUST

FORM 10-Q

September 30, 2023

TABLE OF CONTENTS

 

 

 

Page

Special Note Regarding Forward-Looking Statements

1

PART I. FINANCIAL INFORMATION

4

Item 1.

Financial Statements (Unaudited)

4

 

Consolidated Balance Sheets

4

 

Consolidated Statements of Operations

6

 

Consolidated Statements of Changes in Shareholders’ Equity

7

 

Consolidated Statements of Cash Flows

9

 

Notes to Consolidated Financial Statements

11

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

58

 

Our Company

58

 

Results of Operations

61

 

Net Investment Income

62

 

Expenses

72

 

Balance Sheet Analysis

74

 

Asset Acquisitions

74

 

Investment Portfolio Composition

75

 

Cash Flows

78

 

Liquidity and Capital Resources

79

 

Off-Balance Sheet Arrangements and Aggregate Contractual Obligations

82

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

83

Item 4.

Controls and Procedures

84

PART II. OTHER INFORMATION

85

Item 1.

Legal Proceedings

85

Item 1A

 

Risk Factors

 

85

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

85

Item 3.

Defaults Upon Senior Securities

85

Item 4.

Mine Safety Disclosures

85

Item 5.

Other Information

85

Item 6.

Exhibits

86

 

 

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:

•
projections of our revenues, income, earnings per share, capital structure or other financial items;
•
descriptions of our plans or objectives for future operations, products or services;
•
forecasts of our future economic performance, interest rates, profit margins and our share of future markets; and
•
descriptions of assumptions underlying or relating to any of the foregoing expectations regarding the timing of generating any revenues.

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:

•
changes in interest rates and other macroeconomic conditions;
•
our ability to comply with various federal, state and local laws and regulations that govern our business;
•
changes in our investment objectives or investment or operational strategies, including any new lines of business or new products and services that may subject us to additional risks;
•
changes in real estate values, housing prices and housing sales;
•
the degree and nature of our competition;
•
volatility in our industry, the debt or equity markets, the general economy or the real estate finance and real estate markets specifically, whether the result of market events or otherwise;
•
events or circumstances which undermine confidence in the financial and housing markets or otherwise have a broad impact on financial and housing markets, such as the sudden instability or collapse of large depository institutions or other significant corporations, terrorist attacks, natural or man-made disasters, or threatened or actual armed conflicts;
•
changes in general business, economic, market, employment and domestic and international political conditions, or in consumer confidence and spending habits from those expected;
•
the availability of, and level of competition for, attractive risk-adjusted investment opportunities in loans and mortgage-related assets that satisfy our investment objectives;
•
the inherent difficulty in winning bids to acquire loans, and our success in doing so;
•
the concentration of credit risks to which we are exposed;
•
our dependence on our Manager and servicer, potential conflicts of interest with such entities and their affiliates, and the performance of such entities;
•
changes in personnel and lack of availability of qualified personnel at our Manager, servicer or their affiliates;
•
the availability, terms and deployment of short-term and long-term capital;
•
the adequacy of our cash reserves and working capital;

1

 

•
our substantial amount of debt;
•
our ability to maintain the desired relationship between our financing and the interest rates and maturities of our assets;
•
the timing and amount of cash flows, if any, from our investments;
•
our exposure to risks of loss and disruptions in operations resulting from adverse weather conditions, man-made or natural disasters, climate change and pandemics such as the COVID-19 pandemic;
•
unanticipated increases or volatility in financing and other costs, including a rise in interest rates;
•
the performance, financial condition and liquidity of borrowers;
•
the ability of our servicer, which also provides us with fulfillment services, to approve and monitor correspondent sellers and underwrite loans to investor standards;
•
incomplete or inaccurate information or documentation provided by customers or counterparties, or adverse changes in the financial condition of our customers and counterparties;
•
our indemnification and repurchase obligations in connection with loans we purchase and later sell or securitize;
•
the quality and enforceability of the collateral documentation evidencing our ownership and rights in the assets in which we invest;
•
increased rates of delinquency, default and/or decreased recovery rates on our investments;
•
the performance of loans underlying mortgage-backed securities in which we retain credit risk;
•
our ability to foreclose on our investments in a timely manner or at all;
•
the degree to which our hedging strategies may or may not protect us from interest rate volatility;
•
the effect of the accuracy of or changes in the estimates we make about uncertainties, contingencies and asset and liability valuations when measuring and reporting upon our financial condition and results of operations;
•
our ability to maintain appropriate internal control over financial reporting;
•
technology failures, cybersecurity risks and incidents, and our ability to mitigate cybersecurity risks and cyber intrusions;
•
our ability to obtain and/or maintain licenses and other approvals in those jurisdictions where required to conduct our business;
•
our ability to detect misconduct and fraud;
•
changes in our CRT arrangements and agreements;
•
developments in the secondary markets for our loan products;
•
legislative and regulatory changes that impact the loan industry or housing market;
•
changes in regulations that impact the business, operations or governance of mortgage lenders and/or publicly-traded companies or such changes that increase the cost of doing business with such entities;
•
the Consumer Financial Protection Bureau and its issued and future rules and the enforcement thereof;
•
changes in government support of homeownership;
•
our ability to effectively identify, manage and hedge our credit, interest rate, prepayment, liquidity and climate risks;
•
changes in government or government-sponsored home affordability programs;
•
limitations imposed on our business and our ability to satisfy complex rules for us to qualify as a real estate investment trust (“REIT”) for U.S. federal income tax purposes and qualify for an exclusion from the Investment Company Act of 1940 and the ability of certain of our subsidiaries to qualify as REITs or as taxable REIT subsidiaries for U.S. federal income tax purposes, as applicable, and our ability and the ability of our subsidiaries to operate effectively within the limitations imposed by these rules;
•
changes in governmental regulations, accounting treatment, tax rates and similar matters (including changes to laws governing the taxation of REITs, or the exclusions from registration as an investment company);

2

 

•
our ability to make distributions to our shareholders in the future;
•
our failure to deal appropriately with issues that may give rise to reputational risk; and
•
our organizational structure and certain requirements in our charter documents.

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

 

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

PENNYMAC MORTGAGE INVESTMENT TRUST AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS (UNAUDITED)

 

 

 

September 30,

 

 

December 31,

 

 

 

2023

 

 

2022

 

 

 

(in thousands, except share information)

 

ASSETS

 

 

 

 

 

 

Cash

 

$

236,396

 

 

$

111,866

 

Short-term investments at fair value

 

 

150,059

 

 

 

252,271

 

Mortgage-backed securities at fair value pledged to creditors

 

 

4,665,970

 

 

 

4,462,601

 

Loans acquired for sale at fair value ($1,019,247 and $1,801,368 pledged to creditors, respectively)

 

 

1,025,730

 

 

 

1,821,933

 

Loans at fair value ($1,370,220 and $1,510,148 pledged to creditors, respectively)

 

 

1,372,118

 

 

 

1,513,399

 

Derivative assets ($7,010 and $1,262 pledged to creditors, respectively)

 

 

29,750

 

 

 

84,940

 

Deposits securing credit risk transfer arrangements pledged to creditors

 

 

1,237,294

 

 

 

1,325,294

 

Mortgage servicing rights at fair value ($4,038,113 and $3,962,820 pledged to creditors, respectively)

 

 

4,108,661

 

 

 

4,012,737

 

Servicing advances ($76,740 and $100,888 pledged to creditors, respectively)

 

 

93,614

 

 

 

197,972

 

Due from PennyMac Financial Services, Inc.

 

 

2,252

 

 

 

3,560

 

Other ($2,466 and $3,297 pledged to creditors, respectively)

 

 

301,492

 

 

 

134,991

 

Total assets

 

$

13,223,336

 

 

$

13,921,564

 

LIABILITIES

 

 

 

 

 

 

Assets sold under agreements to repurchase

 

$

6,020,716

 

 

$

6,616,528

 

Mortgage loan participation purchase and sale agreements

 

 

23,991

 

 

 

—

 

Notes payable secured by credit risk transfer and mortgage servicing assets

 

 

2,825,591

 

 

 

2,804,028

 

Unsecured senior notes

 

 

599,754

 

 

 

546,254

 

Asset-backed financing of variable interest entities at fair value

 

 

1,279,059

 

 

 

1,414,955

 

Interest-only security payable at fair value

 

 

28,288

 

 

 

21,925

 

Derivative and credit risk transfer strip liabilities at fair value

 

 

140,494

 

 

 

167,226

 

Accounts payable and accrued liabilities

 

 

92,633

 

 

 

160,212

 

Due to PennyMac Financial Services, Inc.

 

 

27,613

 

 

 

36,372

 

Income taxes payable

 

 

202,967

 

 

 

151,778

 

Liability for losses under representations and warranties

 

 

33,152

 

 

 

39,471

 

Total liabilities

 

 

11,274,258

 

 

 

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

 

 

 

541,482

 

Common shares of beneficial interest—authorized, 500,000,000 common shares of $0.01
   par value; issued and outstanding, 86,760,408 and 88,888,889 common shares, respectively

 

 

868

 

 

 

889

 

Additional paid-in capital

 

 

1,923,130

 

 

 

1,947,266

 

Accumulated deficit

 

 

(516,402

)

 

 

(526,822

)

Total shareholders’ equity

 

 

1,949,078

 

 

 

1,962,815

 

Total liabilities and shareholders’ equity

 

$

13,223,336

 

 

$

13,921,564

 

 

The accompanying notes are an integral part of these consolidated financial statements.

4

 

PENNYMAC MORTGAGE INVESTMENT TRUST AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS (UNAUDITED)

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:

 

 

 

September 30,

 

 

December 31,

 

 

 

2023

 

 

2022

 

 

 

(in thousands)

 

ASSETS

 

 

 

 

 

 

Loans at fair value

 

$

1,370,021

 

 

$

1,509,942

 

Derivative assets at fair value

 

 

7,010

 

 

 

1,262

 

Deposits securing credit risk transfer arrangements

 

 

1,237,294

 

 

 

1,325,294

 

Other—interest receivable

 

 

4,160

 

 

 

4,343

 

 

$

2,618,485

 

 

$

2,840,841

 

LIABILITIES

 

 

 

 

 

 

Asset-backed financings at fair value

 

$

1,279,059

 

 

$

1,414,955

 

Derivative and credit risk transfer strip liabilities at fair value

 

 

70,860

 

 

 

160,553

 

Interest-only security payable at fair value

 

 

28,288

 

 

 

21,925

 

Accounts payable and accrued liabilities—interest payable

 

 

4,160

 

 

 

4,343

 

 

$

1,382,367

 

 

$

1,601,776

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

5

 

PENNYMAC MORTGAGE INVESTMENT TRUST AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)

 

 

 

Quarter ended September 30,

 

 

Nine months ended September 30,

 

 

 

2023

 

 

2022

 

 

2023

 

 

2022

 

 

 

(in thousands, except per common share amounts)

 

Net investment income

 

 

 

 

 

 

 

 

 

 

 

 

Net loan servicing fees:

 

 

 

 

 

 

 

 

 

 

 

 

From nonaffiliates

 

 

 

 

 

 

 

 

 

 

 

 

Contractually specified

 

$

166,809

 

 

$

162,987

 

 

$

496,522

 

 

$

461,021

 

Other

 

 

3,752

 

 

 

4,246

 

 

 

14,521

 

 

 

20,539

 

 

 

170,561

 

 

 

167,233

 

 

 

511,043

 

 

 

481,560

 

Change in fair value of mortgage servicing rights

 

 

160,926

 

 

 

66,974

 

 

 

(64,515

)

 

 

504,474

 

Mortgage servicing rights hedging results

 

 

(50,689

)

 

 

154,269

 

 

 

(81,584

)

 

 

(87,651

)

 

 

280,798

 

 

 

388,476

 

 

 

364,944

 

 

 

898,383

 

From PennyMac Financial Services, Inc.

 

 

500

 

 

 

1,648

 

 

 

1,494

 

 

 

13,232

 

 

 

 

281,298

 

 

 

390,124

 

 

 

366,438

 

 

 

911,615

 

Net gains on loans acquired for sale:

 

 

 

 

 

 

 

 

 

 

 

 

From nonaffiliates

 

 

11,704

 

 

 

3,110

 

 

 

19,463

 

 

 

12,375

 

From PennyMac Financial Services, Inc.

 

 

1,854

 

 

 

1,203

 

 

 

5,014

 

 

 

3,562

 

 

 

13,558

 

 

 

4,313

 

 

 

24,477

 

 

 

15,937

 

Loan origination fees

 

 

3,226

 

 

 

13,215

 

 

 

15,227

 

 

 

42,417

 

Net (losses) gains on investments and financings

 

 

(109,544

)

 

 

(253,336

)

 

 

13,761

 

 

 

(713,081

)

Net interest expense:

 

 

 

 

 

 

 

 

 

 

 

 

Interest income

 

 

158,926

 

 

 

109,658

 

 

 

474,629

 

 

 

251,419

 

Interest expense

 

 

183,918

 

 

 

114,080

 

 

 

550,445

 

 

 

255,744

 

Net interest expense

 

 

(24,992

)

 

 

(4,422

)

 

 

(75,816

)

 

 

(4,325

)

Results of real estate acquired in settlement of loans

 

 

(251

)

 

 

966

 

 

 

(251

)

 

 

1,195

 

Other

 

 

134

 

 

 

205

 

 

 

411

 

 

 

646

 

Net investment income

 

 

163,429

 

 

 

151,065

 

 

 

344,247

 

 

 

254,404

 

Expenses

 

 

 

 

 

 

 

 

 

 

 

 

Earned by PennyMac Financial Services, Inc.:

 

 

 

 

 

 

 

 

 

 

 

 

Loan servicing fees

 

 

20,257

 

 

 

20,247

 

 

 

61,023

 

 

 

61,670

 

Loan fulfillment fees

 

 

5,531

 

 

 

18,407

 

 

 

22,895

 

 

 

55,807

 

Management fees

 

 

7,175

 

 

 

7,731

 

 

 

21,510

 

 

 

23,758

 

Professional services

 

 

2,133

 

 

 

2,394

 

 

 

5,537

 

 

 

7,671

 

Compensation

 

 

1,961

 

 

 

1,368

 

 

 

4,779

 

 

 

4,354

 

Loan origination

 

 

710

 

 

 

2,430

 

 

 

3,785

 

 

 

8,054

 

Loan collection and liquidation

 

 

1,890

 

 

 

690

 

 

 

3,378

 

 

 

5,118

 

Safekeeping

 

 

467

 

 

 

2,986

 

 

 

2,707

 

 

 

6,402

 

Other

 

 

4,885

 

 

 

4,433

 

 

 

14,559

 

 

 

13,001

 

Total expenses

 

 

45,009

 

 

 

60,686

 

 

 

140,173

 

 

 

185,835

 

Income before provision for income taxes

 

 

118,420

 

 

 

90,379

 

 

 

204,074

 

 

 

68,569

 

Provision for income taxes

 

 

56,998

 

 

 

78,466

 

 

 

57,331

 

 

 

146,519

 

Net income (loss)

 

 

61,422

 

 

 

11,913

 

 

 

146,743

 

 

 

(77,950

)

Dividends on preferred shares

 

 

10,455

 

 

 

10,455

 

 

 

31,364

 

 

 

31,364

 

Net income (loss) attributable to common shareholders

 

$

50,967

 

 

$

1,458

 

 

$

115,379

 

 

$

(109,314

)

Earnings (loss) per common share

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

0.59

 

 

$

0.01

 

 

$

1.31

 

 

$

(1.19

)

Diluted

 

$

0.51

 

 

$

0.01

 

 

$

1.20

 

 

$

(1.19

)

Weighted average common shares outstanding

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

86,760

 

 

 

90,594

 

 

 

87,613

 

 

 

92,221

 

Diluted

 

 

111,088

 

 

 

90,594

 

 

 

111,941

 

 

 

92,221

 

 

The accompanying notes are an integral part of these consolidated financial statements.

6

 

PENNYMAC MORTGAGE INVESTMENT TRUST AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY (UNAUDITED)

 

 

 

Quarter ended September 30, 2023

 

 

 

Preferred shares

 

 

Common shares

 

 

 

 

 

 

 

 

 

Number

 

 

 

 

 

Number

 

 

 

 

 

Additional

 

 

 

 

 

 

 

 

 

of

 

 

 

 

 

of

 

 

Par

 

 

paid-in

 

 

Accumulated

 

 

 

 

 

 

shares

 

 

Amount

 

 

shares

 

 

value

 

 

capital

 

 

deficit

 

 

Total

 

 

 

(in thousands, except per share amounts)

 

Balance at June 30, 2023

 

 

22,400

 

 

$

541,482

 

 

 

86,761

 

 

$

868

 

 

$

1,921,710

 

 

$

(532,564

)

 

$

1,931,496

 

Net income

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

61,422

 

 

 

61,422

 

Share-based compensation

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

1,420

 

 

 

—

 

 

 

1,420

 

Dividends:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Preferred shares

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

(10,455

)

 

 

(10,455

)

Common shares ($0.40 per share)

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

(34,805

)

 

 

(34,805

)

Balance at September 30, 2023

 

 

22,400

 

 

$

541,482

 

 

 

86,761

 

 

$

868

 

 

$

1,923,130

 

 

$

(516,402

)

 

$

1,949,078

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Quarter ended September 30, 2022

 

 

 

Preferred shares

 

 

Common shares

 

 

 

 

 

 

 

 

 

Number

 

 

 

 

 

Number

 

 

 

 

 

Additional

 

 

 

 

 

 

 

 

 

of

 

 

 

 

 

of

 

 

Par

 

 

paid-in

 

 

Accumulated

 

 

 

 

 

 

shares

 

 

Amount

 

 

shares

 

 

value

 

 

capital

 

 

deficit

 

 

Total

 

 

 

(in thousands, except per share amounts)

 

Balance at June 30, 2022

 

 

22,400

 

 

$

541,482

 

 

 

91,081

 

 

$

911

 

 

$

1,972,849

 

 

$

(444,602

)

 

$

2,070,640

 

Net income

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

11,913

 

 

 

11,913

 

Share-based compensation

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

959

 

 

 

—

 

 

 

959

 

Dividends:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Preferred shares

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

(10,455

)

 

 

(10,455

)

Common shares ($0.47 per share)

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

(42,228

)

 

 

(42,228

)

Repurchase of common shares

 

 

—

 

 

 

—

 

 

 

(987

)

 

 

(10

)

 

 

(13,488

)

 

 

—

 

 

 

(13,498

)

Balance at September 30, 2022

 

 

22,400

 

 

$

541,482

 

 

 

90,094

 

 

$

901

 

 

$

1,960,320

 

 

$

(485,372

)

 

$

2,017,331

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

7

 

 

 

Nine months ended September 30, 2023

 

 

 

Preferred shares

 

 

Common shares

 

 

 

 

 

 

 

 

 

Number

 

 

 

 

 

Number

 

 

 

 

 

Additional

 

 

 

 

 

 

 

 

 

of

 

 

 

 

 

of

 

 

Par

 

 

paid-in

 

 

Accumulated

 

 

 

 

 

 

shares

 

 

Amount

 

 

shares

 

 

value

 

 

capital

 

 

deficit

 

 

Total

 

 

 

(in thousands, except per share amounts)

 

Balance at December 31, 2022

 

 

22,400

 

 

$

541,482

 

 

 

88,889

 

 

$

889

 

 

$

1,947,266

 

 

$

(526,822

)

 

$

1,962,815

 

Net income

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

146,743

 

 

 

146,743

 

Share-based compensation

 

 

—

 

 

 

—

 

 

 

146

 

 

 

1

 

 

 

2,853

 

 

 

—

 

 

 

2,854

 

Dividends:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Preferred shares

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

(31,364

)

 

 

(31,364

)

Common shares ($1.20 per share)

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

(104,959

)

 

 

(104,959

)

Repurchase of common shares

 

 

—

 

 

 

—

 

 

 

(2,274

)

 

 

(22

)

 

 

(26,989

)

 

 

—

 

 

 

(27,011

)

Balance at September 30, 2023

 

 

22,400

 

 

$

541,482

 

 

 

86,761

 

 

$

868

 

 

$

1,923,130

 

 

$

(516,402

)

 

$

1,949,078

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine months ended September 30, 2022

 

 

 

Preferred shares

 

 

Common shares

 

 

 

 

 

 

 

 

 

Number

 

 

 

 

 

Number

 

 

 

 

 

Additional

 

 

 

 

 

 

 

 

 

of

 

 

 

 

 

of

 

 

Par

 

 

paid-in

 

 

Accumulated

 

 

 

 

 

 

shares

 

 

Amount

 

 

shares

 

 

value

 

 

capital

 

 

deficit

 

 

Total

 

 

 

(in thousands, except per share amounts)

 

Balance at December 31, 2021

 

 

22,400

 

 

$

541,482

 

 

 

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

 

 

22,400

 

 

 

541,482

 

 

 

94,897

 

 

 

949

 

 

 

2,031,410

 

 

 

(247,276

)

 

 

2,326,565

 

Net loss

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

(77,950

)

 

 

(77,950

)

Share-based compensation

 

 

—

 

 

 

—

 

 

 

85

 

 

 

1

 

 

 

2,607

 

 

 

—

 

 

 

2,608

 

Dividends:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Preferred shares

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

(31,364

)

 

 

(31,364

)

Common shares ($1.41 per share)

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

(128,782

)

 

 

(128,782

)

Repurchase of common shares

 

 

—

 

 

 

—

 

 

 

(4,888

)

 

 

(49

)

 

 

(73,697

)

 

 

—

 

 

 

(73,746

)

Balance at September 30, 2022

 

 

22,400

 

 

$

541,482

 

 

 

90,094

 

 

$

901

 

 

$

1,960,320

 

 

$

(485,372

)

 

$

2,017,331

 

 

The accompanying notes are an integral part of these consolidated financial statements.

8

 

PENNYMAC MORTGAGE INVESTMENT TRUST AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

 

 

 

Nine months ended September 30,

 

 

 

2023

 

 

2022

 

 

 

(in thousands)

 

Cash flows from operating activities

 

 

 

 

 

 

Net income (loss)

 

$

146,743

 

 

$

(77,950

)

Adjustments to reconcile net income (loss) to net cash provided by operating activities:

 

 

 

 

 

 

Change in fair value of mortgage servicing rights

 

 

64,515

 

 

 

(504,474

)

Mortgage servicing rights hedging results

 

 

81,584

 

 

 

87,651

 

Net gains on loans acquired for sale

 

 

(24,477

)

 

 

(15,937

)

Net (gains) losses on investments and financings

 

 

(13,761

)

 

 

713,081

 

Accrual of unearned discounts and amortization of purchase premiums on
   mortgage-backed securities, loans at fair value, and asset-backed financings

 

 

8,050

 

 

 

(11,355

)

Amortization of debt issuance costs

 

 

11,147

 

 

 

11,855

 

Results of real estate acquired in settlement of loans

 

 

251

 

 

 

(1,195

)

Share-based compensation expense

 

 

3,421

 

 

 

3,130

 

Purchase of loans acquired for sale at fair value from nonaffiliates

 

 

(63,699,477

)

 

 

(67,083,546

)

Purchase of loans acquired for sale at fair value from PennyMac Financial Services, Inc.

 

 

—

 

 

 

(298,862

)

Sale to nonaffiliates and repayment of loans acquired for sale

 

 

13,576,673

 

 

 

31,922,573

 

Sale of loans acquired for sale to PennyMac Financial Services, Inc.

 

 

50,812,386

 

 

 

36,544,166

 

Repurchase of loans subject to representation and warranties

 

 

(50,537

)

 

 

(72,933

)

Decrease in servicing advances

 

 

103,636

 

 

 

123,552

 

Decrease in due from PennyMac Financial Services, Inc.

 

 

1,308

 

 

 

12,393

 

Repurchase of real estate previously sold as loans acquired for sale

 

 

(456

)

 

 

—

 

Increase in other assets

 

 

(187,922

)

 

 

(223,929

)

(Decrease) increase in accounts payable and accrued liabilities

 

 

(68,352

)

 

 

4,550

 

Decrease in due to PennyMac Financial Services, Inc.

 

 

(8,759

)

 

 

(7,785

)

Increase in income taxes payable

 

 

51,189

 

 

 

150,519

 

Net cash provided by operating activities

 

 

807,162

 

 

 

1,275,504

 

Cash flows from investing activities

 

 

 

 

 

 

Net decrease (increase) in short-term investments

 

 

102,212

 

 

 

(184,344

)

Purchase of mortgage-backed securities at fair value

 

 

(3,108,701

)

 

 

(3,114,891

)

Sale and repayment of mortgage-backed securities at fair value

 

 

2,880,273

 

 

 

1,294,352

 

Repurchase of loans at fair value

 

 

(119

)

 

 

—

 

Repayment of loans at fair value

 

 

72,925

 

 

 

133,361

 

Net settlement of derivative financial instruments

 

 

(56,025

)

 

 

22,840

 

Distribution from credit risk transfer arrangements

 

 

136,033

 

 

 

418,087

 

Purchase of mortgage servicing rights at fair value

 

 

(14,637

)

 

 

—

 

Transfer of mortgage servicing rights relating to delinquent loans to Agency

 

 

653

 

 

 

—

 

Sale of real estate acquired in settlement of loans

 

 

3,803

 

 

 

7,619

 

Decrease in margin deposits

 

 

44,065

 

 

 

80,275

 

Net cash provided by (used in) investing activities

 

 

60,482

 

 

 

(1,342,701

)

 

The accompanying notes are an integral part of these consolidated financial statements.

Statements continued on the next page

9

 

PENNYMAC MORTGAGE INVESTMENT TRUST AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

(Continued)

 

 

Nine months ended September 30,

 

 

2023

 

 

2022

 

 

(in thousands)

 

Cash flows from financing activities

 

 

 

 

 

Sale of assets under agreements to repurchase

 

92,891,387

 

 

 

94,543,430

 

Repurchase of assets sold under agreements to repurchase

 

(93,488,136

)

 

 

(94,807,378

)

Issuance of mortgage loan participation purchase and sale agreements

 

1,739,456

 

 

 

3,067,648

 

Repayment of mortgage loan participation purchase and sale agreements

 

(1,715,465

)

 

 

(3,100,550

)

Issuance of notes payable secured by credit risk transfer and mortgage servicing assets

 

615,000

 

 

 

713,476

 

Repayment of notes payable secured by credit risk transfer and mortgage servicing assets

 

(595,303

)

 

 

(355,324

)

Issuance of Unsecured senior notes

 

53,500

 

 

 

—

 

Issuance of asset-backed financings at fair value

 

—

 

 

 

382,423

 

Repayment of asset-backed financings at fair value

 

(70,455

)

 

 

(130,698

)

Payment of debt issuance costs

 

(8,344

)

 

 

(8,932

)

Payment of dividends to preferred shareholders

 

(31,364

)

 

 

(31,364

)

Payment of dividends to common shareholders

 

(105,812

)

 

 

(131,318

)

Payment of vested share-based compensation tax withholdings

 

(567

)

 

 

(522

)

Repurchase of common shares

 

(27,011

)

 

 

(73,746

)

Net cash (used in) provided by financing activities

 

(743,114

)

 

 

67,145

 

Net increase (decrease) in cash

 

124,530

 

 

 

(52

)

Cash at beginning of period

 

111,866

 

 

 

58,983

 

Cash at end of period

$

236,396

 

 

$

58,931

 

Supplemental cash flow information

 

 

 

 

 

Payments (refunds), net:

 

 

 

 

 

Income taxes

$

6,142

 

 

$

(4,000

)

Interest

$

562,109

 

 

$

244,232

 

Non-cash investing activities:

 

 

 

 

 

Receipt of mortgage servicing rights as proceeds from sales of loans

$

249,925

 

 

$

543,255

 

Unsettled purchase of mortgage servicing rights

$

1,626

 

 

$

—

 

Exchange of mortgage servicing spread for interest-only stripped securities
   and interest receivable

$

105,096

 

 

$

—

 

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

$

1,182

 

 

$

—

 

Non-cash financing activities:

 

 

 

 

 

Recognition of asset-backed financings resulting from initial consolidation of VIEs

$

—

 

 

$

382,423

 

Dividends declared, not paid

$

34,805

 

 

$

42,228

 

 

The accompanying notes are an integral part of these consolidated financial statements.

10

 

PENNYMAC MORTGAGE INVESTMENT TRUST AND SUBSIDIARIES

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 in residential mortgage-related assets. The Company operates in four segments: credit sensitive strategies, interest rate sensitive strategies, correspondent production, and corporate:

•
The credit sensitive strategies segment represents the Company’s investments in credit risk transfer (“CRT”) arrangements referencing loans from its own correspondent production, including CRT agreements (“CRT Agreements”) and other CRT securities (together, “CRT arrangements”) and subordinate mortgage-backed securities (“MBS”).
•
The interest rate sensitive strategies segment represents the Company’s investments in mortgage servicing rights (“MSRs”), Agency and senior non-Agency MBS and the related interest rate hedging activities.
•
The correspondent production segment represents the Company’s operations aimed at serving as an intermediary between lenders and the capital markets by purchasing, pooling and reselling newly originated prime credit quality loans either directly or in the form of MBS, using the services of PNMAC Capital Management, LLC (“PCM”) and PennyMac Loan Services, LLC (“PLS”), both indirect controlled subsidiaries of PennyMac Financial Services, Inc. (“PFSI”), a publicly-traded mortgage banking and investment management company separately listed on the New York Stock Exchange.

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 ("Ginnie Mae") or the GSEs. Fannie Mae, Freddie Mac and Ginnie Mae are each referred to as an “Agency” and, collectively, as the “Agencies.”

•
The corporate segment includes management fees, corporate expense amounts and certain interest income and expense.

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

11

 

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 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 issuing trusts 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 the Agencies 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 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, may be required to recognize losses associated with adverse changes to the fair value of its investments in MSRs, CRT arrangements, and MBS:

•
The fair value of MSRs is sensitive to changes in prepayment speeds, estimates of cost to service the underlying loans or the returns demanded by market participants;
•
The fair values of CRT arrangements and subordinate MBS are sensitive to market perceptions of future credit performance of the underlying loans as well as the actual credit performance of such loans and to the returns required by market participants to hold such investments; and
•
The fair values of fixed-rate Agency and senior non-Agency pass through MBS are sensitive to changes in market interest rates.

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

Loan Servicing

The Company 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 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 pandemic-related forbearance and modification activities.

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 (recaptures) 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:

•
40% of the fair market value of the MSRs relating to the recaptured loans subject to the first 15% of the “recapture rate”;
•
35% of the fair market value of the MSRs relating to the recaptured loans subject to the “recapture rate” in excess of 15% and up to 30%; and
•
30% of the fair market value of the MSRs relating to the recaptured loans subject to the “recapture rate” in excess of 30%.

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:

 

 

Quarter ended September 30,

 

 

Nine months ended September 30,

 

 

 

2023

 

 

2022

 

 

2023

 

 

2022

 

 

 

(in thousands)

 

Loan servicing fees:

 

 

 

 

 

 

 

 

 

 

 

 

Loans acquired for sale at fair value

 

$

112

 

 

$

258

 

 

$

569

 

 

$

780

 

Loans at fair value

 

 

33

 

 

 

111

 

 

 

184

 

 

 

427

 

MSRs

 

 

20,112

 

 

 

19,878

 

 

 

60,270

 

 

 

60,463

 

 

$

20,257

 

 

$

20,247

 

 

$

61,023

 

 

$

61,670

 

Average investment in loans:

 

 

 

 

 

 

 

 

 

 

 

 

Acquired for sale at fair value

 

$

868,808

 

 

$

1,763,506

 

 

$

1,613,347

 

 

$

1,884,840

 

At fair value

 

$

1,437,418

 

 

$

1,659,183

 

 

$

1,479,525

 

 

$

1,655,022

 

Average MSR portfolio UPB

 

$

231,333,064

 

 

$

224,756,659

 

 

$

231,333,990

 

 

$

220,988,459

 

 

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

13

 

Company plus accrued interest and a sourcing fee. The Company may also sell conventional loans to PLS under the same arrangement subject to mutual agreement between the parties.

