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PennyMac Mortgage Investment Trust
PMT
#5925
Rank
$0.98 B
Marketcap
๐Ÿ‡บ๐Ÿ‡ธ United States
Country
$11.35
Share price
1.34%
Change (1 day)
-17.45%
Change (1 year)
๐Ÿ  Real estate๐Ÿ’ฐ Investment ๐Ÿ˜๏ธ REITs
Categories
  1. PennyMac Mortgage Investment Trust
  2. Quarterly Reports (10-Q)
  3. Financial Year FY2024 Q3

PennyMac Mortgage Investment Trust - 10-Q quarterly report FY2024 Q3


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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

 

Form 10-Q

 

(Mark One)

☒

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 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 Preferred
Shares of Beneficial Interest, $0.01 Par Value

PMT/PRA

New York Stock Exchange

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

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

PMT/PRB

 

PMT/PRC

 

New York Stock Exchange

 

New York Stock Exchange

 

8.50% Senior Note Due 2028

 

PMTU

 

New York Stock Exchange

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer”, “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer

☒

 

Accelerated filer

☐

Non-accelerated filer

☐

 

Smaller reporting company

☐

 

 

 

 

Emerging growth company

 

☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act): Yes ☐ No ☒

 

Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date.

 

 

Class

Outstanding at October 29, 2024

Common Shares of Beneficial Interest, $0.01 par value

86,860,960

 

 

 

PENNYMAC MORTGAGE INVESTMENT TRUST

FORM 10-Q

September 30, 2024

TABLE OF CONTENTS

 

 

 

Page

Special Note Regarding Forward-Looking Statements

1

PART I. FINANCIAL INFORMATION

3

Item 1.

Financial Statements (Unaudited)

3

 

Consolidated Balance Sheets

3

 

Consolidated Statements of Income

5

 

Consolidated Statements of Changes in Shareholders’ Equity

6

 

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

57

 

Our Company

57

 

Results of Operations

60

 

Net Investment Income

62

 

Expenses

70

 

Balance Sheet Analysis

73

 

Asset Acquisitions

73

 

Investment Portfolio Composition

74

 

Cash Flows

76

 

Liquidity and Capital Resources

77

 

Off-Balance Sheet Arrangements and Aggregate Contractual Obligations

81

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

82

Item 4.

Controls and Procedures

83

PART II. OTHER INFORMATION

84

Item 1.

Legal Proceedings

84

Item 1A

 

Risk Factors

 

84

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

84

Item 3.

Defaults Upon Senior Securities

84

Item 4.

Mine Safety Disclosures

84

Item 5.

Other Information

84

Item 6.

Exhibits

85

 

 

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:

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

Our ability to predict results or the actual effect of future events, actions, plans or strategies is inherently uncertain. Although we believe that the expectations reflected in such forward-looking statements are based on reasonable assumptions, our actual results and performance could differ materially from those set forth in the forward-looking statements. There are a number of factors, many of which are beyond our control that could cause actual results to differ significantly from management’s expectations. Some of these factors are discussed below.

You should not place undue reliance on any forward-looking statement and should consider the following uncertainties and risks, as well as the risks and uncertainties discussed elsewhere in this Report and the section entitled “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 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:

•
changes in interest rates;
•
our ability to comply with various federal, state and local laws and regulations that govern our business;
•
volatility in our industry, the debt or equity markets, the general economy or the real estate finance and real estate markets;
•
events or circumstances which undermine confidence in the financial and housing markets or otherwise have a broad impact on financial and housing markets; changes in real estate values, housing prices and housing sales;
•
changes in macroeconomic, consumer and real estate market conditions;
•
the degree and nature of our competition;
•
the availability of, and level of competition for, attractive risk-adjusted investment opportunities in mortgage loans and mortgage-related assets that satisfy our investment objectives;
•
the inherent difficulty in winning bids to acquire mortgage loans, and our success in doing so;
•
the concentration of credit risks to which the Company is exposed;
•
our dependence on our manager and servicer, potential conflicts of interest with such entities and their affiliates, and the performance of such entities;
•
changes in personnel and lack of availability of qualified personnel at our manager,servicer or their affiliates;
•
our ability to mitigate cybersecurity risks, cybersecurity incidents and technology disruptions;
•
the availability, terms and deployment of short-term and long-term capital;
•
the adequacy of our cash reserves and working capital;
•
our ability to maintain the desired relationship between our financing and the interest rates and maturities of our assets;
•
the timing and amount of cash flows,if any, from our investments; our substantial amount of indebtedness;
•
the performance, financial condition and liquidity of borrowers;

1

 

•
our exposure to risks of loss and disruptions in operations resulting from severe weather events, man-made or other natural conditions, including climate change and pandemics;
•
the ability of our servicer to approve and monitor correspondent sellers and underwrite loans to investor standards;
•
incomplete or inaccurate information or documentation provided by customers or counterparties, or adverse changes in the financial condition of our customers and counterparties;
•
our indemnification and repurchase obligations in connection with mortgage loans we may purchase, sell or securitize;
•
the quality and enforceability of the collateral documentation evidencing our ownership rights in our investments;
•
increased rates of delinquency, defaults and forbearances and/or decreased recovery rates on our investments;
•
the performance of mortgage loans underlying mortgage-backed securities in which the Company retains credit risk;
•
our ability to foreclose on our investments in a timely manner or at all;
•
increased prepayments of the mortgages and other loans underlying our mortgage-backed securities or relating to our mortgage servicing rights and other investments;
•
the degree to which our hedging strategies may or may not protect us from interest rate volatility;
•
the effect of the accuracy of or changes in the estimates the Company makes about uncertainties, contingencies and asset and liability valuations when measuring and reporting upon our financial condition and results of operations;
•
our ability to maintain appropriate internal control over financial reporting;
•
our ability to detect misconduct and fraud; developments in the secondary markets for our mortgage loan products;
•
legislative and regulatory changes that impact the mortgage loan industry or housing market;
•
regulatory or other changes that impact government agencies or government-sponsored entities,or such changes that increase the cost of doing business with such agencies or entities;
•
the Consumer Financial Protection Bureau and its issued and future rules and the enforcement thereof;
•
changes in government support of home ownership and home affordability programs;
•
changes in our investment objectives or investment or operational strategies, including any new lines of business or new products and services that may subject us to additional risks;
•
limitations imposed on our business and our ability to satisfy complex rules for us to qualify as a REIT for U.S. federal income tax purposes and qualify for an exclusion from the Investment Company Act of 1940 and the ability of certain of our subsidiaries to qualify as REITs or as taxable REIT subsidiaries for U.S. federal income tax purposes;
•
changes in governmental regulations, accounting treatment, tax rates and similar matters;
•
our ability to make distributions to our shareholders in the future;
•
our failure to deal appropriately with issues that may give rise to reputational risk; and our organizational structure and certain requirements in our charter documents.

Other factors that could also cause results to differ from our expectations may not be described in this Report or any other document. Each of these factors could by itself, or together with one or more other factors, adversely affect our business, 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.

 

2

 

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

PENNYMAC MORTGAGE INVESTMENT TRUST AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS (UNAUDITED)

 

 

 

September 30,

 

 

December 31,

 

 

 

2024

 

 

2023

 

 

 

(in thousands, except share information)

 

ASSETS

 

 

 

 

 

 

Cash

 

$

344,358

 

 

$

281,085

 

Short-term investments at fair value

 

 

102,787

 

 

 

128,338

 

Mortgage-backed securities at fair value pledged to creditors

 

 

4,182,382

 

 

 

4,836,292

 

Loans acquired for sale at fair value ($1,649,411 and $659,751 pledged to creditors, respectively)

 

 

1,665,796

 

 

 

669,018

 

Loans at fair value ($1,427,722 and $1,431,896 pledged to creditors, respectively)

 

 

1,429,525

 

 

 

1,433,820

 

Derivative assets ($29,690 and $16,160 pledged to creditors, respectively)

 

 

81,844

 

 

 

177,984

 

Deposits securing credit risk transfer arrangements pledged to creditors

 

 

1,135,447

 

 

 

1,209,498

 

Mortgage servicing rights at fair value ($3,756,894 and $3,871,249 pledged to creditors, respectively)

 

 

3,809,047

 

 

 

3,919,107

 

Servicing advances ($59,121 and $181,201 pledged to creditors, respectively)

 

 

71,124

 

 

 

206,151

 

Due from PennyMac Financial Services, Inc.

