UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
Form 10-Q
(Mark One)
☒
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2024
Or
☐
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number: 001-34416
PennyMac Mortgage Investment Trust
(Exact name of registrant as specified in its charter)
Maryland
27-0186273
(State or other jurisdiction of
incorporation or organization)
(IRS Employer
Identification No.)
3043 Townsgate Road, Westlake Village, California
91361
(Address of principal executive offices)
(Zip Code)
(818) 224-7442
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class
Trading Symbol (s)
Name of Each Exchange on Which Registered
Common Shares of Beneficial Interest, $0.01 Par Value
PMT
New York Stock Exchange
8.125% Series A Cumulative Redeemable PreferredShares of Beneficial Interest, $0.01 Par Value
PMT/PRA
8.00% Series B Cumulative Redeemable PreferredShares of Beneficial Interest, $0.01 Par Value
6.75% Series C Cumulative Redeemable PreferredShares of Beneficial Interest, $0.01 Par Value
PMT/PRB
PMT/PRC
8.50% Senior Note Due 2028
PMTU
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 April 30, 2024
Common Shares of Beneficial Interest, $0.01 par value
86,845,447
PENNYMAC MORTGAGE INVESTMENT TRUST
FORM 10-Q
March 31, 2024
TABLE OF CONTENTS
Page
Special Note Regarding Forward-Looking Statements
1
PART I. FINANCIAL INFORMATION
4
Item 1.
Financial Statements (Unaudited)
Consolidated Balance Sheets
Consolidated Statements of Income
6
Consolidated Statements of Changes in Shareholders’ Equity
7
Consolidated Statements of Cash Flows
8
Notes to Consolidated Financial Statements
10
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
53
Our Company
Results of Operations
56
Net Investment Income
57
Expenses
65
Balance Sheet Analysis
68
Asset Acquisitions
Investment Portfolio Composition
69
Cash Flows
72
Liquidity and Capital Resources
Off-Balance Sheet Arrangements and Aggregate Contractual Obligations
76
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
77
Item 4.
Controls and Procedures
78
PART II. OTHER INFORMATION
79
Legal Proceedings
Item 1A
Risk Factors
Unregistered Sales of Equity Securities and Use of Proceeds
Defaults Upon Senior Securities
Mine Safety Disclosures
Item 5.
Other Information
Item 6.
Exhibits
80
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, future plans and strategies, contain financial and operating projections or state other forward-looking information. Examples of forward-looking statements include the following:
Our ability to predict results or the actual effect of future events, actions, plans or strategies is inherently uncertain. Although we believe that the expectations reflected in such forward-looking statements are based on reasonable assumptions, our actual results and performance could differ materially from those set forth in the forward-looking statements. There are a number of factors, many of which are beyond our control that could cause actual results to differ significantly from management’s expectations. Some of these factors are discussed below.
You should not place undue reliance on any forward-looking statement and should consider the following uncertainties and risks, as well as the risks and uncertainties discussed elsewhere in this Report and the section entitled “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2023, filed with the Securities and Exchange Commission (“SEC”) on February 22, 2024.
Factors that could cause actual results to differ materially from historical results or those anticipated include, but are not limited to:
2
Other factors that could also cause results to differ from our expectations may not be described in this Report or any other document. Each of these factors could by itself, or together with one or more other factors, adversely affect our business, income and/or financial condition.
Forward-looking statements speak only as of the date they are made, and we undertake no obligation to update any forward-looking statement to reflect the impact of circumstances or events that arise after the date the forward-looking statement was made.
3
Item 1. Financial Statements
PENNYMAC MORTGAGE INVESTMENT TRUST AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
March 31,
December 31,
2024
2023
(in thousands, except share information)
ASSETS
Cash
$
126,578
281,085
Short-term investments at fair value
343,343
128,338
Mortgage-backed securities at fair value pledged to creditors
3,949,678
4,836,292
Loans acquired for sale at fair value ($903,963 and $659,751 pledged to creditors, respectively)
911,602
669,018
Loans at fair value ($1,406,774 and $1,431,896 pledged to creditors, respectively)
1,408,610
1,433,820
Derivative assets ($22,899 and $16,160 pledged to creditors, respectively)
62,734
177,984
Deposits securing credit risk transfer arrangements pledged to creditors
1,187,100
1,209,498
Mortgage servicing rights at fair value ($3,901,513 and $3,871,249 pledged to creditors, respectively)
3,951,737
3,919,107
Servicing advances ($105,287 and $181,201 pledged to creditors, respectively)
125,971
206,151
Due from PennyMac Financial Services, Inc.
Other ($1,891 and $1,905 pledged to creditors, respectively)
226,346
252,538
Total assets
12,293,700
13,113,887
LIABILITIES
Assets sold under agreements to repurchase
5,118,377
5,624,558
Mortgage loan participation purchase and sale agreements
25,216
—
Notes payable secured by credit risk transfer and mortgage servicing assets
2,880,025
2,910,605
Unsecured senior notes
601,373
600,458
Asset-backed financing of variable interest entities at fair value
1,308,680
1,336,731
Interest-only security payable at fair value
32,227
32,667
Derivative and credit risk transfer strip liabilities at fair value
18,750
51,381
Accounts payable and accrued liabilities
125,055
354,989
Due to PennyMac Financial Services, Inc.
30,835
29,262
Income taxes payable
174,730
190,003
Liability for losses under representations and warranties
19,519
26,143
Total liabilities
10,334,787
11,156,797
Commitments and contingencies ─ Note 17
SHAREHOLDERS’ EQUITY
Preferred shares of beneficial interest, $0.01 par value per share, authorized 100,000,000 shares, issued and outstanding 22,400,000, liquidation preference $560,000,000
541,482
Common shares of beneficial interest—authorized, 500,000,000 common shares of $0.01 par value; issued and outstanding, 86,845,447 and 86,624,044 common shares, respectively
868
866
Additional paid-in capital
1,922,954
1,923,437
Accumulated deficit
(506,391
)
(508,695
Total shareholders’ equity
1,958,913
1,957,090
Total liabilities and shareholders’ equity
The accompanying notes are an integral part of these consolidated financial statements.
Assets and liabilities of consolidated variable interest entities (“VIEs”) included in total assets and liabilities (the assets of each VIE can only be used to settle liabilities of that VIE) are summarized below:
(in thousands)
Loans at fair value
1,406,576
1,431,689
Derivative assets
22,899
16,160
Deposits securing credit risk transfer arrangements
Other—interest receivable
4,047
4,106
2,620,622
2,661,453
Asset-backed financings at fair value
17,352
46,692
Accounts payable and accrued liabilities—interest payable
1,362,306
1,420,196
5
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
Quarter ended March 31,
(in thousands, except per common share amounts)
Net investment income
Net loan servicing fees:
From nonaffiliates
Contractually specified
160,357
164,214
Other
3,011
3,943
163,368
168,157
Change in fair value of mortgage servicing rights
(28,202
(137,444
Mortgage servicing rights hedging results
(89,814
(54,891
45,352
(24,178
From PennyMac Financial Services, Inc.
353
485
45,705
(23,693
Net gains on investments and financings
39,753
125,804
Net gains on loans acquired for sale:
12,913
5,145
1,605
1,328
14,518
6,473
Loan origination fees
2,008
7,706
Net interest expense:
Interest income
143,559
153,019
Interest expense
171,527
179,137
Net interest expense
(27,968
(26,118
Results of real estate acquired in settlement of loans
134
55
138
74,205
90,366
Earned by PennyMac Financial Services, Inc.:
Loan servicing fees
20,262
20,449
Management fees
7,188
7,257
Loan fulfillment fees
4,016
11,923
Compensation
1,916
1,539
Professional services
1,758
1,523
Loan collection and liquidation
1,369
579
Safekeeping
932
1,116
Loan origination
473
2,178
3,910
5,001
Total expenses
41,824
51,565
Income before benefit from income taxes
32,381
38,801
Benefit from income taxes
(15,227
(21,896
Net income
47,608
60,697
Dividends on preferred shares
10,455
Net income attributable to common shareholders
37,153
50,242
Earnings per common share
Basic
0.43
0.56
Diluted
0.39
0.50
Weighted average common shares outstanding
86,689
88,831
111,017
113,388
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY (UNAUDITED)
Quarter ended March 31, 2024
Preferred shares
Common shares
Number
Additional
of
Par
paid-in
Accumulated
shares
Amount
value
capital
deficit
Total
(in thousands, except per share amounts)
Balance at December 31, 2023
22,400
86,624
Share-based compensation
221
(483
(481
Dividends:
(10,455
Common shares ($0.40 per share)
(34,849
Balance at March 31, 2024
86,845
Quarter ended March 31, 2023
Balance at December 31, 2022
88,889
889
1,947,266
(526,822
1,962,815
135
589
590
(35,349
Repurchase of common shares
(638
(6
(7,558
(7,564
Balance at March 31, 2023
88,386
884
1,940,297
(511,929
1,970,734
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Cash flows from operating activities
Adjustments to reconcile net income to net cash used in operating activities:
28,202
137,444
89,814
54,891
(39,753
(125,804
Net gains on loans acquired for sale
(14,518
(6,473
Accrual of unearned discounts and amortization of purchase premiums on mortgage-backed securities, loans at fair value, and asset-backed financings
(464
1,289
Amortization of debt issuance costs
4,184
3,762
(134
(56
Share-based compensation expense
1,365
1,156
Purchase of loans acquired for sale at fair value from nonaffiliates
(18,410,727
(20,417,078
Sale to nonaffiliates and repayment of loans acquired for sale
1,928,336
5,587,266
Sale of loans acquired for sale to PennyMac Financial Services, Inc.
16,302,059
13,451,031
Repurchase of loans subject to representations and warranties
(7,514
(19,199
Decrease in servicing advances
80,123
58,919
Decrease in due from PennyMac Financial Services, Inc.
3,560
Repurchase of real estate previously sold as loans acquired for sale
(442
Increase in other assets
(104,330
(36,963
Decrease in accounts payable and accrued liabilities
(232,977
(7,110
Increase (decrease) in due to PennyMac Financial Services, Inc.
1,573
(1,206
Decrease in income taxes payable
(15,273
Net cash used in operating activities
(342,371
(1,276,212
Cash flows from investing activities
Net increase in short-term investments
(215,005
(39,882
Purchase of mortgage-backed securities at fair value
(159,585
(2,772,168
Sale and repayment of mortgage-backed securities at fair value
1,011,092
2,694,450
Repurchase of loans at fair value
(119
Repayment of loans at fair value
21,797
22,182
Net settlement of derivative financial instruments
(2,884
(3,352
Distribution from credit risk transfer arrangements
37,491
42,709
Purchase of mortgage servicing rights at fair value
(26,497
Transfer of mortgage servicing rights relating to delinquent loans to Agency
(142
835
Sale of real estate acquired in settlement of loans
52
760
Decrease (increase) in margin deposits
104,477
(68,158
Net cash provided by (used in) investing activities
770,796
(122,743
Statements continued on the next page
(Continued)
Cash flows from financing activities
Sale of assets under agreements to repurchase
23,278,163
33,465,001
Repurchase of assets sold under agreements to repurchase
(23,783,768
(31,968,132
Issuance of mortgage loan participation purchase and sale agreements
335,689
416,243
Repayment of mortgage loan participation purchase and sale agreements
(310,473
(416,243
Issuance of notes payable secured by credit risk transfer and mortgage servicing assets
306,000
10,000
Repayment of notes payable secured by credit risk transfer and mortgage servicing assets
(335,237
(24,578
Repayment of asset-backed financings at fair value
(21,067
(21,493
Payment of debt issuance costs
(5,188
(794
Payment of dividends to preferred shareholders
Payment of dividends to common shareholders
(34,750
(35,658
Payment of vested share-based compensation tax withholdings
(1,846
(567
Repurchase of common shares of beneficial interest
(7,563
Net cash (used in) provided by financing activities
(582,932
1,405,761
Net (decrease) increase in cash
(154,507
6,806
Cash at beginning of quarter
111,866
Cash at end of quarter
118,672
Supplemental cash flow information
Payments, net:
Income taxes
46
Interest
187,619
189,351
Non cash investing activities:
Receipt of mortgage servicing rights as proceeds from sales of loans
31,249
100,618
Unsettled purchase of mortgage servicing rights
2,944
Unsettled securities trades
12,424
Transfer of loans and advances to real estate acquired in settlement of loans
797
Non-cash financing activities:
Dividends declared, not paid
34,849
35,349
9
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Note 1—Organization
PennyMac Mortgage Investment Trust (“PMT” or the “Company”) is a specialty finance company, which, through its subsidiaries (all of which are wholly-owned), invests in residential mortgage-related assets. The Company operates in four segments: credit sensitive strategies, interest rate sensitive strategies, correspondent production, and corporate:
The Company primarily sells the loans it acquires through its correspondent production activities to government-sponsored entities ("GSEs") such as the Federal National Mortgage Association (“Fannie Mae”) and the Federal Home Loan Mortgage Corporation (“Freddie Mac”) or to PLS for sale into securitizations guaranteed by the Government National Mortgage Association ("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 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 (the “Internal Revenue Code”). 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 and Recently Issued Accounting Pronouncements
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 ("FASB") 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, 2023.