Fulfillment and sourcing fees are summarized below:

•
Fulfillment fees shall not exceed the following:
(i)
the number of loan commitments issued by the Company multiplied by a pull-through factor of either .99 or .80 depending on whether the loan commitments are subject to a “mandatory trade confirmation” or a “best efforts lock confirmation”, respectively, and then multiplied by $585 for each pull-through adjusted loan commitment up to and including 16,500 per quarter and $355 for each pull-through adjusted loan commitment in excess of 16,500 per quarter, plus
(ii)
$315 multiplied by the number of purchased loans up to and including 16,500 per quarter and $195 multiplied by the number of purchased loans in excess of 16,500 per quarter, plus
(iii)
$750 multiplied by the number of all purchased loans that are sold or securitized to parties other than Fannie Mae and Freddie Mac; provided however, that no fulfillment fee shall be due or payable to PLS with respect to any Ginnie Mae loans or, as of October 1, 2022, designated Fannie Mae or Freddie Mac loans acquired by PLS.
•
Sourcing fees range from one to two basis points of the loans' unpaid principal balance (“UPB”), generally based on the average number of calendar days the loans are held by PMT before purchase by PLS.

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:

 

 

Quarter ended September 30,

 

 

Nine months ended September 30,

 

 

 

2023

 

 

2022

 

 

2023

 

 

2022

 

 

 

(in thousands)

 

Loan fulfillment fees earned by PLS

 

$

5,531

 

 

$

18,407

 

 

$

22,895

 

 

$

55,807

 

UPB of loans fulfilled by PLS

 

$

2,760,000

 

 

$

10,226,513

 

 

$

12,418,084

 

 

$

30,319,475

 

 

 

 

 

 

 

 

 

 

 

 

 

Sourcing fees received from PLS included in
   Net gains on loans acquired for sale

 

$

1,854

 

 

$

1,203

 

 

$

5,014

 

 

$

3,562

 

UPB of loans sold to PLS:

 

 

 

 

 

 

 

 

 

 

 

 

Government guaranteed or insured

 

$

8,606,835

 

 

$

12,261,222

 

 

$

29,127,889

 

 

$

35,643,210

 

Conventional conforming

 

 

9,932,593

 

 

 

—

 

 

 

21,013,357

 

 

 

—

 

 

$

18,539,428

 

 

$

12,261,222

 

 

$

50,141,246

 

 

$

35,643,210

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Purchases of loans acquired for sale from PLS

 

$

—

 

 

$

—

 

 

$

—

 

 

$

298,862

 

 

 

 

 

 

 

 

 

 

 

 

 

Tax service fees paid to PLS

 

$

579

 

 

$

2,192

 

 

$

2,690

 

 

$

6,938

 

 

 

 

September 30, 2023

 

 

December 31, 2022

 

 

 

(in thousands)

 

Loans included in Loans acquired for sale at fair value
   pending sale to PLS

 

$

499,132

 

 

$

159,671

 

 

Management Fees

The Company has a management agreement with PCM pursuant to which PMT pays PCM management fees as follows:

•
A base management fee that is calculated quarterly and is equal to the sum of (i) 1.5% per year of average shareholders’ equity up to $2 billion, (ii) 1.375% per year of average shareholders’ equity in excess of $2 billion and up to $5 billion, and (iii) 1.25% per year of average shareholders’ equity in excess of $5 billion.
•
A performance incentive fee that is calculated quarterly at a defined annualized percentage of the amount by which “net income,” on a rolling four-quarter basis and before deducting the incentive fee, exceeds certain levels of return on “equity.”

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

14

 

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 of the management agreement.

Following is a summary of management fee expenses:

 

 

Quarter ended September 30,

 

 

Nine months ended September 30,

 

 

 

2023

 

 

2022

 

 

2023

 

 

2022

 

 

 

(in thousands)

 

Base management

 

$

7,175

 

 

$

7,731

 

 

$

21,510

 

 

$

23,758

 

Performance incentive

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

$

7,175

 

 

$

7,731

 

 

$

21,510

 

 

$

23,758

 

Average shareholders' equity amounts used
   to calculate base management fee expense

 

$

1,897,964

 

 

$

2,048,887

 

 

$

1,917,525

 

 

$

2,128,916

 

 

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.

15

 

Following is a summary of the Company’s reimbursements to PCM and its affiliates for expenses:

 

 

Quarter ended September 30,

 

 

Nine months ended September 30,

 

 

 

2023

 

 

2022

 

 

2023

 

 

2022

 

 

 

(in thousands)

 

Reimbursement of:

 

 

 

 

 

 

 

 

 

 

 

 

Expenses incurred on the Company’s behalf, net

 

$

5,893

 

 

$

705

 

 

$

15,532

 

 

$

8,896

 

Common overhead incurred by PCM and its
   affiliates

 

 

1,489

 

 

 

2,574

 

 

 

5,450

 

 

 

6,247

 

Compensation

 

 

165

 

 

 

165

 

 

 

495

 

 

 

495

 

 

$

7,547

 

 

$

3,444

 

 

$

21,477

 

 

$

15,638

 

Payments and settlements during the year (1)

 

$

9,190

 

 

$

41,509

 

 

$

72,446

 

 

$

110,835

 

 

(1)
Payments and settlements include payments and netting settlements made pursuant to master netting agreements between the Company and PFSI for the operating, investing and financing activities itemized in this Note.

Financing Activities

PFSI held 75,000 of the Company’s Common Shares at both September 30, 2023 and December 31, 2022.

Amounts Receivable from and Payable to PFSI

Amounts receivable from and payable to PFSI are summarized below:

 

 

September 30, 2023

 

 

December 31, 2022

 

 

(in thousands)

 

Due from PFSI-Miscellaneous receivables

 

$

2,252

 

 

$

3,560

 

 

 

 

 

 

 

Due to PFSI:

 

 

 

 

 

 

Correspondent production fees

 

$

9,183

 

 

$

6,835

 

Management fees

 

 

7,175

 

 

 

7,307

 

Loan servicing fees

 

 

6,760

 

 

 

6,740

 

Allocated expenses and expenses and costs
    paid by PFSI on PMT’s behalf

 

 

2,672

 

 

 

11,447

 

Fulfillment fees

 

 

1,823

 

 

 

4,043

 

 

$

27,613

 

 

$

36,372

 

 

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

 

September 30, 2023

 

 

December 31, 2022

 

 

 

(in thousands)

 

Loan servicing advances

 

$

93,614

 

 

$

197,972

 

Real estate acquired in settlement of loans

 

 

2,109

 

 

 

3,479

 

 

$

95,723

 

 

$

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:

 

 

Quarter ended September 30,

 

 

Nine months ended September 30,

 

 

 

2023

 

 

2022

 

 

2023

 

 

2022

 

 

 

(in thousands)

 

Cash flows:

 

 

 

 

 

 

 

 

 

 

 

 

Proceeds from sales

 

$

3,107,613

 

 

$

9,709,969

 

 

$

13,576,673

 

 

$

31,922,573

 

Loan servicing fees received

 

$

166,809

 

 

$

162,987

 

 

$

496,522

 

 

$

461,021

 

 

16

 

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:

 

 

September 30, 2023

 

 

December 31, 2022

 

 

 

(in thousands)

 

UPB of loans outstanding

 

$

230,066,301

 

 

$

229,858,573

 

Collection status (UPB)

 

 

 

 

 

 

Delinquency:

 

 

 

 

 

 

30-89 days delinquent

 

$

2,005,518

 

 

$

1,903,007

 

90 or more days delinquent:

 

 

 

 

 

 

Not in foreclosure

 

$

944,892

 

 

$

880,841

 

In foreclosure

 

$

69,656

 

 

$

70,921

 

Bankruptcy

 

$

170,596

 

 

$

123,239

 

Custodial funds managed by the Company (1)

 

$

2,760,857

 

 

$

1,783,157

 

 

(1)
Custodial funds include borrower and investor custodial cash accounts relating to loans serviced under mortgage servicing agreements and are not included on the Company’s consolidated balance sheets. The Company earns placement fees on certain of the custodial funds it manages on behalf of the loans’ borrowers and investors, and these fees are included in Interest income in the Company’s consolidated statements of operations.

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:

•
CRT Agreements, which are structured such that loans that reach a specific number of days delinquent (including loans in forbearance) trigger losses chargeable to the CRT Agreements based on the size of the loan and a contractual schedule of loss severity; and
•
Other CRT securities, which require the Company to absorb losses only when the reference loans realize credit losses.

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 (losses) gains on investments and financings in the consolidated statements of operations.

17

 

Following is a summary of the CRT arrangements:

 

 

Quarter ended September 30,

 

 

Nine months ended September 30,

 

 

 

2023

 

 

2022

 

 

2023

 

 

2022

 

 

 

(in thousands)

 

Net investment income:

 

 

 

 

 

 

 

 

 

 

 

 

Net (losses) gains on investments and financings:

 

 

 

 

 

 

 

 

 

 

 

 

CRT Derivatives and strips:

 

 

 

 

 

 

 

 

 

 

 

 

CRT derivatives

 

 

 

 

 

 

 

 

 

 

 

 

Realized

 

$

4,051

 

 

$

4,624

 

 

$

12,504

 

 

$

34,982

 

Valuation changes

 

 

9,113

 

 

 

(365

)

 

 

26,619

 

 

 

(42,154

)

 

 

13,164

 

 

 

4,259

 

 

 

39,123

 

 

 

(7,172

)

CRT strips

 

 

 

 

 

 

 

 

 

 

 

 

Realized

 

 

11,241

 

 

 

13,589

 

 

 

35,529

 

 

 

47,430

 

Valuation changes

 

 

9,977

 

 

 

(11,788

)

 

 

68,601

 

 

 

(103,284

)

 

 

21,218

 

 

 

1,801

 

 

 

104,130

 

 

 

(55,854

)

Interest-only security payable at fair value

 

 

(4,228

)

 

 

(1,701

)

 

 

(6,363

)

 

 

(10,593

)

 

 

30,154

 

 

 

4,359

 

 

 

136,890

 

 

 

(73,619

)

Interest income — Deposits securing CRT arrangements

 

 

16,419

 

 

 

6,978

 

 

 

46,410

 

 

 

9,584

 

 

$

46,573

 

 

$

11,337

 

 

$

183,300

 

 

$

(64,035

)

 

 

 

 

 

 

 

 

 

 

 

 

 

Net payments made (recoveries received) to settle losses
    (recoveries) on CRT arrangements

 

$

496

 

 

$

180

 

 

$

2,252

 

 

$

(20,249

)

 

 

 

September 30, 2023

 

 

December 31, 2022

 

 

 

(in thousands)

 

Carrying value of CRT arrangements:

 

 

 

 

 

 

Derivative assets - CRT derivatives

 

$

7,010

 

 

$

1,262

 

Derivative and credit risk transfer strip liabilities:

 

 

 

 

 

 

CRT derivatives

 

 

(2,268

)

 

 

(23,360

)

CRT strips

 

 

(68,592

)

 

 

(137,193

)

 

 

(70,860

)

 

 

(160,553

)

Deposits securing CRT arrangements

 

 

1,237,294

 

 

 

1,325,294

 

Interest-only security payable at fair value

 

 

(28,288

)

 

 

(21,925

)

 

 

$

1,145,156

 

 

$

1,144,078

 

 

 

 

 

 

 

CRT arrangement assets pledged to secure borrowings:

 

 

 

 

 

 

Derivative assets

 

$

7,010

 

 

$

1,262

 

Deposits securing CRT arrangements (1)

 

$

1,237,294

 

 

$

1,325,294

 

 

 

 

 

 

 

UPB of loans underlying CRT arrangements

 

$

23,613,675

 

 

$

25,315,524

 

Collection status (UPB):

 

 

 

 

Delinquency

 

 

 

 

 

 

Current

 

$

23,028,327

 

 

$

24,673,719

 

30-89 days delinquent

 

$

384,340

 

 

$

409,049

 

90-180 days delinquent

 

$

116,110

 

 

$

112,286

 

180 or more days delinquent

 

$

66,178

 

 

$

93,717

 

Foreclosure

 

$

18,720

 

 

$

26,753

 

Bankruptcy

 

$

61,364

 

 

$

54,395

 

 

(1)
Deposits securing credit risk transfer strip liabilities also secure $70.9 million and $160.6 million in CRT derivative and CRT strip liabilities at September 30, 2023 and December 31, 2022, respectively.

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 respective securities' contractual priority of payments and, as such, most of these inflows must be directed first to service and repay the senior securities.

18

 

The rights of holders of subordinate securities to receive distributions of principal and/or interest, as applicable, are subordinate to the rights of holders of senior securities. After senior securities are repaid, substantially all cash inflows will be directed to 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 investments 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:

•
Certain of the Company’s investments in subordinate MBS either do not expose the Company to losses or residual returns that could be significant to the issuing VIE or the Company has concluded that it does not have the power to direct the activities that most significantly impact the VIE’s economic performance. These investments are classified as subordinate credit-linked securities in its investment in MBS as shown in Note 8 – Mortgage-Backed Securities.
•
For other investments in subordinate MBS, comprised of transactions backed by loans purchased by the Company that were subsequently included in securitizations sponsored by the Company or a nonaffiliate and serviced by PLS, the Company concluded that it is the primary beneficiary of the VIEs as it has the power, through PLS, in its role as the servicer or sub-servicer of the majority of the loans, to direct the activities of the VIEs that most significantly impact the VIEs’ economic performance and, as a holder of subordinate securities, is exposed to losses or residual returns that could potentially be significant to the VIEs. Therefore, PMT consolidates the VIEs that issue those subordinate MBS.

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:

 

 

 

Quarter ended September 30,

 

 

Nine months ended September 30,

 

 

 

2023

 

 

2022

 

 

2023

 

 

2022

 

 

 

(in thousands)

 

Net investment income

 

 

 

 

 

 

 

 

 

 

 

 

Fair value changes:

 

 

 

 

 

 

 

 

 

 

 

 

Loans at fair value

 

$

(54,082

)

 

$

(99,267

)

 

$

(61,318

)

 

$

(318,300

)

Asset-backed financings at fair value

 

 

58,474

 

 

 

92,993

 

 

 

66,108

 

 

 

298,834

 

Interest income

 

 

9,505

 

 

 

16,002

 

 

 

38,315

 

 

 

44,587

 

Interest expense

 

 

13,652

 

 

 

14,265

 

 

 

38,796

 

 

 

40,308

 

 

 

$

245

 

 

$

(4,537

)

 

$

4,309

 

 

$

(15,187

)

 

 

 

September 30, 2023

 

 

December 31, 2022

 

 

 

(in thousands)

 

Loans at fair value

 

$

1,370,021

 

 

$

1,509,942

 

Asset-backed financings at fair value

 

$

1,279,059

 

 

$

1,414,955

 

Subordinate MBS retained at fair value pledged to
   secure Assets sold under agreements to repurchase

 

$

80,298

 

 

$

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:

•
Level 1—Quoted prices in active markets for identical assets or liabilities.
•
Level 2—Prices determined using other significant observable inputs. Observable inputs are inputs that other market participants would use in pricing an asset or liability and are developed based on market data obtained from sources independent of the Company.

19

 

•
Level 3—Prices determined using significant unobservable inputs. In situations where significant observable inputs are unavailable, unobservable inputs may be used. 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 in the circumstances.

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.

20

 

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:

 

 

September 30, 2023

 

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Total

 

 

 

(in thousands)

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

Short-term investments

 

$

150,059

 

 

$

—

 

 

$

—

 

 

$

150,059

 

Mortgage-backed securities at fair value

 

 

—

 

 

 

4,562,437

 

 

 

103,533

 

 

 

4,665,970

 

Loans acquired for sale at fair value

 

 

—

 

 

 

1,020,848

 

 

 

4,882

 

 

 

1,025,730

 

Loans at fair value

 

 

—

 

 

 

1,370,021

 

 

 

2,097

 

 

 

1,372,118

 

Derivative assets:

 

 

 

 

 

 

 

 

 

 

 

 

Call options on interest rate futures purchase contracts

 

 

641

 

 

 

—

 

 

 

—

 

 

 

641

 

Put options on interest rate futures purchase contracts

 

 

19,256

 

 

 

—

 

 

 

—

 

 

 

19,256

 

Forward purchase contracts

 

 

—

 

 

 

1,287

 

 

 

—

 

 

 

1,287

 

Forward sale contracts

 

 

—

 

 

 

30,348

 

 

 

—

 

 

 

30,348

 

MBS put options

 

 

—

 

 

 

169

 

 

 

—

 

 

 

169

 

CRT derivatives

 

 

—

 

 

 

—

 

 

 

7,010

 

 

 

7,010

 

Interest rate lock commitments

 

 

—

 

 

 

—

 

 

 

1,970

 

 

 

1,970

 

Total derivative assets before netting

 

 

19,897

 

 

 

31,804

 

 

 

8,980

 

 

 

60,681

 

Netting

 

 

—

 

 

 

—

 

 

 

—

 

 

 

(30,931

)

Total derivative assets after netting

 

 

19,897

 

 

 

31,804

 

 

 

8,980

 

 

 

29,750

 

Mortgage servicing rights at fair value

 

 

—

 

 

 

—

 

 

 

4,108,661

 

 

 

4,108,661

 

 

$

169,956

 

 

$

6,985,110

 

 

$

4,228,153

 

 

$

11,352,288

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

Asset-backed financings at fair value

 

$

—

 

 

$

1,279,059

 

 

$

—

 

 

$

1,279,059

 

Interest-only security payable at fair value

 

 

—

 

 

 

—

 

 

 

28,288

 

 

 

28,288

 

Derivative and credit risk transfer strip liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

Put options on interest rate futures sell contracts

 

 

1,688

 

 

 

—

 

 

 

—

 

 

 

1,688

 

Forward purchase contracts

 

 

—

 

 

 

9,994

 

 

 

—

 

 

 

9,994

 

Forward sales contracts

 

 

—

 

 

 

1,464

 

 

 

—

 

 

 

1,464

 

CRT derivatives

 

 

—

 

 

 

—

 

 

 

2,268

 

 

 

2,268

 

Interest rate lock commitments

 

 

—

 

 

 

—

 

 

 

5,318

 

 

 

5,318

 

Total derivative liabilities before netting

 

 

1,688

 

 

 

11,458

 

 

 

7,586

 

 

 

20,732

 

Netting

 

 

—

 

 

 

—

 

 

 

—

 

 

 

51,170

 

Total derivative liabilities after netting

 

 

1,688

 

 

 

11,458

 

 

 

7,586

 

 

 

71,902

 

Credit risk transfer strips

 

 

—

 

 

 

—

 

 

 

68,592

 

 

 

68,592

 

Total derivative and credit risk transfer strip liabilities

 

 

1,688

 

 

 

11,458

 

 

 

76,178

 

 

 

140,494

 

 

$

1,688

 

 

$

1,290,517

 

 

$

104,466

 

 

$

1,447,841

 

 

 

21

 

 

 

December 31, 2022

 

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Total

 

 

 

(in thousands)

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

Short-term investments

 

$

252,271

 

 

$

—

 

 

$

—

 

 

$

252,271

 

Mortgage-backed securities at fair value

 

 

—

 

 

 

4,462,601

 

 

 

—

 

 

 

4,462,601

 

Loans acquired for sale at fair value

 

 

—

 

 

 

1,811,225

 

 

 

10,708

 

 

 

1,821,933

 

Loans at fair value

 

 

—

 

 

 

1,509,942

 

 

 

3,457

 

 

 

1,513,399

 

Derivative assets:

 

 

 

 

 

 

 

 

 

 

 

 

Call options on interest rate futures purchase contracts

 

 

2,906

 

 

 

—

 

 

 

—

 

 

 

2,906

 

Put options on interest rate futures purchase contracts

 

 

8,130

 

 

 

—

 

 

 

—

 

 

 

8,130

 

Forward purchase contracts

 

 

—

 

 

 

418

 

 

 

—

 

 

 

418

 

Forward sale contracts

 

 

—

 

 

 

43,435

 

 

 

—

 

 

 

43,435

 

MBS put options

 

 

—

 

 

 

2,783

 

 

 

—

 

 

 

2,783

 

CRT derivatives

 

 

—

 

 

 

—

 

 

 

1,262

 

 

 

1,262

 

Interest rate lock commitments

 

 

—

 

 

 

—

 

 

 

3,877

 

 

 

3,877

 

Total derivative assets before netting

 

 

11,036

 

 

 

46,636

 

 

 

5,139

 

 

 

62,811

 

Netting

 

 

—

 

 

 

—

 

 

 

—

 

 

 

22,129

 

Total derivative assets after netting

 

 

11,036

 

 

 

46,636

 

 

 

5,139

 

 

 

84,940

 

Mortgage servicing rights at fair value

 

 

—

 

 

 

—

 

 

 

4,012,737

 

 

 

4,012,737

 

 

$

263,307

 

 

$

7,830,404

 

 

$

4,032,041

 

 

$

12,147,881

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

Asset-backed financings at fair value

 

$

—

 

 

$

1,414,955

 

 

$

—

 

 

$

1,414,955

 

Interest-only security payable at fair value

 

 

—

 

 

 

—

 

 

 

21,925

 

 

 

21,925

 

Derivative liabilities and credit risk transfer strips:

 

 

 

 

 

 

 

 

 

 

 

 

Forward purchase contracts

 

 

—

 

 

 

15,196

 

 

 

—

 

 

 

15,196

 

Forward sales contracts

 

 

—

 

 

 

17,279

 

 

 

—

 

 

 

17,279

 

CRT derivatives

 

 

—

 

 

 

—

 

 

 

23,360

 

 

 

23,360

 

Interest rate lock commitments

 

 

—

 

 

 

—

 

 

 

4,355

 

 

 

4,355

 

Total derivative liabilities before netting

 

 

—

 

 

 

32,475

 

 

 

27,715

 

 

 

60,190

 

Netting

 

 

—

 

 

 

—

 

 

 

—

 

 

 

(30,157

)

Total derivative liabilities after netting

 

 

—

 

 

 

32,475

 

 

 

27,715

 

 

 

30,033

 

Credit risk transfer strips

 

 

—

 

 

 

—

 

 

 

137,193

 

 

 

137,193

 

Total derivative and credit risk transfer strip
   liabilities

 

 

—

 

 

 

32,475

 

 

 

164,908

 

 

 

167,226

 

 

$

—

 

 

$

1,447,430

 

 

$

186,833

 

 

$

1,604,106

 

 

22

 

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:

 

 

Quarter ended September 30, 2023

 

Assets (1)

 

Interest-only stripped securities

 

 

Loans
acquired
for sale

 

 

Loans at
fair value

 

 

CRT
derivatives

 

 

Interest rate
lock
commitments

 

 

CRT
strips

 

 

Mortgage
servicing
rights

 

 

Total

 

 

 

(in thousands)

 

Balance, June 30, 2023

 

$

—

 

 

$

6,630

 

 

$

2,665

 

 

$

(4,394

)

 

$

(1,298

)

 

$

(78,569

)

 

$

3,977,938

 

 

$

3,902,972

 

Purchases and issuances

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

6,618

 

 

 

—

 

 

 

16,263

 

 

 

22,881

 

Repayments and sales

 

 

—

 

 

 

(1,383

)

 

 

(510

)

 

 

(4,028

)

 

 

—

 

 

 

(11,241

)

 

 

—

 

 

 

(17,162

)

Amounts received pursuant to sales
  of loans

 

 

—

 

 

 

(496

)

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

58,560

 

 

 

58,064

 

Changes in fair value included in results
of operations arising from:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Changes in instrument -
   specific credit risk

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

Other factors

 

 

(14

)

 

 

131

 

 

 

(58

)

 

 

13,164

 

 

 

(16,255

)

 

 

21,218

 

 

 

160,926

 

 

 

179,112

 

 

 

(14

)

 

 

131

 

 

 

(58

)

 

 

13,164

 

 

 

(16,255

)

 

 

21,218

 

 

 

160,926

 

 

 

179,112

 

Exchange of mortgage servicing spread
    for interest-only stripped securities
    and accrued interest

 

 

103,547

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

(105,096

)

 

 

(1,549

)

Transfers of:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

—

 

Interest rate lock commitments to loans
   acquired for sale (2)

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

7,587

 

 

 

—

 

 

 

—

 

 

 

7,587

 

Mortgage servicing rights relating to
   delinquent loans to Agency

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

70

 

 

 

70

 

Balance, September 30, 2023

 

$

103,533

 

 

$

4,882

 

 

$

2,097

 

 

$

4,742

 

 

$

(3,348

)

 

$

(68,592

)

 

$

4,108,661

 

 

$

4,151,975

 

Changes in fair value recognized during
the quarter relating to assets still held at
September 30, 2023

 

$

(14

)

 

$

(104

)

 

$

(74

)

 

$

9,113

 

 

$

(3,348

)

 

$

9,977

 

 

$

160,926

 

 

$

176,476

 

 

(1)
For the purpose of this table, CRT derivative, interest rate lock commitment (“IRLC”), and CRT strip asset and liability positions are shown net.
(2)
The Company had transfers among the fair value levels arising from transfers of IRLCs to loans acquired for sale at fair value upon purchase of the respective loans.

 

Liabilities

 

Quarter ended September 30, 2023

 

 

 

(in thousands)

 

Interest-only security payable:

 

 

 

Balance, June 30, 2023

 

$

24,060

 

Changes in fair value included in results of operations arising from:

 

 

 

Changes in instrument - specific credit risk

 

 

—

 

Other factors

 

 

4,228

 

 

 

4,228

 

Balance, September 30, 2023

 

$

28,288

 

Changes in fair value recognized during the quarter relating
to liability outstanding at September 30, 2023

 

$

4,228

 

 

 

 

23

 

 

Quarter ended September 30, 2022

 

Assets (1)

 

Loans
acquired
for sale

 

 

Loans at
fair
value

 

 

CRT
derivatives

 

 

Interest
rate lock
commitments

 

 

CRT
strips

 

 

Mortgage
servicing
rights

 

 

Total

 

 

 

(in thousands)

 

Balance, June 30, 2022

 

$

20,376

 

 

$

3,979

 

 

$

(22,511

)

 

$

(1,656

)

 

$

(118,333

)

 

$

3,695,609

 

 

$

3,577,464

 

Purchases and issuances

 

 

20,803

 

 

 

—

 

 

 

—

 

 

 

(19,218

)

 

 

—

 

 

 

—

 

 

 

1,585

 

Repayments and sales

 

 

(30,170

)

 

 

(47

)

 

 

(4,223

)

 

 

—

 

 

 

(13,589

)

 

 

—

 

 

 

(48,029

)

Amounts received pursuant to sales
  of loans

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

178,001

 

 

 

178,001

 

Changes in fair value included in results
of operations arising from:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Changes in instrument - specific credit
   risk

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

Other factors

 

 

(1,230

)

 

 

56

 

 

 

4,259

 

 

 

(71,443

)

 

 

1,801

 

 

 

66,974

 

 

 

417

 

 

 

(1,230

)

 

 

56

 

 

 

4,259

 

 

 

(71,443

)

 

 

1,801

 

 

 

66,974

 

 

 

417

 

Transfers of interest rate lock
   commitments to loans acquired
   for sale (2)

 

 

—

 

 

 

—

 

 

 

—

 

 

 

49,474

 

 

 

—

 

 

 

—

 

 

 

49,474

 

Balance, September 30, 2022

 

$

9,779

 

 

$

3,988

 

 

$

(22,475

)

 

$

(42,843

)

 

$

(130,121

)

 

$

3,940,584

 

 

$

3,758,912

 

Changes in fair value recognized during
the quarter relating to assets still held at
September 30, 2022

 

$

(813

)

 

$

44

 

 

$

(365

)

 

$

(42,843

)

 

$

(11,788

)

 

$

66,974

 

 

$

11,209

 

 

(1)
For the purpose of this table, CRT derivative, IRLC, and CRT strip asset and liability positions are shown net.
(2)
The Company had transfers among the fair value levels arising from transfers of IRLCs to loans acquired for sale at fair value upon purchase of the respective loans.

Liabilities

 

Quarter ended September 30, 2022

 

 

 

(in thousands)

 

Interest-only security payable:

 

 

 

Balance, June 30, 2022

 

$

19,485

 

Changes in fair value included in income arising from:

 

 

 

Changes in instrument-specific credit risk

 

 

—

 

Other factors

 

 

1,701

 

 

 

1,701

 

Balance, September 30, 2022

 

$

21,186

 

Changes in fair value recognized during the quarter relating
to liability outstanding at September 30, 2022

 

$

1,701

 

 

24

 

 

 

Nine months ended September 30, 2023

 

Assets (1)

 

Interest-only stripped securities

 

 

Loans
acquired
for sale

 

 

Loans at
fair
value

 

 

CRT
derivatives

 

 

Interest rate
lock
commitments

 

 

CRT
strips

 

 

Mortgage
servicing
rights

 

 

Total

 

 

 

(in thousands)

 

Balance, December 31, 2022

 

$

—

 

 

$

10,708

 

 

$

3,457

 

 

$

(22,098

)

 

$

(478

)

 

$

(137,193

)

 

$

4,012,737

 

 

$

3,867,133

 

Purchases and issuances

 

 

—

 

 

 

4,262

 

 

 

119

 

 

 

—

 

 

 

2,687

 

 

 

—

 

 

 

16,263

 

 

 

23,331

 

Repayments and sales

 

 

—

 

 

 

(9,787

)

 

 

(534

)

 

 

(12,283

)

 

 

—

 

 

 

(35,529

)

 

 

—

 

 

 

(58,133

)

Amounts received pursuant to sales of loans

 

 

—

 

 

 

(496

)

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

249,925

 

 

 

249,429

 

Changes in fair value included in results
of operations arising from:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Changes in instrument - specific
   credit risk

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

Other factors

 

 

(14

)

 

 

195

 

 

 

(485

)

 

 

39,123

 

 

 

(3,578

)

 

 

104,130

 

 

 

(64,515

)

 

 

74,856

 

 

 

(14

)

 

 

195

 

 

 

(485

)

 

 

39,123

 

 

 

(3,578

)

 

 

104,130

 

 

 

(64,515

)

 

 

74,856

 

Exchange of mortgage servicing spread
    for interest-only stripped securities
    and interest receivable

 

 

103,547

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

(105,096

)

 

 

(1,549

)

Transfers of:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

—

 

Loans to REO

 

 

—

 

 

 

—

 

 

 

(460

)

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

(460

)

Interest rate lock commitments to loans
   acquired for sale (2)

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

(1,979

)

 

 

—

 

 

 

—

 

 

 

(1,979

)

Mortgage servicing rights relating to
   delinquent loans to Agency

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

(653

)

 

 

(653

)

Balance, September 30, 2023

 

$

103,533

 

 

$

4,882

 

 

$

2,097

 

 

$

4,742

 

 

$

(3,348

)

 

$

(68,592

)

 

$

4,108,661

 

 

$

4,151,975

 

Changes in fair value recognized during
the period relating to assets still held at
September 30, 2023

 

$

(14

)

 

$

(74

)

 

$

(1,011

)

 

$

26,619

 

 

$

(3,348

)

 

$

68,601

 

 

$

(64,515

)

 

$

26,258

 

 

(1)
For the purpose of this table, CRT derivative, IRLC, and CRT strip asset and liability positions are shown net.
(2)
The Company had transfers among the fair value levels arising from transfers of IRLCs to loans acquired for sale at fair value upon purchase of the respective loans.