 

 

8,538

 

 

 

56

 

Other ($1,230 and $1,905 pledged to creditors, respectively)

 

 

224,806

 

 

 

252,538

 

Total assets

 

$

13,055,654

 

 

$

13,113,887

 

LIABILITIES

 

 

 

 

 

 

Assets sold under agreements to repurchase

 

$

5,748,461

 

 

$

5,624,558

 

Mortgage loan participation purchase and sale agreements

 

 

28,790

 

 

 

—

 

Notes payable secured by credit risk transfer and mortgage servicing assets

 

 

2,830,108

 

 

 

2,910,605

 

Unsecured senior notes

 

 

814,915

 

 

 

600,458

 

Asset-backed financings of variable interest entities at fair value

 

 

1,334,797

 

 

 

1,336,731

 

Interest-only security payable at fair value

 

 

35,098

 

 

 

32,667

 

Derivative and credit risk transfer strip liabilities at fair value

 

 

16,151

 

 

 

51,381

 

Accounts payable and accrued liabilities

 

 

114,085

 

 

 

354,989

 

Due to PennyMac Financial Services, Inc.

 

 

32,603

 

 

 

29,262

 

Income taxes payable

 

 

155,544

 

 

 

190,003

 

Liability for losses under representations and warranties

 

 

8,315

 

 

 

26,143

 

Total liabilities

 

 

11,118,867

 

 

 

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

 

 

 

541,482

 

Common shares of beneficial interest—authorized, 500,000,000 common shares of $0.01
   par value; issued and outstanding, 86,860,960 and 86,624,044 common shares, respectively

 

 

869

 

 

 

866

 

Additional paid-in capital

 

 

1,924,596

 

 

 

1,923,437

 

Accumulated deficit

 

 

(530,160

)

 

 

(508,695

)

Total shareholders’ equity

 

 

1,936,787

 

 

 

1,957,090

 

Total liabilities and shareholders’ equity

 

$

13,055,654

 

 

$

13,113,887

 

 

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

3

 

PENNYMAC MORTGAGE INVESTMENT TRUST AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS (UNAUDITED)

Assets and liabilities of consolidated variable interest entities (“VIEs”) included in total assets and liabilities (the assets of each VIE can only be used to settle liabilities of that VIE) are summarized below:

 

 

 

September 30,

 

 

December 31,

 

 

 

2024

 

 

2023

 

 

 

(in thousands)

 

ASSETS

 

 

 

 

 

 

Loans at fair value

 

$

1,427,575

 

 

$

1,431,689

 

Derivative assets

 

 

29,690

 

 

 

16,160

 

Deposits securing credit risk transfer arrangements

 

 

1,135,447

 

 

 

1,209,498

 

Other—interest receivable

 

 

3,936

 

 

 

4,106

 

 

$

2,596,648

 

 

$

2,661,453

 

LIABILITIES

 

 

 

 

 

 

Asset-backed financings of the variable interest entities at fair value

 

$

1,334,797

 

 

$

1,336,731

 

Derivative and credit risk transfer strip liabilities at fair value

 

 

13,475

 

 

 

46,692

 

Interest-only security payable at fair value

 

 

35,098

 

 

 

32,667

 

Accounts payable and accrued liabilities—interest payable

 

 

3,936

 

 

 

4,106

 

 

$

1,387,306

 

 

$

1,420,196

 

 

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

 

4

 

PENNYMAC MORTGAGE INVESTMENT TRUST AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)

 

 

 

Quarter ended September 30,

 

 

Nine months ended September 30,

 

 

 

2024

 

 

2023

 

 

2024

 

 

2023

 

 

 

(in thousands, except earnings per common share)

 

Net investment income

 

 

 

 

 

 

 

 

 

 

 

 

Net gains (losses) on investments and financings

 

$

146,695

 

 

$

(109,544

)

 

$

166,705

 

 

$

13,761

 

Net gains on loans acquired for sale:

 

 

 

 

 

 

 

 

 

 

 

 

From nonaffiliates

 

 

18,065

 

 

 

11,704

 

 

 

41,088

 

 

 

19,463

 

From PennyMac Financial Services, Inc.

 

 

1,994

 

 

 

1,854

 

 

 

5,649

 

 

 

5,014

 

 

 

20,059

 

 

 

13,558

 

 

 

46,737

 

 

 

24,477

 

Loan origination fees

 

 

6,640

 

 

 

3,226

 

 

 

11,099

 

 

 

15,227

 

Net loan servicing fees:

 

 

 

 

 

 

 

 

 

 

 

 

From nonaffiliates

 

 

 

 

 

 

 

 

 

 

 

 

Contractually specified

 

 

162,605

 

 

 

166,809

 

 

 

485,089

 

 

 

496,522

 

Other

 

 

4,012

 

 

 

3,752

 

 

 

9,838

 

 

 

14,521

 

 

 

166,617

 

 

 

170,561

 

 

 

494,927

 

 

 

511,043

 

Change in fair value of mortgage servicing rights

 

 

(184,918

)

 

 

160,926

 

 

 

(263,676

)

 

 

(64,515

)

Mortgage servicing rights hedging results

 

 

(67,220

)

 

 

(50,689

)

 

 

(175,399

)

 

 

(81,584

)

 

 

(85,521

)

 

 

280,798

 

 

 

55,852

 

 

 

364,944

 

From PennyMac Financial Services, Inc.

 

 

441

 

 

 

500

 

 

 

1,267

 

 

 

1,494

 

 

 

 

(85,080

)

 

 

281,298

 

 

 

57,119

 

 

 

366,438

 

Net interest expense:

 

 

 

 

 

 

 

 

 

 

 

 

Interest income

 

 

176,734

 

 

 

158,926

 

 

 

472,128

 

 

 

474,629

 

Interest expense

 

 

184,171

 

 

 

183,918

 

 

 

527,539

 

 

 

550,445

 

Net interest expense

 

 

(7,437

)

 

 

(24,992

)

 

 

(55,411

)

 

 

(75,816

)

Results of real estate acquired in settlement of loans

 

 

(65

)

 

 

(251

)

 

 

(155

)

 

 

(251

)

Other

 

 

52

 

 

 

134

 

 

 

173

 

 

 

411

 

Net investment income

 

 

80,864

 

 

 

163,429

 

 

 

226,267

 

 

 

344,247

 

Expenses

 

 

 

 

 

 

 

 

 

 

 

 

Earned by PennyMac Financial Services, Inc.:

 

 

 

 

 

 

 

 

 

 

 

 

Loan servicing fees

 

 

22,240

 

 

 

20,257

 

 

 

62,766

 

 

 

61,023

 

Management fees

 

 

7,153

 

 

 

7,175

 

 

 

21,474

 

 

 

21,510

 

Loan fulfillment fees

 

 

11,492

 

 

 

5,531

 

 

 

19,935

 

 

 

22,895

 

Professional services

 

 

2,614

 

 

 

2,133

 

 

 

6,738

 

 

 

5,537

 

Compensation

 

 

1,326

 

 

 

1,961

 

 

 

4,611

 

 

 

4,779

 

Loan collection and liquidation

 

 

2,257

 

 

 

1,890

 

 

 

4,297

 

 

 

3,378

 

Safekeeping

 

 

1,174

 

 

 

467

 

 

 

3,067

 

 

 

2,707

 

Loan origination

 

 

1,408

 

 

 

710

 

 

 

2,414

 

 

 

3,785

 

Other

 

 

4,666

 

 

 

4,885

 

 

 

13,441

 

 

 

14,559

 

Total expenses

 

 

54,330

 

 

 

45,009

 

 

 

138,743

 

 

 

140,173

 

Income before (benefit from) provision for income
   taxes

 

 

26,534

 

 

 

118,420

 

 

 

87,524

 

 

 

204,074

 

(Benefit from) provision for income taxes

 

 

(14,873

)

 

 

56,998

 

 

 

(26,925

)

 

 

57,331

 

Net income

 

 

41,407

 

 

 

61,422

 

 

 

114,449

 

 

 

146,743

 

Dividends on preferred shares

 

 

10,455

 

 

 

10,455

 

 

 

31,364

 

 

 

31,364

 

Net income attributable to common shareholders

 

$

30,952

 

 

$

50,967

 

 

$

83,085

 

 

$

115,379

 

Earnings per common share

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

0.36

 

 

$

0.59

 

 

$

0.95

 

 

$

1.31

 

Diluted

 

$

0.36

 

 

$

0.51

 

 

$

0.95

 

 

$

1.20

 