These unaudited consolidated financial statements reflect all normal recurring adjustments necessary to present fairly the financial position, income, and cash flows for the interim periods presented, but are not necessarily indicative of the income 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.
Recently Issued Accounting Pronouncements
During 2023, the FASB issued two Accounting Standards Updates (“ASUs”) aimed at increasing the amount of detail provided to financial statement users in certain existing disclosures. Neither ASU requires changes to the Company’s accounting. The ASUs are discussed below:
Segment Disclosures
The FASB issued ASU 2023-07, Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures (“ASU 2023-07”), that is intended to improve disclosures about a public entity’s reportable segments and addresses requests from investors and other allocators of capital for more detailed information about a reportable segment’s expenses.
The amendments in ASU 2023-07 are intended to improve reportable segment disclosure requirements primarily through enhanced disclosures about significant segment expenses. The key amendments will require that the Company supplement its existing disclosures to include disclosure of:
The Company will be required to apply ASU 2023-07 in annual periods beginning with its fiscal year ending December 31, 2024 and for quarterly periods ended thereafter with early adoption permitted.
Income Tax Disclosures
The FASB issued ASU 2023-09, Income Taxes (Topic 740): Improvements to Income Tax Disclosures (“ASU 2023-09”), that is intended to enhance the transparency and decision usefulness of income tax disclosures. ASU 2023-09 requires disclosures of:
The disclosures required by ASU 2023-09 are required in the Company’s annual financial statements beginning with the year ended December 31, 2025, with early adoption permitted.
Note 3—Concentration of Risks
As discussed in Note 1 – Organization above, PMT’s operations and investing activities are centered in residential mortgage-related assets, including CRT arrangements, subordinate MBS, Agency and senior Non-Agency MBS and MSRs. CRT arrangements and subordinate MBS are more sensitive to borrower credit performance than other mortgage-related investments such as traditional loans. Agency MBS. Interest-only (“IO”) stripped MBS, principal-only stripped MBS 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 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 through the acquisition of beneficial interests in the trust entities.
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.
11
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 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 sizes of the delinquent loans 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:
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 and 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 REO.
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 based on the delinquency, bankruptcy and foreclosure status of the loan or $75 per month if the underlying mortgaged property becomes real estate acquired in settlement of loans (“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.
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
MSR Recapture Agreement
The Company has an MSR recapture agreement with PLS. Pursuant to the terms of the MSR recapture agreement, if PLS refinances (recaptures) mortgage loans for which the Company previously held the MSRs, PLS is generally required to transfer and convey to the Company cash in an amount equal to:
The “recapture rate” means, during each month, the ratio of (i) the aggregate unpaid principal balance ("UPB") of all recaptured loans, to (ii) the aggregate UPB of all mortgage loans for which the Company held the MSRs and that were refinanced or otherwise paid off in such month. PFSI has further agreed to allocate sufficient resources to target a recapture rate of at least 15%.
The MSR recapture agreement expires, unless terminated earlier in accordance with its terms, on June 30, 2025, subject to automatic renewal for additional 18-month periods, unless terminated in accordance with its terms.
Following is a summary of loan servicing fees earned by PLS:
Loan servicing fees:
Loans acquired for sale at fair value
90
285
62
120
Mortgage servicing rights
20,110
20,044
Average investment in loans:
Acquired for sale at fair value
704,809
2,359,044
At fair value
1,425,584
1,510,606
Average MSR portfolio unpaid principal balance
230,591,966
230,812,774
Correspondent Production Activities
The Company is provided fulfillment and other services by PLS under an amended and restated mortgage banking services agreement. The Company does not hold the Ginnie Mae approval required to issue securities guaranteed by Ginnie Mae MBS and act as a servicer. Accordingly, under the agreement, PLS currently purchases loans saleable in accordance with the Ginnie Mae MBS Guide “as is” and without recourse of any kind from the Company at cost less any administrative fees paid by the correspondent to the Company plus accrued interest and a sourcing fee. 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:
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.
13
The Company may purchase newly originated conforming balance non-government insured or guaranteed loans from PLS under a mortgage loan purchase and sale agreement.
Following is a summary of correspondent production activity between the Company and PLS:
Loan fulfillment fees earned by PLS
UPB of loans fulfilled by PLS
1,771,681
6,628,810
Sourcing fees received from PLS included in Net gains on loans acquired for sale
UPB of loans sold to PLS:
Government guaranteed or insured
7,856,925
9,213,712
Conventional conforming
8,189,930
4,062,874
16,046,855
13,276,586
Tax service fees paid to PLS
359
1,410
December 31, 2023
Loans included in Loans acquired for sale at fair value pending sale to PLS
480,421
168,303
Management Fees
The Company has a management agreement with PCM pursuant to which PMT pays PCM management fees as follows:
The performance incentive fee is equal to the sum of:
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.
14
“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:
Base management
Performance incentive
Average shareholders' equity amounts used to calculate base management fee expense
1,927,401
1,962,105
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.
Following is a summary of the Company’s reimbursements to PCM and its affiliates for expenses:
Reimbursement of:
Expenses incurred on the Company’s behalf, net
6,414
5,661
Common overhead incurred by PCM and its affiliates
1,944
1,821
165
8,523
7,647
Payments and settlements during the quarter (1)
30,085
32,384
Financing Activities
PFSI held 75,000 of the Company’s Common Shares at both March 31, 2024 and December 31, 2023.
15
Amounts Receivable from and Payable to PFSI
Amounts receivable from and payable to PFSI are summarized below:
Due from PFSI-Miscellaneous receivables
Due to PFSI:
Correspondent production fees
7,368
8,288
7,252
6,730
6,809
Allocated expenses and expenses and costs paid by PFSI on PMT’s behalf
8,194
5,612
Fulfillment fees
1,355
1,301
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 of the Company's balance sheet items as summarized below:
Balance sheet line including advance amount
Loan servicing advances
Real estate acquired in settlement of loans
2,021
2,003
127,992
208,154
Note 5—Loan Sales
The following table summarizes cash flows between the Company and transferees in transfers of loans that are accounted for as sales where the Company maintains continuing involvement with the loans:
Cash flows:
Proceeds from sales
Loan servicing fees received
The following table summarizes for the dates presented collection status information for loans that are accounted for as sales where the Company maintains continuing involvement:
UPB of loans outstanding
226,806,609
228,838,471
Collection status (UPB)
Delinquency:
30-89 days delinquent
1,962,219
2,184,500
90 or more days delinquent:
Not in foreclosure
868,093
1,029,962
In foreclosure
108,958
85,045
Bankruptcy
212,975
185,320
Custodial funds managed by the Company (1)
2,468,707
1,759,974
Note 6—Variable Interest Entities
The Company is a variable interest holder in various VIEs that relate to its investing and financing activities as discussed below.
16
Credit Risk Transfer Arrangements
The Company has previously entered into certain loan sales arrangements pursuant to which it accepted credit risk relating to the loans sold in exchange for a portion of the interest earned on such loans. These arrangements absorb scheduled or realized credit losses on such loans and include CRT Agreements, and other CRT securities.
The Company, through its subsidiary, PennyMac Corp. (“PMC”), entered into CRT arrangements with Fannie Mae, pursuant to which the Company sold pools of loans into Fannie Mae-guaranteed securitizations while retaining recourse obligations as part of the retention of IO ownership interests in such loans and include:
The Company placed Deposits securing CRT arrangements into 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 decreased through repayments, the percentage exposure of each CRT arrangement increased to maximums ranging from 4.5% to 5.0% of outstanding UPB, although the total dollar amount of exposure to losses did 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’ income. For CRT Agreements, the Company recognizes its IO ownership interests and recourse obligations on the consolidated balance sheets as CRT Derivatives in Derivative assets and Derivative and credit risk transfer strip liabilities. For other CRT securities, the Company recognizes its IO ownership interests and recourse obligations as CRT strips which are also included on the consolidated balance sheet in Derivative and credit risk transfer strip liabilities. Gains and losses on the derivatives and strips (including the IO ownership interest sold to nonaffiliates) included in the CRT arrangements are included in Net gains on investments and financings in the consolidated statements of income.
Following is a summary of the CRT arrangements:
Net investment income:
Net gains on investments and financings:
CRT Derivatives and strips:
CRT derivatives
Realized
3,409
3,030
Valuation changes
6,781
8,096
10,190
11,126
CRT strips
11,685
12,304
29,340
24,128
41,025
36,432
440
(1,280
51,655
46,278
Interest income — Deposits securing CRT arrangements
15,696
14,212
67,351
60,490
Net payments made to settle losses on CRT arrangements
185
1,257
17
Carrying value of CRT arrangements:
Derivative assets - CRT derivatives
CRT strip liabilities
(17,352
(46,692
Deposits securing CRT arrangements
(32,227
(32,667
1,160,420
1,146,299
CRT arrangement assets pledged to secure borrowings:
Deposits securing CRT arrangements (1)
UPB of loans underlying CRT arrangements
22,725,768
23,152,230
Collection status (UPB):
Delinquency
Current
22,187,344
22,531,905
363,398
411,991
90-180 days delinquent
98,415
120,011
180 or more days delinquent
48,346
64,647
Foreclosure
28,265
23,676
58,352
58,696
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.
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 the senior securities are repaid, substantially all cash inflows will be directed to the subordinate securities, including those held by the Company, until they are fully repaid.
The Company’s retention or purchase of subordinate MBS exposes PMT to the credit risk in the underlying loans because the Company’s 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.
The Company has concluded that the trusts holding the assets underlying certain of these transactions are VIEs. The Company has 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 loans, to direct the activities of the trusts that most significantly impact the trusts’ economic performance and, as a holder of subordinate securities, that PMT is exposed to losses that could potentially be significant to the VIEs. Therefore, PMT consolidates those VIEs.
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 income.
Following is a summary of the Company’s investment in subordinate MBS backed by assets held in consolidated VIEs:
Fair value changes:
(1,240
11,017
7,476
(10,160
12,108
15,166
12,678
12,353
5,666
3,670
18
Retained subordinate MBS at fair value pledged to secure Assets sold under agreements to repurchase
88,412
85,344
Financing of Mortgage Servicing Assets
The Company entered into a securitization transaction in which VIEs issued variable funding notes backed by beneficial interests in Fannie Mae MSRs. The Company acts as guarantor of the variable funding notes. The Company determined that it is the primary beneficiary of the VIEs because, as the holder of the variable funding notes and issuer of performance guarantees, it holds the variable interests in the VIEs. Therefore, the Company consolidates the VIEs.
For financial reporting purposes, the MSRs financed by the consolidated VIEs are included in Mortgage servicing rights at fair value and the variable funding notes are included in Assets sold under agreements to repurchase and Notes payable secured by credit risk transfer and mortgage servicing assets on the Company’s consolidated balance sheets. The financing is detailed in Note 15 – Long Term Debt.