 

Liabilities

 

Nine months ended September 30, 2023

 

 

 

(in thousands)

 

Interest-only security payable:

 

 

 

Balance, December 31, 2022

 

$

21,925

 

Changes in fair value included in results of operations arising from:

 

 

 

Changes in instrument - specific credit risk

 

 

—

 

Other factors

 

 

6,363

 

 

 

6,363

 

Balance, September 30, 2023

 

$

28,288

 

Changes in fair value recognized during the period relating
to liability outstanding at September 30, 2023

 

$

6,363

 

 

 

25

 

 

 

Nine months ended September 30, 2022

 

Assets (1)

 

Loans
acquired
for sale

 

 

Loans at
fair
value

 

 

CRT
derivatives

 

 

Interest
rate lock
commitments

 

 

CRT strips

 

 

Mortgage
servicing
rights

 

 

Total

 

 

 

(in thousands)

 

Balance, December 31, 2021

 

$

30,129

 

 

$

4,161

 

 

$

18,964

 

 

$

2,451

 

 

$

(26,837

)

 

$

2,892,855

 

 

$

2,921,723

 

Purchases and issuances

 

 

72,365

 

 

 

—

 

 

 

—

 

 

 

(88,901

)

 

 

—

 

 

 

—

 

 

 

(16,536

)

Repayments and sales

 

 

(89,310

)

 

 

(677

)

 

 

(34,267

)

 

 

—

 

 

 

(47,430

)

 

 

—

 

 

 

(171,684

)

Amounts received pursuant to sales
  of loans

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

543,255

 

 

 

543,255

 

Changes in fair value included in results
of operations arising from:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Changes in instrument - specific credit
   risk

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

Other factors

 

 

(3,405

)

 

 

504

 

 

 

(7,172

)

 

 

(250,913

)

 

 

(55,854

)

 

 

504,474

 

 

 

187,634

 

 

 

(3,405

)

 

 

504

 

 

 

(7,172

)

 

 

(250,913

)

 

 

(55,854

)

 

 

504,474

 

 

 

187,634

 

Transfers of interest rate lock
   commitments to loans acquired
   for sale (2)

 

 

—

 

 

 

—

 

 

 

—

 

 

 

294,520

 

 

 

—

 

 

 

—

 

 

 

294,520

 

Balance, September 30, 2022

 

$

9,779

 

 

$

3,988

 

 

$

(22,475

)

 

$

(42,843

)

 

$

(130,121

)

 

$

3,940,584

 

 

$

3,758,912

 

Changes in fair value recognized during
the period relating to assets still held at
September 30, 2022

 

$

(1,121

)

 

$

159

 

 

$

(42,154

)

 

$

(42,843

)

 

$

(103,284

)

 

$

504,474

 

 

$

315,231

 

(1)
For the purpose of this table, CRT derivative, IRLC, and CRT strip asset and liability positions are shown net.
(2)
The Company had transfers among the fair value levels arising from transfers of IRLCs to loans acquired for sale at fair value upon purchase of the respective loans.

Liabilities

 

Nine months ended September 30, 2022

 

 

 

(in thousands)

 

Interest-only security payable:

 

 

 

Balance, December 31, 2021

 

$

10,593

 

Changes in fair value included in results of operations arising from:

 

 

 

Changes in instrument-specific credit risk

 

 

—

 

Other factors

 

 

10,593

 

 

 

10,593

 

Balance, September 30, 2022

 

$

21,186

 

Changes in fair value recognized during the period relating
to liability outstanding at September 30, 2022

 

$

10,593

 

 

26

 

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:

 

 

September 30, 2023

 

 

December 31, 2022

 

 

 

Fair value

 

 

Principal
amount due
upon maturity

 

 

Difference

 

 

Fair value

 

 

Principal
amount due
upon maturity

 

 

Difference

 

 

 

(in thousands)

 

Loans acquired for sale at fair value:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Current through 89 days delinquent

 

$

1,025,027

 

 

$

1,015,017

 

 

$

10,010

 

 

$

1,819,551

 

 

$

1,795,445

 

 

$

24,106

 

90 or more days delinquent:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Not in foreclosure

 

 

427

 

 

 

618

 

 

 

(191

)

 

 

1,666

 

 

 

1,927

 

 

 

(261

)

In foreclosure

 

 

276

 

 

 

397

 

 

 

(121

)

 

 

716

 

 

 

809

 

 

 

(93

)

 

 

703

 

 

 

1,015

 

 

 

(312

)

 

 

2,382

 

 

 

2,736

 

 

 

(354

)

 

$

1,025,730

 

 

$

1,016,032

 

 

$

9,698

 

 

$

1,821,933

 

 

$

1,798,181

 

 

$

23,752

 

Loans at fair value:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Held in consolidated VIEs:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Current through 89 days delinquent

 

$

1,369,087

 

 

$

1,718,390

 

 

$

(349,303

)

 

$

1,508,540

 

 

$

1,788,911

 

 

$

(280,371

)

90 or more days delinquent:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Not in foreclosure

 

 

934

 

 

 

1,276

 

 

 

(342

)

 

 

1,231

 

 

 

1,642

 

 

 

(411

)

In foreclosure

 

 

—

 

 

 

—

 

 

 

—

 

 

 

171

 

 

 

226

 

 

 

(55

)

 

 

934

 

 

 

1,276

 

 

 

(342

)

 

 

1,402

 

 

 

1,868

 

 

 

(466

)

 

 

1,370,021

 

 

 

1,719,666

 

 

 

(349,645

)

 

 

1,509,942

 

 

 

1,790,779

 

 

 

(280,837

)

Distressed:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Current through 89 days delinquent

 

 

564

 

 

 

775

 

 

 

(211

)

 

 

498

 

 

 

682

 

 

 

(184

)

90 or more days delinquent:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Not in foreclosure

 

 

401

 

 

 

1,989

 

 

 

(1,588

)

 

 

1,230

 

 

 

2,964

 

 

 

(1,734

)

In foreclosure

 

 

1,132

 

 

 

2,546

 

 

 

(1,414

)

 

 

1,729

 

 

 

2,728

 

 

 

(999

)

 

 

1,533

 

 

 

4,535

 

 

 

(3,002

)

 

 

2,959

 

 

 

5,692

 

 

 

(2,733

)

 

 

2,097

 

 

 

5,310

 

 

 

(3,213

)

 

 

3,457

 

 

 

6,374

 

 

 

(2,917

)

 

$

1,372,118

 

 

$

1,724,976

 

 

$

(352,858

)

 

$

1,513,399

 

 

$

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:

 

 

Quarter ended September 30, 2023

 

 

 

Net loan
servicing fees

 

 

Net gains on loans acquired for sale

 

 

Net (losses) gains on investments and financings

 

 

Net interest
expense

 

 

Total

 

 

 

(in thousands)

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Mortgage-backed securities at fair value

 

$

—

 

 

$

—

 

 

$

(144,031

)

 

$

1,048

 

 

$

(142,983

)

Loans acquired for sale at fair value

 

 

—

 

 

 

(13,106

)

 

 

—

 

 

 

—

 

 

 

(13,106

)

Loans at fair value

 

 

—

 

 

 

—

 

 

 

(54,141

)

 

 

(5,153

)

 

 

(59,294

)

Credit risk transfer strips

 

 

—

 

 

 

—

 

 

 

21,218

 

 

 

—

 

 

 

21,218

 

MSRs at fair value

 

 

160,926

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

160,926

 

 

$

160,926

 

 

$

(13,106

)

 

$

(176,954

)

 

$

(4,105

)

 

$

(33,239

)

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest-only security payable at fair value

 

$

—

 

 

$

—

 

 

$

(4,228

)

 

$

—

 

 

$

(4,228

)

Asset-backed financing of VIEs at fair value

 

 

—

 

 

 

—

 

 

 

58,474

 

 

 

1,132

 

 

 

59,606

 

 

$

—

 

 

$

—

 

 

$

54,246

 

 

$

1,132

 

 

$

55,378

 

 

27

 

 

 

 

 

 

 

Quarter ended September 30, 2022

 

 

 

Net loan
servicing fees

 

 

Net gains on loans acquired for sale

 

 

Net (losses) gains on investments and financings

 

 

Net interest
expense

 

 

Total

 

 

 

(in thousands)

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Mortgage-backed securities at fair value

 

$

—

 

 

$

—

 

 

$

(251,477

)

 

$

229

 

 

$

(251,248

)

Loans acquired for sale at fair value

 

 

—

 

 

 

(129,873

)

 

 

—

 

 

 

—

 

 

 

(129,873

)

Loans at fair value

 

 

—

 

 

 

—

 

 

 

(99,211

)

 

 

533

 

 

 

(98,678

)

Credit risk transfer strips

 

 

—

 

 

 

—

 

 

 

1,801

 

 

 

—

 

 

 

1,801

 

MSRs at fair value

 

 

66,974

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

66,974

 

 

$

66,974

 

 

$

(129,873

)

 

$

(348,887

)

 

$

762

 

 

$

(411,024

)

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest-only security payable at fair value

 

$

—

 

 

$

—

 

 

$

(1,701

)

 

$

—

 

 

$

(1,701

)

Asset-backed financings at fair value

 

 

—

 

 

 

—

 

 

 

92,993

 

 

 

993

 

 

 

93,986

 

 

$

—

 

 

$

—

 

 

$

91,292

 

 

$

993

 

 

$

92,285

 

 

 

 

 

 

 

Nine months ended September 30, 2023

 

 

 

Net loan
servicing fees

 

 

Net gains on loans acquired for sale

 

 

Net (losses) gains on investments and financings

 

 

Net interest
expense

 

 

Total

 

 

 

(in thousands)

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Mortgage-backed securities at fair value

 

$

—

 

 

$

—

 

 

$

(127,434

)

 

$

(1,172

)

 

$

(128,606

)

Loans acquired for sale at fair value

 

 

—

 

 

 

(7,215

)

 

 

—

 

 

 

—

 

 

 

(7,215

)

Loans at fair value

 

 

—

 

 

 

—

 

 

 

(61,803

)

 

 

(6,212

)

 

 

(68,015

)

Credit risk transfer strips

 

 

—

 

 

 

—

 

 

 

104,130

 

 

 

—

 

 

 

104,130

 

MSRs at fair value

 

 

(64,515

)

 

 

—

 

 

 

—

 

 

 

—

 

 

 

(64,515

)

 

$

(64,515

)

 

$

(7,215

)

 

$

(85,107

)

 

$

(7,384

)

 

$

(164,221

)

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest-only security payable at fair value

 

$

—

 

 

$

—

 

 

$

(6,363

)

 

$

—

 

 

$

(6,363

)

Asset-backed financings at fair value

 

 

—

 

 

 

—

 

 

 

66,108

 

 

 

666

 

 

 

66,774

 

 

$

—

 

 

$

—

 

 

$

59,745

 

 

$

666

 

 

$

60,411

 

 

 

 

Nine months ended September 30, 2022

 

 

 

Net loan
servicing fees

 

 

Net gains on loans acquired for sale

 

 

Net (losses) gains on investments and financings

 

 

Net interest
expense

 

 

Total

 

 

 

(in thousands)

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Mortgage-backed securities at fair value

 

$

—

 

 

$

—

 

 

$

(620,500

)

 

$

13,481

 

 

$

(607,019

)

Loans acquired for sale at fair value

 

 

—

 

 

 

(510,250

)

 

 

—

 

 

 

—

 

 

 

(510,250

)

Loans at fair value

 

 

—

 

 

 

—

 

 

 

(317,796

)

 

 

(543

)

 

 

(318,339

)

Credit risk transfer strips

 

 

—

 

 

 

—

 

 

 

(55,854

)

 

 

—

 

 

 

(55,854

)

MSRs at fair value

 

 

504,474

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

504,474

 

 

$

504,474

 

 

$

(510,250

)

 

$

(994,150

)

 

$

12,938

 

 

$

(986,988

)

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest-only security payable at fair value

 

$

—

 

 

$

—

 

 

$

(10,593

)

 

$

—

 

 

$

(10,593

)

Asset-backed financings at fair value

 

 

—

 

 

 

—

 

 

 

298,834

 

 

 

1,583

 

 

 

300,417

 

 

$

—

 

 

$

—

 

 

$

288,241

 

 

$

1,583

 

 

$

289,824

 

 

28

 

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:

Real estate acquired in settlement of loans

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Total

 

 

 

(in thousands)

 

September 30, 2023

 

$

—

 

 

$

—

 

 

$

1,114

 

 

$

1,114

 

December 31, 2022

 

$

—

 

 

$

—

 

 

$

1,292

 

 

$

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:

 

 

Quarter ended September 30,

 

 

Nine months ended September 30,

 

 

 

2023

 

 

2022

 

 

2023

 

 

2022

 

 

 

(in thousands)

 

Real estate asset acquired in settlement of loans

 

$

(258

)

 

$

(119

)

 

$

(288

)

 

$

(199

)

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 the Exchangeable Notes defined in Note 15 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 classifies the 2023 Senior Notes, defined in Note 15, as “Level 2” fair value liabilities.

The Company has concluded that the fair values of these borrowings other than term notes and term loans included in Notes payable secured by credit risk transfer and mortgage servicing assets and Unsecured senior notes approximate the agreements’ carrying values due to the borrowing agreements’ variable interest rates and short maturities.

The Company estimates the fair value of the term notes and term loans included in Notes payable secured by credit risk transfer and mortgage servicing assets indications of fair value provided by nonaffiliate brokers for the term notes and pricing services for Unsecured senior notes and internal estimates of fair value for the term loans. The fair value and carrying value of these liabilities are summarized below:

 

 

September 30, 2023

 

 

December 31, 2022

 

Instrument

 

Carrying value

 

 

Fair value

 

 

Carrying value

 

 

Fair value

 

 

 

(in thousands)

 

Notes payable secured by credit risk transfer
      and mortgage servicing assets

 

$

2,825,591

 

 

$

2,804,737

 

 

$

2,804,028

 

 

$

2,721,391

 

Unsecured senior notes

 

$

599,754

 

 

$

567,189

 

 

$

546,254

 

 

$

471,781

 

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 within its capital markets group and subjects the valuation process to significant senior management oversight.

With respect to “Level 3” valuations other than IRLCs, the capital markets valuation staff reports to PFSI’s senior management valuation committee, which oversees the valuations. The capital markets valuation staff 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

29

 

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 capital markets valuation staff 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 capital markets valuation staff 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 key inputs to those procured from nonaffiliate brokers and published surveys.

The fair value of the Company’s IRLCs is developed by its capital markets risk management staff and is reviewed by capital markets operations staff.

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’s categorization of its current holdings of MBS is based on whether the respective security is a pass-through security or an IO security:

•
The Company categorizes the majority of its current holdings of MBS as “Level 2” fair value assets. Fair value of these securities is established based on quoted market prices for the Company’s MBS holdings or similar securities.
•
The Company categorizes its current holdings of interest-only stripped ("IO") securities as “Level 3” fair value assets. The Company uses a discounted cash flow approach to estimate the fair value of its IO securities.

The key inputs used in the estimation of the fair value of IO securities include discount rate (pricing spread) and prepayment rate (prepayment speed). Significant changes to those inputs in isolation may result in a significant change in the IO securities fair value measurement. Changes in these key inputs are not directly related.

Following are the key inputs used in determining the fair value of IO securities:

 

 

September 30, 2023

 

Fair value (in thousands)

 

$

103,533

 

UPB of securities (in thousands)

 

$

425,682

 

Weighted average interest rate

 

4.9%

 

Key inputs (1)

 

 

 

Pricing spread (2)

 

 

 

Range

 

5.6% – 5.6%

 

Weighted average

 

5.6%

 

Annual total prepayment speed (3)

 

 

 

Range

 

8.1% – 8.2%

 

Weighted average

 

8.1%

 

Equivalent life (in years)

 

 

 

Range

 

5.4 - 8.8

 

Weighted average

 

8.7

 

 

(1)
Weighted-average inputs are based on the UPB of the underlying loans.
(2)
Pricing spread represents a margin that is applied to a reference forward rate to develop periodic discount rates. The Company uses the pricing spread over the United States Treasury (“Treasury”) securities yield curve for the purpose of discounting cash flows relating to IO securities.
(3)
Prepayment speed is measured using Life Total Conditional Prepayment Rate (“CPR”). Equivalent life is provided as supplementary information.

Changes in the fair value of MBS are included in Net (losses) gains on investments and financings in the consolidated statements of operations.

30

 

Loans

Fair value of loans is estimated based on whether the loans are saleable into active markets:

•
Loans that are saleable into active markets, comprised of most of the Company’s loans acquired for sale at fair value and all of the loans at fair value held in VIEs, are categorized as “Level 2” fair value assets:
•
For loans acquired for sale, the fair values are established using the loans’ contracted selling price or quoted market price or market price equivalent.
•
For the loans at fair value held in VIEs, the quoted indications of fair value of all of the individual securities issued by the securitization trusts are used to derive fair values for the loans. The Company obtains indications of fair value from nonaffiliate brokers based on comparable securities and validates the brokers’ indications of fair value using pricing models and inputs the Company believes are similar to the pricing models and inputs used by other market participants. The Company adjusts the fair values received from brokers to include the fair value of MSRs attributable to the loans included in the VIEs.
•
Loans that are not saleable into active markets, comprised of previously sold loans that the Company repurchased pursuant to the representation and warranties it provided to the purchaser and distressed loans, are categorized as “Level 3” fair value assets:
•
Fair value for loans acquired for sale categorized as “Level 3” assets is estimated using a discounted cash flow approach or their contracted selling price when applicable. Inputs to the discounted cash flow model include current interest rates, payment status, property types, discount rates and forecasts of future interest rates, home prices, prepayment speeds, default speeds and loss severities.
•
Distressed loans’ fair values are estimated based on the expected resolution from the individual asset’s disposition strategy. When a cash flow projection is used to estimate the fair value, those cash flows are discounted at annual rates up to 20%.

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 nonaffiliate 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 nonaffiliate 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 rates, 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 (losses) gains on investments and financings in the consolidated statements of operations.

31

 

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:

 

 

September 30, 2023

 

 

December 31, 2022

 

 

 

(dollars in thousands)

 

Fair value

 

 

 

 

 

 

CRT derivatives

 

 

 

 

 

 

Assets

 

$

7,010

 

 

$

1,262

 

Liabilities

 

$

2,268

 

 

$

23,360

 

UPB of loans in reference pools

 

$

5,556,206

 

 

$

5,972,060

 

Key inputs (1)

 

 

 

 

 

 

Discount rate

 

 

 

 

 

 

Range

 

10.1% – 11.4%

 

 

8.7% – 11.1%

 

Weighted average

 

11.0%

 

 

10.8%

 

Voluntary prepayment speed (2)

 

 

 

 

 

 

Range

 

6.7% – 7.4%

 

 

7.5% – 8.3%

 

Weighted average

 

7.3%

 

 

7.6%

 

Involuntary prepayment speed (3)

 

 

 

 

 

 

Range

 

0.2% – 0.8%

 

 

0.5% – 1.3%

 

Weighted average

 

0.4%

 

 

0.6%

 

Remaining loss expectation

 

 

 

 

 

 

Range

 

0.3% – 0.4%

 

 

0.4% – 0.7%

 

Weighted average

 

0.3%

 

 

0.6%

 

 

(1)
Weighted average inputs are based on fair value amounts of the CRT Agreements, except for remaining loss expectation which is based on the UPB of the loans in the reference pools.
(2)
Voluntary prepayment speed is measured using Life Voluntary CPR.
(3)
Involuntary prepayment speed is measured using Life Involuntary CPR.

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.

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:

 

 

September 30, 2023

 

 

December 31, 2022

 

Fair value (in thousands) (1)

 

$

(3,348

)

 

$

(478

)

Committed amount (in thousands)

 

$

1,459,919

 

 

$

1,484,384

 

Key inputs (2)

 

 

 

 

 

 

Pull-through rate

 

 

 

 

 

 

Range

 

62.6% – 100%

 

 

54.8% – 100%

 

Weighted average

 

85.4%

 

 

92.1%

 

MSR fair value expressed as

 

 

 

 

 

 

Servicing fee multiple

 

 

 

 

 

 

Range

 

3.6 – 7.0

 

 

1.9 – 7.1

 

Weighted average

 

5.3

 

 

4.7

 

Percentage of UPB

 

 

 

 

 

 

Range

 

0.9% – 2.8%

 

 

0.7% – 3.1%

 

Weighted average

 

1.9%

 

 

1.9%

 

 

(1)
For purposes of this table, IRLC asset and liability positions are shown net.
(2)
Weighted-average inputs are based on the committed amounts.

32

 

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 loan servicing fees – from nonaffiliates – Mortgage servicing rights hedging results, Net gains on loans acquired for sale or Net (losses) gains on investments and financings, 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 nonaffiliate 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 nonaffiliate 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 (losses) gains on investments and financings during the quarter ended March 31, 2022.

The Company assesses the indications of fair value it receives from nonaffiliate 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 (losses) gains 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 the broker-provided fair values used to derive the fair value of the CRT strip liabilities:

 

 

September 30, 2023

 

 

December 31, 2022

 

 

 

(dollars in thousands)

 

Fair value

 

$

68,592

 

 

$

137,193

 

UPB of loans in the reference pools

 

$

18,057,469

 

 

$

19,343,464

 

Key inputs (1)

 

 

 

 

 

 

Discount rate

 

 

 

 

 

 

Range

 

8.7% – 11.0%

 

 

4.3% – 11.3%

 

Weighted average

 

10.7%

 

 

10.5%

 

Voluntary prepayment speed (2)

 

 

 

 

 

 

Range

 

6.5% – 7.8%

 

 

7.7% – 7.9%

 

Weighted average

 

6.7%

 

 

7.7%

 

Involuntary prepayment speed (3)

 

 

 

 

 

 

Range

 

0.2% – 0.4%

 

 

0.6% – 2.0%

 

Weighted average

 

0.2%

 

 

0.8%

 

Remaining loss expectation

 

 

 

 

 

 

Range

 

0.5% – 1.7%

 

 

0.7% – 2.0%

 

Weighted average

 

0.7%

 

 

0.9%

 

 

(1)
Weighted average inputs are based on fair value amounts of the CRT arrangements, except for remaining loss expectation which is based on the UPB of the loans in the reference pools.
(2)
Voluntary prepayment speed is measured using Life Voluntary CPR.
(3)
Involuntary prepayment speed is measured using Life Involuntary CPR.

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 certain custodial funds held pending remittance of mortgagor principal, interest, tax and insurance payments.

33

 

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.

Following are the key inputs used in determining the fair value of MSRs at the time of initial recognition:

 

Quarter ended September 30,

 

 

Nine months ended September 30,

 

 

 

2023

 

 

2022

 

 

2023

 

 

2022

 

 

 

(MSR recognized and UPB of underlying loans amounts in thousands)

 

MSR recognized

 

$

58,560

 

 

$

178,001

 

 

$

249,925

 

 

$

543,255

 

UPB of underlying loans

 

$

3,052,557

 

 

$

9,538,175

 

 

$

13,458,182

 

 

$

31,767,152

 

Weighted average annual servicing fee rate (in basis points)

 

38

 

 

38

 

 

40

 

 

34

 

Key inputs (1)

 

 

 

 

 

 

 

 

 

 

 

 

Pricing spread (2)

 

 

 

 

 

 

 

 

 

 

 

 

Range

 

5.5% – 8.5%

 

 

5.5% – 8.7%

 

 

5.5% – 8.8%

 

 

5.5% – 8.9%

 

Weighted average

 

5.5%

 

 

6.2%

 

 

5.8%

 

 

6.4%

 

Prepayment speed (3)

 

 

 

 

 

 

 

 

 

 

 

 

Range

 

10.1% – 22.7%

 

 

6.8% – 18.9%

 

 

10.1% – 22.7%

 

 

6.0% – 18.9%

 

Weighted average

 

11.3%

 

 

10.1%

 

 

12.3%

 

 

9.1%

 

Equivalent average life (in years)

 

 

 

 

 

 

 

 

 

 

 

 

Range

 

3.2 - 7.2

 

 

4.1 – 9.5

 

 

2.8 - 7.2

 

 

4.0 – 9.5

 

Weighted average

 

7.1

 

 

7.7

 

 

6.8

 

 

8.0

 

Annual per-loan cost of servicing

 

 

 

 

 

 

 

 

 

 

 

 

Range

 

$69 – $71

 

 

$80 – $80

 

 

$68 – $71

 

 

$80 – $80

 

Weighted average

 

$71

 

 

$80

 

 

$69

 

 

$80

 

 

(1)
Weighted average inputs are based on UPB of the underlying loans.
(2)
The Company uses the pricing spread over the Treasury securities yield curve for the purpose of discounting cash flows relating to MSRs.
(3)
Prepayment speed is measured using Life Total CPR, which includes both voluntary and involuntary prepayments. Equivalent average life is provided as supplementary information.

34

 

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:

 

 

September 30, 2023

 

 

December 31, 2022

 

 

 

(Fair value, UPB of underlying loans and
effect on fair value amounts in thousands)

 

Fair value

 

$

4,108,661

 

 

$

4,012,737

 

UPB of underlying loans

 

$

231,545,013

 

 

$

229,971,035

 

Weighted average annual servicing fee rate (in basis points)

 

28

 

 

29

 

Weighted average note interest rate

 

3.6%

 

 

3.5%

 

Key inputs (1)

 

 

 

 

 

 

Pricing spread (2)

 

 

 

 

 

 

Range

 

5.6% - 8.7%

 

 

4.9% – 8.8%

 

Weighted average

 

5.6%

 

 

5.7%

 

Effect on fair value of (3):

 

 

 

 

 

 

5% adverse change

 

$(52,357)

 

 

$(52,004)

 

10% adverse change

 

$(103,437)

 

 

$(102,727)

 

20% adverse change

 

$(201,939)

 

 

$(200,497)

 

Prepayment speed (4)

 

 

 

 

 

 

Range

 

4.9% – 16.9%

 

 

5.1% – 17.4%

 

Weighted average

 

5.9%

 

 

6.3%

 

Equivalent average life (in years)

 

 

 

 

 

 

Range

 

2.9 - 10.4

 

 

3.5 – 9.3

 

Weighted average

 

9.2

 

 

8.9

 

Effect on fair value of (3):

 

 

 

 

 

 

5% adverse change

 

$(47,226)

 

 

$(51,044)

 

10% adverse change

 

$(93,108)

 

 

$(100,544)

 

20% adverse change

 

$(181,071)

 

 

$(195,201)

 

Annual per-loan cost of servicing

 

 

 

 

 

 

Range

 

$68 – $72

 

 

$69 – $69

 

Weighted average

 

$71

 

 

$69

 

Effect on fair value of (3):

 

 

 

 

 

 

5% adverse change

 

$(17,748)

 

 

$(17,629)

 

10% adverse change

 

$(35,495)

 

 

$(35,258)

 

20% adverse change

 

$(70,991)

 

 

$(70,515)

 

 

(1)
Weighted-average inputs are based on the UPB of the underlying loans.
(2)
The Company uses a pricing spread over the Treasury securities yield curve for the purpose of discounting cash flows relating to MSRs.
(3)
These sensitivity analyses are limited in that they were performed as of a particular date; only account for the estimated effect of the movements in the indicated inputs; do not incorporate changes in those inputs in relation to other inputs; are subject to the accuracy of the models and inputs used; and do not incorporate other factors that would affect the Company’s overall financial performance in such events, including operational adjustments to account for changing circumstances. For these reasons, these analyses should not be viewed as earnings forecasts.
(4)
Prepayment speed is measured using Life Total CPR, which includes both voluntary and involuntary prepayments. Equivalent average life is provided as supplementary information.

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.

35

 

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 holdings of MBS:

 

 

Quarter ended September 30,

 

 

Nine months ended September 30,

 

 

 

2023

 

 

2022

 

 

2023

 

 

2022

 

 

 

(in thousands)

 

Balance at beginning of period

 

$

4,731,341

 

 

$

3,853,076

 

 

$

4,462,601

 

 

$

2,666,768

 

Purchases

 

 

64,384

 

 

 

354,015

 

 

 

3,108,701

 

 

 

3,114,891

 

Sales

 

 

—

 

 

 

—

 

 

 

(2,629,540

)

 

 

(1,079,826

)

Repayments

 

 

(90,319

)

 

 

(75,555

)

 

 

(250,733

)

 

 

(214,526

)

Exchange of mortgage servicing spread for interest-only
   stripped mortgage-backed securities

 

 

103,547

 

 

 

—

 

 

 

103,547

 

 

 

—

 

Changes in fair value included in income arising from:

 

 

 

 

 

 

 

 

 

 

 

 

Accrual (amortization) of net purchase premiums
   (discounts)

 

 

1,048

 

 

 

229

 

 

 

(1,172

)

 

 

13,481

 

Valuation adjustments

 

 

(144,031

)

 

 

(251,477

)

 

 

(127,434

)

 

 

(620,500

)

 

 

(142,983

)

 

 

(251,248

)

 

 

(128,606

)

 

 

(607,019

)

Balance at end of period

 

$

4,665,970

 

 

$

3,880,288

 

 

$

4,665,970

 

 

$

3,880,288

 

 

Following is a summary of the Company’s investment in MBS:

 

 

September 30, 2023

 

Security type (1)

 

Principal
balance

 

 

Unamortized
net purchase
premiums (discounts)

 

 

Cumulative
valuation
changes

 

 

Fair value (1)

 

 

 

(in thousands)

 

Agency fixed-rate pass-through securities

 

$

4,403,330

 

 

$

494

 

 

$

(233,304

)

 

$

4,170,520

 

Subordinate credit-linked securities

 

 

259,863

 

 

 

(3,831

)

 

 

21,053

 

 

 

277,085

 

Senior non-Agency securities

 

 

127,172

 

 

 

(3,760

)

 

 

(8,580

)

 

 

114,832

 

 

$

4,790,365

 

 

$

(7,097

)

 

$

(220,831

)

 

 

4,562,437

 

Interest-only stripped mortgage-backed
  securities

 

 

 

 

 

 

 

 

 

 

 

103,533

 

 

 

 

 

 

 

 

 

 

 

 

$

4,665,970

 

 

 

 

December 31, 2022

 

Security type (1)

 

Principal
balance

 

 

Unamortized
net purchase
premiums (discounts)

 

 

Cumulative
valuation
changes

 

 

Fair value (1)

 

 

 

(in thousands)

 

Agency fixed-rate pass-through securities

 

$

4,693,045

 

 

$

30,423

 

 

$

(460,966

)

 

$

4,262,502

 

Subordinate credit-linked securities

 

 

184,620

 

 

 

52

 

 

 

(6,774

)

 

 

177,898

 

Senior non-Agency securities

 

 

28,103

 

 

 

(876

)

 

 

(5,026

)

 

 

22,201

 

 

$

4,905,768

 

 

$

29,599

 

 

$

(472,766

)

 

$

4,462,601

 

 

(1)
All MBS have maturities of more than ten years and are pledged to secure Assets sold under agreements to repurchase.

36

 

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

 

September 30, 2023

 

 

December 31, 2022

 

 

 

(in thousands)

 

GSE eligible — held for sale to nonaffiliates (1)

 

$

520,702

 

 

$

1,651,554

 

Held for sale to PLS (2)

 

 

499,132

 

 

 

159,671

 

Jumbo

 

 

1,014

 

 

 

—

 

Home equity lines of credit

 

 

1,903

 

 

 

2,424

 

Repurchased pursuant to representations and warranties

 

 

2,979

 

 

 

8,284

 

 

$

1,025,730

 

 

$

1,821,933

 

Loans pledged to secure:

 

 

 

 

 

 

Assets sold under agreements to repurchase

 

$

994,057

 

 

$

1,801,368

 

Mortgage loan participation purchase and sale agreements

 

 

25,190

 

 

 

—

 

 

$

1,019,247

 

 

$

1,801,368

 

 

(1)
GSE eligibility refers to the eligibility of loans for sale to Fannie Mae or Freddie Mac. The Company sells or finances a portion of its GSE eligible loan production to or with other investors, including PLS.
(2)
The Company sells a portion of its loan production to PLS, including all of its loans eligible for inclusion in Ginnie Mae securities. The Company is not approved by Ginnie Mae as an issuer of Ginnie Mae-guaranteed securities which are backed by government-insured or guaranteed loans. The Company earns a sourcing fee for all loans that it purchases from correspondent sellers and subsequently sells to PLS as described in Note 4 – Transactions with Related Parties – Operating activities – Correspondent Production Activities.