Weighted average common shares outstanding

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

86,861

 

 

 

86,760

 

 

 

86,800

 

 

 

87,613

 

Diluted

 

 

86,861

 

 

 

111,088

 

 

 

86,800

 

 

 

111,941

 

 

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

5

 

PENNYMAC MORTGAGE INVESTMENT TRUST AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY (UNAUDITED)

 

 

 

Quarter ended September 30, 2024

 

 

 

Preferred shares

 

 

Common shares

 

 

 

 

 

 

 

 

 

Number

 

 

 

 

 

Number

 

 

 

 

 

Additional

 

 

 

 

 

 

 

 

 

of

 

 

 

 

 

of

 

 

Par

 

 

paid-in

 

 

Accumulated

 

 

 

 

 

 

shares

 

 

Amount

 

 

shares

 

 

value

 

 

capital

 

 

deficit

 

 

Total

 

 

 

(in thousands, except per share amounts)

 

Balance at June 30, 2024

 

 

22,400

 

 

$

541,482

 

 

 

86,861

 

 

$

869

 

 

$

1,923,780

 

 

$

(526,262

)

 

$

1,939,869

 

Net income

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

41,407

 

 

 

41,407

 

Share-based compensation

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

816

 

 

 

—

 

 

 

816

 

Dividends:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Preferred shares

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

(10,455

)

 

 

(10,455

)

Common shares ($0.40 per share)

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

(34,850

)

 

 

(34,850

)

Balance at September 30, 2024

 

 

22,400

 

 

$

541,482

 

 

 

86,861

 

 

$

869

 

 

$

1,924,596

 

 

$

(530,160

)

 

$

1,936,787

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Quarter ended September 30, 2023

 

 

 

Preferred shares

 

 

Common shares

 

 

 

 

 

 

 

 

 

Number

 

 

 

 

 

Number

 

 

 

 

 

Additional

 

 

 

 

 

 

 

 

 

of

 

 

 

 

 

of

 

 

Par

 

 

paid-in

 

 

Accumulated

 

 

 

 

 

 

shares

 

 

Amount

 

 

shares

 

 

value

 

 

capital

 

 

deficit

 

 

Total

 

 

 

(in thousands, except per share amounts)

 

Balance at June 30, 2023

 

 

22,400

 

 

$

541,482

 

 

 

86,761

 

 

$

868

 

 

$

1,921,710

 

 

$

(532,564

)

 

$

1,931,496

 

Net income

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

61,422

 

 

 

61,422

 

Share-based compensation

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

1,420

 

 

 

—

 

 

 

1,420

 

Dividends:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Preferred shares

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

(10,455

)

 

 

(10,455

)

Common shares ($0.40 per share)

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

(34,805

)

 

 

(34,805

)

Balance at September 30, 2023

 

 

22,400

 

 

$

541,482

 

 

 

86,761

 

 

$

868

 

 

$

1,923,130

 

 

$

(516,402

)

 

$

1,949,078

 

 

 

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

6

 

 

 

 

Nine months ended September 30, 2024

 

 

 

Preferred shares

 

 

Common shares

 

 

 

 

 

 

 

 

 

Number

 

 

 

 

 

Number

 

 

 

 

 

Additional

 

 

 

 

 

 

 

 

 

of

 

 

 

 

 

of

 

 

Par

 

 

paid-in

 

 

Accumulated

 

 

 

 

 

 

shares

 

 

Amount

 

 

shares

 

 

value

 

 

capital

 

 

deficit

 

 

Total

 

 

 

(in thousands, except per share amounts)

 

Balance at December 31, 2023

 

 

22,400

 

 

$

541,482

 

 

 

86,624

 

 

$

866

 

 

$

1,923,437

 

 

$

(508,695

)

 

$

1,957,090

 

Net income

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

114,449

 

 

 

114,449

 

Share-based compensation

 

 

—

 

 

 

—

 

 

 

237

 

 

 

3

 

 

 

1,159

 

 

 

—

 

 

 

1,162

 

Dividends:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Preferred shares

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

(31,364

)

 

 

(31,364

)

Common shares ($1.20 per share)

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

(104,550

)

 

 

(104,550

)

Balance at September 30, 2024

 

 

22,400

 

 

$

541,482

 

 

 

86,861

 

 

$

869

 

 

$

1,924,596

 

 

$

(530,160

)

 

$

1,936,787

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine months ended September 30, 2023

 

 

 

Preferred shares

 

 

Common shares

 

 

 

 

 

 

 

 

 

Number

 

 

 

 

 

Number

 

 

 

 

 

Additional

 

 

 

 

 

 

 

 

 

of

 

 

 

 

 

of

 

 

Par

 

 

paid-in

 

 

Accumulated

 

 

 

 

 

 

shares

 

 

Amount

 

 

shares

 

 

value

 

 

capital

 

 

deficit

 

 

Total

 

 

 

(in thousands, except per share amounts)

 

Balance at December 31, 2022

 

 

22,400

 

 

$

541,482

 

 

 

88,889

 

 

$

889

 

 

$

1,947,266

 

 

$

(526,822

)

 

$

1,962,815

 

Net income

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

146,743

 

 

 

146,743

 

Share-based compensation

 

 

—

 

 

 

—

 

 

 

146

 

 

 

1

 

 

 

2,853

 

 

 

—

 

 

 

2,854

 

Dividends:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Preferred shares

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

(31,364

)

 

 

(31,364

)

Common shares ($1.20 per share)

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

(104,959

)

 

 

(104,959

)

Repurchase of common shares

 

 

—

 

 

 

—

 

 

 

(2,274

)

 

 

(22

)

 

 

(26,989

)

 

 

—

 

 

 

(27,011

)

Balance at September 30, 2023

 

 

22,400

 

 

$

541,482

 

 

 

86,761

 

 

$

868

 

 

$

1,923,130

 

 

$

(516,402

)

 

$

1,949,078

 

 

 

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

7

 

PENNYMAC MORTGAGE INVESTMENT TRUST AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

 

 

 

Nine months ended September 30,

 

 

 

2024

 

 

2023

 

 

 

(in thousands)

 

Cash flows from operating activities

 

 

 

 

 

 

Net income

 

$

114,449

 

 

$

146,743

 

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

 

 

 

 

 

 

Net gains on investments and financings

 

 

(166,705

)

 

 

(13,761

)

Net gains on loans acquired for sale

 

 

(46,737

)

 

 

(24,477

)

Change in fair value of mortgage servicing rights

 

 

263,676

 

 

 

64,515

 

Mortgage servicing rights hedging results

 

 

175,399

 

 

 

81,584

 

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

 

 

(25,967

)

 

 

8,050

 

Amortization of debt issuance costs

 

 

16,742

 

 

 

11,147

 

Results of real estate acquired in settlement of loans

 

 

155

 

 

 

251

 

Share-based compensation expense

 

 

3,008

 

 

 

3,421

 

Purchase of loans acquired for sale from nonaffiliates

 

 

(67,670,193

)

 

 

(63,699,477

)

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

 

 

(191,250

)

 

 

—

 

Sale to nonaffiliates and repayment of loans acquired for sale

 

 

9,340,802

 

 

 

13,576,673

 

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

 

 

57,502,461

 

 

 

50,812,386

 

Repurchase of loans subject to representations and warranties

 

 

(25,318

)

 

 

(50,537

)

Decrease in servicing advances

 

 

134,885

 

 

 

103,636

 

(Increase) decrease in due from PennyMac Financial Services, Inc.

 

 

(8,482

)

 

 

1,308

 

Repurchase of real estate previously sold as loans acquired for sale

 

 

—

 

 

 

(456

)

Increase in other assets

 

 

(225,737

)

 

 

(187,922

)

Decrease in accounts payable and accrued liabilities

 

 

(242,451

)

 

 

(68,352

)

Increase (decrease) in due to PennyMac Financial Services, Inc.