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:
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 has also identified its Asset-backed financings at fair value and Interest-only security payable at fair value 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 facility, thereby matching the debt issuance cost to the periods benefiting from the availability of the debt.
19
Financial Statement Items Measured at Fair Value on a Recurring Basis
Following is a summary of financial statement items that are measured at fair value on a recurring basis:
Level 1
Level 2
Level 3
Assets:
Short-term investments
Mortgage-backed securities at fair value
3,855,011
94,667
906,506
5,096
2,034
Derivative assets:
Call options on interest rate futures purchase contracts
559
Put options on interest rate futures purchase contracts
13,754
Forward purchase contracts
5,833
Forward sale contracts
1,782
MBS put options
93
Interest rate lock commitments
5,154
Total derivative assets before netting
14,313
7,708
28,053
50,074
Netting
12,660
Total derivative assets after netting
Mortgage servicing rights at fair value
357,656
6,175,801
4,081,587
10,627,704
Liabilities:
Derivative and credit risk transfer strip liabilities:
Put options on interest rate futures sell contracts
156
1,125
Forward sales contracts
6,174
309
Total derivative liabilities before netting
7,299
7,764
(6,366
Total derivative liabilities after netting
1,398
Credit risk transfer strips
Total derivative and credit risk transfer strip liabilities
17,661
1,315,979
49,888
1,359,657
20
4,742,061
94,231
662,700
6,318
2,131
41,712
4,324
15,905
671
MBS call options
3,218
7,596
46,036
19,799
23,756
89,591
88,393
174,374
6,856,249
4,045,543
11,164,559
Derivative liabilities and credit risk transfer strips:
2,005
Call options on interest rate futures sell contracts
490
50,363
64
3,333
50,853
54,250
(49,561
4,689
46,756
1,387,584
79,423
1,420,779
21
The following is a summary of changes in items measured at fair value on a recurring basis using Level 3 inputs that are significant to the estimation of the fair values of the assets and liabilities at either the beginning or end of the quarters presented:
Assets (1)
Interest-only stripped mortgage-backed securities
Loans acquiredfor sale
Loans at fairvalue
Interest ratelockcommitments
CRTstrips
Balance, December 31, 2023
7,532
3,998,787
Purchases and issuances
1,484
3,111
29,441
34,036
Repayments and sales
(5,070
(2,658
(59
(3,451
(11,685
(22,923
Accrual of unearned discounts
2,216
Amounts received pursuant to sales of loans
Changes in fair value included in results of operations arising from:
Changes in instrument - specific credit risk
Other factors
3,290
(48
(38
(855
25,362
Transfers of:
Interest rate lock commitments to loans acquired for sale (2)
(4,943
Mortgage servicing rights relating to delinquent loans to Agency
142
Balance, March 31, 2024
4,845
4,063,926
Changes in fair value recognized during the quarter relating to assets still held at March 31, 2024
(55
(41
15,958
Liabilities
Interest-only security payable:
Changes in fair value included in income arising from:
(440
Changes in fair value recognized during the quarter relating to liability outstanding at March 31, 2024
22
Loans atfairvalue
CRTderivatives
Interestrate lockcommitments
Mortgageservicingrights
Balance, December 31, 2022
10,708
3,457
(22,098
(478
(137,193
4,012,737
3,867,133
3,495
119
(7,687
(4,073
(3,767
(20
(2,888
(12,304
(18,979
(327
452
27,032
(62,729
Loans to REO
(460
(10,318
(835
Balance, March 31, 2023
10,109
3,548
(13,860
8,549
(113,065
3,975,076
3,870,357
Changes in fair value recognized during the quarter relating to assets still held at March 31, 2023
161
(8
(96,518
21,925
Changes in instrument-specific credit risk
1,280
23,205
Changes in fair value recognized during the year relating to liability outstanding at March 31, 2023
23
Financial Statement Items Measured at Fair Value under the Fair Value Option
Following are the fair values and related principal amounts due upon maturity of loans accounted for under the fair value option (including loans acquired for sale, loans held in consolidated VIEs, and distressed loans):
Fair value
Principalamount dueupon maturity
Difference
Loans acquired for sale at fair value:
Current through 89 days delinquent
909,934
894,884
15,050
667,857
648,283
19,574
1,376
1,699
(323
433
617
(184
292
397
(105
728
845
(117
1,668
2,096
(428
1,161
1,462
(301
896,980
14,622
649,745
19,273
Loans at fair value:
Held in consolidated VIEs:
1,404,532
1,671,969
(267,437
1,430,427
1,697,305
(266,878
2,044
2,595
(551
1,262
1,582
(320
1,674,564
(267,988
1,698,887
(267,198
Distressed:
505
703
(198
569
(159
411
1,786
(1,375
393
2,023
(1,630
1,118
2,546
(1,428
1,169
(1,377
1,529
4,332
(2,803
1,562
4,569
(3,007
5,035
(3,001
5,297
(3,166
1,679,599
(270,989
1,704,184
(270,364
Following are the changes in fair value included in current period income by consolidated statement of income line item for financial statement items accounted for under the fair value option:
Net loanservicing fees
Net interestexpense
(38,198
3,091
(35,107
(337
(1,278
(2,135
(3,413
MSRs at fair value
1,549
956
(26,034
492
7,968
7,916
8,408
24
78,218
(1,956
76,262
15,315
11,468
126
11,594
126,118
(1,830
2,159
(542
(10,702
(11,440
(11,982
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 quarter based on fair value on a nonrecurring basis:
675
753
The following table summarizes the fair value changes recognized during the quarters on assets held at quarter end that were remeasured at fair value on a nonrecurring basis:
82
73
The Company remeasures its REO based on fair value when it evaluates the REO properties 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 income.
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, as defined in Note 15 – Long Term Debt, 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 – Long-Term Debt, 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 the 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 using indications of fair value provided by nonaffiliate brokers for the term notes and internal estimates
25
of fair value for the term loans, and uses pricing services for estimates of fair value of its Unsecured senior notes. The fair value and carrying value of these liabilities are summarized below:
Instrument
Carrying value
2,890,201
2,904,678
589,082
580,090
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 income. 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 PFSI's 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 reports those results to PFSI’s senior management valuation committee. PFSI’s senior management valuation committee includes the Company’s chief financial and investment officers as well as other senior members of PFSI’s finance, risk management and capital markets 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 its 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 an IO security:
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.
26
Following are the key inputs used in determining the fair value of IO securities:
Fair value (in thousands)
Key inputs (1)
Pricing spread (2)
Range
5.1% – 5.1%
Weighted average
5.1%
Annual total prepayment speed (3)
10.1% – 10.2%
10.9% – 11.0%
10.1%
10.9%
Equivalent life (in years)
4.8 – 7.5
4.7 – 7.2
7.5
7.1
Changes in the fair value of MBS are included in Net gains on investments and financings in the consolidated statements of income.
Loans
Fair value of loans is estimated based on whether the loans are saleable into active markets:
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 values of CRT derivatives are 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
27
the CRT derivatives is derived by deducting the balance of the Deposits securing credit risk transfer arrangements pledged to creditors from the fair values 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 gains on investments and financings in the consolidated statements of income.
Following is a quantitative summary of key unobservable inputs used in the Company’s review and approval of broker-provided fair values for CRT derivatives:
(dollars in thousands)
UPB of loans in reference pools
5,322,567
5,437,551
Discount rate
9.7% – 11.8%
9.0% – 9.7%
9.9%
9.6%
Voluntary prepayment speed (2)
7.2% – 7.5%
6.9% – 7.6%
7.3%
7.4%
Involuntary prepayment speed (3)
0.1% – 0.1%
0.2% – 0.8%
0.1%
0.3%
Remaining loss expectation
0.0% – 0.2%
0.2% – 0.3%
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 rates or the MSR components of the IRLCs, in isolation, may result in a significant change in the IRLCs’ fair values. 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 income.
28
Following is a quantitative summary of key unobservable inputs used in the valuation of IRLCs:
Fair value (in thousands) (1)
Committed amount (in thousands)
1,086,938
874,017
Key inputs (2)
Pull-through rate
62.0% - 99.0%
50.0% - 98.0%
83.3%
82.5%
MSR fair value expressed as
Servicing fee multiple
1.9 - 6.9
1.7 - 6.5
5.0
4.6
Percentage of unpaid principal balance
0.5% - 2.5%
0.4% - 2.4%
1.9%
1.7%
Hedging Derivatives
Fair values 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 investments and financings, or Net gains on loans acquired for sale, as applicable, in the consolidated statements of income.
Credit Risk Transfer Strips
The Company categorizes CRT strips as “Level 3” fair value liabilities. The fair values of CRT strips are 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 interests and recourse obligations. 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 indications of fair value of the securities provided by the nonaffiliate brokers.
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 rates, voluntary and involuntary prepayment speeds and the remaining loss expectations of the reference loans. Changes in fair value of CRT strips are included in Net gains on investments and financings in the consolidated statements of income.
29
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:
Unpaid principal balance of loans in the reference pools
17,403,201
17,714,679
8.2% – 9.3%
7.9% – 9.6%
9.2%
9.4%
7.3% – 7.5%
6.6% – 8.2%
6.8%
0.1% – 0.3%
0.2%
0.4% – 1.5%
0.5% – 1.6%
0.6%
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 values of MSRs. The fair values of MSRs are 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.
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 costs 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 income.
MSRs are generally subject to loss in fair value when prepayment speed expectations and experience increase, when returns required by market participants (pricing spreads) increase, or when annual per-loan costs of servicing increase. Reductions in the fair value of MSRs affect income primarily through recognition of the change in fair value.
30
Following are the key inputs used in determining the fair value of MSRs at the time of initial recognition:
MSRs recognized (in thousands)
Unpaid principal balance of underlying loans (in thousands)
1,831,018
5,549,325
Weighted average annual servicing fee rate (in basis points)
36
41
5.5% – 8.5%
5.5% – 8.7%
5.6%
5.8%
Prepayment speed (3)
11.2% – 17.5%
13.1% – 21.8%
13.5%
13.2%
Equivalent average life (in years)
3.6 – 6.5
2.8 – 6.6
6.4
6.5
Annual per-loan cost of servicing
$70 – $70
$69 – $69
$70
$69
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:
230,494,050
230,294,583
Weighted average note interest rate
3.7%
5.5 – 8.5%
5.5%
Effect on fair value (in thousands) of (3):
5% adverse change
$(48,628)
$(48,362)
10% adverse change
$(96,098)
$(95,575)
20% adverse change
$(187,715)
$(186,699)
Prepayment speed (4)
6.7% – 17.8%
6.5% – 17.9%
7.0%
2.6 – 9.2
2.7 – 9.4
8.6
8.5
$(52,875)
$(53,964)
$(104,063)
$(106,144)
$(201,702)
$(205,509)
$70 – $89
$(17,256)
$(17,276)
$(34,512)
$(34,551)
$(69,023)
$(69,103)
31
Real Estate Acquired in Settlement of Loans
REO is measured based on its fair value on a nonrecurring basis and is categorized as a “Level 3” fair value asset. Fair value of REO is established by using a current estimate of fair value from either a broker’s price opinion, a full appraisal, or the price given in a pending contract of sale.
REO fair values are reviewed by PLS staff appraisers when the Company obtains multiple indications of fair value and there is a significant difference between the indications of fair value. PLS staff appraisers will attempt to resolve the difference between the indications of fair value. In circumstances where the staff appraisers are not able to generate adequate data to support a fair value conclusion, the staff appraisers obtain an additional appraisal to determine fair value. Recognized changes in the fair value of REO are included in Results of real estate acquired in settlement of loans in the consolidated statements of income.