Note 10—Loans at Fair Value

Loans at fair value are comprised primarily of loans held in VIEs securing asset-backed financings as described 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:

Loan type

 

September 30, 2023

 

 

December 31, 2022

 

 

 

(in thousands)

 

Loans in VIEs:

 

 

 

 

 

 

Agency-conforming loans secured by investment properties

 

$

1,323,199

 

 

$

1,459,160

 

Fixed interest rate jumbo loans

 

 

46,822

 

 

 

50,782

 

 

 

1,370,021

 

 

 

1,509,942

 

Distressed loans

 

 

2,097

 

 

 

3,457

 

 

$

1,372,118

 

 

$

1,513,399

 

Loans at fair value pledged to secure:

 

 

 

 

 

 

Asset-backed financings at fair value (1)

 

$

1,370,021

 

 

$

1,509,942

 

Assets sold under agreements to repurchase

 

 

199

 

 

 

206

 

 

$

1,370,220

 

 

$

1,510,148

 

 

(1)
As discussed in Note 6 ‒ Variable Interest Entities ‒ Subordinate Mortgage-Backed Securities, the Company holds a portion of the securities issued by the VIEs. At September 30, 2023 and December 31, 2022, $80.3 million and $84.0 million, respectively, of such retained securities were pledged to secure Assets sold under agreements to repurchase.

 

Note 11—Derivative and Credit Risk Transfer Strip Assets and Liabilities

Derivative and credit risk transfer assets and liabilities are summarized below:

 

 

September 30, 2023

 

 

December 31, 2022

 

 

 

(in thousands)

 

Derivative assets

 

$

29,750

 

 

$

84,940

 

 

$

29,750

 

 

$

84,940

 

 

 

 

 

 

 

Derivative liabilities

 

$

71,902

 

 

$

30,033

 

Credit risk transfer strip liabilities

 

 

68,592

 

 

 

137,193

 

 

$

140,494

 

 

$

167,226

 

 

37

 

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.

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:

•
IRLCs that are created when the Company commits to purchase loans acquired for sale; and
•
CRT Agreements whereby the Company retained a recourse obligation relating to certain loans it sold into Fannie Mae guaranteed securitizations as part of the retention of IO ownership interests in such loans.

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:

•
The Company is exposed to losses if market mortgage interest rates increase, because market interest rate increases generally cause the fair value of MBS, IRLCs and loans acquired for sale to decrease.
•
The Company is exposed to losses if market mortgage interest rates decrease, because market interest rate decreases generally cause the fair value of MSRs to decrease.

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 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.

38

 

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 on the consolidated balance sheets:

 

 

September 30, 2023

 

 

December 31, 2022

 

 

 

 

 

 

Fair value

 

 

 

 

 

Fair value

 

 

 

Notional

 

 

Derivative

 

 

Derivative

 

 

Notional

 

 

Derivative

 

 

Derivative

 

Instrument

 

amount (1)

 

 

assets

 

 

liabilities

 

 

amount (1)

 

 

assets

 

 

liabilities

 

 

(in thousands)

 

Hedging derivatives subject to master netting
   arrangements (2):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Call options on interest rate futures purchase
   contracts

 

 

350,000

 

 

$

641

 

 

$

—

 

 

 

1,950,000

 

 

$

2,906

 

 

$

—

 

Put options on interest rate futures purchase
   contracts

 

 

2,280,000

 

 

 

19,256

 

 

 

—

 

 

 

1,785,000

 

 

 

8,130

 

 

 

—

 

Put options on interest rate futures sale
   contracts

 

 

200,000

 

 

 

—

 

 

 

1,688

 

 

 

—

 

 

 

—

 

 

 

—

 

Forward purchase contracts

 

 

3,936,766

 

 

 

1,287

 

 

 

9,994

 

 

 

3,929,833

 

 

 

418

 

 

 

15,196

 

Forward sale contracts

 

 

9,547,291

 

 

 

30,348

 

 

 

1,464

 

 

 

11,661,925

 

 

 

43,435

 

 

 

17,279

 

MBS put options

 

 

100,000

 

 

 

169

 

 

 

—

 

 

 

1,050,000

 

 

 

2,783

 

 

 

—

 

Bond futures

 

 

3,066,000

 

 

 

—

 

 

 

—

 

 

 

867,900

 

 

 

—

 

 

 

—

 

Other derivatives not subject to master netting
    arrangements:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

CRT derivatives

 

 

5,556,206

 

 

 

7,010

 

 

 

2,268

 

 

 

5,972,060

 

 

 

1,262

 

 

 

23,360

 

Interest rate lock commitments

 

 

1,459,919

 

 

 

1,970

 

 

 

5,318

 

 

 

1,484,384

 

 

 

3,877

 

 

 

4,355

 

Total derivative instruments before netting

 

 

 

 

 

60,681

 

 

 

20,732

 

 

 

 

 

 

62,811

 

 

 

60,190

 

Netting

 

 

 

 

 

(30,931

)

 

 

51,170

 

 

 

 

 

 

22,129

 

 

 

(30,157

)

 

 

 

 

$

29,750

 

 

$

71,902

 

 

 

 

 

$

84,940

 

 

$

30,033

 

Margin deposits (received from) placed
  with derivative counterparties included
  in derivative balances above, net

 

 

 

 

$

(82,101

)

 

 

 

 

 

 

 

$

52,286

 

 

 

 

Derivative assets pledged to secure:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Notes payable secured by credit risk transfer
   and mortgage servicing assets

 

 

 

 

$

7,010

 

 

 

 

 

 

 

 

$

1,262

 

 

 

 

 

(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 September 30, 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.

39

 

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.

 

 

September 30, 2023

 

 

December 31, 2022

 

 

 

Net amount

 

 

Gross amounts

 

 

 

 

 

Net amount

 

 

Gross amounts

 

 

 

 

 

 

of assets

 

 

not offset in the

 

 

 

 

 

of assets

 

 

not offset in the

 

 

 

 

 

 

presented

 

 

consolidated

 

 

 

 

 

presented

 

 

consolidated

 

 

 

 

 

 

in the

 

 

balance sheet

 

 

 

 

 

in the

 

 

balance sheet

 

 

 

 

 

 

consolidated

 

 

 

 

 

Cash

 

 

 

 

 

consolidated

 

 

 

 

 

Cash

 

 

 

 

 

 

balance

 

 

Financial

 

 

collateral

 

 

Net

 

 

balance

 

 

Financial

 

 

collateral

 

 

Net

 

 

 

sheet

 

 

instruments

 

 

received

 

 

amount

 

 

sheet

 

 

instruments

 

 

received

 

 

amount

 

Counterparty

 

(in thousands)

 

CRT derivatives

 

$

7,010

 

 

$

—

 

 

$

—

 

 

$

7,010

 

 

$

1,262

 

 

$

—

 

 

$

—

 

 

$

1,262

 

Interest rate lock commitments

 

 

1,970

 

 

 

—

 

 

 

—

 

 

 

1,970

 

 

 

3,877

 

 

 

—

 

 

 

—

 

 

 

3,877

 

RJ O’Brien & Associates, LLC

 

 

18,209

 

 

 

—

 

 

 

—

 

 

 

18,209

 

 

 

11,036

 

 

 

—

 

 

 

—

 

 

 

11,036

 

Mizuho Financial Group

 

 

1,182

 

 

 

—

 

 

 

—

 

 

 

1,182

 

 

 

127

 

 

 

—

 

 

 

—

 

 

 

127

 

Bank of America, N.A.

 

 

1,097

 

 

 

—

 

 

 

—

 

 

 

1,097

 

 

 

14,666

 

 

 

—

 

 

 

—

 

 

 

14,666

 

Morgan Stanley & Co. LLC

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

33,703

 

 

 

—

 

 

 

—

 

 

 

33,703

 

Wells Fargo Securities, LLC

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

6,980

 

 

 

—

 

 

 

—

 

 

 

6,980

 

Credit Suisse Securities (USA) LLC

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

5,827

 

 

 

—

 

 

 

—

 

 

 

5,827

 

Goldman Sachs & Co. LLC

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

2,789

 

 

 

—

 

 

 

—

 

 

 

2,789

 

Barclays Capital Inc.

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

2,013

 

 

 

—

 

 

 

—

 

 

 

2,013

 

J.P. Morgan Securities LLC

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

110

 

 

 

—

 

 

 

—

 

 

 

110

 

Other

 

 

282

 

 

 

—

 

 

 

—

 

 

 

282

 

 

 

2,550

 

 

 

—

 

 

 

—

 

 

 

2,550

 

 

$

29,750

 

 

$

—

 

 

$

—

 

 

$

29,750

 

 

$

84,940

 

 

$

—

 

 

$

—

 

 

$

84,940

 

 

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.

 

 

September 30, 2023

 

 

December 31, 2022

 

 

 

Net amount

 

 

Gross amounts

 

 

 

 

 

Net amount

 

 

Gross amounts

 

 

 

 

 

 

of liabilities

 

 

not offset in the

 

 

 

 

 

of liabilities

 

 

not offset in the

 

 

 

 

 

 

presented

 

 

consolidated

 

 

 

 

 

presented

 

 

consolidated

 

 

 

 

 

 

in the

 

 

balance sheet

 

 

 

 

 

in the

 

 

balance sheet

 

 

 

 

 

 

consolidated

 

 

Financial

 

 

Cash

 

 

 

 

 

consolidated

 

 

Financial

 

 

Cash

 

 

 

 

 

 

balance

 

 

instruments

 

 

collateral

 

 

Net

 

 

balance

 

 

instruments

 

 

collateral

 

 

Net

 

 

 

sheet

 

 

(1)

 

 

pledged

 

 

amount

 

 

sheet

 

 

(1)

 

 

pledged

 

 

amount

 

Counterparty

 

(in thousands)

 

CRT derivatives

 

$

2,268

 

 

$

—

 

 

$

—

 

 

$

2,268

 

 

$

23,360

 

 

$

—

 

 

$

—

 

 

$

23,360

 

Interest rate lock commitments

 

 

5,318

 

 

 

—

 

 

 

—

 

 

 

5,318

 

 

 

4,355

 

 

 

—

 

 

 

—

 

 

 

4,355

 

J.P. Morgan Securities LLC

 

 

1,564,749

 

 

 

(1,560,086

)

 

 

—

 

 

 

4,663

 

 

 

1,605,813

 

 

 

(1,605,813

)

 

 

—

 

 

 

—

 

Barclays Capital Inc.

 

 

835,314

 

 

 

(834,773

)

 

 

—

 

 

 

541

 

 

 

1,115,265

 

 

 

(1,115,265

)

 

 

—

 

 

 

—

 

Bank of America, N.A.

 

 

814,453

 

 

 

(814,453

)

 

 

—

 

 

 

—

 

 

 

1,239,293

 

 

 

(1,239,293

)

 

 

—

 

 

 

—

 

Atlas Securitized Products, L.P.

 

 

775,968

 

 

 

(775,968

)

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

Wells Fargo Securities, LLC

 

 

633,576

 

 

 

(604,904

)

 

 

—

 

 

 

28,672

 

 

 

262,512

 

 

 

(262,512

)

 

 

—

 

 

 

—

 

Daiwa Capital Markets

 

 

350,089

 

 

 

(350,000

)

 

 

—

 

 

 

89

 

 

 

439,089

 

 

 

(439,089

)

 

 

—

 

 

 

—

 

Amherst Pierpont Securities LLC

 

 

302,341

 

 

 

(302,341

)

 

 

—

 

 

 

—

 

 

 

283,928

 

 

 

(283,294

)

 

 

—

 

 

 

634

 

Morgan Stanley & Co. LLC

 

 

243,616

 

 

 

(216,040

)

 

 

—

 

 

 

27,576

 

 

 

218,730

 

 

 

(218,730

)

 

 

—

 

 

 

—

 

Goldman Sachs & Co. LLC

 

 

189,682

 

 

 

(189,429

)

 

 

—

 

 

 

253

 

 

 

156,952

 

 

 

(156,952

)

 

 

—

 

 

 

—

 

Citigroup Global Markets Inc.

 

 

178,693

 

 

 

(176,899

)

 

 

—

 

 

 

1,794

 

 

 

197,229

 

 

 

(195,807

)

 

 

—

 

 

 

1,422

 

Mizuho Financial Group

 

 

72,196

 

 

 

(72,196

)

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

BNP Paribas

 

 

68,697

 

 

 

(68,651

)

 

 

—

 

 

 

46

 

 

 

153,220

 

 

 

(153,220

)

 

 

—

 

 

 

—

 

RBC Capital Markets, L.P.

 

 

48,301

 

 

 

(48,301

)

 

 

—

 

 

 

—

 

 

 

268,581

 

 

 

(268,581

)

 

 

—

 

 

 

—

 

Nomura Holdings America, Inc

 

 

7,937

 

 

 

(7,849

)

 

 

—

 

 

 

88

 

 

 

4,444

 

 

 

(4,444

)

 

 

—

 

 

 

—

 

Credit Suisse Securities (USA) LLC

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

675,639

 

 

 

(675,639

)

 

 

—

 

 

 

—

 

Other

 

 

594

 

 

 

—

 

 

 

—

 

 

 

594

 

 

 

262

 

 

 

—

 

 

 

—

 

 

 

262

 

 

$

6,093,792

 

 

$

(6,021,890

)

 

$

—

 

 

$

71,902

 

 

$

6,648,672

 

 

$

(6,618,639

)

 

$

—

 

 

$

30,033

 

 

40

 

 

(1)
Amounts represent the UPB of Assets sold under agreements to repurchase.

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:

 

 

 

 

Quarter ended September 30,

 

 

Nine months ended September 30,

 

Derivative activity

 

Consolidated statements of operations line

 

2023

 

 

2022

 

 

2023

 

 

2022

 

 

 

 

 

(in thousands)

 

Interest rate lock
    commitments

 

Net gains on loans acquired for sale
   (1)

 

$

(2,050

)

 

$

(41,187

)

 

$

(2,870

)

 

$

(45,294

)

CRT derivatives

 

Net (losses) gains on investments
   and financings

 

$

13,164

 

 

$

4,259

 

 

$

39,123

 

 

$

(7,172

)

Hedged item:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate lock
   commitments and loans
   acquired for sale

 

Net gains on loans acquired for sale

 

$

24,092

 

 

$

172,520

 

 

$

22,742

 

 

$

560,138

 

Mortgage servicing rights

 

Net loan servicing fees

 

$

(50,689

)

 

$

154,269

 

 

$

(81,584

)

 

$

(87,651

)

 

(1)
Represents net change in fair value of IRLCs from the beginning to the end of the reporting period. Amounts recognized at the date of commitment and fair value changes recognized during the period until purchase of the underlying loan or cancellation of the commitment are shown in the rollforward of IRLCs for the period in Note 7 – Fair Value – Financial Statement Items Measured at Fair Value on a Recurring Basis.

Note 12—Mortgage Servicing Rights

Following is a summary of MSRs:

 

 

Quarter ended September 30,

 

 

Nine months ended September 30,

 

 

 

2023

 

 

2022

 

 

2023

 

 

2022

 

 

(in thousands)

 

Balance at beginning of period

 

$

3,977,938

 

 

$

3,695,609

 

 

$

4,012,737

 

 

$

2,892,855

 

Purchases

 

 

16,263

 

 

 

—

 

 

 

16,263

 

 

 

—

 

MSRs resulting from loan sales

 

 

58,560

 

 

 

178,001

 

 

 

249,925

 

 

 

543,255

 

Transfer to Agency of mortgage servicing
   rights relating to delinquent loans

 

 

70

 

 

 

—

 

 

 

(653

)

 

 

—

 

Exchange of mortgage servicing spread for
     interest-only stripped mortgage-backed
      securities and interest receivable

 

 

(105,096

)

 

 

—

 

 

 

(105,096

)

 

 

—

 

Changes in fair value:

 

 

 

 

 

 

 

 

 

 

 

 

Due to changes in inputs used in valuation
    model (1)

 

 

263,139

 

 

 

162,730

 

 

 

232,414

 

 

 

775,792

 

Other changes in fair value (2)

 

 

(102,213

)

 

 

(95,756

)

 

 

(296,929

)

 

 

(271,318

)

 

 

160,926

 

 

 

66,974

 

 

 

(64,515

)

 

 

504,474

 

Balance at end of period

 

$

4,108,661

 

 

$

3,940,584

 

 

$

4,108,661

 

 

$

3,940,584

 

 

 

 

September 30, 2023

 

 

December 31, 2022

 

 

 

(in thousands)

 

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

 

$

4,038,113

 

 

$

3,962,820

 

 

(1)
Primarily reflects changes in pricing spread, prepayment speed, servicing cost, and UPB of underlying loan inputs.
(2)
Represents changes due to realization of expected cash flows.

41

 

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:

 

 

Quarter ended September 30,

 

 

Nine months ended September 30,

 

 

 

2023

 

 

2022

 

 

2023

 

 

2022

 

 

 

(in thousands)

 

Contractually-specified servicing fees

 

$

166,809

 

 

$

162,987

 

 

$

496,522

 

 

$

461,021

 

Ancillary and other fees:

 

 

 

 

 

 

 

 

 

 

 

 

Late charges

 

 

878

 

 

 

662

 

 

 

2,442

 

 

 

1,883

 

Other

 

 

2,874

 

 

 

3,584

 

 

 

12,079

 

 

 

18,656

 

 

 

3,752

 

 

 

4,246

 

 

 

14,521

 

 

 

20,539

 

 

$

170,561

 

 

$

167,233

 

 

$

511,043

 

 

$

481,560

 

Average MSR servicing portfolio

 

$

231,333,064

 

 

$

224,756,659

 

 

$

231,333,990

 

 

$

220,988,459

 

 

 

 

 

 

 

 

 

 

 

 

 

 

From PFSI—MSR recapture fees

 

$

500

 

 

$

1,648

 

 

$

1,494

 

 

$

13,232

 

UPB of loans recaptured

 

$

77,403

 

 

$

284,821

 

 

$

270,720

 

 

$

2,446,282

 

 

Note 13— Other Assets

Other assets are summarized below:

 

 

September 30, 2023

 

 

December 31, 2022

 

 

 

(dollars in thousands)

 

Derivative margin deposits

 

$

163,863

 

 

$

51,463

 

Correspondent lending receivables

 

 

64,834

 

 

 

8,967

 

Interest receivable

 

 

43,051

 

 

 

31,027

 

Servicing fees receivable

 

 

13,861

 

 

 

15,727

 

Other receivables

 

 

6,464

 

 

 

7,657

 

Real estate acquired in settlement of loans

 

 

5,318

 

 

 

7,734

 

Other

 

 

4,101

 

 

 

12,416

 

 

 

$

301,492

 

 

$

134,991

 

Real estate acquired in settlement of loans pledge to secure
   Assets sold under agreements to repurchase

 

$

2,466

 

 

$

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 September 30, 2023.

Assets Sold Under Agreements to Repurchase

Following is a summary of financial information relating to assets sold under agreements to repurchase:

 

 

Quarter ended September 30,

 

 

Nine months ended September 30,

 

 

 

2023

 

 

2022

 

 

2023

 

 

2022

 

 

 

(dollars in thousands)

 

Weighted average interest rate (1)

 

 

5.97

%

 

 

3.09

%

 

 

5.81

%

 

 

2.02

%

Average balance

 

$

5,714,082

 

 

$

5,789,433

 

 

$

6,451,377

 

 

$

5,363,690

 

Total interest expense

 

$

87,414

 

 

$

46,691

 

 

$

284,027

 

 

$

87,310

 

Maximum daily amount outstanding

 

$

6,318,746

 

 

$

6,649,005

 

 

$

9,412,768

 

 

$

8,395,930

 

 

(1)
Excludes the effect of amortization of debt issuance costs of $1.4 million and $3.8 million for the quarter and nine months ended September 30, 2023, respectively, and $1.7 million and $6.1 million for the quarter and nine months ended September 30, 2022, respectively.

 

42

 

 

 

September 30, 2023

 

 

December 31, 2022

 

 

 

(dollars in thousands)

 

Carrying value:

 

 

 

 

 

 

Unpaid principal balance

 

$

6,021,890

 

 

$

6,618,639

 

Unamortized debt issuance costs

 

 

(1,174

)

 

 

(2,111

)

 

 

$

6,020,716

 

 

$

6,616,528

 

Weighted average interest rate

 

 

6.08

%

 

 

5.03

%

Available borrowing capacity (1):

 

 

 

 

 

 

Committed

 

$

465,855

 

 

$

217,279

 

Uncommitted

 

 

5,054,453

 

 

 

4,762,056

 

 

$

5,520,308

 

 

$

4,979,335

 

Margin deposits placed with (received from) counterparties included in
   Other assets (Accounts payable and accrued liabilities), net

 

$

93,467

 

 

$

(13,630

)

Assets securing agreements to repurchase:

 

 

 

 

 

 

Mortgage-backed securities

 

$

4,665,970

 

 

$

4,462,601

 

Loans acquired for sale at fair value

 

$

994,057

 

 

$

1,801,368

 

Loans at fair value:

 

 

 

 

 

 

Securities retained in asset-backed financings

 

$

80,298

 

 

$

84,044

 

Distressed

 

$

199

 

 

$

206

 

Deposits securing credit risk transfer arrangements

 

$

79,490

 

 

$

455,552

 

Mortgage servicing rights (2)

 

$

2,106,489

 

 

$

2,092,794

 

Servicing advances

 

$

46,280

 

 

$

100,888

 

Real estate acquired in settlement of loans

 

$

2,466

 

 

$

3,297

 

 

(1)
The amount the Company is able to borrow under asset repurchase agreements is tied to the fair value of unencumbered assets eligible to secure those agreements and the Company’s ability to fund the agreements’ margin requirements relating to the assets financed.
(2)
Beneficial interests in Fannie Mae MSRs are pledged to secure both Assets sold under agreements to repurchase and Notes payable secured by credit risk transfer and mortgage servicing assets.

Following is a summary of maturities of outstanding advances under repurchase agreements by maturity date:

Remaining maturity at September 30, 2023 (1)

 

Unpaid
principal
balance

 

 

 

(in thousands)

 

Within 30 days

 

$

3,661,146

 

Over 30 to 90 days

 

 

1,889,816

 

Over 90 days to 180 days

 

 

—

 

Over 180 days to 1 year

 

 

—

 

Over 1 year to 2 years

 

 

470,928

 

 

$

6,021,890

 

Weighted average maturity (in months)

 

 

2.8

 

 

(1)
The Company is subject to margin calls during the period the repurchase agreements are outstanding and therefore may be required to repay a portion of the borrowings before the respective repurchase agreements mature if the fair value (as determined by the applicable lender) of the assets securing those repurchase agreements decreases.

43

 

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 September 30, 2023:

Loans, REO and MSRs

 

 

 

 

 

Weighted-average maturity

Counterparty

 

Amount at risk

 

 

Advances

 

Facility

 

 

(in thousands)

 

 

 

 

 

Goldman Sachs & Co. LLC

 

$

1,757

 

 

December 19, 2023

 

December 23, 2023

Barclays Capital Inc.

 

$

2,507

 

 

December 20, 2023

 

November 13, 2024

Atlas Securitized Products, L.P.

 

$

53,974

 

 

December 21, 2023

 

June 27, 2025

Bank of America, N.A.

 

$

15,506

 

 

November 3, 2023

 

June 12, 2025

JPMorgan Chase & Co.

 

$

128

 

 

December 3, 2023

 

June 16, 2025

Citibank, N.A.

 

$

8,935

 

 

December 14, 2023

 

June 27, 2025

Wells Fargo Securities, LLC

 

$

1,027

 

 

December 16, 2023

 

May 3, 2025

Morgan Stanley & Co. LLC

 

$

9,731

 

 

December 25, 2023

 

January 27, 2025

BNP Paribas Corporate & Institutional Banking

 

$

3,309

 

 

December 24, 2023

 

September 30, 2025

RBC Capital Markets, L.P.

 

$

1,194

 

 

December 27, 2023

 

August 9, 2024

 

Securities

Counterparty

 

Amount at risk

 

 

Weighted average maturity

 

 

(in thousands)

 

 

 

Goldman Sachs & Co. LLC

 

$

25,485

 

 

October 30, 2023

Barclays Capital Inc.

 

$

52,386

 

 

November 3, 2023

Bank of America, N.A.

 

$

36,519

 

 

October 28, 2023

JPMorgan Chase & Co.

 

$

46,287

 

 

October 22, 2023

Citibank, N.A.

 

$

32,657

 

 

October 16, 2023

Wells Fargo Securities, LLC

 

$

27,848

 

 

October 13, 2023

Amherst Pierpont Securities LLC

 

$

9,401

 

 

October 18, 2023

Daiwa Capital Markets America Inc.

 

$

9,255

 

 

October 27, 2023

Nomura Holdings America, Inc

 

$

3,543

 

 

October 3, 2023

Mizuho Financial Group

 

$

1,977

 

 

November 22, 2023

 

CRT arrangements

Counterparty

 

Amount at risk

 

 

Weighted average maturity

 

 

(in thousands)

 

 

 

Goldman Sachs & Co. LLC

 

$

34,219

 

 

October 27, 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.

The mortgage loan participation purchase and sale agreement is summarized below:

 

 

Quarter ended September 30,

 

 

Nine months ended September 30,

 

 

 

2023

 

 

2022

 

 

2023

 

 

2022

 

 

 

(dollars in thousands)

 

Average balance

 

$

22,043

 

 

$

31,092

 

 

$

20,991

 

 

$

33,586

 

Weighted average interest rate (1)

 

 

6.69

%

 

 

3.69

%

 

 

6.46

%

 

 

2.53

%

Total interest expense

 

$

403

 

 

$

320

 

 

$

1,109

 

 

$

728

 

Maximum daily amount outstanding

 

$

46,303

 

 

$

81,360

 

 

$

90,565

 

 

$

88,633

 

 

44

 

 

(1)
Excludes the effect of amortization of debt issuance costs of $31,000 and $94,000 for the quarter and nine months ended September 30, 2023, respectively, and $31,000 and $94,000 for the quarter and nine months ended September 30, 2022, respectively.

 

 

 

September 30, 2023

 

 

 

(dollars in thousands)

 

Carrying value:

 

 

 

Amount outstanding

 

$

23,991

 

Unamortized debt issuance costs

 

 

—

 

 

$

23,991

 

Weighted average interest rate

 

 

6.57

%

Loans acquired for sale pledged to secure mortgage loan participation
   purchase and sale agreement

 

$

25,190

 

 

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:

CRT

 

 

 

 

 

 

Unpaid

 

 

Annual

 

Maturity date

Term
Notes

 

Issuance date

 

Issuance amount

 

 

principal
balance

 

 

interest rate spread (1)

 

Stated

 

Optional extension (2)

 

 

 

 

(in thousands)

 

 

 

 

 

 

 

2023 1R

 

April 5, 2023

 

$

235,000

 

 

$

222,152

 

 

4.40%

 

March 25, 2025

 

—

2021 1R

 

March 4, 2021

 

$

659,156

 

 

 

277,133

 

 

2.90%

 

February 28, 2024

 

February 27, 2026

2020 1R

 

February 14, 2020

 

$

350,000

 

 

 

52,600

 

 

3.35%

 

February 27, 2025

 

(3)

2019 3R

 

October 16, 2019

 

$

375,000

 

 

 

49,257

 

 

3.70%

 

October 29, 2024

 

(3)

2019 2R

 

June 11, 2019

 

$

638,000

 

 

 

166,249

 

 

3.75%

 

May 28, 2025

 

(3)

 

 

 

 

 

 

$

767,391

 

 

 

 

 

 

 

 

(1)
Interest rates are charged based at a spread to the Secured Overnight Financing Rate ("SOFR").
(2)
The indentures relating to these issuances provide the Company with the option to extend the maturity dates of certain of the CRT Term Notes under the conditions specified in the respective agreements.
(3)
Stated maturity date reflects the exercise by the Company of its option to extend the maturity of this issuance.

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 $1 billion and matures on June 27, 2025.

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 Term Notes”) to qualified institutional buyers under Rule 144A of the Securities Act and a series of syndicated term loans with various lenders (the “FT-1 Term Loans”).

On May 25, 2023, the Company, through its indirect, wholly-owned subsidiaries, PMT ISSUER TRUST - FMSR and PMC, entered into a syndicated series of term notes for $155 million (the “Series 2023-FTL1 Loan”), as part of the structured finance transaction that PMC uses to finance Fannie Mae MSRs and related excess servicing spread. On August 16, 2023, two additional lenders were added to the Series 2023-FTL1 Loan and the overall note balance increased by $215 million to $370 million. The initial

45

 

five-year term of the Series 2023-FTL1 Loan is set to expire on May 25, 2028, unless the Company exercises a one-year optional extension. The Series 2023-FTL1 Loan ranks pari passu with the Series 2021-FT1 and Series 2022-FT1 term notes, and the Amended and Restated Series 2017-VF1 Master Repurchase Agreement dated June 29, 2018.

The FT-1 Term Notes and FTL-1 Term Loans 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:

 

 

 

 

 

 

 

Unpaid

 

 

Annual

 

Maturity date

Issuance

 

Issuance date

 

Issuance amount

 

 

principal
balance

 

 

interest rate spread (1)

 

Stated

 

Optional extension (2)

 

 

 

 

(in thousands)

 

 

 

 

 

 

 

Term Loans

 

 

 

 

 

 

 

 

 

 

 

 

2023

 

May 25, 2023

 

$

370,000

 

 

$

370,000

 

 

3.00%

 

May 25, 2028

 

May 25, 2029

Term Notes

 

 

 

 

 

 

 

 

 

 

 

 

2022

 

June 28, 2022

 

$

305,000

 

 

 

305,000

 

 

4.19%

 

June 25, 2027

 

(3)

2021

 

March 30, 2021

 

$

350,000

 

 

 

350,000

 

 

3.00%

 

March 25, 2026

 

March 27, 2028

 

 

 

 

 

 

 

$

1,025,000

 

 

 

 

 

 

 

 

(1)
Interest rates are charged at a spread to SOFR.
(2)
The indentures relating to these issuances provide the Company with the option of extending the maturity dates of certain of the FT-1 Term Notes and FTL-1 Term Loans under the conditions specified in the respective agreements.
(3)
Either June 26, 2028 or June 25, 2029.

Freddie Mac MSR and Servicing Advance Receivables 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 approximately $2.0 billion, bearing interest at an annual rate equal to SOFR plus a spread as defined in each agreement. The agreements have a weighted average maturity of March 2025. 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 August 10, 2023, the Company, through its indirect, wholly owned subsidiaries, PMT ISSUER TRUST - FHLMC SAF, PMT SAF Funding, LLC, and PMC, entered into a structured finance transaction that PMC will use to finance Freddie Mac servicing advance receivables (the “Series 2023-VF1”). The maturity date of the related Series 2023-VF1, Class A-VF1 Variable Funding Note is August 9, 2025 and has a maximum principal amount of $150 million.

Following is a summary of financial information relating to notes payable secured by credit risk transfer and mortgage servicing assets:

 

 

Quarter ended September 30,

 

 

Nine months ended September 30,

 

 

 

2023

 

 

2022

 

 

2023

 

 

2022

 

 

 

(dollars in thousands)

 

Average balance

 

$

3,106,809

 

 

$

2,801,845

 

 

$

2,995,752

 

 

$

2,550,910

 

Weighted average interest rate (1)

 

 

8.70

%

 

 

5.37

%

 

 

8.28

%

 

 

4.19

%

Total interest expense

 

$

69,952

 

 

$

39,818

 

 

$

191,049

 

 

$

84,597

 

Maximum daily amount outstanding

 

$

3,380,951

 

 

$

3,235,376

 

 

$

3,403,116

 

 

$

3,544,637

 

 

(1)
Excludes the effect of amortization of debt issuance costs of $1.9 million and $5.4 million for the quarter and nine months ended September 30, 2023, respectively, and $1.9 million and $4.7 million for the quarter and nine months ended September 30, 2022, respectively.