 

 

3,341

 

 

 

(8,759

)

(Decrease) increase in income taxes payable

 

 

(34,459

)

 

 

51,189

 

Net cash (used in) provided by operating activities

 

 

(1,082,381

)

 

 

807,162

 

Cash flows from investing activities

 

 

 

 

 

 

Net decrease in short-term investments

 

 

25,551

 

 

 

102,212

 

Purchase of mortgage-backed securities

 

 

(479,960

)

 

 

(3,108,701

)

Sale and repayment of mortgage-backed securities

 

 

1,245,129

 

 

 

2,880,273

 

Repurchase of loans at fair value

 

 

—

 

 

 

(119

)

Repayment of loans at fair value

 

 

75,113

 

 

 

72,925

 

Net settlement of derivative financial instruments

 

 

(1,346

)

 

 

(56,025

)

Distribution from credit risk transfer arrangements

 

 

118,668

 

 

 

136,033

 

Purchase of mortgage servicing rights

 

 

(27,981

)

 

 

(14,637

)

Transfer of mortgage servicing rights relating to delinquent loans to Agency

 

 

(341

)

 

 

653

 

Sale of real estate acquired in settlement of loans

 

 

1,127

 

 

 

3,803

 

Decrease in margin deposits

 

 

122,389

 

 

 

44,065

 

Net cash provided by investing activities

 

 

1,078,349

 

 

 

60,482

 

 

 

Statements continued on the next page

8

 

PENNYMAC MORTGAGE INVESTMENT TRUST AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

(Continued)

 

 

Nine months ended September 30,

 

 

2024

 

 

2023

 

 

(in thousands)

 

Cash flows from financing activities

 

 

 

 

 

Sale of assets under agreements to repurchase

 

91,889,781

 

 

 

92,891,387

 

Repurchase of assets sold under agreements to repurchase

 

(91,766,070

)

 

 

(93,488,136

)

Issuance of mortgage loan participation purchase and sale agreements

 

1,771,100

 

 

 

1,739,456

 

Repayment of mortgage loan participation purchase and sale agreements

 

(1,742,221

)

 

 

(1,715,465

)

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

 

1,306,500

 

 

 

615,000

 

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

 

(1,384,419

)

 

 

(595,303

)

Issuance of asset-backed financing of variable interest entities

 

8,137

 

 

 

—

 

Repayment of asset-backed financings of variable interest entities

 

(73,083

)

 

 

(70,455

)

Issuance of unsecured senior notes

 

216,500

 

 

 

53,500

 

Payment of debt issuance costs

 

(21,260

)

 

 

(8,344

)

Payment of dividends to preferred shareholders

 

(31,364

)

 

 

(31,364

)

Payment of dividends to common shareholders

 

(104,450

)

 

 

(105,812

)

Payment of vested share-based compensation tax withholdings

 

(1,846

)

 

 

(567

)

Repurchase of common shares of beneficial interest

 

—

 

 

 

(27,011

)

Net cash provided by (used in) financing activities

 

67,305

 

 

 

(743,114

)

Net increase in cash

 

63,273

 

 

 

124,530

 

Cash at beginning of period

 

281,085

 

 

 

111,866

 

Cash at end of period

$

344,358

 

 

$

236,396

 

Supplemental cash flow information

 

 

 

 

 

Payments, net:

 

 

 

 

 

Income taxes

$

7,534

 

 

$

6,142

 

Interest

$

564,417

 

 

$

562,109

 

Non cash investing activities:

 

 

 

 

 

Receipt of mortgage servicing rights as proceeds from sales of loans

$

159,456

 

 

$

249,925

 

Unsettled purchase of mortgage servicing rights

$

1,447

 

 

$

1,626

 

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

$

35,609

 

 

$

105,096

 

Transfer of loans and advances to real estate acquired in settlement of loans

$

—

 

 

$

1,182

 

Non-cash financing activities:

 

 

 

 

 

Dividends declared, not paid

$

34,850

 

 

$

34,805

 

 

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

9

 

PENNYMAC MORTGAGE INVESTMENT TRUST AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Note 1—Organization

PennyMac Mortgage Investment Trust (“PMT” or the “Company”) is a specialty finance company, which, through its subsidiaries (all of which are wholly-owned), invests in residential mortgage-related assets. The Company operates in four segments: credit sensitive strategies, interest rate sensitive strategies, correspondent production, and corporate:

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

The Company primarily sells the loans it acquires through its correspondent production activities to government-sponsored entities ("GSEs") such as the Federal National Mortgage Association (“Fannie Mae”) and the Federal Home Loan Mortgage Corporation (“Freddie Mac”) or to PLS for sale into securitizations guaranteed by the Government National Mortgage Association ("Ginnie Mae"), or the GSEs. Fannie Mae, Freddie Mac and Ginnie Mae are each referred to as an “Agency” and, collectively, as the “Agencies.”

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

The Company conducts substantially all of its operations and makes substantially all of its investments through its subsidiary, PennyMac Operating Partnership, L.P. (the “Operating Partnership”), and the Operating Partnership’s subsidiaries. A wholly-owned subsidiary of the Company is the sole general partner, and the Company is the sole limited partner, of the Operating Partnership.

The Company believes that it qualifies, and has elected to be taxed, as a real estate investment trust (“REIT”) under the Internal Revenue Code of 1986, as amended. To maintain its tax status as a REIT, the Company is required to distribute at least 90% of its taxable income in the form of qualifying distributions to shareholders.

Note 2—Basis of Presentation 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 or restricted cash equivalents during the periods presented. Therefore, the consolidated statements of cash flows do not include references to restricted cash or restricted cash equivalents.

 

10

 

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:

•
significant segment expenses that are regularly provided to the chief operating decision maker included within each reported measure of segment profit or loss; and
•
an amount for other segment items by reportable segment and a description of its composition. The other segment items category is the difference between segment revenue less the significant expenses disclosed and each reported measure of segment profit or loss.

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:

•
Reconciliation of the expected income tax at the applicable statutory federal income tax rate to the reported income tax in a tabular format, using both percentages and amounts, broken out into specific categories with certain reconciling items of five percent or greater of the expected tax further broken out by nature and/or jurisdiction; and
•
Income taxes paid, net of refunds received, broken out between federal and state and local income taxes. Payments to individual jurisdictions representing five percent or more of the total income tax payments must also be separately disclosed.

The disclosures required by ASU 2023-09 are required in the Company’s annual financial statements beginning with the year ending 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”) and principal-only stripped MBS and senior non-Agency MBS are sensitive to changes in market interest rates. MSRs are sensitive to changes in market interest rates, 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 the securitized reference pools of loans subject to the CRT arrangements into trust entities, and the Company acquired the IO ownership interests 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-backed securities in the case of subordinate MBS.

Certain of the Company's investments in CRT arrangements are structured such that loans that reach a specific number of days delinquent trigger losses chargeable to the CRT arrangements 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 those CRT arrangements 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 other investments in CRT arrangements requires PMT to absorb losses only when the reference loans realize losses.

Fair Value Risk

The Company is exposed to fair value risk in addition to the risks specific to credit and, as a result of prevailing market conditions, may be required to recognize losses associated with adverse changes to the fair value of its investments in MSRs, CRT arrangements, and MBS:

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

Note 4—Transactions with Related Parties

The Company enters into transactions with subsidiaries of PFSI in support of its operating, investing and financing activities as summarized below.

Operating Activities

Loan Servicing

The Company has a loan servicing agreement with PLS (the “Servicing Agreement”) pursuant to which PLS provides subservicing for the Company's portfolio of MSRs, loans held for sale, loans held in VIEs (prime servicing), and its portfolio of residential loans purchased with credit deterioration (special servicing). The Servicing Agreement provides for servicing fees earned by PLS that are established at a per loan monthly amount based on the delinquency, bankruptcy and/or foreclosure status of the serviced loan or real estate acquired in settlement of loans (“REO").

Prime Servicing

The per-loan 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 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 per-loan 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 special servicing loan.

PLS receives activity-based fees for modifications, foreclosures and liquidations that it facilitates with respect to special servicing, as well as other market-based refinancing and loan disposition fees.

12

 

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.