Note 8— Mortgage-Backed Securities
Following is a summary of activity in the Company’s holdings of MBS:
Balance at beginning of quarter
4,462,601
Purchases
159,585
2,784,592
Sales
(941,340
(2,629,540
Repayments
(69,752
(64,910
Accrual (amortization) of net purchase premiums and discounts
(1,957
Valuation adjustments, net
76,261
Balance at end of quarter
4,629,004
Fair value of mortgage-backed securities pledged to secure Assets sold under agreements to repurchase
Following is a summary of the Company’s investments in MBS:
Security type (1)
Principalbalance
Unamortizednet purchasepremiums (discounts)
Cumulativevaluationchanges
Agency fixed-rate pass-through securities
3,367,176
(1,683
(30,407
3,335,086
Subordinate credit-linked securities
174,813
(3,686
23,431
194,558
Senior non-Agency securities
121,791
(3,527
(4,339
113,925
Principal-only stripped mortgage-backed securities
263,964
(57,926
5,404
211,442
3,927,744
(66,822
(5,911
32
4,311,342
34
(41,320
4,270,056
275,963
(3,633
28,850
301,180
124,771
(3,567
(3,715
117,489
65,573
(18,567
6,330
53,336
4,777,649
(25,733
(9,855
Note 9—Loans Acquired for Sale at Fair Value
Following is a summary of the distribution of the Company’s loans acquired for sale at fair value:
Loan type
GSE eligible — held for sale to nonaffiliates (1)
422,066
491,108
Held for sale to PLS
Government insured or guaranteed
150,198
106,069
Conventional conforming loans
330,223
62,234
Jumbo
4,019
3,289
Home equity lines of credit
1,736
1,803
Repurchased pursuant to representations and warranties
3,360
4,515
Loans pledged to secure:
877,377
659,751
26,586
903,963
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:
Loans in VIEs:
Agency-conforming loans secured by investment properties
1,359,304
1,383,392
Fixed interest rate jumbo loans
47,272
48,297
Distressed loans
Loans at fair value pledged to secure:
Asset-backed financings at fair value (1)
198
207
1,406,774
1,431,896
33
Note 11—Derivative and Credit Risk Transfer Strip Assets and Liabilities
Derivative and credit risk transfer assets and liabilities are summarized below:
Derivative liabilities
Credit risk transfer strip liabilities
The Company records all derivative and CRT strip assets and liabilities at fair value and records changes in fair value in current period income.
Derivative Activities
The Company holds and issues derivative financial instruments in connection with its operating, investing and financing activities. Derivative financial instruments are created as a result of certain of the Company’s operations and the Company also enters into derivative transactions as part of its interest rate risk management activities.
Derivative financial instruments created as a result of the Company’s operations include:
The Company engages in interest rate risk management activities in an effort to reduce the variability of earnings caused by the effects of changes in interest rates on the fair values of certain of its assets and liabilities. The Company bears price risk related to its mortgage production, servicing assets and MBS financing activities due to changes in market interest rates as discussed below:
To manage the price risk resulting from these interest rate risks, the Company uses derivative financial instruments with the intention of moderating the risk that changes in market interest rates will result in unfavorable changes in the fair values 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.
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:
Notional
Derivative
amount (1)
assets
liabilities
Hedging derivatives subject to master netting arrangements (2):
325,000
2,315,000
4,225,000
2,900,000
500,000
3,260,797
2,789,324
6,782,456
7,219,512
150,000
450,000
Bond futures
1,342,500
2,860,500
Swap futures
951,200
1,048,800
Other derivatives not subject to master netting arrangements:
Total derivative instruments before netting
Margin deposits placed with derivative counterparties included in derivative balances above, net
19,026
137,955
Derivative assets pledged to secure:
(1)Notional amounts provide an indication of the volume of the Company’s derivative activity.
(2) All hedging derivatives are interest rate derivatives that are used as economic hedges.
Netting of Financial Instruments
The Company has elected to net derivative asset and liability positions, and cash collateral placed with or received from its counterparties when such positions are subject to legally enforceable master netting arrangements and the Company intends to set off. The derivative financial instruments that are not subject to master netting arrangements are CRT derivatives and IRLCs. As of March 31, 2024 and December 31, 2023, the Company was not a party to any reverse repurchase agreements or securities lending transactions that are required to be disclosed in the following tables.
35
Derivative Assets, Financial Instruments and Collateral Held by Counterparty
The following table summarizes by significant counterparty the amounts of derivative asset positions after considering master netting arrangements and financial instruments or cash pledged that do not meet the accounting guidance qualifying for setoff accounting.
Net amount
Gross amounts
of assets
not offset in the
presented
consolidated
in the
balance sheet
balance
Financial
collateral
Net
sheet
instruments
received
amount
Counterparty
RJ O’Brien & Associates, LLC
14,156
42,703
Morgan Stanley & Co. LLC
9,837
79,825
Wells Fargo Securities, LLC
7,866
7,759
J.P. Morgan Securities LLC
2,029
997
Athene Annuity & Life Assurance Company
246
94
BNP Paribas
149
Citigroup Global Markets Inc.
503
Goldman Sachs & Co. LLC
18,701
Bank of America, N.A.
3,418
398
228
Derivative Liabilities, Financial Liabilities and Collateral Pledged by Counterparty
The following table summarizes by significant counterparty the amounts 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 amounts recorded on the consolidated balance sheet.
of liabilities
(1)
pledged
1,487,305
(1,487,305
1,521,072
(1,521,072
612,631
(612,631
569,129
(569,129
542,329
(542,209
785,756
(785,756
Atlas Securitized Products, L.P.
526,347
(526,347
783,456
(783,456
Barclays Capital Inc.
480,762
(480,762
807,404
(803,641
3,763
432,805
(432,482
323
147,093
(147,093
Santander US Capital
337,459
(337,459
292,091
(292,091
Daiwa Capital Markets
237,462
(237,462
340,975
(340,975
RBC Capital Markets, L.P.
189,813
(189,813
128,602
(128,602
120,446
(120,137
145,007
(145,007
Mizuho Financial Group
67,051
(66,749
302
67,637
(67,110
527
41,555
(41,555
25,814
(25,814
39,096
(39,096
10,121
(10,121
Nomura Holdings America, Inc
8,196
(8,196
8,135
(7,940
195
140
5,123,601
(5,122,203
5,632,496
(5,627,807
Following are the net gains (losses) recognized by the Company on derivative financial instruments and the consolidated statements of income line items where such gains and losses are included:
Derivative activity
Consolidated statements of income line
Net gains on loans acquired for sale (1)
(2,688
9,027
Hedged item:
20,098
Interest rate lock commitments and loans acquired for sale
2,610
(20,744
Net loan servicing fees
Note 12—Mortgage Servicing Rights
Following is a summary of MSRs:
MSRs resulting from loan sales
Transfers to Agency of mortgage servicing rights relating to delinquent loans
Changes in fair value:
Due to changes in inputs used in valuation model (1)
71,570
(45,771
Other changes in fair value (2)
(99,772
(91,673
Fair value of mortgage servicing rights pledged to secure Assets sold under agreements to repurchase and Notes payable secured by credit risk transfer and mortgage servicing assets
3,901,513
3,871,249
Servicing fees relating to MSRs are recorded in Net loan servicing fees – from nonaffiliates on the Company’s consolidated statements of income and are summarized below:
Contractually specified servicing fees
Ancillary and other fees:
Late charges
993
759
2,018
3,184
Average MSR servicing portfolio
From PFSI—MSR recapture fees
UPB of loans recaptured
62,073
95,191
37
Note 13— Other Assets
Other assets are summarized below:
Margin deposits
135,657
124,293
Interest receivable
36,206
37,305
Servicing fees receivable
11,247
14,603
Correspondent lending receivables
7,369
6,313
Other receivables
10,065
7,199
4,680
4,541
21,122
58,284
Real estate acquired in settlement of loans pledged to secure Assets sold under agreements to repurchase
1,891
1,905
Note 14— Short-Term Debt
The borrowing facilities described throughout these Notes 14 and 15 contain various covenants, including financial covenants governing the Company and its subsidiaries’ net worth, debt-to-equity ratio, and liquidity. Management believes that the Company was in compliance with these covenants as of March 31, 2024.
Assets Sold Under Agreements to Repurchase
Following is a summary of financial information relating to assets sold under agreements to repurchase:
Weighted average interest rate (1)
6.17
%
5.55
Average balance
5,144,834
7,242,478
Total interest expense
80,557
100,267
Maximum daily amount outstanding
6,494,643
9,107,074
March 31, 2024 and 2023, respectively.
38
Carrying value:
Unpaid principal balance
5,122,203
5,627,807
Unamortized debt issuance costs
(3,826
(3,249
Weighted average interest rate
6.09
6.14
Available borrowing capacity (1):
Committed
851,138
634,147
Uncommitted
5,080,528
5,221,706
5,931,666
5,855,853
Margin deposits placed with (received from) counterparties included in Other assets (accounts payable and accrued liabilities), net
59,229
(116,358
Assets securing agreements to repurchase:
Mortgage-backed securities
Securities retained in asset-backed financings
Distressed
75,754
77,417
Mortgage servicing rights (2)
2,013,510
2,000,574
Servicing advances
62,943
101,927
Following is a summary of maturities of outstanding advances under repurchase agreements by maturity date:
Remaining maturity at March 31, 2024 (1)
Unpaidprincipal balance
Within 30 days
2,988,184
Over 30 to 90 days
1,560,763
Over 90 days to 180 days
Over 180 days to 1 year
Over 1 year to 2 years
383,443
Weighted average maturity (in months)
2.5
39
The amount at risk (the fair value of the assets pledged plus the related margin deposit, less the amount advanced by the counterparty and interest payable) and maturity information relating to the Company’s assets sold under agreements to repurchase is summarized by pledged asset and counterparty below as of March 31, 2024:
Loans, REO and MSRs
Weighted-average maturity
Amount at risk
Advances
Facility
213,240
June 22, 2024
June 27, 2025
Citibank, N.A.
145,955
May 25, 2024
50,779
June 16, 2024
March 13, 2026
JPMorgan Chase & Co.
3,595
June 6, 2024
June 16, 2025
15,148
April 22, 2024
July 15, 2024
May 3, 2025
2,148
March 6, 2026
7,557
February 12, 2025
2,333
June 21, 2024
February 6, 2026
1,436
June 24, 2024
September 30, 2025
Securities
Weighted average maturity
63,645
May 7, 2024
42,227
12,617
April 21, 2024
24,354
May 23, 2024
23,916
April 25, 2024
11,038
April 24, 2024
Daiwa Capital Markets America Inc.
6,314
April 30, 2024
3,423
May 4, 2024
1,746
May 22, 2024
CRT arrangements
23,944
Mortgage Loan Participation Purchase and Sale Agreement
One of the borrowing facilities secured by loans acquired for sale is in the form of a mortgage loan participation purchase and sale agreement. Participation certificates, each of which represents an undivided beneficial ownership interest in a pool of loans that have been pooled with Fannie Mae or Freddie Mac, are sold to the lender pending the securitization of such loans and the sale of the resulting security. The commitment between the Company and a nonaffiliate to sell such security is also assigned to the lender at the time a participation certificate is sold.
The purchase price paid by the lender for each participation certificate is based on the trade price of the security, plus an amount of interest expected to accrue on the security to its anticipated delivery date, minus a present value adjustment, any related hedging costs and a holdback amount. The holdback amount is based on a percentage of the purchase price and is not required to be paid to the Company until the settlement of the security and its delivery to the lender.
40
The mortgage loan participation purchase and sale agreement is summarized below:
12,731
17,107
6.78
6.20
293
44,762
90,531
Amount outstanding
6.58
Loans acquired for sale pledged to secure mortgage loan participation purchase and sale agreement
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
TermNotes
Issuance date
Issuance amount
principalbalance
interest rate spread (1)
Maturity date
2024 1R
March 6, 2024
302,616
3.50%
March 1, 2027
2023 1R
April 5, 2023
235,000
213,025
4.40%
March 25, 2025
2020 1R
February 14, 2020
350,000
49,331
3.35%
February 27, 2025
2019 3R
October 16, 2019
375,000
46,068
3.70%
October 29, 2024
2019 2R
June 11, 2019
638,000
157,385
3.75%
May 28, 2025
768,425
Fannie Mae MSR Financing
The Company, through two subsidiaries, PMT ISSUER TRUST-FMSR and PMT CO-ISSUER TRUST-FMSR (together, the "Issuer Trusts"), finance MSRs and Excess Servicing Spread ("ESS") pledged or sold by PMC and PennyMac Holdings, LLC (“PMH”) through a combination of repurchase agreements and term financing.