 

46

 

 

 

September 30, 2023

 

 

December 31, 2022

 

 

 

(dollars in thousands)

 

Carrying value:

 

 

 

 

 

 

Unpaid principal balance:

 

 

 

 

 

 

CRT arrangement financing

 

$

767,391

 

 

$

592,694

 

Fannie Mae MSR and servicing advance
   receivables financing

 

 

1,025,000

 

 

 

1,105,000

 

Freddie Mac MSR financing

 

 

1,040,000

 

 

 

1,115,000

 

 

 

 

2,832,391

 

 

 

2,812,694

 

Unamortized debt issuance costs

 

 

(6,800

)

 

 

(8,666

)

 

$

2,825,591

 

 

$

2,804,028

 

Weighted average interest rate

 

 

8.71

%

 

 

7.30

%

Assets securing notes payable:

 

 

 

 

 

 

Mortgage servicing rights (1)

 

$

4,038,113

 

 

$

3,962,820

 

Servicing advances

 

$

30,460

 

 

$

—

 

CRT Agreements:

 

 

 

 

 

 

Deposits securing CRT arrangements

 

$

1,157,804

 

 

$

869,742

 

Derivative assets

 

$

7,010

 

 

$

1,262

 

 

(1)
Beneficial interests in Freddie Mac MSRs are pledged as collateral for the Notes payable secured by credit risk transfer and mortgage servicing assets. Beneficial interests in Fannie Mae MSRs are pledged for both Assets sold under agreements to repurchase and Notes payable secured by credit risk transfer and mortgage servicing assets.

Unsecured Senior Notes

Exchangeable Senior Notes

PMC has issued $345 million aggregate principal amount of exchangeable senior notes (the “2026 Exchangeable Notes”) due 2026 and $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 private offerings. The 2026 Exchangeable Notes will mature on March 15, 2026 unless repurchased or exchanged in accordance with their terms before such date. The 2024 Exchangeable Notes will mature on November 1, 2024 unless repurchased or exchanged in accordance with their terms before such date. Each series of Exchangeable Notes bears interest at a rate of 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.

2023 Senior Notes

The Company issued $53.5 million principal amount of unsecured 8.50% senior notes due September 30, 2028 (“the 2023 Senior Notes” and, together with the 2024 Exchangeable Notes and the 2026 Exchangeable Notes, the “Senior Notes”) during September 2023. The 2023 Senior Notes bear interest at a rate of 8.50% per year, payable quarterly in arrears on March 30, June 30, September 30 and December 30 of each year, beginning on December 30, 2023.

On or after September 30, 2025, PMT may redeem for cash all or any portion of the 2023 Senior Notes, at its option, at a redemption price equal to 100% of the principal amount of the notes to be redeemed, plus accrued and unpaid interest to, but excluding, the redemption date.

The 2023 Senior Notes are fully and unconditionally guaranteed on a senior unsecured basis by PMC, including the due and punctual payment of principal of and interest on the 2023 Senior Notes, whether at stated maturity, upon acceleration, call for redemption or otherwise.

Following is financial information relating to the Unsecured Senior Notes:

 

 

Quarter ended September 30,

 

 

Nine months ended September 30,

 

 

 

2023

 

 

2022

 

 

2023

 

 

2022

 

 

 

(in thousands)

 

Average balance

 

$

553,338

 

 

$

545,047

 

 

$

549,063

 

 

$

539,703

 

Weighted average interest rate (1)

 

 

5.56

%

 

 

5.55

%

 

 

5.60

%

 

 

5.67

%

Interest expense

 

$

8,541

 

 

$

8,349

 

 

$

25,316

 

 

$

25,004

 

 

47

 

 

(1)
Excludes the effect of amortization of debt issuance costs of $790,000 and $2.3 million for the quarter and nine months ended September 30, 2023, respectively, and $718,000 and $2.1 million for the quarter and nine months ended September 30, 2022, respectively.

 

 

 

September 30, 2023

 

 

December 31, 2022

 

 

 

(in thousands)

 

Carrying value:

 

 

 

 

 

 

UPB

 

$

608,500

 

 

$

555,000

 

Unamortized debt issuance costs

 

 

(8,746

)

 

 

(8,746

)

 

$

599,754

 

 

$

546,254

 

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:

 

 

Quarter ended September 30,

 

 

Nine months ended September 30,

 

 

 

2023

 

 

2022

 

 

2023

 

 

2022

 

 

 

(dollars in thousands)

 

Average balance

 

$

1,342,093

 

 

$

1,540,957

 

 

$

1,381,994

 

 

$

1,549,797

 

Total interest expense

 

$

13,652

 

 

$

14,265

 

 

$

38,796

 

 

$

40,308

 

Weighted average interest rate (1)

 

 

3.70

%

 

 

3.42

%

 

 

3.69

%

 

 

3.34

%

 

(1)
Excludes the effect of amortization of debt issuance cost and premiums of $1.1 million and $666,000 for the quarter and nine months ended September 30, 2023, respectively, and $1.0 million and $1.6 million for the quarter and nine months ended September 30, 2022, respectively.

 

 

 

September 30, 2023

 

 

December 31, 2022

 

 

 

(dollars in thousands)

 

Fair value

 

$

1,279,059

 

 

$

1,414,955

 

Unpaid principal balance

 

$

1,610,955

 

 

$

1,681,410

 

Weighted average interest rate

 

 

3.22

%

 

 

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 securities.

Maturities of Long-Term Debt

Contractual maturities of long-term debt obligations (based on final maturity dates) are as follows:

 

 

 

 

Twelve months ended September 30,

 

 

 

 

 

Total

 

 

2024

 

 

2025

 

 

2026

 

 

2027

 

 

2028

 

 

Thereafter

 

 

(in thousands)

 

Notes payable secured by credit risk transfer
    and mortgage servicing assets (1)

$

2,832,391

 

 

$

717,133

 

 

$

1,090,258

 

 

$

350,000

 

 

$

305,000

 

 

$

370,000

 

 

$

—

 

Unsecured senior notes

 

608,500

 

 

 

—

 

 

 

210,000

 

 

 

345,000

 

 

 

—

 

 

 

53,500

 

 

 

—

 

Asset-backed financings at fair value (2)

 

1,610,955

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

1,610,955

 

Interest-only security payable at fair value (2)

 

28,288

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

28,288

 

Total

$

5,080,134

 

 

$

717,133

 

 

$

1,300,258

 

 

$

695,000

 

 

$

305,000

 

 

$

423,500

 

 

$

1,639,243

 

(1)
Based on stated maturity. As discussed above, certain of the Notes payable secured by credit risk and mortgage servicing assets allow the Company to exercise optional extensions.
(2)
Contractual maturity does not reflect expected repayment as borrowers of the underlying loans generally have the right to repay their loans at any time.

48

 

Note 16—Liability for Losses Under Representations and Warranties

Following is a summary of the Company’s liability for losses under representations and warranties:

 

 

Quarter ended September 30,

 

 

Nine months ended September 30,

 

 

 

2023

 

 

2022

 

 

2023

 

 

2022

 

 

 

(in thousands)

 

Balance, beginning of period

 

$

37,069

 

 

$

39,441

 

 

$

39,471

 

 

$

40,249

 

Provision for losses:

 

 

 

 

 

 

 

 

 

 

 

 

Pursuant to loan sales

 

 

448

 

 

 

996

 

 

 

2,126

 

 

 

3,442

 

Reduction in liability due to change in estimate

 

 

(4,365

)

 

 

(817

)

 

 

(7,920

)

 

 

(3,512

)

Losses incurred

 

 

—

 

 

 

(122

)

 

 

(525

)

 

 

(681

)

Balance, end of period

 

$

33,152

 

 

$

39,498

 

 

$

33,152

 

 

$

39,498

 

UPB of loans subject to representations and
    warranties at end of period

 

 

 

 

 

 

 

$

228,679,429

 

 

$

225,129,199

 

 

Note 17—Commitments and Contingencies

Commitments

The following table summarizes the Company’s outstanding contractual commitments:

 

 

September 30, 2023

 

 

 

(in thousands)

 

Commitments to purchase loans acquired for sale

 

$

1,459,919

 

 

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.

Note 18—Shareholders’ Equity

Preferred Shares of Beneficial Interest

Preferred shares of beneficial interest are summarized below:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Dividends per share, period ended September 30,

 

Preferred

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Quarter

 

 

Nine months

 

Share
 series

 

Description (1)

 

Number of shares

 

 

Liquidation preference

 

 

Issuance discount

 

 

Carrying value

 

 

2023

 

 

2022

 

 

2023

 

 

2022

 

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

 

 

$

0.51

 

 

$

1.53

 

 

$

1.53

 

B

 

8.00% Issued July 2017

 

 

7,800

 

 

 

195,000

 

 

 

6,465

 

 

 

188,535

 

 

$

0.50

 

 

$

0.50

 

 

$

1.50

 

 

$

1.50

 

Fixed-rate cumulative redeemable

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

C

 

6.75% Issued August 2021

 

 

10,000

 

 

 

250,000

 

 

 

8,225

 

 

 

241,775

 

 

$

0.42

 

 

$

0.42

 

 

$

1.26

 

 

$

1.26

 

 

 

 

 

22,400

 

 

$

560,000

 

 

$

18,518

 

 

$

541,482

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1)
Par value is $0.01 per share.

In March 2021, the United Kingdom's Financial Conduct Authority announced that after June 30, 2023, the USD LIBOR for a three-month tenor would cease publication or no longer be representative. In connection with the cessation of representative USD LIBOR, in March 2022, the U.S. Congress enacted the Adjustable Interest Rate (LIBOR) Act, and, in December 2022, the Board of Governors of the Federal Reserve System issued a final rule thereunder (the "LIBOR Rule”). The LIBOR Rule provides that, with respect to any reference in the terms of a security requiring a poll or inquiries for quotes or information related to USD LIBOR (“Polling Provisions”) contained in so called “fallback provisions” applicable in the event USD LIBOR is not published, such Polling Provisions shall be disregarded and deemed null and void and without any force or effect.

In accordance with the Articles Supplementary for each of the Series A Fixed-to-Floating Rate Cumulative Redeemable Preferred Shares of Beneficial Interest (the “Series A Preferred Shares”) and the Series B Fixed-to-Floating Rate Cumulative Redeemable Preferred Shares of Beneficial Interest (the “Series B Preferred Shares”), and disregarding the Polling Provisions contained therein, the applicable dividend rate for dividend periods from and after March 15, 2024, in the case of the Series A

49

 

Preferred Shares, or June 15, 2024, in the case of the Series B Preferred Shares, will be calculated at the dividend rate in effect for the immediately preceding dividend period. As a result, the Series A Preferred Shares and Series B Preferred Shares will continue to accumulate dividends from and after March 15, 2024, in the case of the Series A Preferred Shares, or June 15, 2024, in the case of the Series B Preferred Shares, at their annual fixed rate and will not transition to floating reference rates.

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 occurs, 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.

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 September 30, 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:

 

 

Quarter ended September 30,

 

 

Nine months ended September 30,

 

 

Cumulative

 

 

 

2023

 

 

2022

 

 

2023

 

 

2022

 

 

total (1)

 

 

 

(in thousands)

 

Common Shares repurchased

 

 

—

 

 

 

987

 

 

 

2,274

 

 

 

4,888

 

 

 

28,965

 

Cost of Common Shares repurchased (2)

 

$

—

 

 

$

13,498

 

 

$

27,011

 

 

$

73,746

 

 

$

425,751

 

 

(1)
Amounts represent the Common Share repurchase program total from its inception in August 2015 through September 30, 2023.
(2)
Cumulative total cost of Common Shares repurchased includes $579,000 of transaction fees.

50

 

Note 19— Net Gains on Loans Acquired for Sale

Net gains on loans acquired for sale are summarized below:

 

 

Quarter ended September 30,

 

 

Nine months ended September 30,

 

 

 

2023

 

 

2022

 

 

2023

 

 

2022

 

 

 

(in thousands)

 

From nonaffiliates:

 

 

 

 

 

 

 

 

 

 

 

 

Cash losses:

 

 

 

 

 

 

 

 

 

 

 

 

Sales of loans

 

$

(71,105

)

 

$

(390,543

)

 

$

(260,697

)

 

$

(1,128,355

)

Hedging activities

 

 

(30,155

)

 

 

233,139

 

 

 

(52,822

)

 

 

695,238

 

 

 

(101,260

)

 

 

(157,404

)

 

 

(313,519

)

 

 

(433,117

)

Non-cash gains:

 

 

 

 

 

 

 

 

 

 

 

 

Receipt of MSRs in mortgage loan sale transactions

 

 

58,560

 

 

 

178,001

 

 

 

249,925

 

 

 

543,255

 

Provision for losses relating to representations
   and warranties provided in loan sales:

 

 

 

 

 

 

 

 

 

 

 

 

Pursuant to loans sales

 

 

(448

)

 

 

(996

)

 

 

(2,126

)

 

 

(3,442

)

Reduction of liability due to change in estimate

 

 

4,365

 

 

 

817

 

 

 

7,920

 

 

 

3,512

 

 

 

3,917

 

 

 

(179

)

 

 

5,794

 

 

 

70

 

Changes in fair value of loans and derivatives

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate lock commitments

 

 

(2,050

)

 

 

(41,187

)

 

 

(2,870

)

 

 

(45,294

)

Loans

 

 

(1,710

)

 

 

84,498

 

 

 

4,569

 

 

 

82,561

 

Hedging derivatives

 

 

54,247

 

 

 

(60,619

)

 

 

75,564

 

 

 

(135,100

)

 

 

50,487

 

 

 

(17,308

)

 

 

77,263

 

 

 

(97,833

)

 

 

112,964

 

 

 

160,514

 

 

 

332,982

 

 

 

445,492

 

Total from nonaffiliates

 

 

11,704

 

 

 

3,110

 

 

 

19,463

 

 

 

12,375

 

From PFSI ‒ cash gains

 

 

1,854

 

 

 

1,203

 

 

 

5,014

 

 

 

3,562

 

 

$

13,558

 

 

$

4,313

 

 

$

24,477

 

 

$

15,937

 

 

Note 20— Net (losses) gains on investments and financings

Net (losses) gains on investments and financings are summarized below:

 

 

Quarter ended September 30,

 

 

Nine months ended September 30,

 

 

 

2023

 

 

2022

 

 

2023

 

 

2022

 

 

 

(in thousands)

 

From nonaffiliates:

 

 

 

 

 

 

 

 

 

 

 

 

Mortgage-backed securities

 

$

(144,031

)

 

$

(251,477

)

 

$

(127,434

)

 

$

(620,500

)

Loans:

 

 

 

 

 

 

 

 

 

 

 

 

Held in VIEs

 

 

(54,082

)

 

 

(99,267

)

 

 

(61,318

)

 

 

(318,300

)

Distressed

 

 

(59

)

 

 

56

 

 

 

(485

)

 

 

504

 

CRT arrangements

 

 

30,154

 

 

 

4,359

 

 

 

136,890

 

 

 

(73,619

)

Asset-backed financings

 

 

58,474

 

 

 

92,993

 

 

 

66,108

 

 

 

298,834

 

 

$

(109,544

)

 

$

(253,336

)

 

$

13,761

 

 

$

(713,081

)

 

51

 

Note 21—Net interest expense

Net interest expense is summarized below:

 

 

Quarter ended September 30,

 

 

Nine months ended September 30,

 

 

 

2023

 

 

2022

 

 

2023

 

 

2022

 

 

 

(in thousands)

 

Interest income:

 

 

 

 

 

 

 

 

 

 

 

 

Cash and short-term investments

 

$

6,288

 

 

$

1,993

 

 

$

19,311

 

 

$

3,571

 

Mortgage-backed securities

 

 

66,563

 

 

 

36,070

 

 

 

180,244

 

 

 

91,121

 

Loans acquired for sale at fair value

 

 

14,720

 

 

 

27,921

 

 

 

77,487

 

 

 

70,611

 

Loans at fair value:

 

 

 

 

 

 

 

 

 

 

 

 

Held in consolidated variable interest entities

 

 

9,505

 

 

 

16,002

 

 

 

38,315

 

 

 

44,587

 

Distressed

 

 

9

 

 

 

16

 

 

 

33

 

 

 

204

 

Deposits securing CRT arrangements

 

 

16,419

 

 

 

6,978

 

 

 

46,410

 

 

 

9,584

 

Placement fees relating to custodial funds

 

 

44,005

 

 

 

20,239

 

 

 

110,602

 

 

 

31,152

 

Other

 

 

1,417

 

 

 

439

 

 

 

2,227

 

 

 

589

 

 

 

158,926

 

 

 

109,658

 

 

 

474,629

 

 

 

251,419

 

Interest expense:

 

 

 

 

 

 

 

 

 

 

 

 

Assets sold under agreements to repurchase

 

 

87,414

 

 

 

46,691

 

 

 

284,027

 

 

 

87,310

 

Mortgage loan participation purchase and
   sale agreements

 

 

403

 

 

 

320

 

 

 

1,109

 

 

 

728

 

Notes payable secured by credit risk transfer and
   mortgage servicing assets

 

 

69,952

 

 

 

39,818

 

 

 

191,049

 

 

 

84,597

 

Unsecured senior notes

 

 

8,541

 

 

 

8,349

 

 

 

25,316

 

 

 

25,004

 

Asset-backed financings at fair value

 

 

13,652

 

 

 

14,265

 

 

 

38,796

 

 

 

40,308

 

Interest shortfall on repayments of loans serviced
   for Agency securitizations

 

 

1,503

 

 

 

3,504

 

 

 

4,322

 

 

 

14,975

 

Interest on loan impound deposits

 

 

2,079

 

 

 

1,133

 

 

 

4,737

 

 

 

2,822

 

Other

 

 

374

 

 

 

—

 

 

 

1,089

 

 

 

—

 

 

 

183,918

 

 

 

114,080

 

 

 

550,445

 

 

 

255,744

 

Net interest expense

 

$

(24,992

)

 

$

(4,422

)

 

$

(75,816

)

 

$

(4,325

)

 

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.

52

 

The shares underlying award grants will again be available for award under the 2019 Plan if:

•
any shares subject to an award granted under the equity incentive plan are forfeited, canceled, exchanged or surrendered;
•
an award terminates or expires without a distribution of shares to the participant; or
•
shares are surrendered or withheld by PMT as payment of either the exercise price of an award and/or withholding taxes for an award.

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:

 

Quarter ended September 30,

 

 

Nine months ended September 30,

 

 

 

2023

 

 

2022

 

 

2023

 

 

2022

 

 

 

(in thousands)

 

Grants:

 

 

 

 

 

 

 

 

 

 

 

 

Restricted share units

 

 

—

 

 

 

—

 

 

 

172

 

 

 

134

 

Performance share units

 

 

—

 

 

 

—

 

 

 

166

 

 

 

151

 

 

 

—

 

 

 

—

 

 

 

338

 

 

 

285

 

Grant date fair value:

 

 

 

 

 

 

 

 

 

 

 

 

Restricted share units

 

$

—

 

 

$

—

 

 

$

2,212

 

 

$

2,101

 

Performance share units

 

 

—

 

 

 

—

 

 

 

2,088

 

 

 

2,350

 

 

$

—

 

 

$

—

 

 

$

4,300

 

 

$

4,451

 

Vestings:

 

 

 

 

 

 

 

 

 

 

 

 

Restricted share units

 

 

—

 

 

 

—

 

 

 

140

 

 

 

79

 

Performance share units (1)

 

 

—

 

 

 

—

 

 

 

48

 

 

 

41

 

 

 

—

 

 

 

—

 

 

 

188

 

 

 

120

 

Forfeitures:

 

 

 

 

 

 

 

 

 

 

 

 

Restricted share units

 

 

—

 

 

 

—

 

 

 

6

 

 

 

—

 

Performance share units

 

 

—

 

 

 

—

 

 

 

—

 

 

 

11

 

 

 

—

 

 

 

—

 

 

 

6

 

 

 

11

 

Compensation expense relating to share-based grants

 

$

1,420

 

 

$

959

 

 

$

3,421

 

 

$

3,130

 

 

(1)
The actual number of performance-based restricted share units (“RSUs”) that vested during the nine months ended September 30, 2023, was 48,372 Common Shares, which is approximately 39% of the originally granted performance-based RSUs.

 

 

 

September 30, 2023

 

 

 

Restricted share units

 

 

Performance share units

 

Shares expected to vest:

 

 

Number of units (in thousands)

 

 

251

 

 

 

260

 

Grant date average fair value per unit

 

$

14.29

 

 

$

14.07

 

 

Note 23—Income Taxes

The Company’s effective tax rate was 48.1% and 28.1% with consolidated pretax income of $118.4 million and $204.1 million for the quarter and nine months ended September 30, 2023. The Company’s taxable REIT subsidiary (“TRS”) recognized a tax expense of $57.1 million on pretax income of $234.0 million and a tax expense of $56.5 million on pretax income of $221.9 million for the quarter and nine months ended September 30, 2023. For the same periods in 2022, the TRS recognized a tax expense of $80.8 million on pretax income of $344.8 million and a tax expense of $151.3 million on pretax income of $765.2 million, respectively. The Company’s reported consolidated pretax income for the quarter and nine months ended September 30, 2022 was $90.4 million and $68.6 million, respectively. 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 September 30, 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 September 30, 2023. The amount of deferred tax assets considered realizable could be adjusted in future periods based on future income.

53

 

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 that 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:

 

 

Quarter ended September 30,

 

 

Nine months ended September 30,

 

 

 

2023

 

 

2022

 

 

2023

 

 

2022

 

 

 

(in thousands except per share amounts)

 

Net income (loss)

 

$

61,422

 

 

$

11,913

 

 

$

146,743

 

 

$

(77,950

)

Dividends on preferred shares

 

 

(10,455

)

 

 

(10,455

)

 

 

(31,364

)

 

 

(31,364

)

Effect of participating securities—share-based
  compensation awards

 

 

(147

)

 

 

(111

)

 

 

(332

)

 

 

(318

)

Net income (loss) attributable to common shareholders

 

 

50,820

 

 

 

1,347

 

 

 

115,047

 

 

 

(109,632

)

Interest on Exchangeable Notes, net of income taxes

 

 

6,359

 

 

 

—

 

 

 

18,773

 

 

 

—

 

Loss attributable to participating securities

 

 

(4

)

 

 

—

 

 

 

(35

)

 

 

—

 

Diluted net income (loss) attributable to common
   shareholders

 

 

57,175

 

 

 

1,347

 

 

 

133,785

 

 

 

(109,632

)

Weighted average basic shares outstanding

 

 

86,760

 

 

 

90,594

 

 

 

87,613

 

 

 

92,221

 

Dilutive securities‒Shares issuable pursuant
   to exchange of the Exchangeable Notes

 

 

24,328

 

 

 

—

 

 

 

24,328

 

 

 

—

 

Diluted weighted average shares outstanding

 

 

111,088

 

 

 

90,594

 

 

 

111,941

 

 

 

92,221

 

Basic earnings (loss) per share

 

$

0.59

 

 

$

0.01

 

 

$

1.31

 

 

$

(1.19

)

Diluted earnings (loss) per share

 

$

0.51

 

 

$

0.01

 

 

$

1.20

 

 

$

(1.19

)

 

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:

 

 

 

Quarter ended September 30,

 

 

Nine months ended September 30,

 

 

 

2023

 

 

2022

 

 

2023

 

 

2022

 

 

 

(in thousands)

 

Shares issuable under share-based compensation plan

 

 

188

 

 

 

136

 

 

 

166

 

 

 

127

 

Shares issuable pursuant to exchange of the Exchangeable
  Senior Notes

 

 

—

 

 

 

24,328

 

 

 

—

 

 

 

24,328

 

 

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

54

 

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

 

 

sensitive

 

 

Correspondent

 

 

 

 

 

 

 

 Quarter ended September 30, 2023

 

strategies

 

 

strategies

 

 

production

 

 

Corporate

 

 

Total

 

 

 

(in thousands)

 

Net investment income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loan servicing fees

 

$

—

 

 

$

281,298

 

 

$

—

 

 

$

—

 

 

$

281,298

 

Net gains on loans acquired for sale

 

 

—

 

 

 

—

 

 

 

13,558

 

 

 

—

 

 

 

13,558

 

Net (losses) gains on investments and financings

 

 

38,772

 

 

 

(148,316

)

 

 

—

 

 

 

—

 

 

 

(109,544

)

Net interest expense:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest income

 

 

26,235

 

 

 

114,430

 

 

 

14,656

 

 

 

3,605

 

 

 

158,926

 

Interest expense

 

 

23,235

 

 

 

142,942

 

 

 

16,388

 

 

 

1,353

 

 

 

183,918

 

 

 

3,000

 

 

 

(28,512

)

 

 

(1,732

)

 

 

2,252

 

 

 

(24,992

)

Other

 

 

(251

)

 

 

—

 

 

 

3,360

 

 

 

—

 

 

 

3,109

 

 

 

41,521

 

 

 

104,470

 

 

 

15,186

 

 

 

2,252

 

 

 

163,429

 

Expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loan fulfillment and servicing fees
   payable to PFSI

 

 

33

 

 

 

20,224

 

 

 

5,531

 

 

 

—

 

 

 

25,788

 

Management fees

 

 

—

 

 

 

—

 

 

 

—

 

 

 

7,175

 

 

 

7,175

 

Other

 

 

492

 

 

 

2,683

 

 

 

809

 

 

 

8,062

 

 

 

12,046

 

 

 

525

 

 

 

22,907

 

 

 

6,340

 

 

 

15,237

 

 

 

45,009

 

Pretax income (loss)

 

$

40,996

 

 

$

81,563

 

 

$

8,846

 

 

$

(12,985

)

 

$

118,420

 

Total assets at end of quarter

 

$

1,620,322

 

 

$

10,079,073

 

 

$

1,134,812

 

 

$

389,129

 

 

$

13,223,336

 

 

 

 

Credit

 

 

Interest rate

 

 

 

 

 

 

 

 

 

 

 

 

sensitive

 

 

sensitive

 

 

Correspondent

 

 

 

 

 

 

 

Quarter ended September 30, 2022

 

strategies

 

 

strategies

 

 

production

 

 

Corporate

 

 

Total

 

 

 

(in thousands)

 

Net investment income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loan servicing fees

 

$

—

 

 

$

390,124

 

 

$

—

 

 

$

—

 

 

$

390,124

 

Net gains on loans acquired for sale

 

 

—

 

 

 

—

 

 

 

4,313

 

 

 

—

 

 

 

4,313

 

Net (losses) gains on investments and financings

 

 

(2,230

)

 

 

(251,106

)

 

 

—

 

 

 

—

 

 

 

(253,336

)

Net interest expense:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest income

 

 

12,415

 

 

 

68,152

 

 

 

27,862

 

 

 

1,229

 

 

 

109,658

 

Interest expense

 

 

14,097

 

 

 

80,782

 

 

 

18,322

 

 

 

879

 

 

 

114,080

 

 

 

(1,682

)

 

 

(12,630

)

 

 

9,540

 

 

 

350

 

 

 

(4,422

)

Other

 

 

978

 

 

 

—

 

 

 

13,408

 

 

 

—

 

 

 

14,386

 

 

 

(2,934

)

 

 

126,388

 

 

 

27,261

 

 

 

350

 

 

 

151,065

 

Expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loan fulfillment and servicing fees
   payable to PFSI

 

 

57

 

 

 

20,190

 

 

 

18,407

 

 

 

—

 

 

 

38,654

 

Management fees

 

 

—

 

 

 

—

 

 

 

—

 

 

 

7,731

 

 

 

7,731

 

Other

 

 

708

 

 

 

2,688

 

 

 

2,789

 

 

 

8,116

 

 

 

14,301

 

 

 

765

 

 

 

22,878

 

 

 

21,196

 

 

 

15,847

 

 

 

60,686

 

Pretax income (loss)

 

$

(3,699

)

 

$

103,510

 

 

$

6,065

 

 

$

(15,497

)

 

$

90,379

 

Total assets at end of quarter

 

$

1,656,994

 

 

$

9,365,974

 

 

$

2,505,398

 

 

$

417,574

 

 

$

13,945,940

 

 

 

 

 

55

 

 

 

Credit

 

 

Interest rate

 

 

 

 

 

 

 

 

 

 

 

 

sensitive

 

 

sensitive

 

 

Correspondent

 

 

 

 

 

 

 

Nine months ended September 30, 2023

 

strategies

 

 

strategies

 

 

production

 

 

Corporate

 

 

Total

 

 

 

(in thousands)

 

Net investment income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loan servicing fees

 

$

—

 

 

$

366,438

 

 

$

—

 

 

$

—

 

 

$

366,438

 

Net gains on loans acquired for sale

 

 

—

 

 

 

—

 

 

 

24,477

 

 

 

—

 

 

 

24,477

 

Net (losses) gains on investments and financings

 

 

161,867

 

 

 

(148,106

)

 

 

—

 

 

 

—

 

 

 

13,761

 

Net interest expense:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest income

 

 

72,775

 

 

 

315,168

 

 

 

77,292

 

 

 

9,394

 

 

 

474,629

 

Interest expense

 

 

62,790

 

 

 

406,098

 

 

 

78,259

 

 

 

3,298

 

 

 

550,445

 

 

 

9,985

 

 

 

(90,930

)

 

 

(967

)

 

 

6,096

 

 

 

(75,816

)

Other

 

 

(251

)

 

 

—

 

 

 

15,638

 

 

 

—

 

 

 

15,387

 

 

 

171,601

 

 

 

127,402

 

 

 

39,148

 

 

 

6,096

 

 

 

344,247

 

Expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loan fulfillment and servicing fees
   payable to PFSI

 

 

142

 

 

 

60,881

 

 

 

22,895

 

 

 

—

 

 

 

83,918

 

Management fees

 

 

—

 

 

 

—

 

 

 

—

 

 

 

21,510

 

 

 

21,510

 

Other

 

 

2,039

 

 

 

5,155

 

 

 

4,224

 

 

 

23,327

 

 

 

34,745

 

 

 

2,181

 

 

 

66,036

 

 

 

27,119

 

 

 

44,837

 

 

 

140,173

 

Pretax income (loss)

 

$

169,420

 

 

$

61,366

 

 

$

12,029

 

 

$

(38,741

)

 

$

204,074

 

Total assets at end of period

 

$

1,620,322

 

 

$

10,079,073

 

 

$

1,134,812

 

 

$

389,129

 

 

$

13,223,336

 

 

 

 

 

Credit

 

 

Interest rate

 

 

 

 

 

 

 

 

 

 

 

 

sensitive

 

 

sensitive

 

 

Correspondent

 

 

 

 

 

 

 

Nine months ended September 30, 2022

 

strategies

 

 

strategies

 

 

production

 

 

Corporate

 

 

Total

 

 

 

(in thousands)

 

Net investment income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loan servicing fees

 

$

—

 

 

$

911,615

 

 

$

—

 

 

$

—

 

 

$

911,615

 

Net gains on loans acquired for sale

 

 

5

 

 

 

—

 

 

 

15,932

 

 

 

—

 

 

 

15,937

 

Net (losses) gains on investments and financings

 

 

(104,946

)

 

 

(608,135

)

 

 

—

 

 

 

—

 

 

 

(713,081

)

Net interest expense:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest income

 

 

20,391

 

 

 

158,158

 

 

 

70,436

 

 

 

2,434

 

 

 

251,419

 

Interest expense

 

 

34,653

 

 

 

177,622

 

 

 

41,980

 

 

 

1,489

 

 

 

255,744

 

 

 

(14,262

)

 

 

(19,464

)

 

 

28,456

 

 

 

945

 

 

 

(4,325

)

Other

 

 

1,237

 

 

 

—

 

 

 

43,021

 

 

 

—

 

 

 

44,258

 

 

 

(117,966

)

 

 

284,016

 

 

 

87,409

 

 

 

945

 

 

 

254,404

 

Expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loan fulfillment and servicing fees
   payable to PFSI

 

 

167

 

 

 

61,503

 

 

 

55,807

 

 

 

—

 

 

 

117,477

 

Management fees

 

 

—

 

 

 

—

 

 

 

—

 

 

 

23,758

 

 

 

23,758

 

Other

 

 

5,242

 

 

 

5,425

 

 

 

11,176

 

 

 

22,757

 

 

 

44,600

 

 

 

5,409

 

 

 

66,928

 

 

 

66,983

 

 

 

46,515

 

 

 

185,835

 

Pretax income (loss)

 

$

(123,375

)

 

$

217,088

 

 

$

20,426

 

 

$

(45,570

)

 

$

68,569

 

Total assets at end of period

 

$

1,656,994

 

 

$

9,365,974

 

 

$

2,505,398

 

 

$

417,574

 

 

$

13,945,940

 

 

 

 

56

 

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 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

 

 

Actual

 

 

Required

 

 

Actual

 

 

Required

 

 

 

(dollars in thousands)

 

September 30, 2023 (2)

 

$

872,644

 

 

$

588,227

 

 

 

13

%

 

 

6

%

 

$

432,844

 

 

$

205,181

 

December 31, 2022

 

$

1,138,331

 

 

$

586,436

 

 

 

16

%

 

 

6

%

 

$

343,286

 

 

$

79,372

 

 

(1)
Calculated in accordance with the Agencies’ requirements.
(2)
The Agencies adopted revised capital and liquidity requirements, most of which became effective on September 30, 2023. The amounts shown for September 30, 2023 are in compliance with those requirements. The Agencies have pending origination liquidity requirements that will be effective on December 31, 2023. The Company believes it is in compliance with the Agencies’ pending liquidity requirements as of September 30, 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.