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:

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

The “recapture rate” means, during each month, the ratio of (i) the aggregate unpaid principal balance ("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 and recapture fees earned by PLS:

 

 

Quarter ended September 30,

 

 

Nine months ended September 30,

 

 

 

2024

 

 

2023

 

 

2024

 

 

2023

 

 

 

(in thousands)

 

Loan servicing fees:

 

 

 

 

 

 

 

 

 

 

 

 

Loans acquired for sale

 

$

158

 

 

$

112

 

 

$

342

 

 

$

569

 

Loans at fair value

 

 

60

 

 

 

33

 

 

 

185

 

 

 

184

 

Mortgage servicing rights

 

 

22,022

 

 

 

20,112

 

 

 

62,239

 

 

 

60,270

 

 

$

22,240

 

 

$

20,257

 

 

$

62,766

 

 

$

61,023

 

Average investment in loans:

 

 

 

 

 

 

 

 

 

 

 

 

Acquired for sale

 

$

1,069,653

 

 

$

868,808

 

 

$

1,002,719

 

 

$

1,613,347

 

At fair value

 

$

1,388,368

 

 

$

1,437,418

 

 

$

1,401,643

 

 

$

1,479,525

 

Average MSR portfolio unpaid principal balance

 

$

227,804,449

 

 

$

231,333,064

 

 

$

229,174,686

 

 

$

231,333,990

 

 

 

 

 

 

 

 

 

 

 

 

 

 

MSR recapture fees

 

$

441

 

 

$

500

 

 

$

1,267

 

 

$

1,494

 

UPB of loans recaptured

 

$

71,370

 

 

$

77,403

 

 

$

207,651

 

 

$

270,720

 

 

Correspondent Production Activities

The Company is provided fulfillment and other services for the operation of its correspondent business under an amended and restated mortgage banking services agreement with PLS. These services include: provision of models and technology for the pricing of loans and MSRs; reviews of loan data; documentation and appraisals to assess loan quality and risk; hedging the fair value of the Company's mortgage loan inventory and commitments to purchase mortgage loans to reduce the risk of loss arising from fluctuations in fair value due to movements in interest rates; correspondent seller performance and credit monitoring procedures; and the sale of loans through secondary mortgage markets on behalf of the Company.

Fulfillment and sourcing fees are summarized below:

•
Fulfillment fees shall not exceed the following:
(i)
the number of loan commitments issued by the Company multiplied by a pull-through factor of either .99 or .80 depending on whether the loan commitments are subject to a “mandatory trade confirmation” or a “best efforts lock confirmation”, respectively, and then multiplied by $585 for each pull-through adjusted loan commitment up to and including 16,500 per quarter and $355 for each pull-through adjusted loan commitment in excess of 16,500 per quarter, plus

13

 

(ii)
$315 multiplied by the number of purchased loans up to and including 16,500 per quarter and $195 multiplied by the number of purchased loans in excess of 16,500 per quarter, plus
(iii)
$750 multiplied by the number of all purchased loans that are sold to parties other than Fannie Mae and Freddie Mac; provided however, that no fulfillment fee shall be due or payable to PLS with respect to any Ginnie Mae loans and, as of October 1, 2022, designated Fannie Mae or Freddie Mac loans acquired by PLS.

The Company does not hold the Ginnie Mae approval required to issue securities guaranteed by Ginnie Mae for a pool of securitized loans or to act as a servicer for such pool of loans. 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. Sourcing fees range from one to two basis points of the loans' UPBs, generally based on the average number of calendar days the loans are held by PMT before purchase by PLS.

The mortgage banking services agreement expires, unless terminated earlier in accordance with its terms, on June 30, 2025, subject to automatic renewal for additional 18-month periods, unless terminated in accordance with its terms.

The Company may purchase newly originated conforming balance non-government insured or guaranteed loans from PLS under a mortgage loan purchase and sale agreement.

Following is a summary of correspondent production activity between the Company and PLS:

 

 

Quarter ended September 30,

 

 

Nine months ended September 30,

 

 

 

2024

 

 

2023

 

 

2024

 

 

2023

 

 

 

(in thousands)

 

Loan fulfillment fees earned by PLS

 

$

11,492

 

 

$

5,531

 

 

$

19,935

 

 

$

22,895

 

UPB of loans fulfilled by PLS

 

$

5,948,057

 

 

$

2,760,000

 

 

$

9,949,135

 

 

$

12,418,084

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

$

1,994

 

 

$

1,854

 

 

$

5,649

 

 

$

5,014

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Purchases of loans acquired for sale from PLS

 

$

191,250

 

 

$

—

 

 

$

191,250

 

 

$

—

 

 

 

 

 

 

 

 

 

 

 

 

 

 

UPB of loans sold to PLS:

 

 

 

 

 

 

 

 

 

 

 

 

Government guaranteed or insured

 

$

11,843,268

 

 

$

8,606,835

 

 

$

30,200,608

 

 

$

29,127,889

 

Conventional conforming

 

 

8,092,380

 

 

 

9,932,593

 

 

 

26,289,016

 

 

 

21,013,357

 

 

$

19,935,648

 

 

$

18,539,428

 

 

$

56,489,624

 

 

$

50,141,246

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Tax service fees paid to PLS

 

$

1,112

 

 

$

579

 

 

$

1,902

 

 

$

2,690

 

 

 

 

September 30, 2024

 

 

December 31, 2023

 

 

 

(in thousands)

 

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

 

$

114,723

 

 

$

168,303

 

 

Management Fees

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

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

14

 

The performance incentive fee is equal to the sum of:

•
10% of the amount by which “net income” for the quarter exceeds (i) an 8% return on “equity” plus the “high watermark”, up to (ii) a 12% return on “equity”; plus
•
15% of the amount by which “net income” for the quarter exceeds (i) a 12% return on “equity” plus the “high watermark”, up to (ii) a 16% return on “equity”; plus
•
20% of the amount by which “net income” for the quarter exceeds a 16% return on “equity” plus the “high watermark.”

For the purpose of determining the amount of the performance incentive fee:

“Net income” is defined as net income or loss attributable to the Company’s common shares of beneficial interest (“Common Shares”) calculated in accordance with GAAP, and adjusted to exclude one-time events pursuant to changes in GAAP and certain other non-cash charges after discussion between PCM and the Company’s independent trustees and after approval by a majority of the Company’s independent trustees.

“Equity” is the weighted average of the issue price per Common Share of all of the Company’s public offerings, multiplied by the weighted average number of Common Shares outstanding (including restricted share units) in the rolling four-quarter period.

“High watermark” is the quarterly adjustment that reflects the amount by which the “net income” (stated as a percentage of return on "equity") exceeds or falls short of the lesser of 8% and the average Fannie Mae 30-year MBS yield (the "Target Yield") for the rolling four quarters then ended. The “high watermark” starts at zero and is adjusted quarterly. If the “net income” is lower than the Target Yield, the “high watermark” is increased by the difference. If the “net income” is higher than the Target Yield, the “high watermark” is reduced by the difference. Each time a performance incentive fee is earned, the “high watermark” returns to zero. As a result, the threshold amounts required for PCM to earn a performance incentive fee are adjusted cumulatively based on the performance of PMT’s “net income” over (or under) the Target Yield, until the “net income” in excess of the Target Yield exceeds the then-current cumulative “high watermark” amount.

The base management fee and the performance incentive fee are both payable quarterly in arrears. The performance incentive fee may be paid in cash or a combination of cash and the Company’s Common Shares (subject to a limit of no more than 50% paid in Common Shares), at the Company’s option.

In the event of termination of the management agreement between the Company and PCM, PCM may be entitled to a termination fee in certain circumstances. The termination fee is equal to three times the sum of (a) the average annual base management fee, and (b) the average annual performance incentive fee earned by PCM, in each case during the 24-month period before termination of the management agreement.

Following is a summary of management fee expenses:

 

 

Quarter ended September 30,

 

 

Nine months ended September 30,

 

 

 

2024

 

 

2023

 

 

2024

 

 

2023

 

 

 

(in thousands)

 

Base management

 

$

7,153

 

 

$

7,175

 

 

$

21,474

 

 

$

21,510

 

Performance incentive

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

$

7,153

 

 

$

7,175

 

 

$

21,474

 

 

$

21,510

 

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

 

$

1,897,006

 

 

$

1,897,964

 

 

$

1,912,310

 

 

$

1,917,525

 

 

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 for these services, 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 the rent, telephone, utilities, office furniture, equipment, machinery and other office, internal and overhead expenses of PCM and its affiliates required for the Company’s and its subsidiaries’ operations. These expenses are allocated based on the ratio of the Company’s and its subsidiaries’ proportion of gross assets compared to all remaining gross assets managed or owned by PCM and/or its affiliates as calculated at each fiscal quarter end.

15

 

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

 

 

Quarter ended September 30,

 

 

Nine months ended September 30,

 

 

 

2024

 

 

2023

 

 

2024

 

 

2023

 

 

 

(in thousands)

 

Reimbursement of:

 

 

 

 

 

 

 

 

 

 

 

 

Expenses incurred on the Company’s behalf, net

 

$

6,318

 

 

$

5,893

 

 

$

15,511

 

 

$

15,532

 

Common overhead incurred by PCM and its affiliates

 

 

1,867

 

 

 

1,489

 

 

 

5,811

 

 

 

5,450

 

Compensation

 

 

165

 

 

 

165

 

 

 

495

 

 

 

495

 

 

$

8,350

 

 

$

7,547

 

 

$

21,817

 

 

$

21,477

 

Payments and settlements during the periods (1)

 

$

31,752

 

 

$

9,190

 

 

$

91,100

 

 

$

72,446

 

 

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

Financing Activities

PFSI held 75,000 of the Company’s Common Shares at both September 30, 2024 and December 31, 2023.