The repurchase agreements financing for Fannie Mae MSRs and ESS are effected through the issuance of variable funding notes (a Series 2017-VF1 Note and a Series 2024-VF1 Note, and together the ("FMSR VFNs")) by the Issuer Trusts to PMC and PMH, which are then sold to qualified institutional buyers under agreements to repurchase. The amounts outstanding under the FMSR VFNs are included in Assets sold under agreements to repurchase in the Company’s consolidated balance sheets. The FMSR VFNs have a committed borrowing combined capacity of $1.4 billion under two year repurchase agreement facilities.
The term financing for Fannie Mae MSRs through the Issuer Trusts 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 “FTL-1 Term Loans").
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 ESS and rank pari passu with each other.
Following is a summary of the term financing of the Company’s Fannie Mae MSRs:
Issuance
Stated
Optional extension (2)
Term Loans
May 25, 2023
370,000
3.00%
May 25, 2028
May 25, 2029
Term Notes
2022
June 28, 2022
305,000
4.19%
June 25, 2027
(3)
2021
March 30, 2021
March 25, 2026
March 27, 2028
1,025,000
Freddie Mac MSR and Servicing Advance Receivables Financing
The Company, through PMC and PMH, finances certain MSRs 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 allows PMC 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:
2,866,504
2,802,691
8.84
7.69
64,989
54,947
2,945,587
2,812,694
42
Unpaid principal balance:
CRT arrangement financing
747,662
Fannie Mae MSR financing
Freddie Mac MSR and servicing advance receivable financing
1,095,000
1,145,000
2,888,425
2,917,662
(8,400
(7,057
8.71
8.73
Assets securing notes payable:
Mortgage servicing rights (1)
42,344
79,274
CRT Agreements:
1,111,346
1,132,081
Unsecured Senior Notes
Exchangeable Senior Notes
PMC has issued $345 million aggregate principal amount of exchangeable senior notes due 2026 (the “2026 Exchangeable Notes”) 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. The Exchangeable Notes bear 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
In September 2023, the Company issued $53.5 million principal amount of unsecured 8.50% senior notes due
September 30, 2028 (the "2023 Senior Notes”). The 2023 Senior Notes bear interest at a rate of 8.50% per year, payable quarterly.
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 and interest, whether at stated maturity, upon acceleration, call for redemption or otherwise.
43
Following is financial information relating to the unsecured senior notes:
608,500
546,511
5.80
5.66
9,684
8,380
(7,127
(8,042
Asset-Backed Financing of Variable Interest Entities at Fair Value
Following is a summary of financial information relating to the asset-backed financings of VIEs at fair value described in Note 6 ‒ Variable Interest Entities ‒ Subordinate Mortgage-Backed Securities:
1,581,818
1,411,990
3.10
3.70
1,568,935
1,590,003
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 March 31,
2025
2026
2027
2028
2029
Thereafter
Notes payable secured by credit risk transfer and mortgage servicing assets (1)
758,424
1,152,385
210,000
345,000
53,500
Asset-backed financings at fair value (2)
Interest-only security payable at fair value (2)
5,098,087
968,424
1,497,385
423,500
1,601,162
44
Note 16—Liability for Losses Under Representations and Warranties
Following is a summary of the Company’s liability for losses under representations and warranties:
Balance, beginning of quarter
39,471
Provision for losses:
Pursuant to loan sales
254
940
Reduction in liability due to change in estimate
(6,878
(616
Losses incurred
(388
Balance, end of quarter
39,407
UPB of loans subject to representations and warranties at end of quarter
225,439,542
230,035,290
Note 17—Commitments and Contingencies
Commitments
The following table summarizes the Company’s outstanding contractual commitments:
Commitments to purchase loans acquired for sale
Litigation
From time to time, the Company may be involved in various legal and regulatory proceedings, claims and legal actions arising in the ordinary course of business. The amount, if any, of ultimate liability with respect to such matters cannot be determined, but despite the inherent uncertainties of litigation, management believes that the ultimate disposition of any such proceedings and exposure will not have, individually or taken together, a material adverse effect on the financial condition, income, 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, Quarter ended March 31,
Preferred Share series
Description (1)
Number of shares
Liquidation preference
Issuance discount
Fixed-rate cumulative redeemable
(in thousands, except dividends per share)
A
8.125% Issued March 2017
4,600
115,000
3,828
111,172
0.51
B
8.00% Issued July 2017
7,800
195,000
6,465
188,535
C
6.75% Issued August 2021
250,000
8,225
241,775
0.42
560,000
18,518
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 in the Articles Supplementary for the Series A Preferred Shares and the Series B Preferred Shares that are deemed null and void in accordance with Federal Reserve rules, the applicable dividend rate for dividend periods 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, 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 fixed rate then in effect and will not transition to floating reference rates.
The Series A Preferred Shares became redeemable on March 15, 2024. The Series B Preferred Shares and Series C Cumulative Redeemable Preferred Shares will not be redeemable before 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
45
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. No preferred shares were redeemed during the quarter ended March 31, 2024.
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 March 31, 2024.
Common Share Repurchase Program
The Company has a Common Share repurchase program. On October 24, 2022, the Company’s board of trustees approved an increase to PMT's Common Share repurchase authorization from $400 million to $500 million before transaction fees.
The following table summarizes the Company’s Common Share repurchase activity:
Cumulative
total (1)
Common Shares repurchased
638
29,102
Cost of Common Shares repurchased (2)
7,564
427,229
Note 19— Net Gains on Investments and Financings
Net gains on investments and financings are summarized below:
From nonaffiliates:
Loans:
Held in VIEs
451
Asset-backed financings
Hedging derivatives
Note 20— Net Gains on Loans Acquired for Sale
Net gains on loans acquired for sale are summarized below:
Cash losses:
Sales of loans
(31,177
(72,945
Hedging activities
(69,956
(52,116
(101,133
(125,061
Non-cash gains:
Receipt of MSRs in mortgage loan sale transactions
Provision for losses relating to representations and warranties provided in loan sales:
Pursuant to loans sales
(254
(940
Reduction of liability due to change in estimate
6,878
616
6,624
(324
Changes in fair value of loans and derivatives
6,295
(10,487
72,566
31,372
76,173
29,912
114,046
130,206
Total from nonaffiliates
From PFSI ‒ cash gains
47
Note 21—Net Interest Expense
Net interest expense is summarized below:
Interest income:
Cash and short-term investments
8,192
6,311
59,771
51,139
11,946
36,988
Held in consolidated variable interest entities
(7
Placement fees relating to custodial funds
35,440
28,920
290
Interest expense:
To nonaffiliates:
Interest shortfall on repayments of loans serviced for Agency securitizations
1,293
1,029
Interest on loan impound deposits
1,347
1,343
733
525
Note 22—Share-Based Compensation
The Company has an equity incentive plan (“2019 Plan”) which provides for the issuance of equity based awards based on PMT’s Common Shares that may be made by the Company to its officers and trustees, and the members, officers, trustees, directors and employees of PCM, PFSI, or their affiliates and to PCM, PFSI and other entities that provide services to PMT and the employees of such other entities.
The 2019 Plan is administered by the Company’s compensation committee, pursuant to authority delegated by PMT’s board of trustees, which has the authority to make awards to the eligible participants referenced above, and to determine what form the awards will take, and the terms and conditions of the awards.
The 2019 Plan allows for the grant of restricted and performance-based share and unit awards.
The shares underlying award grants will again be available for award under the 2019 Plan if:
Restricted share units have been awarded to trustees and officers of the Company and to other employees of PFSI and its subsidiaries at no cost to the grantees. Such awards generally vest over a one- to three-year period.
48
The following table summarizes the Company’s share-based compensation activity:
Grants:
Restricted share units
176
Performance share units
123
316
288
Grant date fair value:
2,522
2,134
2,007
1,581
4,529
3,715
Vestings:
129
Performance share units (1)
203
352
177
Forfeitures:
Compensation expense relating to share-based grants
Shares expected to vest:
Number of restricted shares units (in thousands)
278
255
Grant date average fair value per unit
14.09
14.05
Note 23—Income Taxes
The Company’s effective tax rate was (47.0)% and (56.4)% with consolidated pretax income of $32.4 million and $38.8 million for the quarters ended March 31, 2024 and March 31, 2023, respectively. The Company’s taxable REIT subsidiary (“TRS”) recognized a tax benefit of $15.0 million on a pretax loss of $60.9 million for the quarter ended March 31, 2024. For the same period in 2023, the TRS recognized a tax benefit of $21.8 million on a pretax loss of $90.1 million. The Company’s reported consolidated pretax income was $38.8 million for the quarter ended March 31, 2023. The primary difference between the Company’s effective tax rate and the statutory tax rate is generally attributable to nontaxable REIT income resulting from the dividends paid deduction.
The Company assesses the available positive and negative evidence to estimate whether sufficient future taxable income will be generated to permit use of the existing deferred tax assets. On the basis of this evaluation, as of March 31, 2024, the valuation allowance remains zero. The conclusion was primarily based on the fact that the TRS has reported cumulative GAAP income over the last three-year period ending March 31, 2024. The amount of deferred tax assets considered realizable could be adjusted in future periods based on future income.
In general, cash dividends declared by the Company will be considered ordinary income to the shareholders for income tax purposes. Some portion of the dividends may be characterized as capital gain distributions or a return of capital. For tax years beginning after December 31, 2017, the 2017 Tax Cuts and Jobs Act (subject to certain limitations) provides a 20% deduction from taxable income for ordinary REIT dividends.
Note 24—Earnings Per Common Share
The Company determines earnings per share 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. The Company’s participating securities are grants of 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.
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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 quarter.
Diluted earnings per share is determined by dividing net income by the weighted average number of Common Shares and dilutive securities. The Company’s potentially dilutive securities are share-based compensation awards and the Exchangeable Notes. The number of dilutive securities included in diluted earnings per share is calculated using the treasury stock method for share-based compensation awards and the if-converted method for the Exchangeable Notes.
The following table summarizes the basic and diluted earnings per share calculations:
(in thousands except per share amounts)
Effect of participating securities—share-based compensation awards
(140
37,036
50,102
Interest on Exchangeable Notes, net of income taxes
6,363
6,352
Income attributable to participating securities
Diluted net income attributable to common shareholders
43,399
56,462
Weighted average basic shares outstanding
Dilutive securities:
Shares issuable pursuant to exchange of the Exchangeable Notes
24,328
Shares issuable under share-based compensation plan
229
Diluted weighted average shares outstanding
Basic earnings per share
Diluted earnings per share
Calculation of diluted earnings per share requires certain potentially dilutive shares to be excluded when the inclusion of such shares would be anti-dilutive. The following table summarizes the potentially dilutive shares excluded from the diluted earnings per share calculation:
365
Note 25—Segments
The Company operates in four segments as described in Note 1 ‒ Organization.
The Company’s reportable segments are identified based on PMT’s investment strategies. The Company’s chief operating decision maker is its chief executive officer. The following disclosures about the Company’s business segments are presented consistent
50
with the way the Company’s chief operating decision maker organizes and evaluates financial information for making operating decisions and assessing performance.