 

57

 

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.

Our Company

We are a specialty finance company that invests 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 and senior non-Agency MBS, subordinate credit-linked MBS and interest-only ("IO") stripped 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 separately listed on the New York Stock Exchange.

We operate our business in four segments: Credit sensitive strategies, Interest rate sensitive strategies, Correspondent production and our Corporate operations as described below:

•
The credit sensitive strategies segment represents our investments in CRT arrangements referencing loans from our own correspondent production, including CRT agreements and other CRT securities (together, “CRT arrangements”) and subordinate MBS.
•
The interest rate sensitive strategies segment represents our investments in MSRs, Agency, senior non-Agency and IO stripped MBS and the related interest rate hedging activities.
•
The correspondent production segment represents our operations aimed at serving as an intermediary between lenders and the capital markets by purchasing, pooling and reselling newly originated prime credit quality loans either directly or in the form of MBS, using the services of PCM and PLS.

We primarily sell the loans we acquire through our 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 (“Ginnie Mae”) or the GSEs. Fannie Mae, Freddie Mac and Ginnie Mae are each referred to as an “Agency” and, collectively, as the “Agencies.”

•
The corporate segment includes management fees, corporate expense amounts and certain interest income and expense.

Our Investment Activities

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 September 30, 2023.

58

 

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 $70.6 million of subordinate credit-linked MBS during the nine months ended September 30, 2023. We held subordinate credit-linked MBS with fair values totaling approximately $277.1 million at September 30, 2023.

As the result of the Company’s consolidation of the variable interest entities that issued certain 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 the loans underlying these transactions with unpaid principal balances (“UPB”) totaling approximately $1.8 billion on our consolidated balance sheet as of September 30, 2023.

Interest Rate Sensitive Investments

Our interest rate sensitive investments include:

•
Mortgage servicing rights. During the quarter and nine months ended September 30, 2023, we received approximately $58.6 million and $249.9 million, respectively, of MSRs as proceeds from sales of loans acquired for sale. We held approximately $4.1 billion of MSRs at fair value at September 30, 2023.
•
REIT-eligible Agency, senior non-Agency and IO MBS, or mortgage-related securities. We purchased approximately $408.5 million Agency fixed-rate pass-through securities and senior non-Agency MBS, net of sales during the nine months ended September 30, 2023. We held Agency fixed-rate pass-through, senior non-Agency and IO MBS with fair values totaling approximately $4.4 billion at September 30, 2023.

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:

 

 

Quarter ended September 30,

 

 

Nine months ended September 30,

 

 

 

2023

 

 

2022

 

 

2023

 

 

2022

 

 

 

(in thousands)

 

Sales of loans acquired for sale:

 

 

 

 

 

 

 

 

 

 

 

 

To nonaffiliates

 

$

3,107,613

 

 

$

9,709,969

 

 

$

13,576,673

 

 

$

31,922,573

 

To PennyMac Financial Services, Inc.

 

 

18,725,228

 

 

 

12,561,276

 

 

 

50,812,386

 

 

 

36,544,166

 

 

$

21,832,841

 

 

$

22,271,245

 

 

$

64,389,059

 

 

$

68,466,739

 

Net gains on loans acquired for sale

 

$

13,558

 

 

$

4,313

 

 

$

24,477

 

 

$

15,937

 

Investment activities resulting from correspondent production:

 

 

 

 

 

 

 

 

 

 

 

 

Receipt of MSRs as proceeds from sales of loans

 

$

58,560

 

 

$

178,001

 

 

$

249,925

 

 

$

543,255

 

Retention of interests in securitizations of loans secured
    by investment properties, net of associated
    asset-backed financings

 

$

—

 

 

$

—

 

 

$

—

 

 

$

23,485

 

During the nine months ended September 30, 2023, we purchased newly originated prime credit quality residential loans with fair values totaling $63.7 billion as compared to $67.4 billion for the nine months ended September 30, 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 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 nine months ended September 30, 2023, we also sold $21.0 billion, in UPB of conventional loans to PLS in order to optimize our use and allocation of capital.

Our purchase volume included $50.8 billion and $36.5 billion of loans we sold to PLS during the nine months ended September 30, 2023 and 2022, respectively. We receive a sourcing fee from PLS based on the 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 nine months ended September 30, 2023, we received sourcing fees totaling $5.0 million, relating to $50.1 billion, in UPB of loans that we sold to PLS.

59

 

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:

 

 

Quarter ended September 30,

 

 

Nine months ended September 30,

 

 

 

2023

 

 

2022

 

 

2023

 

 

2022

 

 

 

(dollars in thousands)

 

Net (losses) gains on investments and financings:

 

 

 

 

 

 

 

 

 

 

 

 

Mortgage-backed securities

 

$

(144,031

)

 

$

(251,477

)

 

$

(127,434

)

 

$

(620,500

)

Loans:

 

 

 

 

 

 

 

 

 

 

 

 

Held in variable interest entities

 

 

(54,082

)

 

 

(99,267

)

 

 

(61,318

)

 

 

(318,300

)

Distressed

 

 

(88

)

 

 

44

 

 

 

(515

)

 

 

495

 

CRT arrangements

 

 

19,090

 

 

 

(12,153

)

 

 

95,220

 

 

 

(145,438

)

Interest-only security payable at fair value

 

 

(4,228

)

 

 

(1,701

)

 

 

(6,363

)

 

 

(10,593

)

Asset-backed financings at fair value

 

 

58,474

 

 

 

92,993

 

 

 

66,108

 

 

 

298,834

 

 

 

(124,865

)

 

 

(271,561

)

 

 

(34,302

)

 

 

(795,502

)

Net gains on loans acquired for sale (1)

 

 

112,964

 

 

 

160,514

 

 

 

332,982

 

 

 

445,492

 

Net loan servicing fees‒MSR valuation adjustments (2)

 

 

162,605

 

 

 

94,690

 

 

 

(35,444

)

 

 

462,347

 

 

$

150,704

 

 

$

(16,357

)

 

$

263,236

 

 

$

112,337

 

Net investment income

 

$

163,429

 

 

$

151,065

 

 

$

344,247

 

 

$

254,404

 

Non-cash items as a percentage of net investment income

 

 

92

%

 

 

(11

%)

 

 

76

%

 

 

44

%

 

(1)
Amount represents MSRs received, liability for representations and warranties incurred in loan sales transactions and changes in fair value of loans, IRLCs and hedging derivatives held at period end.
(2)
Includes fair value changes related to MSR derivative hedging instruments.

We receive or pay cash relating to:

•
Our investment in mortgage-backed securities through monthly principal and interest payments from the issuer of such securities or from the sale of the investment;
•
Loan investments when the investments are paid down, paid off or sold, when payments of principal and interest occur on such loans or when the properties acquired in settlement of loans are sold;
•
CRT arrangements through a portion of the interest payments collected on loans in the CRT arrangements’ reference pools, interest payments from the investment of the deposits securing the arrangement in short-term investments and the release to us of the deposits securing the arrangements as principal on such loans is repaid;

60

 

•
Hedging instruments when we receive or make margin deposits as the fair value of respective instruments change, when the instruments mature or when we effectively cancel the transactions through offsetting trades;
•
Our liability for representations and warranties when we repurchase loans or settle loss claims from investors; and
•
MSRs in the form of loan servicing fees and placement fees on the deposits we manage on behalf of the borrowers and investors in the loans we service.

Results of Operations

 

Business Trends

Due to ongoing inflationary pressures, the U.S. Federal Reserve continued to raise the federal funds rate during the nine months ended September 30, 2023 and continues to reduce the federal government’s overall holdings of Treasury and mortgage-backed securities. Higher interest rates and a slowing economy and housing market are expected to continue to reduce the size of the mortgage origination market from an estimated $2.3 trillion in 2022 to a projected range of $1.6 trillion to $1.8 trillion for 2023 according to mortgage lending industry economists.

Higher 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. Higher interest rates have increased the costs of floating rate borrowings and have generated more interest income from our custodial placement fees on deposits and loans held for sale. We have also increased our sales of conventional loans to PLS during the nine months ended September 30, 2023, and we intend to continue to sell a portion of our conventional loans to PLS in the fourth quarter of 2023 to optimize our use and allocation of capital.

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 including low loan-to-value ratios, which are likely to help offset the negative effects of credit performance in an economic downturn.

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.

The following is a summary of our key performance measures:

 

 

Quarter ended September 30,

 

 

Nine months ended September 30,

 

 

 

2023

 

 

2022

 

 

2023

 

 

2022

 

 

 

(dollar amounts in thousands, except per common share amounts)

 

Net investment income

 

$

163,429

 

 

$

151,065

 

 

$

344,247

 

 

$

254,404

 

Expenses

 

 

45,009

 

 

 

60,686

 

 

 

140,173

 

 

 

185,835

 

Pretax income

 

 

118,420

 

 

 

90,379

 

 

 

204,074

 

 

 

68,569

 

Provision for income taxes

 

 

56,998

 

 

 

78,466

 

 

 

57,331

 

 

 

146,519

 

Net income (loss)

 

 

61,422

 

 

 

11,913

 

 

 

146,743

 

 

 

(77,950

)

Dividends on preferred shares

 

 

10,455

 

 

 

10,455

 

 

 

31,364

 

 

 

31,364

 

Net income (loss) attributable to common
   shareholders

 

$

50,967

 

 

$

1,458

 

 

$

115,379

 

 

$

(109,314

)

Pretax income (loss) by segment:

 

 

 

 

 

 

 

 

 

 

 

 

Credit sensitive strategies

 

$

40,996

 

 

$

(3,699

)

 

$

169,420

 

 

$

(123,375

)

Interest rate sensitive strategies

 

 

81,563

 

 

 

103,510

 

 

 

61,366

 

 

 

217,088

 

Correspondent production

 

 

8,846

 

 

 

6,065

 

 

 

12,029

 

 

 

20,426

 

Corporate

 

 

(12,985

)

 

 

(15,497

)

 

 

(38,741

)

 

 

(45,570

)

 

$

118,420

 

 

$

90,379

 

 

$

204,074

 

 

$

68,569

 

Annualized return on average common
  shareholders' equity

 

 

14.5

%

 

 

0.4

%

 

 

10.8

%

 

 

(8.9

)%

Earnings (loss) per common share

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

0.59

 

 

$

0.01

 

 

$

1.31

 

 

$

(1.19

)

Diluted

 

$

0.51

 

 

$

0.01

 

 

$

1.20

 

 

$

(1.19

)

Dividends per common share

 

$

0.40

 

 

$

0.47

 

 

$

1.20

 

 

$

1.41

 

 

61

 

 

 

 

September 30, 2023

 

 

December 31, 2022

 

Total assets

 

$

13,223,336

 

 

$

13,921,564

 

Book value per common share

 

$

16.01

 

 

$

15.78

 

Closing price per common share

 

$

12.40

 

 

$

12.39

 

Our results of operations increased by $49.5 million and $224.7 million during the quarter and nine months ended September 30, 2023, as compared to the quarter and nine months ended September 30, 2022, reflecting the effect of decreased losses on MBS, increased valuation of CRT-related investments and a reduced provision for income taxes, offset by the fair value performance of our MSR investments.

 

The increase in the quarterly pretax results is summarized below:

•
Our credit sensitive strategies segment recognized a $25.8 million increase in net gains on our CRT arrangements as credit spreads tightened due to supply and demand dynamics and an improving macroeconomic outlook compared to the quarter ended September 30, 2022, in which the macroeconomic outlook was worsening.
•
Our interest rate sensitive strategies segment benefited less due to reduced interest rate sensitivity of our assets during the quarter ended September 30, 2023, as compared to the quarter ended September 30, 2022, resulting in a $107.4 million decrease in valuation losses on MBS, offset by a $108.8 million decrease in net servicing fees caused by lower valuation gains net of hedge impact in MSRs.
•
Our correspondent production segment recognized a $9.2 million increase in gains on sales of loans during the quarter ended September 30, 2023, reflecting improved gain on sale margins and a reduction of our liability for representations and warranties partially offset by reduced volume of sales to nonaffiliates.

The increase in the nine months pretax results is summarized below:

•
Our credit sensitive strategies segment recognized a $210.5 million increase in net gains on our CRT arrangements as credit spreads tightened due to supply and demand dynamics and an improving macroeconomic outlook compared to the effect of credit spread widening on CRT fair values during the nine months ended September 30, 2022.
•
Our interest rate sensitive strategies segment benefited less from the slower rise in interest rates and reduced interest rate sensitivity of our assets during the nine months ended September 30, 2023, as compared to the significantly increasing interest rates in the nine months ended September 30, 2022, resulting in a $493.1 million decrease in losses on MBS, offset by a $545.2 million decrease in net servicing fees caused by reduced valuation gains net of hedges in our investment in MSRs.
•
Our correspondent production segment recognized an $8.5 million increase in gains on sales of loans held for sale during the nine months ended September 30, 2023, reflecting improved gain on sale margins and a reduction in our liability for representations and warranties partially offset by reduced volume of sale to nonaffiliates.

 

Net Investment Income

Our net investment income is summarized below:

 

 

Quarter ended September 30,

 

 

Nine months ended September 30,

 

 

 

2023

 

 

2022

 

 

2023

 

 

2022

 

 

 

(in thousands)

 

Net loan servicing fees

 

$

281,298

 

 

$

390,124

 

 

$

366,438

 

 

$

911,615

 

Net gains on loans acquired for sale

 

 

13,558

 

 

 

4,313

 

 

 

24,477

 

 

 

15,937

 

Net loan origination fees

 

 

3,226

 

 

 

13,215

 

 

 

15,227

 

 

 

42,417

 

Net (losses) gains on investments and financings

 

 

(109,544

)

 

 

(253,336

)

 

 

13,761

 

 

 

(713,081

)

Net interest expense

 

 

(24,992

)

 

 

(4,422

)

 

 

(75,816

)

 

 

(4,325

)

Other

 

 

(117

)

 

 

1,171

 

 

 

160

 

 

 

1,841

 

 

$

163,429

 

 

$

151,065

 

 

$

344,247

 

 

$

254,404

 

 

62

 

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:

 

 

Quarter ended September 30,

 

 

Nine months ended September 30,

 

 

 

 

2023

 

 

2022

 

 

2023

 

 

2022

 

 

 

 

(in thousands)

Loan servicing fees

 

$

170,561

 

 

$

167,233

 

 

$

511,043

 

 

$

481,560

 

 

Effect of MSRs and hedging results

 

 

110,737

 

 

 

222,891

 

 

 

(144,605

)

 

 

430,055

 

 

Net loan servicing fees

 

$

281,298

 

 

$

390,124

 

 

$

366,438

 

 

$

911,615

 

 

 

Following is a summary of our loan servicing fees:

 

 

Quarter ended September 30,

 

 

Nine months ended September 30,

 

 

 

2023

 

 

2022

 

 

2023

 

 

2022

 

 

 

(in thousands)

 

Contractually-specified servicing fees

 

$

166,809

 

 

$

162,987

 

 

$

496,522

 

 

$

461,021

 

Ancillary and other fees:

 

 

 

 

 

 

 

 

 

 

 

 

Late charges

 

 

878

 

 

 

662

 

 

 

2,442

 

 

 

1,883

 

Other

 

 

2,874

 

 

 

3,584

 

 

 

12,079

 

 

 

18,656

 

 

 

3,752

 

 

 

4,246

 

 

 

14,521

 

 

 

20,539

 

 

$

170,561

 

 

$

167,233

 

 

$

511,043

 

 

$

481,560

 

Average MSR servicing portfolio

 

$

231,333,064

 

 

$

224,756,659

 

 

$

231,333,990

 

 

$

220,988,459

 

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 and 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 and nine months ended September 30, 2023, as compared to the same periods in 2022, is due primarily to increased servicing fees resulting from the growth in our loan servicing portfolio.

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:

 

 

Quarter ended September 30,

 

 

Nine months ended September 30,

 

 

 

2023

 

 

2022

 

 

2023

 

 

2022

 

 

(in thousands)

 

Change in fair value of MSRs

 

 

 

 

 

 

 

 

 

 

 

 

Changes in valuation inputs used in valuation
   model

 

$

263,139

 

 

$

162,730

 

 

$

232,414

 

 

$

775,792

 

Recapture income from PFSI

 

 

500

 

 

 

1,648

 

 

 

1,494

 

 

 

13,232

 

Hedging results

 

 

(50,689

)

 

 

154,269

 

 

 

(81,584

)

 

 

(87,651

)

 

 

212,950

 

 

 

318,647

 

 

 

152,324

 

 

 

701,373

 

Realization of cash flows

 

 

(102,213

)

 

 

(95,756

)

 

 

(296,929

)

 

 

(271,318

)

 

 

110,737

 

 

 

222,891

 

 

 

(144,605

)

 

 

430,055

 

Average balance of mortgage servicing rights

 

$

4,054,265

 

 

$

3,780,826

 

 

$

4,014,783

 

 

$

3,499,318

 

 

Changes in fair value due to changes in valuation inputs used in our valuation model during the quarter and nine months ended September 30, 2023, reflect the effects of significantly increasing interest rates. The magnitude of the change in fair value of the MSRs compared to the same periods in 2022 is impacted by both the magnitude of the interest rate changes and the interest rate and prepayment sensitivity of the MSR in each period, which changes based on the relationship of the interest rates of the underlying mortgages and the level of market interest rates.

63

 

The decrease in loan recapture income from PFSI reflects the decrease in refinancing activity in our MSR portfolio during the quarter and nine months ended September 30, 2023, as compared to the same periods 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.

Hedging results reflect valuation losses in hedges against interest rates during the quarter and nine months ended September 30, 2023, during which interest rates increased, as do the hedging results from the nine months ended September 30, 2022. Hedging results reflect valuation gains in hedges against increasing costs of financing and discount rates during the quarter ended September 30, 2022, during which short term interest rates in particular rose very sharply.

 

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 and nine months ended September 30, 2023, realization of cash flows increased primarily due to growth of our investment in MSRs as compared to the same periods in 2022.

 

Following is a summary of our loan servicing portfolio:

 

 

September 30, 2023

 

 

December 31, 2022

 

 

 

(in thousands)

 

UPB of loans outstanding

 

$

230,066,301

 

 

$

229,858,573

 

Collection status (UPB)

 

 

 

 

 

 

Delinquency:

 

 

 

 

 

 

30-89 days delinquent

 

$

2,005,518

 

 

$

1,903,007

 

90 or more days delinquent:

 

 

 

 

 

 

Not in foreclosure

 

$

944,892

 

 

$

880,841

 

In foreclosure

 

$

69,656

 

 

$

70,921

 

Bankruptcy

 

$

170,596

 

 

$

123,239

 

Custodial funds managed by the Company (1)

 

$

2,760,857

 

 

$

1,783,157

 

 

(1)
Custodial funds include borrower and investor custodial cash accounts relating to loans serviced under mortgage servicing agreements and are not included on the Company’s consolidated balance sheets. The Company earns placement fees on certain of the custodial funds it manages on behalf of the loans’ borrowers and investors, which are included in Interest income in the Company’s consolidated statements of operations.

 

Following is a summary of characteristics of our MSR servicing portfolio as of September 30, 2023:

 

 

 

 

 

 

 

 

 

Average

 

 

Loan type

 

UPB

 

 

Loan count

 

 

Note rate

 

 

Seasoning (months)

 

 

Remaining
maturity (months)

 

 

Loan size

 

 

FICO credit score at origination

 

 

Original LTV (1)

 

 

Current LTV (1)

 

 

60+ Delinquency (by UPB)

 

 

 

(Dollars and loan count in thousands)

 

Agency:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fannie Mae

 

$

117,021,669

 

 

 

442

 

 

 

3.7

%

 

 

37

 

 

 

310

 

 

$

265

 

 

 

757

 

 

 

75

%

 

 

54

%

 

 

0.8

%

Freddie Mac

 

 

111,135,933

 

 

 

390

 

 

 

3.6

%

 

 

28

 

 

 

317

 

 

$

285

 

 

 

761

 

 

 

74

%

 

 

58

%

 

 

0.4

%

Other (2)

 

 

3,387,411

 

 

 

14

 

 

 

4.2

%

 

 

32

 

 

 

323

 

 

$

247

 

 

 

757

 

 

 

72

%

 

 

55

%

 

 

0.7

%

 

 

$

231,545,013

 

 

 

846

 

 

 

3.6

%

 

 

33

 

 

 

314

 

 

$

274

 

 

 

759

 

 

 

75

%

 

 

56

%

 

 

0.6

%

 

(1)
Loan-to-Value.
(2)
Represents MSRs on conventional loans sold to private investor.

64

 

Net Gains on Loans Acquired for Sale

Our net gains on loans acquired for sale are summarized below:

 

 

Quarter ended September 30,

 

 

Nine months ended September 30,

 

 

 

2023

 

 

2022

 

 

2023

 

 

2022

 

 

 

(in thousands)

 

From non-affiliates:

 

 

 

 

 

 

 

 

 

 

 

 

Cash losses:

 

 

 

 

 

 

 

 

 

 

 

 

Sales of loans

 

$

(71,105

)

 

$

(390,543

)

 

$

(260,697

)

 

$

(1,128,355

)

Hedging activities

 

 

(30,155

)

 

 

233,139

 

 

 

(52,822

)

 

 

695,238

 

 

 

(101,260

)

 

 

(157,404

)

 

 

(313,519

)

 

 

(433,117

)

Non-cash gains:

 

 

 

 

 

 

 

 

 

 

 

 

Receipt of MSRs in loan sale transactions

 

 

58,560

 

 

 

178,001

 

 

 

249,925

 

 

 

543,255

 

Provision for losses relating to representations
   and warranties provided in loan sales:

 

 

 

 

 

 

 

 

 

 

 

 

Pursuant to loan sales

 

 

(448

)

 

 

(996

)

 

 

(2,126

)

 

 

(3,442

)

Reduction in liability due to change in estimate

 

 

4,365

 

 

 

817

 

 

 

7,920

 

 

 

3,512

 

 

 

3,917

 

 

 

(179

)

 

 

5,794

 

 

 

70

 

Changes in fair value of financial instruments during
  the periods:

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate lock commitments

 

 

(2,050

)

 

 

(41,187

)

 

 

(2,870

)

 

 

(45,294

)

Loans

 

 

(1,710

)

 

 

84,498

 

 

 

4,569

 

 

 

82,561

 

Hedging derivatives

 

 

54,247

 

 

 

(60,619

)

 

 

75,564

 

 

 

(135,100

)

 

 

50,487

 

 

 

(17,308

)

 

 

77,263

 

 

 

(97,833

)

 

 

112,964

 

 

 

160,514

 

 

 

332,982

 

 

 

445,492

 

Total from nonaffiliates

 

 

11,704

 

 

 

3,110

 

 

 

19,463

 

 

 

12,375

 

From PFSI—cash

 

 

1,854

 

 

 

1,203

 

 

 

5,014

 

 

 

3,562

 

 

$

13,558

 

 

$

4,313

 

 

$

24,477

 

 

$

15,937

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate lock commitments issued on loans acquired
  for sale:

 

 

 

 

 

 

 

 

 

 

 

 

To nonaffiliates

 

$

3,492,877

 

 

$

10,646,885

 

 

$

14,402,777

 

 

$

31,921,109

 

To PFSI

 

 

10,333,029

 

 

 

—

 

 

 

21,637,229

 

 

 

—

 

 

 

$

13,825,906

 

 

$

10,646,885

 

 

$

36,040,006

 

 

$

31,921,109

 

Acquisition of loans for sale (UPB):

 

 

 

 

 

 

 

 

 

 

 

 

To nonaffiliates

 

$

2,760,001

 

 

$

10,226,513

 

 

$

12,418,084

 

 

$

30,319,475

 

To PFSI

 

 

18,780,719

 

 

 

12,160,616

 

 

 

50,461,568

 

 

 

35,540,023

 

 

$

21,540,720

 

 

$

22,387,129

 

 

$

62,879,652

 

 

$

65,859,498

 

The changes in Net gains on loans acquired for sale during the quarter and nine months ended September 30, 2023, as compared to the same periods in 2022, reflect the effect of increased gain on sale margins for mortgage loans and a reduction in our liability for representations and warranties partially offset by reduced volume of sales to nonaffiliates.

Non-cash elements of gain on sale of loans:

Interest Rate Lock Commitments

Our Net gains on loans acquired for sale 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 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 Net gains on loans acquired for sale. The fair value of our IRLCs becomes 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.

65

 

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.

Mortgage Servicing Rights

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 $448,000 and $2.1 million, respectively, for the quarter and nine months ended September 30, 2023, and $1.0 million and $3.4 million, respectively, for the same periods in 2022. The decrease in the provision relating to current loan sales reflects the decrease of our loan sales volume to nonaffiliates 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, repurchase and loss activity and loans subject to representations and warranties:

 

 

Quarter ended September 30,

 

 

Nine months ended September 30,

 

 

 

2023

 

 

2022

 

 

2023

 

 

2022

 

 

 

(in thousands)

 

Indemnification activity (UPB):

 

 

 

 

 

 

 

 

 

 

 

 

Loans indemnified at beginning of period

 

$

12,148

 

 

$

4,750

 

 

$

8,108

 

 

$

2,782

 

New indemnifications

 

 

1,734

 

 

 

907

 

 

 

6,522

 

 

 

2,875

 

Less: Indemnified loans repaid, expired or refinanced

 

 

1,980

 

 

 

682

 

 

 

2,728

 

 

 

682

 

Loans indemnified at end of period

 

$

11,902

 

 

$

4,975

 

 

$

11,902

 

 

$

4,975

 

Indemnified loans indemnified by correspondent lenders at
  end of period

 

 

 

 

 

 

 

$

4,076

 

 

$

1,312

 

UPB of loans with deposits received from correspondent sellers
   collateralizing prospective indemnification losses at end of
   period

 

 

 

 

 

 

 

$

4,190

 

 

$

2,047

 

Repurchase activity (UPB):

 

 

 

 

 

 

 

 

 

 

 

 

Loans repurchased

 

$

13,908

 

 

$

20,909

 

 

$

50,849

 

 

$

72,933

 

Less:

 

 

 

 

 

 

 

 

 

 

 

 

Loans repurchased by correspondent sellers

 

 

14,383

 

 

 

19,076

 

 

 

46,063

 

 

 

60,448

 

Loans resold or repaid by borrowers

 

 

1,469

 

 

 

10,884

 

 

 

11,081

 

 

 

25,967

 

Net loans repurchased (resolved) with losses chargeable to
    liability to representations and warranties

 

$

(1,944

)

 

$

(9,051

)

 

$

(6,295

)

 

$

(13,482

)

Losses charged to liability for representations and warranties

 

$

—

 

 

$

122

 

 

$

525

 

 

$

681

 

At end of period:

 

 

 

 

 

 

 

 

 

 

 

 

Loans subject to representations and warranties

 

 

 

 

 

 

 

$

228,679,429

 

 

$

225,129,199

 

Liability for representations and warranties

 

 

 

 

 

 

 

$

33,152

 

 

$

39,498

 

 

66

 

 

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 $4.4 million and $7.9 million, respectively, reduction in liability for representations and warranties during the quarter and nine months ended September 30, 2023, and an $817,000 and $3.5 million reduction in liability for representations and warranties during the same periods in 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 and nine months ended September 30, 2023, as compared to the same periods in 2022, reflects a decrease in our purchases of loans with delivery fees.

Net (losses) gains on investments and financings

Net (losses) gains on investments and financings are summarized below:

 

 

Quarter ended September 30,

 

 

Nine months ended September 30,

 

 

 

2023

 

 

2022

 

 

2023

 

 

2022

 

 

 

(in thousands)

 

From nonaffiliates:

 

 

 

 

 

 

 

 

 

 

 

 

Mortgage-backed securities

 

$

(144,031

)

 

$

(251,477

)

 

$

(127,434

)

 

$

(620,500

)

Loans at fair value:

 

 

 

 

 

 

 

 

 

 

 

 

Held in consolidated variable interest entities

 

 

(54,082

)

 

 

(99,267

)

 

 

(61,318

)

 

 

(318,300

)

Distressed

 

 

(59

)

 

 

56

 

 

 

(485

)

 

 

504

 

CRT arrangements

 

 

30,154

 

 

 

4,359

 

 

 

136,890

 

 

 

(73,619

)

Asset-backed financings at fair value

 

 

58,474

 

 

 

92,993

 

 

 

66,108

 

 

 

298,834

 

 

$

(109,544

)

 

$

(253,336

)

 

$

13,761

 

 

$

(713,081

)

The increase in net gains on investments for the quarter and nine months ended September 30, 2023, as compared to the same periods in 2022, was primarily due to improved performance from our investments in MBS and CRT arrangements as interest rates increased at a slower rate during 2023 as compared to 2022, reducing losses on MBS, and credit spreads tightened (a decrease in the interest rate premium demanded by investors for instruments over those that are considered “risk free”), in 2023 as compared to widening in 2022, which benefited the fair value of our investment in CRT arrangements.

Mortgage-Backed Securities

During the quarter and nine months ended September 30, 2023, we recognized net valuation losses of $144.0 million and $127.4 million, respectively, as compared to valuation losses of $251.5 million and $620.5 million, respectively, for the same periods in 2022. The changes recognized reflect a slower rate of increase in interest rates along with credit spread tightening during the quarter and nine months ended September 30, 2023, as compared to the effect of significantly increasing interest rates and credit spread widening on fair value during the same periods in 2022.

67

 

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 net valuation gains of $4.4 million and $4.8 million, respectively, during the quarter and nine months ended September 30, 2023, as compared to a net loss of $6.3 million and $19.5 million, respectively, during the same periods in 2022. The net gain during the quarter and nine months ended September 30, 2023, reflects the effect of credit spread tightening during the periods compared to the same periods in 2022 when interest rates increased significantly and credit spreads widened.