Amounts Receivable from and Payable to PFSI

Amounts receivable from and payable to PFSI are summarized below:

 

 

September 30, 2024

 

 

December 31, 2023

 

 

(in thousands)

 

Due from PFSI-Miscellaneous receivables

 

$

8,538

 

 

$

56

 

 

 

 

 

 

 

Due to PFSI:

 

 

 

 

 

 

Loan servicing fees

 

$

8,670

 

 

$

6,809

 

Correspondent production fees

 

 

7,986

 

 

 

8,288

 

Management fees

 

 

7,153

 

 

 

7,252

 

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

 

 

4,788

 

 

 

5,612

 

Fulfillment fees

 

 

4,006

 

 

 

1,301

 

 

$

32,603

 

 

$

29,262

 

 

The Company has also transferred cash to PLS to fund loan servicing advances and REO property acquisition and preservation costs on its behalf. Such amounts are included in various balance sheet items of the Company as summarized below:

Balance sheet line including advance amount

 

September 30, 2024

 

 

December 31, 2023

 

 

 

(in thousands)

 

Loan servicing advances

 

$

71,124

 

 

$

206,151

 

Other assets-Real estate acquired in settlement of loans

 

 

1,378

 

 

 

2,003

 

 

$

72,502

 

 

$

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:

 

 

Quarter ended September 30,

 

 

Nine months ended September 30,

 

 

 

2024

 

 

2023

 

 

2024

 

 

2023

 

 

 

(in thousands)

 

Cash flows:

 

 

 

 

 

 

 

 

 

 

 

 

Proceeds from sales

 

$

5,172,208

 

 

$

3,107,613

 

 

$

9,340,802

 

 

$

13,576,673

 

Loan servicing fees received

 

$

162,605

 

 

$

166,809

 

 

$

485,089

 

 

$

496,522

 

 

16

 

The following table summarizes for the dates presented collection status information for loans that are accounted for as sales where the Company maintains continuing involvement:

 

 

September 30, 2024

 

 

December 31, 2023

 

 

 

(in thousands)

 

UPB of loans outstanding

 

$

224,586,882

 

 

$

228,838,471

 

Collection status (UPB)

 

 

 

 

 

 

Delinquency:

 

 

 

 

 

 

30-89 days delinquent

 

$

2,510,113

 

 

$

2,184,500

 

90 or more days delinquent:

 

 

 

 

 

 

Not in foreclosure

 

$

891,525

 

 

$

1,029,962

 

In foreclosure

 

$

105,065

 

 

$

85,045

 

Bankruptcy

 

$

256,683

 

 

$

185,320

 

Custodial funds managed by the Company (1)

 

$

3,019,441

 

 

$

1,759,974

 

 

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

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.

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 those loans and comprise the Company’s investments in CRT arrangements.

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. CRT arrangements include:

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

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 to losses 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 arrangements where losses are triggered based on the loans’ delinquency status, 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 CRT securities where losses are absorbed when the reference loans realize credit losses, the Company recognizes its IO ownership interests and recourse obligations as CRT strips which are 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 a nonaffiliate) included in the CRT arrangements are included in Net gains (losses) on investments and financings in the consolidated statements of income.

17

 

Following is a summary of the CRT arrangements:

 

 

 

Quarter ended September 30,

 

 

Nine months ended September 30,

 

 

 

2024

 

 

2023

 

 

2024

 

 

2023

 

 

 

(in thousands)

 

Net investment income:

 

 

 

 

 

 

 

 

 

 

 

 

Net gains (losses) on investments and financings

 

 

 

 

 

 

 

 

 

 

 

 

CRT derivatives and strips:

 

 

 

 

 

 

 

 

 

 

 

 

CRT derivatives

 

 

 

 

 

 

 

 

 

 

 

 

Realized

 

$

3,275

 

 

$

4,051

 

 

$

10,248

 

 

$

12,504

 

Valuation changes

 

 

5,460

 

 

 

9,113

 

 

 

13,716

 

 

 

26,619

 

 

 

8,735

 

 

 

13,164

 

 

 

23,964

 

 

 

39,123

 

CRT strips

 

 

 

 

 

 

 

 

 

 

 

 

Realized

 

 

10,990

 

 

 

11,241

 

 

 

34,368

 

 

 

35,529

 

Valuation changes

 

 

3,499

 

 

 

9,977

 

 

 

33,217

 

 

 

68,601

 

 

 

14,489

 

 

 

21,218

 

 

 

67,585

 

 

 

104,130

 

Interest-only security payable at fair value

 

 

(2,390

)

 

 

(4,228

)

 

 

(2,431

)

 

 

(6,363

)

 

 

20,834

 

 

 

30,154

 

 

 

89,118

 

 

 

136,890

 

Interest income — Deposits securing CRT arrangements

 

 

15,042

 

 

 

16,419

 

 

 

46,121

 

 

 

46,410

 

 

$

35,876

 

 

$

46,573

 

 

$

135,239

 

 

$

183,300

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net payments made to settle losses on CRT arrangements

 

$

827

 

 

$

496

 

 

$

1,140

 

 

$

2,252

 

 

 

 

September 30, 2024

 

 

December 31, 2023

 

 

 

(in thousands)

 

Carrying value of CRT arrangements:

 

 

 

 

 

 

Derivative assets - CRT derivatives

 

$

29,690

 

 

$

16,160

 

CRT strip liabilities

 

 

(13,475

)

 

 

(46,692

)

Deposits securing CRT arrangements

 

 

1,135,447

 

 

 

1,209,498

 

Interest-only security payable at fair value

 

 

(35,098

)

 

 

(32,667

)

 

 

$

1,116,564

 

 

$

1,146,299

 

 

 

 

 

 

 

CRT arrangement assets pledged to secure borrowings:

 

 

 

 

 

 

Derivative assets

 

$

29,690

 

 

$

16,160

 

Deposits securing CRT arrangements (1)

 

$

1,135,447

 

 

$

1,209,498

 

 

 

 

 

 

 

UPB of loans underlying CRT arrangements

 

$

21,708,165

 

 

$

23,152,230

 

Collection status (UPB):

 

 

 

 

Delinquency

 

 

 

 

 

 

Current

 

$

21,105,679

 

 

$

22,531,905

 

30-89 days delinquent

 

$

424,102

 

 

$

411,991

 

90-180 days delinquent

 

$

119,236

 

 

$

120,011

 

180 or more days delinquent

 

$

42,283

 

 

$

64,647

 

Foreclosure

 

$

16,865

 

 

$

23,676

 

Bankruptcy

 

$

64,331

 

 

$

58,696

 

 

(1)
Deposits securing credit risk transfer arrangements also secure $13.5 million and $46.7 million in CRT strip liabilities at September 30, 2024 and December 31, 2023, respectively.

Subordinate Mortgage-Backed Securities

The Company retains or purchases subordinate MBS in transactions sponsored by PMC or a nonaffiliate. Cash inflows from the loans underlying these securities are distributed to investors and service providers in accordance with the respective securities' contractual priorities 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.