Financial highlights by operating segment are summarized below:
Credit
Interest rate
sensitive
Correspondent
strategies
production
Corporate
59,591
(19,838
24,209
104,179
11,891
3,280
23,010
134,825
12,261
1,431
1,199
(30,646
(370
1,849
2,063
2,197
60,924
(4,779
16,211
Expenses:
Loan fulfillment and servicing fees payable to PFSI
20,242
24,278
2,224
528
7,528
10,358
98
22,466
4,544
14,716
Pretax income
60,826
(27,245
11,667
(12,867
Total assets at end of quarter
1,502,800
9,377,573
943,008
470,319
54,388
71,416
21,394
92,083
36,927
2,615
17,803
125,168
35,132
1,034
3,591
(33,085
1,795
7,844
7,900
58,035
14,638
16,112
20,372
32,372
636
2,408
7,603
11,936
713
21,661
14,331
14,860
57,322
(7,023
1,781
(13,279
1,620,576
10,110,650
3,196,705
429,298
15,357,229
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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' applicable capital and liquidity amounts and requirements are summarized below:
Net worth (1)
Tangible net worth / total assets ratio (1)
Liquidity (1)
Measurement date
Actual
Required
840,038
585,186
526,779
213,064
874,628
584,131
450,210
210,691
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.
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 income 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 consolidated subsidiaries.
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 other CRT securities that absorb credit losses on certain of the loans we have sold. We also invest in Agency and senior non-Agency MBS, subordinate credit-linked MBS and interest-only ("IO") and principal-only ("PO") 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.
During the quarter ended March 31, 2024, we purchased newly originated prime credit quality residential loans with fair values totaling $18.4 billion as compared to $20.4 billion for the quarter ended March 31, 2023, 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 guaranteed by the U.S. Department of Veterans Affairs or U.S. Department of Agriculture, we and PLS have agreed that PLS will fulfill and purchase such loans, as PLS is a Government National Mortgage Association (“Ginnie Mae”) approved issuer and we are not. This arrangement has enabled us to compete with other correspondent aggregators that purchase both government and conventional loans. During the quarter ended March 31, 2024, we sold $8.2 billion in unpaid principal balance (“UPB”) of conventional loans to PLS in order to optimize our use and allocation of capital.
Our purchase volume included $16.3 billion and $13.5 billion of loans we sold to PLS during the quarters ended March 31, 2024 and 2023, 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 quarter ended March 31, 2024, we received sourcing fees totaling $1.6 million, relating to $16.0 billion, in UPB of loans that we sold to PLS.
We operate our business in four segments: Credit sensitive strategies, Interest rate sensitive strategies, Correspondent production and our Corporate operations, as described below:
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.”
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 $1.2 billion at March 31, 2024.
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 sold approximately $111.0 million of our holdings of subordinate credit-linked MBS during the quarter ended March 31, 2024. We held subordinate credit-linked MBS with fair values totaling approximately $194.6 million at March 31, 2024.
As the result of the Company’s consolidation of the variable interest entities that issued the subordinate MBS as described in Note 6 – Variable Interest Entities – Subordinate Mortgage-Backed Securities to the consolidated financial statements included in this Report, we include loans underlying these and similar transactions with UPBs totaling approximately $1.7 billion on our consolidated balance sheet as of March 31, 2024.
Interest Rate Sensitive Investments
Our interest rate sensitive investments include:
March 31, 2024.
Correspondent Production
Our correspondent production activities involve the acquisition and sale of newly originated prime credit quality residential loans. Correspondent production has served as the source of our investments in MSRs, private label non-Agency securitizations and CRT arrangements. Our correspondent production and resulting investment activity are summarized below:
Sales of loans acquired for sale:
To nonaffiliates
To PennyMac Financial Services, Inc.
18,230,395
19,038,297
Investment activities resulting from correspondent production:
Receipt of MSRs as proceeds from sales of loans
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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 sales 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 income items included in net investment income are as follows:
Held in variable interest entities
36,121
32,224
4,561
110,471
Net loan servicing fees‒MSR valuation adjustments (2)
143,922
(183,705
262,529
56,972
Non-cash items as a percentage of net investment income
354
63
We receive or pay cash relating to:
Business Trends
Due to ongoing inflationary pressures, over the last few quarters, the U.S. Federal Reserve has maintained the federal funds rate at its highest level since 2007 and has continued to reduce the federal government’s overall holdings of Treasury and mortgage-backed securities. Elevated interest rates are expected to constrain growth in the size of the mortgage origination market from an estimated $1.4 trillion in 2023 to an estimated $1.8 trillion in 2024 according to mortgage lending industry economists.
The limited size of the mortgage origination market and sustained interest rates at higher levels continue to impact our mortgage production activities. Higher interest rates have also increased the costs of floating rate borrowings, increased interest income from placement fees we receive relating to custodial funds that we manage on deposits and loans held for sale and reduced prepayment speeds in our mortgage servicing portfolio as compared to the same time period in the prior year. We have also continued our sales of conventional loans to PLS during the three months ended March 31, 2024, and we intend to continue to sell a portion of our conventional loans to PLS throughout the remainder of 2024 to optimize our use and allocation of capital.
Elevated 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 our CRT arrangements or subordinate credit-linked notes and increase losses from our representations and warranties. However, many of the loans underlying our assets have favorable credit characteristics including low loan-to-value ratios, which are likely to help moderate the negative effects of credit performance in an economic downturn.
The following is a summary of our key performance measures:
(dollar amounts in thousands, except per common share amounts)
Loan production income (1)
16,526
14,179
189
194
Pretax income by segment:
Credit sensitive strategies
Interest rate sensitive strategies
Correspondent production
Annualized return on average common shareholders' equity
10.4
13.9
Dividends per common share
0.40
Our consolidated net income decreased by $13.1 million during the quarter ended March 31, 2024, as compared to the quarter ended March 31, 2023, reflecting the effect of increased losses on MBS and a reduced benefit from income taxes, offset by the fair value performance of our MSRs:
The decrease in pretax results is summarized below:
Our net investment income is summarized below:
Net loan origination fees
Net Loan Servicing Fees
Our net loan servicing fees have two primary components: fees earned for servicing loans and the effects of MSR valuation changes, net of hedging results, as summarized below:
Effect of MSRs and hedging results
(117,663
(191,850
Following is a summary of our loan servicing fees:
Loan servicing fees relate to our MSRs which are primarily related to servicing we provide for loans included in Agency securitizations. These fees are contractually established at an annualized percentage of the UPB of the loans serviced and we collect these fees from borrower payments. Other loan servicing fees are comprised primarily of borrower-contracted fees, such as late charges 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 ended March 31, 2024, as compared to the same period in 2023, is due primarily to a reduction in our MSR servicing spread as a result of the securitization of a portion of the MSR servicing spread
during 2023. This reduction is offset by an increase in interest income in our MBS holdings as we retained the resulting IO stripped MBS.
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 fair value. We endeavor to moderate the effects of changes in fair value attributable to changes in fair value inputs (market conditions) primarily by entering into derivatives transactions.
Changes in fair value of MSRs and hedging results are summarized below:
Change in fair value of MSRs
Changes in valuation inputs used in valuation model
Recapture income from PFSI
Hedging results
(17,891
(100,177
Realization of cash flows
Average balance of mortgage servicing rights
3,955,320
3,983,193
Changes in fair value due to changes in valuation inputs used in our valuation model during the quarter ended March 31, 2024 reflect the effects of expectations for slower future prepayments of the underlying loans and higher earnings on custodial balances as a result of interest rates increasing during the quarter ended March 31, 2024, as compared to interest rates decreasing during the same period in 2023.
The decrease in loan recapture income from PFSI reflects the decrease in refinancing activity in our MSR portfolio during the quarter ended March 31, 2024, as compared to the same period in 2023. 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 ended March 31, 2024, which is attributable to interest rates increasing as well as the effects of interest rate volatility on the fair value of the hedging instruments. The loss from hedging activities increased since interest rates increased during the quarter ended March 31, 2024 and decreased during the quarter ended March 31, 2023.
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.
58
Following is a summary of characteristics of our MSR servicing portfolio as of March 31, 2024:
Average
Loan count
Note rate
Seasoning (months)
Remainingmaturity (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
115,957,103
442
3.7
306
262
757
75
0.8
Freddie Mac
110,904,692
3.6
312
282
761
74
0.4
Other (2)
3,632,255
321
253
758
0.6
849
271
Net Gains on Investments and Financings
The decrease in net gains on investments for the quarter ended March 31, 2024, as compared to the same period in 2023, was primarily due to losses from our investments in MBS as interest rates increased.
During the quarter ended March 31, 2024, we recognized net valuation losses of $38.2 million, as compared to valuation gains of $78.2 million for the same period in 2023. The losses recognized reflect an increase in market interest rates during the quarter ended March 31, 2024, as compared to a modest decrease in interest rates during the quarter ended March 31, 2023.
Loans at Fair Value – Held in VIEs and Asset-backed Financings at Fair Value
Loans at fair value held in VIEs and Asset-backed financings at fair value recorded a combined net valuation gain of $6.2 million during the quarter ended March 31, 2024, as compared to a net gain of $857,000 during the quarter ended March 31, 2023. The net gain during the quarter ended March 31, 2024 reflects the gains on the asset-backed financing exceeding the losses on the underlying assets as the result of credit spreads tightening (a decrease in the interest rate premium demanded by investors for instruments over those that are considered “risk free”), on our net investments secured by jumbo loans and investment properties.
59
The activity in and balances relating to our CRT arrangements are summarized below:
The performance of our investments in CRT arrangements during the quarters ended March 31, 2024 and March 31, 2023 reflect credit spread tightening for CRT securities in the credit markets.
60
Net Gains on Loans Acquired for Sale
Our net gains on loans acquired for sale are summarized below:
From non-affiliates:
Receipt of MSRs in loan sale transactions
Changes in fair value of financial instruments during the quarter:
From PFSI—cash
Interest rate lock commitments issued on loans acquired for sale:
2,471,860
7,587,587
To PFSI
8,614,290
3,780,852
11,086,150
11,368,439
Acquisition of loans for sale (UPB):
6,628,809
16,356,544
13,524,332
18,128,225
20,153,141
The changes in gain on loans acquired for sale during the quarter ended March 31, 2024, as compared to the same period in 2023, reflect the effect of a reduction in our liability for representations and warranties and increased gain on sale margins for mortgage loans partially offset by reduced volume of sales to nonaffiliates.
Non-cash elements of gain on sale of loans:
Our Net gains on loans acquired for sale include 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 values 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.
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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 income.
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.
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.
We recorded a provision for losses relating to representations and warranties relating to current loan sales of $254,000 and $940,000 for the quarters ended March 31, 2024 and 2023, respectively. 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.
Following is a summary of the indemnification, repurchase and loss activity and loans subject to representations and warranties:
Indemnification activity (UPB):
Loans indemnified at beginning of quarter
12,123
8,108
New indemnifications
3,234
Less: indemnified loans sold, repaid or refinanced
748
Loans indemnified at end of quarter
13,881
10,594
Indemnified loans indemnified by correspondent lenders at end of quarter
5,969
2,149
UPB of loans with deposits received from correspondent sellers collateralizing prospective indemnification losses at end of quarter
4,190
4,043
Repurchase activity (UPB):
Loans repurchased
7,515
19,199
Less:
Loans repurchased by correspondent sellers
5,979
15,267
Loans resold or repaid by borrowers
2,788
3,901
Net loans (resolved) repurchased with losses chargeable to liability to representations and warranties
(1,252
Losses charged to liability for representations and warranties
388
At end of quarter:
Loans subject to representations and warranties
Liability for representations and warranties
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 outstanding season, 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 and adjust the liability for estimated losses in excess of the recorded liability.
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 income 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 $6.9 million reduction in liability for representations and warranties during the quarter ended March 31, 2024 due to the effects of certain loans reaching specified performance histories identified by the Agencies as sufficient to limit repurchase claims relating to such loans.
Loan Origination Fees
Loan origination fees represent fees we charge correspondent sellers relating to our purchase of loans from those sellers. The decrease in fees during the quarter ended March 31, 2024, as compared to the same period in 2023, reflects a decrease in our purchases of loans for sale to nonaffiliates.