CRT Arrangements

The activity in and balances relating to our CRT arrangements are summarized below:

 

 

Quarter ended September 30,

 

 

Nine months ended September 30,

 

 

 

2023

 

 

2022

 

 

2023

 

 

2022

 

 

 

(in thousands)

 

Net investment income:

 

 

 

 

 

 

 

 

 

 

 

 

Net (losses) gains on investments and financings:

 

 

 

 

 

 

 

 

 

 

 

 

CRT Derivatives and strips:

 

 

 

 

 

 

 

 

 

 

 

 

CRT derivatives

 

 

 

 

 

 

 

 

 

 

 

 

Realized

 

$

4,051

 

 

$

4,624

 

 

$

12,504

 

 

$

34,982

 

Valuation changes

 

 

9,113

 

 

 

(365

)

 

 

26,619

 

 

 

(42,154

)

 

 

13,164

 

 

 

4,259

 

 

 

39,123

 

 

 

(7,172

)

CRT strips

 

 

 

 

 

 

 

 

 

 

 

 

Realized

 

 

11,241

 

 

 

13,589

 

 

 

35,529

 

 

 

47,430

 

Valuation changes

 

 

9,977

 

 

 

(11,788

)

 

 

68,601

 

 

 

(103,284

)

 

 

21,218

 

 

 

1,801

 

 

 

104,130

 

 

 

(55,854

)

Interest-only security payable at fair value

 

 

(4,228

)

 

 

(1,701

)

 

 

(6,363

)

 

 

(10,593

)

 

 

30,154

 

 

 

4,359

 

 

 

136,890

 

 

 

(73,619

)

Interest income — Deposits securing CRT arrangements

 

 

16,419

 

 

 

6,978

 

 

 

46,410

 

 

 

9,584

 

 

$

46,573

 

 

$

11,337

 

 

$

183,300

 

 

$

(64,035

)

 

 

 

 

 

 

 

 

 

 

 

 

 

Net payments made (recoveries received) to settle losses
    (recoveries) on CRT arrangements

 

$

496

 

 

$

180

 

 

$

2,252

 

 

$

(20,249

)

 

 

 

September 30, 2023

 

 

December 31, 2022

 

 

 

(in thousands)

 

Carrying value of CRT arrangements:

 

 

 

 

 

 

Derivative assets - CRT derivatives

 

$

7,010

 

 

$

1,262

 

Derivative and credit risk transfer strip liabilities:

 

 

 

 

 

 

CRT derivatives

 

 

(2,268

)

 

 

(23,360

)

CRT strips

 

 

(68,592

)

 

 

(137,193

)

 

 

(70,860

)

 

 

(160,553

)

Deposits securing CRT arrangements

 

 

1,237,294

 

 

 

1,325,294

 

Interest-only security payable at fair value

 

 

(28,288

)

 

 

(21,925

)

 

 

$

1,145,156

 

 

$

1,144,078

 

 

 

 

 

 

 

CRT arrangement assets pledged to secure borrowings:

 

 

 

 

 

 

Derivative assets

 

$

7,010

 

 

$

1,262

 

Deposits securing CRT arrangements (1)

 

$

1,237,294

 

 

$

1,325,294

 

 

 

 

 

 

 

UPB of loans underlying CRT arrangements

 

$

23,613,675

 

 

$

25,315,524

 

Collection status (UPB):

 

 

 

 

Delinquency

 

 

 

 

 

 

Current

 

$

23,028,327

 

 

$

24,673,719

 

30-89 days delinquent

 

$

384,340

 

 

$

409,049

 

90-180 days delinquent

 

$

116,110

 

 

$

112,286

 

180 or more days delinquent

 

$

66,178

 

 

$

93,717

 

Foreclosure

 

$

18,720

 

 

$

26,753

 

Bankruptcy

 

$

61,364

 

 

$

54,395

 

 

68

 

(1)
Deposits securing credit risk transfer strip liabilities also secure $70.9 million and $160.6 million in CRT strip and CRT derivative liabilities at September 30, 2023, and December 31, 2022, respectively.

The performance of our investments in CRT arrangements during the quarter and nine months ended September 30, 2023 reflects credit spread tightening for CRT securities in the credit markets. This contrasts with CRT investments' fair value losses during the same periods in 2022, when credit spreads widened.

Net interest expense

Net interest expense is summarized below:

 

Quarter ended September 30, 2023

 

 

Quarter ended September 30, 2022

 

 

Interest

 

 

 

 

 

Interest

 

 

Interest

 

 

 

 

 

Interest

 

 

income/

 

 

Average

 

 

yield/

 

 

income/

 

 

Average

 

 

yield/

 

 

expense

 

 

balance

 

 

cost %

 

 

expense

 

 

balance

 

 

cost %

 

 

(dollars in thousands)

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and short-term investments

$

6,288

 

 

$

431,256

 

 

 

5.78

%

 

$

1,993

 

 

$

205,742

 

 

 

3.84

%

Mortgage-backed securities

 

66,563

 

 

 

4,711,723

 

 

 

5.60

%

 

 

36,070

 

 

 

3,990,746

 

 

 

3.59

%

Loans acquired for sale at fair value

 

14,720

 

 

 

868,808

 

 

 

6.72

%

 

 

27,921

 

 

 

1,763,506

 

 

 

6.28

%

Loans at fair value:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Held by variable interest entities

 

9,505

 

 

 

1,434,993

 

 

 

2.63

%

 

 

16,002

 

 

 

1,655,206

 

 

 

3.84

%

Distressed

 

9

 

 

 

2,425

 

 

 

1.47

%

 

 

16

 

 

 

3,977

 

 

 

1.60

%

 

9,514

 

 

 

1,437,418

 

 

 

2.63

%

 

 

16,018

 

 

 

1,659,183

 

 

 

3.83

%

Deposits securing CRT arrangements

 

16,419

 

 

 

1,255,966

 

 

 

5.19

%

 

 

6,978

 

 

 

1,404,375

 

 

 

1.97

%

 

113,504

 

 

 

8,705,171

 

 

 

5.17

%

 

 

88,980

 

 

 

9,023,552

 

 

 

3.91

%

Placement fees relating to custodial funds

 

44,005

 

 

 

 

 

 

 

 

 

20,239

 

 

 

 

 

 

 

Other

 

1,417

 

 

 

 

 

 

 

 

 

439

 

 

 

 

 

 

 

$

158,926

 

 

$

8,705,171

 

 

 

7.24

%

 

$

109,658

 

 

$

9,023,552

 

 

 

4.82

%

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Assets sold under agreements to repurchase

$

87,414

 

 

$

5,714,082

 

 

 

6.07

%

 

$

46,691

 

 

$

5,789,433

 

 

 

3.20

%

Mortgage loan participation purchase and sale
   agreements

 

403

 

 

 

22,043

 

 

 

7.25

%

 

 

320

 

 

 

31,092

 

 

 

4.08

%

Notes payable secured by credit risk transfer
    and mortgage servicing assets

 

69,952

 

 

 

3,106,809

 

 

 

8.93

%

 

 

39,818

 

 

 

2,801,845

 

 

 

5.64

%

Senior notes

 

8,541

 

 

 

553,338

 

 

 

6.12

%

 

 

8,349

 

 

 

545,047

 

 

 

6.08

%

Asset-backed financings at fair value

 

13,652

 

 

 

1,342,093

 

 

 

4.04

%

 

 

14,265

 

 

 

1,540,957

 

 

 

3.67

%

 

179,962

 

 

 

10,738,365

 

 

 

6.65

%

 

 

109,443

 

 

 

10,708,374

 

 

 

4.05

%

Interest shortfall on repayments of loans serviced
   for Agency securitizations

 

1,503

 

 

 

 

 

 

 

 

 

3,504

 

 

 

 

 

 

 

Interest on loan impound deposits

 

2,079

 

 

 

 

 

 

 

 

 

1,133

 

 

 

 

 

 

 

Other

 

374

 

 

 

 

 

 

 

 

 

—

 

 

 

 

 

 

 

 

183,918

 

 

$

10,738,365

 

 

 

6.80

%

 

 

114,080

 

 

$

10,708,374

 

 

 

4.23

%

Net interest expense

$

(24,992

)

 

 

 

 

 

 

 

$

(4,422

)

 

 

 

 

 

 

 

69

 

 

 

Nine months ended September 30, 2023

 

 

Nine months ended September 30, 2022

 

 

Interest

 

 

 

 

 

Interest

 

 

Interest

 

 

 

 

 

Interest

 

 

income/

 

 

Average

 

 

yield/

 

 

income/

 

 

Average

 

 

yield/

 

 

expense

 

 

balance

 

 

cost %

 

 

expense

 

 

balance

 

 

cost %

 

 

(dollars in thousands)

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and short-term investments

$

19,311

 

 

$

511,194

 

 

 

5.05

%

 

$

3,571

 

 

$

277,409

 

 

 

1.72

%

Mortgage-backed securities

 

180,244

 

 

 

4,603,082

 

 

 

5.24

%

 

 

91,121

 

 

 

3,347,658

 

 

 

3.64

%

Loans acquired for sale at fair value

 

77,487

 

 

 

1,613,347

 

 

 

6.42

%

 

 

70,611

 

 

 

1,884,840

 

 

 

5.01

%

Loans at fair value:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Held by variable interest entities

 

38,315

 

 

 

1,476,435

 

 

 

3.47

%

 

 

44,587

 

 

 

1,651,010

 

 

 

3.61

%

Distressed

 

33

 

 

 

3,090

 

 

 

1.43

%

 

 

204

 

 

 

4,012

 

 

 

6.80

%

 

38,348

 

 

 

1,479,525

 

 

 

3.47

%

 

 

44,791

 

 

 

1,655,022

 

 

 

3.62

%

Deposits securing CRT arrangements

 

46,410

 

 

 

1,285,327

 

 

 

4.83

%

 

 

9,584

 

 

 

1,508,150

 

 

 

0.85

%

 

361,800

 

 

 

9,492,475

 

 

 

5.10

%

 

 

219,678

 

 

 

8,673,079

 

 

 

3.39

%

Placement fees relating to custodial funds

 

110,602

 

 

 

 

 

 

 

 

 

31,152

 

 

 

 

 

 

 

Other

 

2,227

 

 

 

 

 

 

 

 

 

589

 

 

 

 

 

 

 

$

474,629

 

 

$

9,492,475

 

 

 

6.69

%

 

$

251,419

 

 

$

8,673,079

 

 

 

3.88

%

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Assets sold under agreements to repurchase

$

284,027

 

 

$

6,451,377

 

 

 

5.89

%

 

$

87,310

 

 

$

5,363,690

 

 

 

2.18

%

Mortgage loan participation purchase and sale
   agreements

 

1,109

 

 

 

20,991

 

 

 

7.06

%

 

 

728

 

 

 

33,586

 

 

 

2.90

%

Notes payable secured by credit risk transfer
    and mortgage servicing assets

 

191,049

 

 

 

2,995,752

 

 

 

8.53

%

 

 

84,597

 

 

 

2,550,910

 

 

 

4.43

%

Senior notes

 

25,316

 

 

 

549,063

 

 

 

6.16

%

 

 

25,004

 

 

 

539,703

 

 

 

6.19

%

Asset-backed financings at fair value

 

38,796

 

 

 

1,381,994

 

 

 

3.75

%

 

 

40,308

 

 

 

1,549,797

 

 

 

3.48

%

 

540,297

 

 

 

11,399,177

 

 

 

6.34

%

 

 

237,947

 

 

 

10,037,686

 

 

 

3.17

%

Interest shortfall on repayments of loans serviced
   for Agency securitizations

 

4,322

 

 

 

 

 

 

 

 

 

14,975

 

 

 

 

 

 

 

Interest on loan impound deposits

 

4,737

 

 

 

 

 

 

 

 

 

2,822

 

 

 

 

 

 

 

Other

 

1,089

 

 

 

 

 

 

 

 

 

—

 

 

 

 

 

 

 

 

550,445

 

 

$

11,399,177

 

 

 

6.46

%

 

 

255,744

 

 

$

10,037,686

 

 

 

3.41

%

Net interest expense

$

(75,816

)

 

 

 

 

 

 

 

$

(4,325

)

 

 

 

 

 

 

 

70

 

The effects of changes in the yields and costs and composition of our investments on our net interest expense are summarized below:

 

 

Quarter ended September 30, 2023

 

 

Nine months ended September 30, 2023

 

 

 

vs.

 

 

vs.

 

 

 

Quarter ended September 30, 2022

 

 

Nine months ended September 30, 2022

 

 

 

Increase (decrease)
due to changes in

 

 

Increase (decrease)
due to changes in

 

 

 

Rate

 

 

Volume

 

 

Total

 

 

Rate

 

 

Volume

 

 

Total

 

 

 

(in thousands)

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and short-term investments

 

$

1,355

 

 

$

2,940

 

 

$

4,295

 

 

$

10,964

 

 

$

4,776

 

 

$

15,740

 

Mortgage-backed securities

 

 

23,085

 

 

 

7,408

 

 

 

30,493

 

 

 

48,043

 

 

 

41,080

 

 

 

89,123

 

Loans acquired for sale at fair value

 

 

1,837

 

 

 

(15,038

)

 

 

(13,201

)

 

 

18,017

 

 

 

(11,141

)

 

 

6,876

 

Loans at fair value:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Held by variable interest entities

 

 

(4,567

)

 

 

(1,930

)

 

 

(6,497

)

 

 

(1,692

)

 

 

(4,580

)

 

 

(6,272

)

Distressed

 

 

(1

)

 

 

(6

)

 

 

(7

)

 

 

(132

)

 

 

(39

)

 

 

(171

)

 

 

(4,568

)

 

 

(1,936

)

 

 

(6,504

)

 

 

(1,824

)

 

 

(4,619

)

 

 

(6,443

)

Deposits securing CRT arrangements

 

 

10,252

 

 

 

(811

)

 

 

9,441

 

 

 

38,445

 

 

 

(1,619

)

 

 

36,826

 

 

 

31,961

 

 

 

(7,437

)

 

 

24,524

 

 

 

113,645

 

 

 

28,477

 

 

 

142,122

 

Placement fees relating to custodial
  funds

 

 

 

 

 

 

 

 

23,766

 

 

 

 

 

 

 

 

 

79,450

 

Other

 

 

 

 

 

 

 

 

978

 

 

 

 

 

 

 

 

 

1,638

 

 

$

31,961

 

 

$

(7,437

)

 

$

49,268

 

 

$

113,645

 

 

$

28,477

 

 

$

223,210

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Assets sold under agreements to
   repurchase

 

$

41,338

 

 

$

(615

)

 

$

40,723

 

 

$

175,803

 

 

$

20,914

 

 

$

196,717

 

Mortgage loan participation
   purchase and sale agreement

 

 

196

 

 

 

(113

)

 

 

83

 

 

 

735

 

 

 

(354

)

 

 

381

 

Notes payable secured by credit risk
   transfer and mortgage servicing
   assets

 

 

25,402

 

 

 

4,732

 

 

 

30,134

 

 

 

89,536

 

 

 

16,916

 

 

 

106,452

 

Senior notes

 

 

64

 

 

 

128

 

 

 

192

 

 

 

(120

)

 

 

432

 

 

 

312

 

Asset-backed financings at fair value

 

 

1,331

 

 

 

(1,944

)

 

 

(613

)

 

 

3,052

 

 

 

(4,564

)

 

 

(1,512

)

 

 

68,331

 

 

 

2,188

 

 

 

70,519

 

 

 

269,006

 

 

 

33,344

 

 

 

302,350

 

Interest shortfall on repayments of
   loans serviced for Agency
   securitizations

 

 

 

 

 

 

 

 

(2,001

)

 

 

 

 

 

 

 

 

(10,653

)

Interest on loan impound deposits

 

 

 

 

 

 

 

 

946

 

 

 

 

 

 

 

 

 

1,915

 

Other

 

 

 

 

 

 

 

 

374

 

 

 

 

 

 

 

 

 

1,089

 

 

 

68,331

 

 

 

2,188

 

 

 

69,838

 

 

 

269,006

 

 

 

33,344

 

 

 

294,701

 

Increase in net interest (expense) income

 

$

(36,370

)

 

$

(9,625

)

 

$

(20,570

)

 

$

(155,361

)

 

$

(4,867

)

 

$

(71,491

)

The increase in net interest expense during the quarter and nine months ended September 30, 2023, as compared to the same periods in 2022, is due to an increase in interest costs attributable to financing non-interest earning MSR assets along with faster repricing of our debt than our interest earning assets, partially offset by an increase in placement fees relating to custodial funds.

71

 

Expenses

Our expenses are summarized below:

 

 

Quarter ended September 30,

 

 

Nine months ended September 30,

 

 

 

2023

 

 

2022

 

 

2023

 

 

2022

 

 

 

(in thousands)

 

Earned by PennyMac Financial Services, Inc.:

 

 

 

 

 

 

 

 

 

 

 

 

Loan servicing fees

 

$

20,257

 

 

$

20,247

 

 

$

61,023

 

 

$

61,670

 

Loan fulfillment fees

 

 

5,531

 

 

 

18,407

 

 

 

22,895

 

 

 

55,807

 

Management fees

 

 

7,175

 

 

 

7,731

 

 

 

21,510

 

 

 

23,758

 

Professional services

 

 

2,133

 

 

 

2,394

 

 

 

5,537

 

 

 

7,671

 

Loan origination

 

 

710

 

 

 

2,430

 

 

 

3,785

 

 

 

8,054

 

Compensation

 

 

1,961

 

 

 

1,368

 

 

 

4,779

 

 

 

4,354

 

Safekeeping

 

 

467

 

 

 

2,986

 

 

 

2,707

 

 

 

6,402

 

Loan collection and liquidation

 

 

1,890

 

 

 

690

 

 

 

3,378

 

 

 

5,118

 

Other

 

 

4,885

 

 

 

4,433

 

 

 

14,559

 

 

 

13,001

 

 

$

45,009

 

 

$

60,686

 

 

$

140,173

 

 

$

185,835

 

Expenses decreased $15.7 million and $45.7 million, or 26% and 25%, respectively, during the quarter and nine months ended September 30, 2023, as compared to the same periods in 2022, as discussed below.

Loan Servicing Fees

Loan servicing fees payable to PLS are summarized below:

 

 

Quarter ended September 30,

 

 

Nine months ended September 30,

 

 

 

2023

 

 

2022

 

 

2023

 

 

2022

 

 

 

(in thousands)

 

Loan servicing fees:

 

 

 

 

 

 

 

 

 

 

 

 

Loans acquired for sale at fair value

 

$

112

 

 

$

258

 

 

$

569

 

 

$

780

 

Loans at fair value

 

 

33

 

 

 

111

 

 

 

184

 

 

 

427

 

MSRs

 

 

20,112

 

 

 

19,878

 

 

 

60,270

 

 

 

60,463

 

 

$

20,257

 

 

$

20,247

 

 

$

61,023

 

 

$

61,670

 

Average investment in loans:

 

 

 

 

 

 

 

 

 

 

 

 

Acquired for sale at fair value

 

$

868,808

 

 

$

1,763,506

 

 

$

1,613,347

 

 

$

1,884,840

 

At fair value

 

$

1,437,418

 

 

$

1,659,183

 

 

$

1,479,525

 

 

$

1,655,022

 

Average MSR portfolio UPB

 

$

231,333,064

 

 

$

224,756,659

 

 

$

231,333,990

 

 

$

220,988,459

 

Loan servicing fees increased by $10,000 and decreased $647,000 during the quarter and nine months ended September 30, 2023, respectively, as compared to the same periods in 2022. We incur loan servicing fees primarily in support of our MSR portfolio. The limited growth or 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 $12.9 million and $32.9 million during the quarter and nine months ended September 30, 2023, respectively, compared to the same periods 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.

72

 

Management Fees

Management fees payable to PCM are summarized below:

 

 

Quarter ended September 30,

 

 

Nine months ended September 30,

 

 

 

2023

 

 

2022

 

 

2023

 

 

2022

 

 

 

(in thousands)

 

Base

 

$

7,175

 

 

$

7,731

 

 

$

21,510

 

 

$

23,758

 

Performance incentive

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

$

7,175

 

 

$

7,731

 

 

$

21,510

 

 

$

23,758

 

Average shareholders' equity amounts used
   to calculate base management fee expense

 

$

1,897,964

 

 

$

2,048,887

 

 

$

1,917,525

 

 

$

2,128,916

 

 

Management fees decreased by $556,000 and $2.2 million during the quarter and nine months ended September 30, 2023, respectively, as compared to the same periods in 2022. This decrease reflects the decrease in our average shareholders’ equity during the quarter and nine months ended September 30, 2023, as compared to the same periods in 2022.

Loan origination

Loan origination expenses decreased $1.7 million and $4.3 million, or 71% and 53%, during the quarter and nine months ended September 30, 2023, respectively, as compared to the same periods in 2022, primarily reflecting a decrease in our loan originations purchased for sale to nonaffiliates.

Other Expenses

Other expenses are summarized below:

 

 

 

Quarter ended September 30,

 

 

Nine months ended September 30,

 

 

 

2023

 

 

2022

 

 

2023

 

 

2022

 

 

 

(in thousands)

 

Common overhead allocation from PFSI

 

$

1,489

 

 

$

2,574

 

 

$

5,450

 

 

$

6,247

 

Technology

 

 

601

 

 

 

455

 

 

 

1,521

 

 

 

1,538

 

Bank service charges

 

 

483

 

 

 

600

 

 

 

1,478

 

 

 

1,790

 

Insurance

 

 

472

 

 

 

385

 

 

 

1,494

 

 

 

1,190

 

Other

 

 

1,840

 

 

 

419

 

 

 

4,616

 

 

 

2,236

 

 

$

4,885

 

 

$

4,433

 

 

$

14,559

 

 

$

13,001

 

 

Income Taxes

We have elected to treat PMC as a 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 48.1% and 28.1% with consolidated pretax income of a $118.4 million and $204.1 million for the quarter and nine months ended September 30, 2023. The Company’s TRS recognized a tax expense of $57.1 million on pretax income of $234.0 million and a tax expense of $56.5 million on pretax income of $221.9 million for the quarter and nine months ended September 30, 2023. For the same periods in 2022, the TRS recognized tax expense of $80.8 million on pretax income of $344.8 million and tax expense of $151.3 million on pretax income of $765.2 million, respectively. The Company’s reported consolidated pretax income for the quarter and nine months ended September 30, 2022 was $90.4 million and $68.6 million, respectively. 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 higher effective tax rate for the quarter ended September 30, 2023 is the result of realizing pretax GAAP income at the TRS, where the tax provision is recorded, while realizing a loss in the quarter for the rest of the Company's consolidated subsidiaries, excluding the TRS and its subsidiaries.

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 September 30, 2023, the valuation allowance remains zero as a result of cumulative GAAP income at the TRS for the three-year period ended September 30, 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

73

 

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.

Balance Sheet Analysis

Following is a summary of key balance sheet items as of the dates presented:

 

 

September 30,

 

 

December 31,

 

 

 

2023

 

 

2022

 

 

 

(in thousands)

 

Assets

 

 

 

 

 

 

Cash

 

$

236,396

 

 

$

111,866

 

Investments:

 

 

 

 

 

 

Short-term

 

 

150,059

 

 

 

252,271

 

Mortgage-backed securities at fair value

 

 

4,665,970

 

 

 

4,462,601

 

Loans acquired for sale at fair value

 

 

1,025,730

 

 

 

1,821,933

 

Loans at fair value

 

 

1,372,118

 

 

 

1,513,399

 

Derivative assets

 

 

29,750

 

 

 

84,940

 

Deposits securing credit risk transfer arrangements

 

 

1,237,294

 

 

 

1,325,294

 

MSRs

 

 

4,108,661

 

 

 

4,012,737

 

 

 

12,589,582

 

 

 

13,473,175

 

Other

 

 

397,358

 

 

 

336,523

 

Total assets

 

$

13,223,336

 

 

$

13,921,564

 

Liabilities

 

 

 

 

 

 

Debt:

 

 

 

 

 

 

Short-term

 

$

6,044,707

 

 

$

6,616,528

 

Long-term

 

 

4,732,692

 

 

 

4,787,162

 

 

 

10,777,399

 

 

 

11,403,690

 

Other

 

 

496,859

 

 

 

555,059

 

Total liabilities

 

 

11,274,258

 

 

 

11,958,749

 

Shareholders’ equity

 

 

1,949,078

 

 

 

1,962,815

 

Total liabilities and shareholders’ equity

 

$

13,223,336

 

 

$

13,921,564

 

Total assets decreased by approximately $698.2 million, or 5%, during the period from December 31, 2022 through September 30, 2023, primarily due to a decrease of $796.2 million in Loans acquired for sale at fair value, a decrease of $ 141.3 million in Loans at fair value and a decrease in Deposits securing credit risk transfer arrangements of $88.0 million, partially offset by a $203.4 million increase in Mortgage-backed securities at fair value and a $95.9 million increase in MSRs.

Asset Acquisitions

Our asset acquisitions are summarized below.

Correspondent Production

Following is a summary of our correspondent production acquisitions at fair value:

 

 

Quarter ended September 30,

 

 

Nine months ended September 30,

 

 

 

2023

 

 

2022

 

 

2023

 

 

2022

 

 

 

(in thousands)

 

Correspondent loan purchases:

 

 

 

 

 

 

 

 

 

 

 

 

GSE eligible — held for sale to nonaffiliates (1)

 

$

12,810,679

 

 

$

10,329,858

 

 

$

33,722,514

 

 

$

30,956,741

 

Held for sale to PLS (2)

 

 

8,945,053

 

 

 

12,454,277

 

 

 

29,975,859

 

 

 

36,425,554

 

Jumbo loans

 

 

—

 

 

 

1,317

 

 

 

1,002

 

 

 

5,029

 

Advances to home equity lines of credit

 

 

52

 

 

 

15

 

 

 

102

 

 

 

112

 

 

$

21,755,784

 

 

$

22,785,467

 

 

$

63,699,477

 

 

$

67,387,436

 

 

(1)
GSE eligibility refers to the eligibility of loans for sale to Fannie Mae or Freddie Mac. The Company sells or finances a portion of its GSE eligible loan production to other investors, including PLS.
(2)
The Company sells a portion of its production to PLS, including all of its loans eligible for inclusion in Ginnie Mae securities. The Company is not approved by Ginnie Mae as an issuer of Ginnie Mae-guaranteed securities which are backed by government-insured or guaranteed loans. The Company earns a sourcing fee for all loans that it purchases from correspondent sellers and

74

 

subsequently sells to PLS as described in Note 4 – Transactions with Related Parties – Operating activities – Correspondent Production Activities.

During the quarter and nine months ended September 30, 2023, we purchased for sale $21.8 billion and $63.7 billion, respectively, in fair value of correspondent production loans as compared to $22.8 billion and $67.4 billion during the same periods in 2022.

Other Investment Activities

Following is a summary of our acquisitions of mortgage-related investments held in our credit and interest rate sensitive strategies segments:

 

 

Quarter ended September 30,

 

 

Nine months ended September 30,

 

 

 

2023

 

 

2022

 

 

2023

 

 

2022

 

 

 

(in thousands)

 

Credit sensitive assets:

 

 

 

 

 

 

 

 

 

 

 

 

Subordinate credit-linked securities

 

$

6,555

 

 

$

59,001

 

 

$

70,616

 

 

$

184,670

 

Loans secured by investment properties, net of
  associated asset-backed financing

 

 

—

 

 

 

—

 

 

 

—

 

 

 

23,485

 

 

 

 

6,555

 

 

 

59,001

 

 

 

70,616

 

 

 

208,155

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate sensitive assets:

 

 

 

 

 

 

 

 

 

 

 

 

Agency fixed-rate pass-through securities (net of sales)

 

 

—

 

 

 

295,014

 

 

 

308,742

 

 

 

1,821,576

 

Interest-only stripped mortgage-backed securities

 

 

103,547

 

 

 

—

 

 

 

103,547

 

 

 

—

 

Senior non-Agency securities

 

 

57,829

 

 

 

—

 

 

 

99,803

 

 

 

28,819

 

Mortgage servicing rights:

 

 

 

 

 

 

 

 

 

 

 

 

Purchased

 

 

16,263

 

 

 

—

 

 

 

16,263

 

 

 

—

 

Received in loan sales (1)

 

 

(46,536

)

 

 

178,001

 

 

 

144,829

 

 

 

543,255

 

 

 

131,103

 

 

 

473,015

 

 

 

673,184

 

 

 

2,393,650

 

 

$

137,658

 

 

$

532,016

 

 

$

743,800

 

 

$

2,601,805

 

 

(1)
Net of exchange of servicing spread for IO mortgage-backed securities and interest receivable.

Our acquisitions during the quarter and nine months ended September 30, 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.