18

 

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 these transactions are VIEs. The Company also has concluded that it is the primary beneficiary of certain of the VIEs as it has the power, through PLS, in its role as the servicer or sub-servicer of the underlying 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:

 

 

 

Quarter ended September 30,

 

 

Nine months ended September 30,

 

 

 

2024

 

 

2023

 

 

2024

 

 

2023

 

 

 

(in thousands)

 

Net investment income:

 

 

 

 

 

 

 

 

 

 

 

 

Net gains (losses) on investments and financings:

 

 

 

 

 

 

 

 

 

 

 

 

Loans at fair value

 

$

75,360

 

 

$

(54,082

)

 

$

71,381

 

 

$

(61,318

)

Asset-backed financings at fair value

 

 

(72,922

)

 

 

58,474

 

 

 

(64,151

)

 

 

66,108

 

Interest income

 

 

16,037

 

 

 

9,505

 

 

 

41,594

 

 

 

38,315

 

Interest expense

 

 

10,838

 

 

 

13,652

 

 

 

34,918

 

 

 

38,796

 

 

 

$

7,637

 

 

$

245

 

 

$

13,906

 

 

$

4,309

 

 

 

 

September 30, 2024

 

 

December 31, 2023

 

 

 

(in thousands)

 

Loans at fair value

 

$

1,427,575

 

 

$

1,431,689

 

Asset-backed financings at fair value

 

$

1,334,797

 

 

$

1,336,731

 

Retained subordinate MBS at fair value pledged to
   secure Assets sold under agreements to repurchase

 

$

83,417

 

 

$

85,344

 

 

Financing of Mortgage Servicing Assets

The Company entered into financing transactions in which VIEs issued variable funding notes, term notes and term loans backed by beneficial interests in Fannie Mae MSRs. The Company acts as guarantor of the variable funding notes, term notes and term loans. 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, the variable funding notes sold under agreements to repurchase are included in Assets sold under agreements to repurchase and the term notes and term loans are included in Notes payable secured by credit risk transfer and mortgage servicing assets on the Company’s consolidated balance sheets. The financing is described 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 of assets and liabilities at or based on fair value may be on a recurring or nonrecurring basis depending on the accounting principles applicable to the specific asset or liability and whether the Company has elected to carry the item at its fair value as discussed in the following paragraphs.

The Company groups its assets and liabilities at fair value in three levels, based on the markets in which the assets and liabilities are traded and the observability of the inputs used to determine fair value. These levels are:

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

19

 

•
Level 3—Prices determined using significant unobservable inputs. In situations where significant observable inputs are unavailable, unobservable inputs may be used. Unobservable inputs reflect the Company’s own judgments about the factors that market participants use in pricing an asset or liability, and are based on the best information available in the circumstances.

As a result of the difficulty in observing certain significant valuation inputs affecting “Level 3” fair value assets and liabilities, the Company is required to make judgments regarding these items’ fair values. Different persons in possession of the same facts may reasonably arrive at different conclusions as to the inputs to be applied in valuing these assets and liabilities and their fair values. Such differences may result in significantly different fair value measurements. Likewise, due to the general illiquidity of some of these assets and liabilities, subsequent transactions may be at values significantly different from those reported.

The Company reclassifies its assets and liabilities between levels of the fair value hierarchy when the inputs required to establish fair value at a level of the fair value hierarchy are no longer readily available, requiring the use of lower-level inputs, or when the inputs required to establish fair value at a higher level of the hierarchy become available.

Fair Value Accounting Elections

The Company identified all of PMT’s non-cash financial assets and MSRs to be accounted for at fair value. The Company has elected to account for these assets at fair value so such changes in fair value will be reflected in income as they occur and more timely reflect the results of the Company’s performance.

The Company 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 historical cost accounting debt issuance costs are amortized over the term of the debt facility, thereby matching the debt issuance costs to the periods benefiting from the availability of the debt.

20

 

Financial Statement Items Measured at Fair Value on a Recurring Basis

Following is a summary of financial statement items that are measured at fair value on a recurring basis:

 

 

September 30, 2024

 

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Total

 

 

 

(in thousands)

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

Short-term investments

 

$

102,787

 

 

$

—

 

 

$

—

 

 

$

102,787

 

Mortgage-backed securities at fair value

 

 

—

 

 

 

4,101,126

 

 

 

81,256

 

 

 

4,182,382

 

Loans acquired for sale at fair value

 

 

—

 

 

 

1,659,727

 

 

 

6,069

 

 

 

1,665,796

 

Loans at fair value

 

 

—

 

 

 

1,427,575

 

 

 

1,950

 

 

 

1,429,525

 

Derivative assets:

 

 

 

 

 

 

 

 

 

 

 

 

Call options on interest rate futures purchase contracts

 

 

12,844

 

 

 

—

 

 

 

—

 

 

 

12,844

 

Put options on interest rate futures purchase contracts

 

 

1,953

 

 

 

—

 

 

 

—

 

 

 

1,953

 

Forward purchase contracts

 

 

—

 

 

 

635

 

 

 

—

 

 

 

635

 

Forward sale contracts

 

 

—

 

 

 

11,997

 

 

 

—

 

 

 

11,997

 

MBS put options

 

 

—

 

 

 

1,508

 

 

 

—

 

 

 

1,508

 

CRT derivatives

 

 

—

 

 

 

—

 

 

 

29,690

 

 

 

29,690

 

Interest rate lock commitments

 

 

—

 

 

 

—

 

 

 

7,476

 

 

 

7,476

 

Total derivative assets before netting

 

 

14,797

 

 

 

14,140

 

 

 

37,166

 

 

 

66,103

 

Netting

 

 

—

 

 

 

—

 

 

 

—

 

 

 

15,741

 

Total derivative assets after netting

 

 

14,797

 

 

 

14,140

 

 

 

37,166

 

 

 

81,844

 

Mortgage servicing rights at fair value

 

 

—

 

 

 

—

 

 

 

3,809,047

 

 

 

3,809,047

 

 

$

117,584

 

 

$

7,202,568

 

 

$

3,935,488

 

 

$

11,271,381

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

Asset-backed financings of the variable interest entities
   at fair value

 

$

—

 

 

$

1,334,797

 

 

$

—

 

 

$

1,334,797

 

Interest-only security payable at fair value

 

 

—

 

 

 

—

 

 

 

35,098

 

 

 

35,098

 

Derivative and credit risk transfer strip liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

Forward purchase contracts

 

 

—

 

 

 

7,452

 

 

 

—

 

 

 

7,452

 

Forward sales contracts

 

 

—

 

 

 

11,530

 

 

 

—

 

 

 

11,530

 

Interest rate lock commitments

 

 

—

 

 

 

—

 

 

 

1,574

 

 

 

1,574

 

Total derivative liabilities before netting

 

 

—

 

 

 

18,982

 

 

 

1,574

 

 

 

20,556

 

Netting

 

 

—

 

 

 

—

 

 

 

—

 

 

 

(17,880

)

Total derivative liabilities after netting

 

 

—

 

 

 

18,982

 

 

 

1,574

 

 

 

2,676

 

Credit risk transfer strips

 

 

—

 

 

 

—

 

 

 

13,475

 

 

 

13,475

 

Total derivative and credit risk transfer strip liabilities

 

 

—

 

 

 

18,982

 

 

 

15,049

 

 

 

16,151

 

 

$

—

 

 

$

1,353,779

 

 

$

50,147

 

 

$

1,386,046

 

 

 

21

 

 

 

December 31, 2023

 

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Total

 

 

 

(in thousands)

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

Short-term investments

 

$

128,338

 

 

$

—

 

 

$

—

 

 

$

128,338

 

Mortgage-backed securities at fair value

 

 

—

 

 

 

4,742,061

 

 

 

94,231

 

 

 

4,836,292

 

Loans acquired for sale at fair value

 

 

—

 

 

 

662,700

 

 

 

6,318

 

 

 

669,018

 

Loans at fair value

 

 

—

 

 

 

1,431,689

 

 

 

2,131

 

 

 

1,433,820

 

Derivative assets:

 

 

 

 

 

 

 

 

 

 

 

 

Call options on interest rate futures purchase contracts

 

 

41,712

 

 

 

—

 

 

 

—

 

 

 

41,712

 

Put options on interest rate futures purchase contracts

 

 

4,324

 

 

 

—

 

 

 

—

 

 

 

4,324

 

Forward purchase contracts

 

 

—

 

 

 

15,905

 

 

 

—

 

 

 

15,905

 

Forward sale contracts

 

 

—

 

 

 

671

 

 

 

—

 

 

 

671

 

MBS call options

 

 

—

 

 

 

3,218

 

 

 

—

 

 

 

3,218

 

MBS put options

 

 

—

 

 

 

5

 

 

 

—

 

 

 

5

 

CRT derivatives

 

 

—

 

 

 

—

 

 

 

16,160

 

 

 

16,160

 

Interest rate lock commitments

 

 

—

 

 

 

—

 

 

 

7,596

 

 

 

7,596

 

Total derivative assets before netting

 

 

46,036

 

 

 

19,799

 

 

 

23,756

 

 

 

89,591

 

Netting

 

 

—

 

 

 

—

 

 

 

—

 

 

 

88,393

 

Total derivative assets after netting

 

 

46,036

 

 

 

19,799

 

 

 

23,756

 

 

 

177,984

 

Mortgage servicing rights at fair value

 

 

—

 

 

 

—

 

 

 

3,919,107

 

 

 

3,919,107

 

 

$

174,374

 

 

$

6,856,249

 