Net Interest Expense
income/
yield/
expense
cost %
580,594
5.67
538,073
4.76
4,143,942
4,464,996
4.64
6.82
6.36
Held by variable interest entities
1,423,489
3.42
1,507,128
4.08
2,095
1.54
3,478
-0.82
12,116
15,159
4.07
1,200,301
5.26
1,285,678
4.48
107,721
8,055,230
5.38
123,809
10,158,397
4.94
7.17
6.11
6.30
5.61
7.77
6.95
9.12
7.95
6.40
6.22
3.55
168,154
10,214,387
6.62
176,240
12,020,777
5.95
6.75
6.04
The effects of changes in the yields and costs and composition of our investments on our net interest expense are summarized below:
vs.
Increase (decrease)due to changes in
Rate
Volume
1,335
546
1,881
12,451
(3,819
8,632
2,540
(27,582
(25,042
(2,277
(781
(3,058
(2,264
(779
(3,043
2,448
(964
16,510
(32,598
(16,088
6,520
108
(9,460
11,492
(31,202
(19,710
Mortgage loan participation purchase and sale agreement
(80
(47
8,694
1,348
10,042
Senior notes
268
1,036
1,304
(1,154
1,479
325
19,333
(27,419
(8,086
264
208
(7,610
Increase in net interest expense
(2,823
(5,179
(1,850
The increase in net interest expense during the quarter ended March 31, 2024, as compared to the same period in 2023, is due to an increase in interest costs attributable to financing non-interest earning MSR assets, partially offset by an increase in the yields we earn on our investments in MBS and an increase in placement fee income.
Our expenses are summarized below:
Expenses decreased $9.7 million, or 19%, during the quarter ended March 31, 2024, as compared to the same period in 2023, primarily due to decreased expenses relating to our correspondent lending activities as discussed below.
Loan Servicing Fees
Loan servicing fees payable to PLS are summarized below:
Loan servicing fees decreased by $187,000 during the quarter ended March 31, 2024, as compared to the same period in 2023, due to the decreases in the size of our investment in loans acquired for sale.
Management fees payable to PCM are summarized below:
Base
Management fees decreased by $69,000 during the quarter ended March 31, 2024, as compared to the same period in 2023. This decrease reflects lower average shareholders’ equity during the quarter ended March 31, 2024, as compared to the quarter ended March 31, 2023.
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 $7.9 million during the quarter ended March 31, 2024, as compared to the same period in 2023. The decrease was due to a decrease in the volume of loans purchased for sale to nonaffiliates. Our loan fulfillment fee structure is described in Note 4 – Transactions with Related Parties to the consolidated financial statements included in this Report.
Loan Origination
Loan origination expenses decreased $1.7 million, or 78%, during the quarter ended March 31, 2024, as compared to the same period in 2023, primarily reflecting a decrease in the volume of our loans purchased for sale to nonaffiliates.
66
Other Expenses
Other expenses are summarized below:
Common overhead allocation from PFSI
Bank service charges
496
Insurance
476
435
Technology
548
556
1,701
Income Taxes
We have elected to treat PennyMac Corp. (“PMC”), as a taxable REIT subsidiary (“TRS”). Income from a TRS is only included as a component of REIT taxable income to the extent that the TRS makes dividend distributions of income to us. A TRS is subject to corporate federal and state income tax. Accordingly, a provision for income taxes for PMC is included in the accompanying consolidated statements of income.
The Company’s effective tax rate was (47.0)% and (56.4)% with consolidated pretax income of $32.4 million and $38.8 million for the quarters ended March 31, 2024 and March 31, 2023, respectively. The Company’s TRS recognized a tax benefit of $15.0 million on a pretax loss of $60.9 million for the quarter ended March 31, 2024. For the same period in 2023, the TRS recognized a tax benefit of $21.8 million on a pretax loss of $90.1 million. The Company’s reported consolidated pretax income was $38.8 million for the quarter ended March 31, 2023. The primary difference between the Company’s effective tax rate and the statutory tax rate is generally attributable to nontaxable REIT income resulting from the dividends paid deduction.
The Company assesses the available positive and negative evidence to estimate whether sufficient future taxable income will be generated to permit use of the existing deferred tax assets. On the basis of this evaluation, as of March 31, 2024, the valuation allowance remains zero as a result of cumulative GAAP income at the TRS for the three-year period ended March 31, 2024. The amount of deferred tax assets considered realizable could be adjusted in future periods based on future income.
67
Following is a summary of key balance sheet items as of the dates presented:
Assets
Investments:
Short-term
11,814,804
12,374,057
352,318
458,745
Debt:
5,143,593
Long-term
4,822,305
4,880,461
9,965,898
10,505,019
368,889
651,778
Shareholders’ equity
Total assets decreased by approximately $820.2 million, or 6%, during the period from December 31, 2023 through March 31, 2024, primarily due to an $886.6 million reduction in Mortgage-backed securities at fair value partially offset by an increase of $242.6 million in Loans acquired for sale at fair value and a $32.6 million increase in MSRs.
Our asset acquisitions are summarized below.
Following is a summary of our correspondent production acquisitions at fair value:
Correspondent loan purchases:
GSE-Eligible Loans (1)
10,080,120
10,755,072
Government insured or guaranteed (2)
8,328,018
9,661,960
Jumbo loans
2,589
Advances to home equity lines of credit
18,410,727
20,417,078
During the quarter ended March 31, 2024, we purchased for sale $18.4 billion in fair value of correspondent production loans as compared to $20.4 billion during the quarter ended March 31, 2023.
Other Investment Activities
Following is a summary of our (sales) acquisitions of mortgage-related investments held in our credit rate sensitive strategies and interest rate sensitive strategies segments:
Credit sensitive assets:
(111,044
12,392
Interest rate sensitive assets:
Agency fixed-rate pass-through securities (net of sales)
(830,296
142,660
Interest-only and principal-only stripped mortgage-backed securities
Mortgage servicing rights:
Purchased
Received in loan sales
(610,021
243,278
(721,065
255,670
Our acquisitions during the quarters ended March 31, 2024 and 2023 were financed through the use of a combination of proceeds from borrowings and liquidations of existing investments. We continue to identify additional means of increasing our investment portfolio through cash flow from our business activities, existing investments, borrowings, and transactions that minimize current cash outlays. However, we expect that, over time, our ability to continue our investment portfolio growth will depend on our ability to raise additional equity capital.
Following is a summary of our MBS holdings:
Fair
Principal/
Life
notional
(in years)
Coupon
Agency pass-through securities
7.8
5.4
7.6
5.1
4.4
13.2
4.3
12.4
8.2
7.0
Interest-only stripped securities
413,762
4.9
419,791
7.3
Principal-only stripped securities
0.1
3.3
4,341,506
5,197,440
Following is a summary of our investment in CRT arrangements:
Derivative and credit risk transfer strip liabilities- CRT strips
UPB of loans subject to credit guarantee obligations
Following is a summary of the composition of the loans underlying our investment in CRT arrangements as of March 31, 2024:
Year of origination
2020
2019
2018
2017
2016
2015
(in millions)
UPB:
Outstanding
4,634
10,574
2,730
2,310
1,887
591
22,726
Liquidations:
Balances
6.8
57.1
160.1
120.4
61.0
406.0
Losses
0.0
5.8
19.9
12.7
7.4
46.6
Modifications:
67.5
551.8
305.0
924.3
1.5
15.9
12.3
29.7
Original debt-to income ratio
<25%
952
1,569
248
287
280
3,400
25 - 30%
744
1,337
265
256
2,888
30 - 35%
817
1,619
319
357
88
3,525
35 - 40%
807
1,894
439
420
356
107
4,023
40 - 45%
799
2,294
648
593
498
4,993
>45%
515
1,861
855
172
106
3,897
33.5
35.8
39.0
36.5
35.0
35.7
Origination FICO credit score
600 - 649
145
296
650 - 699
226
999
580
349
231
115
2,500
700 - 749
1,094
3,112
965
788
595
181
6,735
750 or greater
3,276
6,291
1,113
1,141
1,044
13,150
Not available
765
754
736
745
751
743
Origination loan-to value ratio
<80%
2,192
3,742
873
752
770
241
8,570
80-85%
772
2,028
644
653
508
154
4,759
85-90%
298
125
105
1,277
90-95%
418
315
281
2,401
95-100%
954
3,093
773
5,719
80.7
83.3
83.5
82.5
80.6
80.9
82.4
70
Current loan-to value ratio (1)
4,617
10,513
2,714
2,309
22,631
>100%
52.7
52.4
49.9
44.8
40.8
38.2
50.1
(1) Based on current UPB compared to estimated fair value of the property securing the loan.
Distribution by state
California
482
1,040
342
245
364
110
2,583
Florida
509
1,016
350
240
201
2,368
Texas
551
916
218
234
2,204
Virginia
249
472
99
131
182
450
124
133
1,047
2,661
6,680
1,597
1,390
832
13,408
Regional geographicdistribution (1)
Northeast
1,318
338
244
2,742
Southeast
3,624
980
794
7,746
Midwest
431
1,111
219
171
2,208
Southwest
1,207
2,334
512
4,975
West
990
2,187
683
530
5,055
Collection status
Current - 89 Days
4,619
10,485
2,683
2,298
1,878
22,553
90 - 179 Days
180+ Days
71
Our cash flows for the quarters ended March 31, 2024 and 2023 are summarized below:
Operating activities
Investing activities
Financing activities
Net cash flows
Our cash flows resulted in a net decrease in cash of $154.5 million during the quarter ended March 31, 2024, as discussed below.
Cash used in operating activities totaled $342.4 million during the quarter ended March 31, 2024, as compared to cash used in our operating activities of $1.3 billion during the quarter ended March 31, 2023. Cash flows from operating activities are influenced by cash flows from loans acquired for sale as shown below:
Operating cash flows from:
Loans acquired for sale
(187,846
(1,397,980
(154,525
121,768
Cash flows from loans acquired for sale primarily reflect changes in the level of inventory from the beginning to end of the periods presented. Our inventory of loans held for sale increased at a slower rate during the quarter ended March 31, 2024, as compared to a decrease during the same period in 2023.
Net cash provided by our investing activities was $770.8 million for the quarter ended March 31, 2024, as compared to net cash used in our investing activities of $122.7 million for the quarter ended March 31, 2023, primarily due to our net sale of MBS.
Net cash used in our financing activities was $582.9 million for the quarter ended March 31, 2024, as compared to net cash provided by our financing activities of $1.4 billion for the quarter ended March 31, 2023. This change primarily reflects the repayment of financing related to our net sale of MBS.
As discussed below in Liquidity and Capital Resources, our Manager continually evaluates and pursues additional sources of financing to provide us with future investing capacity. We do not raise equity or enter into borrowings for the purpose of financing the payment of dividends. We believe that our cash earnings are adequate to fund our operating expenses and dividend payment requirements. However, we manage our liquidity in the aggregate and are reinvesting our cash flows in new investments as well as using such cash to fund our dividend requirements.
Our liquidity reflects our ability to meet our current obligations (including the purchase of loans from correspondent sellers, our operating expenses and, when applicable, retirement of, and margin calls relating to, our debt and derivatives positions), make investments as our Manager identifies them, pursue our share repurchase program and make distributions to our shareholders. We generally need to distribute at least 90% of our taxable income each year (subject to certain adjustments) to our shareholders to qualify as a REIT under the Internal Revenue Code. This distribution requirement limits our ability to retain earnings and thereby replenish or increase capital to support our activities.
We expect our primary sources of liquidity to be cash flows from our investment portfolio, including cash earnings on our investments, cash flows from business activities, liquidation of existing investments and proceeds from borrowings and/or additional equity offerings. When we finance a particular asset, the amount borrowed is less than the asset’s fair value and we must provide the cash in the amount of such difference. Our ability to continue making investments is dependent on our ability to invest the cash representing such difference.
On March 15, 2024, the Company, the Issuer Trusts, PMT and PennyMac Holdings, LLC (“PMH”) entered into a Series 2024-VF1 Note with Goldman Sachs Bank, USA, as part of the structured finance transaction that PMC uses to finance Fannie Mae mortgage servicing rights and related excess servicing spread and servicing advance receivables. The initial two-year term of the Series 2024-VF1 Note is set to expire on March 15, 2026, at which point the Series 2024-VF1 Note amortizes over 12 months prior to termination.