Investment Portfolio Composition

Mortgage-Backed Securities

Following is a summary of our MBS holdings:

 

 

September 30, 2023

 

 

December 31, 2022

 

 

 

 

 

 

 

 

 

Average

 

 

 

 

 

 

 

 

Average

 

 

 

Fair

 

 

Principal/

 

 

Life

 

 

 

 

 

Fair

 

 

 

 

 

Life

 

 

 

 

 

 

value

 

 

Notional

 

 

(in years)

 

 

Coupon

 

 

value

 

 

Principal

 

 

(in years)

 

 

Coupon

 

 

 

(dollars in thousands)

 

Agency pass-through securities

 

$

4,170,520

 

 

$

4,403,330

 

 

 

8.9

 

 

 

5.1

%

 

$

4,262,502

 

 

$

4,693,045

 

 

 

10.1

 

 

 

3.5

%

Subordinate credit-linked securities

 

 

277,085

 

 

 

259,863

 

 

 

4.6

 

 

 

12.3

%

 

 

177,898

 

 

 

184,620

 

 

 

4.6

 

 

 

11.2

%

Senior non-Agency securities

 

 

114,832

 

 

 

127,172

 

 

 

10.1

 

 

 

5.1

%

 

 

22,201

 

 

 

28,103

 

 

 

14.3

 

 

 

2.5

%

 

 

4,562,437

 

 

 

4,790,365

 

 

 

 

 

 

 

 

 

4,462,601

 

 

 

4,905,768

 

 

 

 

 

 

 

Interest-only stripped mortgage
  -backed securities

 

 

103,533

 

 

 

425,682

 

 

 

8.7

 

 

 

4.9

%

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

$

4,665,970

 

 

$

5,216,047

 

 

 

 

 

 

 

 

$

4,462,601

 

 

$

4,905,768

 

 

 

 

 

 

 

 

75

 

Credit Risk Transfer Arrangements

Following is a summary of the composition of the loans underlying our investment in funded CRT arrangements:

 

 

 

September 30, 2023

 

 

December 31, 2022

 

 

 

(in thousands)

 

Carrying value of CRT arrangements:

 

 

 

 

 

 

Derivative assets - CRT derivatives

 

$

7,010

 

 

$

1,262

 

Derivative and credit risk transfer strip liabilities:

 

 

 

 

 

 

CRT strips

 

 

(68,592

)

 

 

(137,193

)

CRT derivatives

 

 

(2,268

)

 

 

(23,360

)

 

 

(70,860

)

 

 

(160,553

)

Deposits securing CRT arrangements

 

 

1,237,294

 

 

 

1,325,294

 

Interest-only security payable at fair value

 

 

(28,288

)

 

 

(21,925

)

 

$

1,145,156

 

 

$

1,144,078

 

UPB of loans subject to credit guarantee obligations

 

$

23,613,675

 

 

$

25,315,524

 

 

Following is a summary of the composition of the loans underlying our investment in CRT arrangements as of September 30, 2023:

 

 

Year of origination

 

 

 

2020

 

 

2019

 

 

2018

 

 

2017

 

 

2016

 

 

2015

 

 

Total

 

 

(in millions)

 

UPB:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Outstanding

 

$

4,793

 

 

$

10,974

 

 

$

2,853

 

 

$

2,408

 

 

$

1,966

 

 

$

620

 

 

$

23,614

 

Liquidations:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balances

 

$

0.4

 

 

$

4.9

 

 

$

54.1

 

 

$

158.9

 

 

$

118.1

 

 

$

59.3

 

 

$

395.7

 

Losses

 

$

0.1

 

 

$

0.3

 

 

$

5.5

 

 

$

19.8

 

 

$

12.3

 

 

$

7.1

 

 

$

45.1

 

Modifications:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balances

 

$

66.8

 

 

$

546.4

 

 

$

300.7

 

 

$

—

 

 

$

—

 

 

$

—

 

 

$

913.9

 

Losses

 

$

1.1

 

 

$

12.3

 

 

$

9.8

 

 

$

—

 

 

$

—

 

 

$

—

 

 

$

23.2

 

 

 

 

 

Year of origination

 

Original debt-to income ratio

 

2020

 

 

2019

 

 

2018

 

 

2017

 

 

2016

 

 

2015

 

 

Total

 

 

(in millions)

 

<25%

 

$

987

 

 

$

1,636

 

 

$

261

 

 

$

302

 

 

$

292

 

 

$

66

 

 

$

3,544

 

25 - 30%

 

 

770

 

 

 

1,388

 

 

 

232

 

 

 

277

 

 

 

266

 

 

 

69

 

 

 

3,002

 

30 - 35%

 

 

846

 

 

 

1,679

 

 

 

334

 

 

 

371

 

 

 

338

 

 

 

93

 

 

 

3,661

 

35 - 40%

 

 

831

 

 

 

1,966

 

 

 

458

 

 

 

436

 

 

 

374

 

 

 

112

 

 

 

4,177

 

40 - 45%

 

 

828

 

 

 

2,375

 

 

 

677

 

 

 

616

 

 

 

518

 

 

 

168

 

 

 

5,182

 

>45%

 

 

531

 

 

 

1,930

 

 

 

891

 

 

 

406

 

 

 

178

 

 

 

112

 

 

 

4,048

 

 

$

4,793

 

 

$

10,974

 

 

$

2,853

 

 

$

2,408

 

 

$

1,966

 

 

$

620

 

 

$

23,614

 

Weighted average

 

 

33.4

%

 

 

35.8

%

 

 

39.0

%

 

 

36.5

%

 

 

35.0

%

 

 

35.6

%

 

 

35.7

%

 

 

 

Year of origination

 

Origination FICO credit score

 

2020

 

 

2019

 

 

2018

 

 

2017

 

 

2016

 

 

2015

 

 

Total

 

 

(in millions)

 

600 - 649

 

$

33

 

 

$

152

 

 

$

66

 

 

$

29

 

 

$

18

 

 

$

11

 

 

$

309

 

650 - 699

 

 

237

 

 

 

1,038

 

 

 

605

 

 

 

365

 

 

 

243

 

 

 

122

 

 

 

2,610

 

700 - 749

 

 

1,131

 

 

 

3,227

 

 

 

1,006

 

 

 

819

 

 

 

620

 

 

 

189

 

 

 

6,992

 

750 or greater

 

 

3,385

 

 

 

6,529

 

 

 

1,169

 

 

 

1,191

 

 

 

1,085

 

 

 

298

 

 

 

13,657

 

Not available

 

 

7

 

 

 

28

 

 

 

7

 

 

 

4

 

 

 

—

 

 

 

—

 

 

 

46

 

 

$

4,793

 

 

$

10,974

 

 

$

2,853

 

 

$

2,408

 

 

$

1,966

 

 

$

620

 

 

$

23,614

 

Weighted average

 

 

765

 

 

 

754

 

 

 

736

 

 

 

745

 

 

 

751

 

 

 

742

 

 

 

753

 

 

76

 

 

 

Year of origination

 

Origination loan-to value ratio

 

2020

 

 

2019

 

 

2018

 

 

2017

 

 

2016

 

 

2015

 

 

Total

 

 

(in millions)

 

<80%

 

$

2,262

 

 

$

3,884

 

 

$

920

 

 

$

786

 

 

$

802

 

 

$

252

 

 

$

8,906

 

80-85%

 

 

800

 

 

 

2,104

 

 

 

671

 

 

 

684

 

 

 

529

 

 

 

164

 

 

 

4,952

 

85-90%

 

 

310

 

 

 

618

 

 

 

131

 

 

 

124

 

 

 

109

 

 

 

36

 

 

 

1,328

 

90-95%

 

 

432

 

 

 

1,159

 

 

 

329

 

 

 

292

 

 

 

216

 

 

 

64

 

 

 

2,492

 

95-100%

 

 

989

 

 

 

3,209

 

 

 

802

 

 

 

522

 

 

 

310

 

 

 

104

 

 

 

5,936

 

 

$

4,793

 

 

$

10,974

 

 

$

2,853

 

 

$

2,408

 

 

$

1,966

 

 

$

620

 

 

$

23,614

 

Weighted average

 

 

80.7

%

 

 

83.3

%

 

 

83.4

%

 

 

82.4

%

 

 

80.6

%

 

 

80.9

%

 

 

82.4

%

 

 

 

Year of origination

 

Current loan-to value ratio (1)

 

2020

 

 

2019

 

 

2018

 

 

2017

 

 

2016

 

 

2015

 

 

Total

 

 

(in millions)

 

<80%

 

$

4,778

 

 

$

10,922

 

 

$

2,837

 

 

$

2,407

 

 

$

1,966

 

 

$

620

 

 

$

23,530

 

80-85%

 

 

12

 

 

 

35

 

 

 

10

 

 

 

1

 

 

 

—

 

 

 

—

 

 

 

58

 

85-90%

 

 

3

 

 

 

10

 

 

 

4

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

17

 

90-95%

 

 

—

 

 

 

4

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

4

 

95-100%

 

 

—

 

 

 

2

 

 

 

1

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

3

 

>100%

 

 

—

 

 

 

1

 

 

 

1

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

2

 

 

$

4,793

 

 

$

10,974

 

 

$

2,853

 

 

$

2,408

 

 

$

1,966

 

 

$

620

 

 

$

23,614

 

Weighted average

 

 

53.2

%

 

 

52.9

%

 

 

50.4

%

 

 

45.3

%

 

 

41.2

%

 

 

38.7

%

 

 

50.5

%

 

(1) Based on current UPB compared to estimated fair value of the property securing the loan.

 

 

 

Year of origination

 

Geographic distribution

 

2020

 

 

2019

 

 

2018

 

 

2017

 

 

2016

 

 

2015

 

 

Total

 

 

(in millions)

 

California

 

$

497

 

 

$

1,074

 

 

$

355

 

 

$

255

 

 

$

378

 

 

$

114

 

 

$

2,673

 

Florida

 

 

531

 

 

 

1,059

 

 

 

368

 

 

 

252

 

 

 

211

 

 

 

55

 

 

 

2,476

 

Texas

 

 

575

 

 

 

954

 

 

 

229

 

 

 

204

 

 

 

246

 

 

 

95

 

 

 

2,303

 

Virginia

 

 

253

 

 

 

489

 

 

 

103

 

 

 

112

 

 

 

137

 

 

 

60

 

 

 

1,154

 

Maryland

 

 

186

 

 

 

464

 

 

 

129

 

 

 

138

 

 

 

130

 

 

 

35

 

 

 

1,082

 

Other

 

 

2,751

 

 

 

6,934

 

 

 

1,669

 

 

 

1,447

 

 

 

864

 

 

 

261

 

 

 

13,926

 

 

$

4,793

 

 

$

10,974

 

 

$

2,853

 

 

$

2,408

 

 

$

1,966

 

 

$

620

 

 

$

23,614

 

 

 

 

Year of origination

 

Regional geographic
distribution (1)

 

2020

 

 

2019

 

 

2018

 

 

2017

 

 

2016

 

 

2015

 

 

Total

 

 

(in millions)

 

Northeast

 

$

446

 

 

$

1,358

 

 

$

334

 

 

$

352

 

 

$

253

 

 

$

91

 

 

$

2,834

 

Southeast

 

 

1,629

 

 

 

3,768

 

 

 

1,025

 

 

 

828

 

 

 

618

 

 

 

191

 

 

 

8,059

 

Midwest

 

 

443

 

 

 

1,151

 

 

 

243

 

 

 

227

 

 

 

177

 

 

 

45

 

 

 

2,286

 

Southwest

 

 

1,254

 

 

 

2,435

 

 

 

539

 

 

 

469

 

 

 

367

 

 

 

130

 

 

 

5,194

 

West

 

 

1,021

 

 

 

2,262

 

 

 

712

 

 

 

532

 

 

 

551

 

 

 

163

 

 

 

5,241

 

 

 

$

4,793

 

 

$

10,974

 

 

$

2,853

 

 

$

2,408

 

 

$

1,966

 

 

$

620

 

 

$

23,614

 

 

(1)
Northeast consists of CT, DE, ME, MA, NH, NJ, NY, PA, PR, RI, VT, VI; Southeast consists of AL, DC, FL, GA, KY, MD, MS, NC, SC, TN, VA, WV; Midwest consists of IL, IN, IA, MI, MN, NE, ND, OH, SD, WI; Southwest consists of AZ, AR, CO, KS, LA, MO, NM, OK, TX, UT; and West consists of AK, CA, GU, HI, ID, MT, NV, OR, WA and WY.

 

77

 

 

 

Year of origination

 

Collection status

 

2020

 

 

2019

 

 

2018

 

 

2017

 

 

2016

 

 

2015

 

 

Total

 

 

(in millions)

 

Delinquency

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Current - 89 Days

 

$

4,774

 

 

$

10,867

 

 

$

2,800

 

 

$

2,395

 

 

$

1,959

 

 

$

618

 

 

$

23,413

 

90 - 179 Days

 

 

12

 

 

 

55

 

 

 

30

 

 

 

12

 

 

 

6

 

 

 

2

 

 

 

117

 

180+ Days

 

 

5

 

 

 

42

 

 

 

17

 

 

 

1

 

 

 

—

 

 

 

—

 

 

 

65

 

Foreclosure

 

 

2

 

 

 

10

 

 

 

6

 

 

 

—

 

 

 

1

 

 

 

—

 

 

 

19

 

 

$

4,793

 

 

$

10,974

 

 

$

2,853

 

 

$

2,408

 

 

$

1,966

 

 

$

620

 

 

$

23,614

 

Bankruptcy

 

$

3

 

 

$

25

 

 

$

18

 

 

$

6

 

 

$

8

 

 

$

1

 

 

$

61

 

 

Cash Flows

Our cash flows for the quarters ended September 30, 2023 and 2022 are summarized below:

 

 

Nine months ended September 30,

 

 

 

2023

 

 

2022

 

 

 

(in thousands)

 

Operating activities

 

$

807,162

 

 

$

1,275,504

 

Investing activities

 

 

60,482

 

 

 

(1,342,701

)

Financing activities

 

 

(743,114

)

 

 

67,145

 

Net cash flows

 

$

124,530

 

 

$

(52

)

Our cash flows resulted in a net increase in cash of $124.5 million during the nine months ended September 30, 2023, as discussed below.

Operating activities

Cash provided by operating activities totaled $807.2 million during the nine months ended September 30, 2023, as compared to cash provided by our operating activities of $1.3 billion during the nine months ended September 30, 2022. Cash flows from operating activities are most influenced by cash flows from loans acquired for sale as shown below:

 

 

Nine months ended September 30,

 

 

 

2023

 

 

2022

 

 

 

(in thousands)

 

Operating cash flows from:

 

 

 

 

 

 

Loans acquired for sale

 

$

639,045

 

 

$

1,011,398

 

Other

 

 

168,117

 

 

 

264,106

 

 

$

807,162

 

 

$

1,275,504

 

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 decreased during both of the nine month periods ended September 30, 2023.

Investing activities

Net cash provided by our investing activities was $60.5 million for the nine months ended September 30, 2023, as compared to net cash used in our investing activities of $1.3 billion for the nine months ended September 30, 2022, primarily due to the increase of our sales and repayments of MBS in excess of purchases of our investments in such assets as well as a decrease in short-term investments and margin deposits.

Financing activities

Net cash used in our financing activities was $743.1 million for the nine months ended September 30, 2023, as compared to net cash provided by our financing activities of $67.1 million for the nine months ended September 30, 2022. This change primarily reflects decreased 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.

78

 

Liquidity and Capital Resources

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 that has allowed us to more closely match the term of our borrowings to the expected lives of the assets securing those borrowings. We have also borrowed money by issuing unsecured senior notes.

Our debt financing is summarized below:

 

 

Assets financed

 

Financing

 

MBS

 

 

Loans acquired
for sale

 

 

Loans at
 fair value

 

 

CRT assets

 

 

Servicing assets (1)

 

 

REO

 

 

Total

 

 

 

(in thousands)

 

Borrowings

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Short term

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Assets sold under agreements to
   repurchase

 

$

4,493,881

 

 

$

946,568

 

 

$

63,341

 

 

$

45,998

 

 

$

470,928

 

 

$

—

 

 

$

6,020,716

 

Mortgage loan participation purchase
   and sale agreements

 

 

—

 

 

 

23,991

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

23,991

 

Long term

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Notes payable secured by CRT
   arrangements and MSRs

 

 

—

 

 

 

—

 

 

 

—

 

 

 

765,738

 

 

 

2,059,853

 

 

 

—

 

 

 

2,825,591

 

Asset-backed financings at fair value

 

 

—

 

 

 

—

 

 

 

1,279,059

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

1,279,059

 

Interest-only security payable

 

 

—

 

 

 

—

 

 

 

—

 

 

 

28,288

 

 

 

—

 

 

 

—

 

 

 

28,288

 

   Total secured borrowings

 

 

4,493,881

 

 

 

970,559

 

 

 

1,342,400

 

 

 

840,024

 

 

 

2,530,781

 

 

 

—

 

 

 

10,177,645

 

Senior notes

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

599,754

 

Total borrowings

 

$

4,493,881

 

 

$

970,559

 

 

$

1,342,400

 

 

$

840,024

 

 

$

2,530,781

 

 

$

—

 

 

 

10,777,399

 

Shareholders' equity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1,949,078

 

Total financing

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

12,726,477

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Assets pledged to secure borrowings

 

$

4,665,970

 

 

$

1,019,247

 

 

$

1,370,220

 

 

$

1,244,304

 

 

$

4,114,853

 

 

$

2,466

 

 

$

12,417,060

 

Debt-to-equity ratio:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Excluding non-recourse debt

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

4.9:1

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

5.5:1

 

 

(1)
Amounts pledged to secure borrowings include MSRs and pledged servicing advances.

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:

 

 

Quarter ended September 30,

 

 

Nine months ended September 30,

 

Assets sold under agreements to repurchase

 

2023

 

 

2022

 

 

2023

 

 

2022

 

 

 

(in thousands)

 

Average balance outstanding

 

$

5,714,082

 

 

$

5,789,433

 

 

$

6,451,377

 

 

$

5,363,690

 

Maximum daily balance outstanding

 

$

6,318,746

 

 

$

6,649,005

 

 

$

9,412,768

 

 

$

8,395,930

 

Ending balance

 

 

 

 

 

 

 

$

6,020,716

 

 

$

6,409,796

 

 

79

 

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 $11.5 billion at September 30, 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:

•
The transactions relating to loans and REO under agreements to repurchase generally provide for terms of approximately one to two years;
•
The transactions relating to loans under mortgage loan participation purchase and sale agreements provide for terms of approximately one year; and
•
The transactions relating to assets under notes payable provide for terms ranging from two to five years.

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 September 30, 2023:

Counterparty

 

Amount at risk

 

 

(in thousands)

 

Goldman Sachs & Co. LLC

 

$

61,461

 

Barclays Capital Inc.

 

 

54,893

 

Atlas Securitized Products, L.P.

 

 

53,974

 

Bank of America, N.A.

 

 

52,025

 

JPMorgan Chase & Co.

 

 

46,415

 

Citibank, N.A.

 

 

41,592

 

Wells Fargo Securities, LLC

 

 

28,875

 

Morgan Stanley & Co. LLC

 

 

9,731

 

Amherst Pierpont Securities LLC

 

 

9,401

 

Daiwa Capital Markets America Inc.

 

 

9,255

 

Nomura Holdings America, Inc.

 

 

3,543

 

BNP Paribas Corporate & Institutional Banking

 

 

3,309

 

Mizuho Financial Group

 

 

1,977

 

RBC Capital Markets, L.P.

 

 

1,194

 

 

$

377,645

 

 

•
All repurchase agreements arrangements that matured between September 30, 2023 and the date of this Report have been renewed, extended or replaced.

Unsecured Senior Notes

We issued $53.5 million principal amount of our unsecured 8.50% senior notes due September 30, 2028 (the “2023 Senior Notes”) during September 2023. The 2023 Senior Notes bear interest at a rate of 8.50% per year, payable quarterly in arrears on March 30, June 30, September 30 and December 30 of each year, beginning on December 30, 2023.

On or after September 30, 2025, we may redeem for cash all or any portion of the 2023 Senior Notes, at our option, at a redemption price equal to 100% of the principal amount of the notes to be redeemed, plus accrued and unpaid interest to, but excluding, the redemption date. No “sinking fund” will be provided for the 2023 Senior Notes.

The 2023 Senior Notes are fully and unconditionally guaranteed on a senior unsecured basis by PennyMac Corp ("PMC"), including the due and punctual payment of principal of and interest on the Unsecured Senior Notes, whether at stated maturity, upon acceleration, call for redemption or otherwise (“PMC Guarantee”). PMC’s operations and investing activities are centered in residential mortgage-related assets, including the creation of and investment in MSRs and CRT Agreements.

80

 

Under the terms of the PMC Guarantee, holders of the 2023 Senior Notes will not be required to exercise their remedies against us before they proceed directly against PMC. PMC’s obligations under the guarantee are limited to the maximum amount that will not, after giving effect to all other contingent and fixed liabilities of PMC, result in the guarantee constituting a fraudulent transfer or conveyance. The PMC Guarantee will:

•
rank equal in right of payment to any of PMC’s existing and future unsecured and unsubordinated indebtedness and guarantees of PMC;
•
be effectively subordinated in right of payment to any of PMC’s existing and future secured indebtedness and secured guarantees to the extent of the value of the assets securing such indebtedness or guarantees; and
•
be structurally subordinated to all existing and future indebtedness and other liabilities (including trade payables) and (to the extent not held by PMC) preferred stock, if any, of PMC’s subsidiaries and of any entity PMC accounts for using the equity method of accounting.

The following summarized financial information for PMT and PMC is presented on a combined basis. Intercompany balances and transactions between PMT and PMC have been eliminated:

 

 

 

September 30, 2023

 

 

 

(in thousands)

 

Loans acquired for sale at fair value

 

$

1,025,730

 

Mortgage servicing rights at fair value

 

 

4,119,211

 

Other assets

 

 

 

From nonaffiliates

 

 

638,510

 

From PFSI

 

 

2,251

 

From non-issuer or non-guarantor subsidiaries

 

 

1,300,818

 

Total assets

 

$

7,086,520

 

 

 

 

 

Total liabilities

 

 

 

Payable to nonaffiliates

 

$

2,014,410

 

Payable to non-issuer or non-guarantor subsidiaries

 

 

3,996,448

 

Payable to PFSI

 

 

19,131

 

 

 

$

6,029,989

 

 

 

 

 

 

 

Nine months ended September 30, 2023

 

 

(in thousands)

 

Net investment income

 

 

From nonaffiliates

$

500,322

 

From PFSI

 

6,508

 

From non-issuer or non-guarantor subsidiaries (1)

 

(228,256

)

Expenses

 

 

From nonaffiliates

 

23,970

 

From PFSI

 

94,325

 

Pre-tax income

 

160,279

 

Provision for income taxes

 

39,108

 

Net income

$

121,171

 

 

(1)
Excludes equity in earnings of non-guarantor subsidiaries.

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:

•
a minimum of $75 million in unrestricted cash and cash equivalents among the Company and/or our subsidiaries; a minimum of $75 million in unrestricted cash and cash equivalents among our Operating Partnership and its consolidated subsidiaries; a minimum of $25 million in unrestricted cash and cash equivalents between PMC and PennyMac Holdings, LLC (“PMH”); a minimum of $25 million in unrestricted cash and cash equivalents at PMC; and a minimum of $10 million in unrestricted cash and cash equivalents at PMH;

81

 

•
a minimum tangible net worth for the Company of $1.25 billion; a minimum tangible net worth for our Operating Partnership of $1.25 billion; a minimum tangible net worth for PMH of $250 million; and a minimum tangible net worth for PMC of $300 million;
•
a maximum ratio of total indebtedness to tangible net worth of less than 10:1 for PMC and PMH and 8.5:1 for the Company and our Operating Partnership; and
•
at least two warehouse or repurchase facilities that finance amounts and assets similar to those being financed under our existing debt financing agreements.

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:

•
a minimum in unrestricted cash and cash equivalents of $100 million;
•
a minimum tangible net worth of $1.25 billion;
•
a maximum ratio of total indebtedness to tangible net worth of 10:1; and
•
at least one other warehouse or repurchase facility that finances amounts and assets that are similar to those being financed under certain of our existing secured financing agreements.

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.

Regulatory Capital and Liquidity Requirements

In addition to the financial covenants imposed upon us and PLS as our servicer under our debt financing agreements, we, through PMC 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.

In August 2022, the Agencies issued revised capital and liquidity requirements. Most of the requirements became effective on September 30, 2023 for issuers of securities guaranteed by Ginnie Mae and seller/servicers of mortgage loans to Fannie Mae and Freddie Mac. We believe that we and PLS are in compliance with Agencies’ revised requirements. The origination liquidity requirements issued by the Agencies will be effective on December 31, 2023 and risk-based capital requirements issued by Ginnie Mae will be effective on December 31, 2024. We believe that we and PLS are in compliance with the pending applicable requirements as of September 30, 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 unsecured debt and 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

Off-Balance Sheet Arrangements

As of September 30, 2023, we have not entered into any off-balance sheet arrangements.

82

 

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.

Mortgage-backed securities at fair value

The following table summarizes the estimated change in fair value of our mortgage-backed securities as of September 30, 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

 

 

50

 

 

75

 

 

200

 

 

 

(in thousands)

 

Change in fair value

 

$

293,452

 

 

$

154,495

 

 

$

106,221

 

 

$

(113,878

)

 

$

(172,339

)

 

$

(465,122

)

Mortgage Servicing Rights

The following tables summarize the estimated change in fair value of MSRs as of September 30, 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%

 

 

 

(in thousands)

 

Pricing spread

 

$

223,092

 

 

$

108,718

 

 

$

53,676

 

 

$

(52,357

)

 

$

(103,437

)

 

$

(201,939

)

Prepayment speed

 

$

203,650

 

 

$

98,736

 

 

$

48,632

 

 

$

(47,226

)

 

$

(93,108

)

 

$

(181,071

)

Annual per-loan cost of servicing

 

$

70,991

 

 

$

35,495

 

 

$

17,748

 

 

$

(17,748

)

 

$

(35,495

)

 

$

(70,991

)

 

CRT Arrangements

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

 

 

-50

 

 

-25

 

 

25

 

 

50

 

 

100

 

 

 

(in thousands)

 

Change in fair value

 

$

43,030

 

 

$

21,176

 

 

$

10,505

 

 

$

(10,343

)

 

$

(20,526

)

 

$

(40,426

)

 

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%

 

 

-10%

 

 

-5%

 

 

5%

 

 

10%

 

 

15%

 

 

 

(in thousands)

 

Change in fair value

 

$

(25,997

)

 

$

(15,231

)

 

$

(6,774

)

 

$

5,491

 

 

$

9,972

 

 

$

13,645

 

 

83

 

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 September 30, 2023 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

84

 

PART II. OTHER INFORMATION

From time to time, we may be involved in various legal actions, claims and proceedings arising in the ordinary course of business. As of September 30, 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 and nine months ended September 30, 2023.

The following table provides information about our repurchases of Common Shares of beneficial interest (“Common Shares”) during the quarter ended September 30, 2023:

Period

 

Total
number of
shares
purchased

 

 

Average
price paid
per share

 

 

Total number of
shares
purchased as
part of publicly
announced plans
or programs (1)

 

 

Amount
available for
future share
repurchases
under the
plans or
programs (1)

 

 

 

(in thousands, except average price paid per share)

 

July 1, 2023 – July 31, 2023

 

 

—

 

 

$

—

 

 

 

—

 

 

$

74,828

 

August 1, 2023 –August 31, 2023

 

 

—

 

 

$

—

 

 

 

—

 

 

$

74,828

 

September 1, 2023 – September 30, 2023

 

 

—

 

 

$

—

 

 

 

—

 

 

$

74,828

 

 

(1)
On October 24, 2022, the Company’s board of trustees approved an increase to the Company’s common share repurchase authorization from $400 million to $500 million (the “share repurchase program”). The share repurchase program does not require the Company to purchase a specific number of Common Shares, and the timing and amount of any Common Shares repurchased are based on market conditions and other factors, including price, regulatory requirements and capital availability. Common share repurchases may be effected through privately negotiated transactions or open market purchases, including pursuant to a trading plan implemented pursuant to Rule 10b5-1 of the Exchange Act. The share repurchase program does not have an expiration date but may be suspended, modified or discontinued at any time without prior notice.

Item 3. Defaults Upon Senior Securities

None

Item 4. Mine Safety Disclosures

Not applicable

Item 5. Other Information

(c) Trading Plans

As of September 30, 2023, no trustee or Section 16 officer adopted or terminated any Rule 10b5-1 trading arrangements or non-Rule 10b5-1 trading arrangements (in each case, as defined in Item 408(a) of Regulation S- K).

85

 

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

 

 

 

 

 

 

 

  3.4

 

Articles Supplementary classifying and designating the 8.00% Series B Fixed-to-Floating Rate Cumulative Redeemable Preferred Shares of Beneficial Interest.

 

8-A

 

June 30, 2017

 

 

 

 

 

 

 

 3.5

 

Articles Supplementary classifying and designating the 6.75% Series C Cumulative Redeemable Preferred Shares of Beneficial Interest.

 

8-A

 

August 20, 2021

 

 

 

 

 

 

 

 4.1

 

Indenture, dated as of September 21, 2023, among PennyMac Mortgage Investment Trust, as issuer, PennyMac Corp., as guarantor, and The Bank of New York Mellon Trust Company, N.A., as trustee.

 

8-K

 

September 21, 2023

 

 

 

 

 

 

 

 4.2

 

First Supplemental Indenture, dated as of September 21, 2023, among PennyMac Mortgage Investment Trust, as issuer, PennyMac Corp., as guarantor, and The Bank of New York Mellon Trust Company, N.A., as trustee.

 

8-K

 

September 21, 2023

 

 

 

 

 

 

 

 4.3

 

Form of 8.50% Senior Notes due 2028 (included in Exhibit 4.2 hereto).

 

8-K

 

September 21, 2023

 

 

 

 

 

 

 

10.1

 

Indenture by and among PMT ISSUER TRUST - FHLMC SAF, PennyMac Corp., Citibank, N.A., Barclays Bank PLC, dated August 10, 2023.

 

8-K

 

August 16, 2023

 

 

 

 

 

 

 

10.2^

 

Series 2023-VF1 Indenture Supplement by and among PMT ISSUER TRUST - FHLMC SAF, PennyMac Corp., Citibank, N.A., Barclays Bank PLC, dated August 10, 2023.

 

8-K

 

August 16, 2023

 

 

 

 

 

 

 

10.3

 

Receivables Sale Agreement by and between PennyMac Corp. and PMT SAF Funding, LLC, dated August 10, 2023

 

8-K

 

August 16, 2023

 

 

 

 

 

 

 

10.4

 

Receivables Pooling Agreement by and between PMT SAF Funding, LLC and PMT ISSUER TRUST - FHLMC SAF, dated August 10, 2023.

 

8-K

 

August 16, 2023

 

 

 

 

 

 

 

10.5^

 

Variable Funding Note Purchase Agreement by and among PMT ISSUER TRUST – FHLMC SAF, Sheffield Receivables Company LLC, Barclays Bank PLC, Citibank, N.A., PennyMac Corp., and PMT SAF Funding, LLC, dated August 10, 2023.

 

8-K

 

August 16, 2023

 

 

 

 

 

 

 

10.6^

 

Amendment No. 1 and Joinder, dated August 16, 2023, to the Series 2023-FTL1 Indenture Supplement and Loan Agreement, dated as of May 25, 2023, by and among PMT ISSUER TRUST - FMSR, Citibank, N.A., PennyMac Corp., Atlas Securitized Products, L.P., and the syndicated lenders party thereto.

 

8-K

 

August 17, 2023

 

 

 

 

 

 

 

10.7

 

Amendment No. 7 to the Base Indenture, dated as of August 16, 2023, by and among PMT ISSUER TRUST – FMSR, Citibank, N.A., PennyMac Corp. and Atlas Securitized Products, L.P.

 

8-K

 

August 17, 2023

 

 

 

 

 

 

 

10.8

 

Underwriting Agreement, dated September 18, 2023, among the Company and the Guarantor, on the one hand, and Piper Sandler & Co., as representative of the several Underwriters named therein, on the other hand

 

8-K

 

September 21, 2023

 

 

 

 

 

 

 

10.9

 

Amended and Restated Master Repurchase Agreement, dated as of October 10, 2023, by and among PMT ISSUER TRUST - FMSR, PMT CO-ISSUER TRUST I – FMSR, PennyMac Corp., PennyMac Holdings, LLC, PennyMac Mortgage Investment Trust, Atlas Securitized Products, L.P., and Citibank, N.A.

 

*

 

 

 

 

 

 

 

 

 

86

 

10.10

 

Amended and Restated Guaranty, dated as of October 10, 2023, by PennyMac Mortgage Investment Trust, in favor of PMT ISSUER TRUST - FMSR and PMT CO-ISSUER TRUST I – FMSR.

 

*

 

 

 

 

 

 

 

 

 

10.11

 

Second Amended and Restated Master Repurchase Agreement, dated as of October 10, 2023, by and among Atlas Securitized Products, L.P., PennyMac Corp., and PennyMac Holdings, LLC.

 

*

 

 

 

 

 

 

 

 

 

10.12

 

Second Amended and Restated Guaranty, dated as of October 10, 2023, by PennyMac Mortgage Investment Trust, in favor of Nexera Holding LLC and Citibank, N.A.

 

*

 

 

 

 

 

 

 

 

 

10.13^

 

Amended and Restated Base Indenture, as dated October 10, 2023, by and among PMT ISSUER TRUST - FMSR, PMT CO-ISSUER TRUST I – FMSR, Citibank, N.A, PennyMac Corp., PennyMac Holdings, LLC, and Atlas Securitized Products, L.P.

 

*

 

 

 

 

 

 

 

 

 

10.14^

 

Amended and Restated Series 2017-VF1 Indenture Supplement, dated as of October 10, 2023, by and among PMT ISSUER TRUST – FMSR, PMT CO-ISSUER TRUST I – FMSR, Citibank, N.A., PennyMac Corp., PennyMac Holdings, LLC, Atlas Securitized Products, L.P.,

 

*

 

 

 

 

 

 

 

 

 

10.15^

 

Amended and Restated Series 2021-FT1 Indenture Supplement, dated as of October 10, 2023, by and among PMT ISSUER TRUST – FMSR, PMT CO-ISSUER TRUST I – FMSR, Citibank, N.A., PennyMac Corp., PennyMac Holdings, LLC, Atlas Securitized Products, L.P.,

 

*

 

 

 

 

 

 

 

 

 

10.16^

 

Amended and Restated Series 2022-FT1 Indenture Supplement, dated as of October 10, 2023, by and among PMT ISSUER TRUST – FMSR, PMT CO-ISSUER TRUST I – FMSR, Citibank, N.A., PennyMac Corp., PennyMac Holdings, LLC, Atlas Securitized Products, L.P.,

 

*

 

 

 

 

 

 

 

 

 

10.17

 

Amendment No. 2 to Series 2023-FTL1 Indenture Supplement and Loan Agreement, dated as of October 10, 2023, by and among PMT ISSUER TRUST - FMSR, PMT CO-ISSUER TRUST I – FMSR, Citibank, N.A., PennyMac Corp., PennyMac Holdings, LLC and Atlas Securitized Products, L.P.

 

*

 

 

 

 

 

 

 

 

 

22

 

List of Guarantor Subsidiaries

 

*

 

 

 

 

 

 

 

 

 

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.

 

**

 

 

 

 

 

 

 

 

 

101

 

Interactive data files pursuant to Rule 405 of Regulation S-T: (i) the Consolidated Balance Sheets as of September 30, 2023 and December 31, 2022 (ii) the Consolidated Statements of Operation for the quarter and six months ended September 30, 2023 and September 30, 2022, (iii) the Consolidated Statements of Changes in Stockholders’ Equity for the quarter and six months ended September 30, 2023 and September 30, 2022, (iv) the Consolidated Statements of Cash Flows for the six months ended September 30, 2023 and September 30, 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.

 

 

 

 

87

 

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.

** 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.

^ Portions of the exhibit have been redacted.

 

 

88

 

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: November 1, 2023

 

By:

 

/s/ David A. Spector

 

 

 

 

David A. Spector

 

 

 

 

Chairman and Chief Executive Officer

(Principal Executive Officer)

 

 

 

 

 

Dated: November 1, 2023

 

By:

 

/s/ Daniel S. Perotti

 

 

 

 

Daniel S. Perotti

 

 

 

 

Senior Managing Director and Chief Financial Officer

(Principal Financial Officer)

 

89

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