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 have allowed us to match the term of our borrowings more closely 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
CRT assets
Servicing assets (1)
REO
Borrowings
Short term
3,784,828
833,152
66,880
52,160
381,357
Long term
Notes payable secured by CRT arrangements and MSRs
766,104
2,113,921
Interest-only security payable
Total secured borrowings
858,368
1,375,560
850,491
2,495,278
9,364,525
Total borrowings
Shareholders' equity
Total financing
11,924,811
Assets pledged to secure borrowings
1,209,999
4,006,800
11,479,105
Debt-to-equity ratio:
Excluding non-recourse debt
4.4:1
5.1:1
Sales of Assets Under Agreements to Repurchase
Our repurchase agreements represent the sales of assets together with agreements for us to buy back the assets at a later date. Following is a summary of the activities in our repurchase agreements financing:
Average balance outstanding
Maximum daily balance outstanding
Ending balance
8,114,108
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 $11.1 billion at March 31, 2024.
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 amount at risk (the fair value of the assets pledged plus the related margin deposit, less the amount advanced by the counterparty and accrued interest) relating to our Assets sold under agreements to repurchase is summarized by counterparty below as of March 31, 2024:
209,600
74,723
45,822
27,765
26,513
26,064
Nomura Holdings America, Inc.
657,574
In September 2023, we issued $53.5 million principal amount of our unsecured 8.50% senior notes due September 30, 2028 (the “2023 Senior Notes”). The 2023 Senior Notes bear interest at a rate of 8.50% per year payable quarterly.
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 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 (the “PMC Guarantee”). PMC’s operations and investing activities are centered in residential mortgage-related assets, including the creation of and investment in MSRs.
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:
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:
3,961,112
Other assets
713,775
From PFSI
From non-issuer or non-guarantor subsidiaries
605,560
6,192,049
Payable to nonaffiliates
1,807,110
Payable to non-issuer or non-guarantor subsidiaries
3,924,390
Payable to PFSI
22,036
5,753,536
Quarter ended
17,087
1,958
From non-issuer or non-guarantor subsidiaries (1)
(66,798
3,687
30,532
Pre-tax income
(81,972
Provision for income taxes
(20,206
(61,766
Debt Covenants
Our debt financing agreements require us and certain of our subsidiaries to comply with various financial covenants. As of the filing of this Report, these financial covenants include the following:
Although these financial covenants limit the amount of indebtedness we may incur and impact our liquidity through minimum cash reserve requirements, we believe that these covenants currently provide us with sufficient flexibility to successfully operate our business and obtain the financing necessary to achieve that purpose.
PLS is also subject to various financial covenants, both as a borrower under its own financing arrangements and as our servicer under certain of our debt financing agreements. The most significant of these financial covenants currently include the following:
Many of our debt financing agreements contain a condition precedent to obtaining additional funding that requires us to maintain positive net income for at least one (1) of the previous two consecutive quarters, or other similar measures. For the most recent fiscal quarter, the Company is compliant with all such conditions. However, we may be required to obtain waivers from certain lenders in the future if this condition precedent is not met.
Our debt financing agreements also contain margin call provisions that, upon notice from the applicable lender at its option, require us to transfer cash or, in some instances, additional assets in an amount sufficient to eliminate any margin deficit. A margin deficit will generally result from any decline in the market value (as determined by the applicable lender) of the assets subject to the related financing agreement, although in some instances we may agree with the lender upon certain thresholds (in dollar amounts or percentages based on the market value of the assets) that must be exceeded before a margin deficit will arise. Upon notice from the applicable lender, we will generally be required to satisfy the margin call on the day of such notice or within one business day thereafter, depending on the timing of the notice.
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 seller/servicers and Ginnie Mae for single-family issuers. FHFA and Ginnie Mae have established minimum liquidity and net worth requirements for their approved non-depository single-family sellers/servicers in the case of Fannie Mae, Freddie Mac, and Ginnie Mae for its approved single-family issuers.
Ginnie Mae has issued risk-based capital requirements which will be effective December 31, 2024. We believe that PLS is in compliance with the Agency's pending requirements as of March 31, 2024.
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
As of March 31, 2024, we have not entered into any off-balance sheet arrangements.
Our management, servicing, and loan fulfillment fee agreements are described in Note 4 – Transactions with Related Parties to the consolidated financial statements included in this Report.
All debt financing arrangements that matured between March 31, 2024 and the date of this Report have been renewed, extended or replaced.
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, 2023 contains a discussion of our critical accounting policies, which utilize relevant critical accounting estimates.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Market risk is the exposure to loss resulting from changes in interest rates, foreign currency exchange rates, commodity prices, equity prices, real estate values and other market-based risks. The primary market risks that we are exposed to are real estate risk, credit risk, interest rate risk, prepayment risk, inflation risk and market value risk.
Our primary trading asset is our inventory of loans acquired for sale. We believe that such assets’ fair values respond primarily to changes in the market interest rates for comparable recently-originated loans. Our other market-risk assets are a substantial portion of our investments and are primarily comprised of MSRs, CRT arrangements and MBS. We believe that the fair values of MSRs and MBS also respond primarily to changes in the market interest rates for comparable loans or yields on MBS. Changes in interest rates are reflected in the prepayment speeds underlying these investments and in the pricing spread (an element of the discount rate) used in their valuation. We believe that the primary market risks to the fair values of our investment in CRT arrangements are changes in market credit spreads and the fair value of the real estate securing the loans underlying such arrangements.
The following sensitivity analyses are limited in that they were performed at a particular point in time; only contemplate the movements in the indicated variables; do not incorporate changes to other variables; are subject to the accuracy of various models and assumptions used; and do not incorporate other factors that would affect our overall financial performance in such scenarios, including operational adjustments made by management to account for changing circumstances. For these reasons, the following estimates should not be viewed as earnings forecasts.
The following table summarizes the estimated change in fair value of our mortgage-backed securities as of March 31, 2024, given several hypothetical (instantaneous) changes in interest rates and parallel shifts in the yield curve:
Interest rate shift in basis points
-200
-75
-50
200
Change in fair value
111,422
91,931
66,044
(78,131
(120,091
(341,540
The following tables summarize the estimated change in fair value of MSRs as of March 31, 2024, given several shifts in pricing spread, prepayment speeds and annual per-loan cost of servicing:
Change in fair value attributable to shift in:
-20%
-10%
-5%
+5%
+10%
+20%
Pricing spread
206,897
100,887
49,825
(48,628
(96,098
(187,715
Prepayment speed
230,268
111,177
54,652
(52,875
(104,063
(201,702
69,023
34,512
17,256
(17,256
(34,512
(69,023
Following is a summary of the effect on fair value of various changes to the pricing spread input used to estimate the fair value of our CRT arrangements given several shifts in pricing spread:
Pricing spread shift in basis points
-100
-25
100
42,720
21,036
10,438
(10,280
(20,407
(40,213
Following is a summary of the effect on fair value of various instantaneous changes in home values from those used to estimate the fair value of our CRT arrangements given several shifts:
Property value shift in %
-15%
5%
10%
15%
(11,653
(6,966
(3,154
2,632
4,769
6,553
Item 4. Controls and Procedures
Disclosure Controls and Procedures
We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our reports filed under the Securities Exchange Act of 1934 (the “Exchange Act”) is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosures. However, no matter how well a control system is designed and operated, it can provide only reasonable, not absolute, assurance that it will detect or uncover failures within the Company to disclose material information otherwise required to be set forth in our periodic reports.
Our management has conducted an evaluation, with the participation of our Chief Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures as of the end of the period covered by this Report as required by paragraph (b) of Rules 13a-15 and 15d-15 under the Exchange Act. Based on our evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures were effective, as of the end of the period covered by this Report, to provide reasonable assurance that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the applicable rules and forms, and that it is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.
Changes in Internal Control over Financial Reporting
There have been no changes in our internal control over financial reporting during the quarter ended March 31, 2024 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Item 1. Legal Proceedings
From time to time, we may be involved in various legal actions, claims and proceedings arising in the ordinary course of business. As of March 31, 2024, 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. For a discussion of our risk factors, refer to our Annual Report on Form 10-K for the year ended December 31, 2023, filed with the SEC on February 22, 2024.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
There were no sales of unregistered equity securities during the quarter ended March 31, 2024.
The following table provides information about our repurchases of common shares of beneficial interest (“Common Shares”) during the quarter ended March 31, 2024:
Period
Totalnumber ofsharespurchased
Averageprice paidper share
Total number ofsharespurchased aspart of publiclyannounced plansor programs (1)
Amountavailable forfuture sharerepurchasesunder theplans orprograms (1)
(in thousands, except average price paid per share)
January 1, 2024 – January 31, 2024
73,353
February 1, 2024 –February 29, 2024
March 1, 2024 – March 31, 2024
Item 3. Defaults Upon Senior Securities
None
Item 4. Mine Safety Disclosures
Not applicable
Item 5. Other Information
(c) Trading Plans
During the quarter ended March 31, 2024, none of our trustees or officers (as defined in Rule 16a-1(f) of the Exchange Act) adopted, terminated or modified a Rule 10b5-1 trading arrangement or non-Rule 10b5-1 trading arrangement (as such terms are defined in Item 408 of Regulation S-K).
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
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.
June 30, 2017
3.5
Articles Supplementary classifying and designating the 6.75% Series C Cumulative Redeemable Preferred Shares of Beneficial Interest.
August 20, 2021
10.1
Series 2024-VF1 Indenture Supplement, dated March 15, 2024, by and among PMT ISSUER TRUST - FMSR, PMT CO-ISSUER TRUST I - FMSR, Citibank, N.A., PennyMac Corp., PennyMac Holdings, LLC, and Goldman Sachs Bank, USA.
March 20, 2024
10.2
Master Repurchase Agreement, dated as of March 15, 2024, among PMC FMSR VFN Funding, LLC, PMH FMSR VFN Funding, LLC, PennyMac Corp., PennyMac Holdings, LLC, the buyers from time to time party thereto, and Goldman Sachs Bank, USA.
10.3
Series 2024-VF1 Guaranty, dated March 15, 2024, by PennyMac Mortgage Investment Trust, PennyMac Corp., and PennyMac Holdings, LLC.
Amendment No. 1 to the Second Amended and Restated Master Repurchase Agreement, dated as of March 15, 2024, by and among Atlas Securitized Products, L.P., Nexera Holding LLC, Citibank, N.A., PennyMac Corp., PennyMac Holdings, LLC, and PennyMac Mortgage Investment Trust.
*
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 March 31, 2024 and December 31, 2023 (ii) the Consolidated Statements of Income for the quarter ended March 31, 2024 and March 31, 2023, (iii) the Consolidated Statements of Changes in Shareholders' Equity for the quarter ended March 31, 2024 and March 31, 2023, (iv) the Consolidated Statements of Cash Flows for the quarter ended March 31, 2024 and March 31, 2023 and (v) the Notes to the Consolidated Financial Statements.
101.INS
Inline XBRL Instance Document – the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.
101.SCH
Inline XBRL Taxonomy Extension Schema Document
104
Cover Page Interactive Data File (embedded within the Inline XBRL document)
* Filed herewith.
† Indicates management contract or compensatory plan or arrangement.
** The certifications attached hereto as Exhibits 32.1 and 32.2 are furnished to the SEC pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and shall not be deemed filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, nor shall it be deemed incorporated by reference in any filing under the Securities Act of 1933, as amended, except as shall be expressly set forth by specific reference in such filing.
81
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Pennymac Mortgage Investment Trust
(Registrant)
Dated: May 2, 2024
By:
/s/ David A. Spector
David A. Spector
Chairman and Chief Executive Officer
(Principal Executive Officer)
/s/ Daniel S. Perotti
Daniel S. Perotti
Senior Managing Director and Chief Financial Officer
(Principal Financial Officer)