 

$

4,045,543

 

 

$

11,164,559

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

Asset-backed financings of the variable interest entities
   at fair value

 

$

—

 

 

$

1,336,731

 

 

$

—

 

 

$

1,336,731

 

Interest-only security payable at fair value

 

 

—

 

 

 

—

 

 

 

32,667

 

 

 

32,667

 

Derivative liabilities and credit risk transfer strips:

 

 

 

 

 

 

 

 

 

 

 

 

Call options on interest rate futures purchase contracts

 

 

2,005

 

 

 

—

 

 

 

—

 

 

 

2,005

 

Call options on interest rate futures sell contracts

 

 

1,328

 

 

 

—

 

 

 

—

 

 

 

1,328

 

Forward purchase contracts

 

 

—

 

 

 

490

 

 

 

—

 

 

 

490

 

Forward sales contracts

 

 

—

 

 

 

50,363

 

 

 

—

 

 

 

50,363

 

Interest rate lock commitments

 

 

—

 

 

 

—

 

 

 

64

 

 

 

64

 

Total derivative liabilities before netting

 

 

3,333

 

 

 

50,853

 

 

 

64

 

 

 

54,250

 

Netting

 

 

—

 

 

 

—

 

 

 

—

 

 

 

(49,561

)

Total derivative liabilities after netting

 

 

3,333

 

 

 

50,853

 

 

 

64

 

 

 

4,689

 

Credit risk transfer strips

 

 

—

 

 

 

—

 

 

 

46,692

 

 

 

46,692

 

Total derivative and credit risk transfer strip
   liabilities

 

 

3,333

 

 

 

50,853

 

 

 

46,756

 

 

 

51,381

 

 

$

3,333

 

 

$

1,387,584

 

 

$

79,423

 

 

$

1,420,779

 

 

22

 

The following is a summary of changes in items measured at fair value on a recurring basis using Level 3 inputs that are significant to the estimation of the fair values of the assets and liabilities at either the beginning or end of the periods presented:

 

 

Quarter ended September 30, 2024

 

Assets (1)

 

Interest-only stripped mortgage-backed securities

 

 

Loans
acquired
for sale

 

 

Loans at
fair value

 

 

CRT
derivatives

 

 

Interest rate
lock
commitments

 

 

CRT
strips

 

 

Mortgage
servicing
rights

 

 

Total

 

 

 

(in thousands)

 

Balance, June 30, 2024

 

$

87,841

 

 

$

7,994

 

 

$

1,998

 

 

$

24,305

 

 

$

1,552

 

 

$

(16,974

)

 

$

3,941,861

 

 

$

4,048,577

 

Purchases (purchase adjustments) and
   issuances

 

 

—

 

 

 

(156

)

 

 

—

 

 

 

—

 

 

 

18,971

 

 

 

—

 

 

 

—

 

 

 

18,815

 

Repayments and sales

 

 

(40,487

)

 

 

(1,728

)

 

 

(38

)

 

 

(3,350

)

 

 

—

 

 

 

(10,990

)

 

 

—

 

 

 

(56,593

)

Accrual of unearned discount

 

 

2,264

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

2,264

 

Amounts received pursuant to sales
  of loans

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

87,588

 

 

 

87,588

 

Changes in fair value included in
income arising from:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Changes in instrument -
   specific credit risk

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

Other factors

 

 

(3,971

)

 

 

(41

)

 

 

(10

)

 

 

8,735

 

 

 

27,776

 

 

 

14,489

 

 

 

(184,918

)

 

 

(137,940

)

 

 

(3,971

)

 

 

(41

)

 

 

(10

)

 

 

8,735

 

 

 

27,776

 

 

 

14,489

 

 

 

(184,918

)

 

 

(137,940

)

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

 

 

35,609

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

(35,609

)

 

 

—

 

Transfers of:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

(42,397

)

 

 

—

 

 

 

—

 

 

 

(42,397

)

Mortgage servicing rights relating to
   delinquent loans to Agency

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

125

 

 

 

125

 

Balance, September 30, 2024

 

$

81,256

 

 

$

6,069

 

 

$

1,950

 

 

$

29,690

 

 

$

5,902

 

 

$

(13,475

)

 

$

3,809,047

 

 

$

3,920,439

 

Changes in fair value recognized during
the quarter relating to assets still held
at September 30, 2024

 

$

(3,971

)

 

$

(9

)

 

$

(19

)

 

$

5,460

 

 

$

5,902

 

 

$

3,499

 

 

$

(180,885

)

 

$

(170,023

)

 

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

 

Liabilities

 

Quarter ended September 30, 2024

 

 

 

(in thousands)

 

Interest-only security payable:

 

 

 

Balance, June 30, 2024

 

$

32,708

 

Changes in fair value included in income arising from:

 

 

 

Changes in instrument - specific credit risk

 

 

—

 

Other factors

 

 

2,390

 

 

 

2,390

 

Balance, September 30, 2024

 

$

35,098

 

Changes in fair value recognized during the quarter relating
to liability outstanding at September 30, 2024

 

$

2,390

 

 

23

 

 

 

Quarter ended September 30, 2023

 

Assets (1)

 

Interest-only stripped mortgage-backed securities

 

 

Loans
acquired
for sale

 

 

Loans at
fair
value

 

 

CRT
derivatives

 

 

Interest
rate lock
commitments

 

 

CRT
strips

 

 

Mortgage
servicing
rights

 

 

Total

 

 

 

(in thousands)

 

Balance, June 30, 2023

 

$

—

 

 

$

6,630

 

 

$

2,665

 

 

$

(4,394

)

 

$

(1,298

)

 

$

(78,569

)

 

$

3,977,938

 

 

$

3,902,972

 

Purchases and issuances

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

6,618

 

 

 

—

 

 

 

16,263

 

 

 

22,881

 

Repayments and sales

 

 

—

 

 

 

(1,383

)

 

 

(510

)

 

 

(4,028

)

 

 

—

 

 

 

(11,241

)

 

 

—

 

 

 

(17,162

)

Amounts received pursuant to sales
  of loans

 

 

—

 

 

 

(496

)

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

58,560

 

 

 

58,064

 

Changes in fair value included in
income arising from:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Changes in instrument -
   specific credit risk

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

Other factors

 

 

(14

)

 

 

131

 

 

 

(58

)

 

 

13,164

 

 

 

(16,255

)

 

 

21,218

 

 

 

160,926

 

 

 

179,112

 

 

 

(14

)

 

 

131

 

 

 

(58

)

 

 

13,164

 

 

 

(16,255

)

 

 

21,218

 

 

 

160,926

 

 

 

179,112

 

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

 

 

103,547

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

(105,096

)

 

 

(1,549

)

Transfers of:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

7,587

 

 

 

—

 

 

 

—

 

 

 

7,587

 

Mortgage servicing rights relating to
   delinquent loans to Agency

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

70

 

 

 

70

 

Balance, September 30, 2023

 

$

103,533

 

 

$

4,882

 

 

$

2,097

 

 

$

4,742

 

 

$

(3,348

)

 

$

(68,592

)

 

$

4,108,661

 

 

$

4,151,975

 

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

 

$

(14

)

 

$

(104

)

 

$

(74

)

 

$

9,113

 

 

$

(3,348

)

 

$

9,977

 

 

$

160,926

 

 

$

176,476

 

 

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

 

 

Liabilities

 

Quarter ended September 30, 2023

 

 

 

(in thousands)

 

Interest-only security payable:

 

 

 

Balance, June 30, 2023

 

$

24,060

 

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

 

 

 

Changes in instrument - specific credit risk

 

 

—

 

Other factors

 

 

4,228

 

 

 

4,228

 

Balance, September 30, 2023

 

$

28,288

 

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

 

$

4,228

 

 

24

 

 

 

 

Nine months ended September 30, 2024

 

Assets (1)

 

Interest-only stripped mortgage-backed securities

 

 

Loans
acquired
for sale

 

 

Loans at
fair
value

 

 

CRT
derivatives

 

 

Interest rate
lock
commitments

 

 

CRT
strips

 

 

Mortgage
servicing
rights

 

 

Total

 

 

 

(in thousands)

 

Balance, December 31, 2023

 

$

94,231

 

 

$

6,318

 

 

$

2,131

 

 

$

16,160

 

 

$

7,532

 

 

$

(46,692

)

 

$

3,919,107

 

 

$

3,998,787

 

Purchases and issuances

 

 

—

 

 

 

5,341

 

 

 

—

 

 

 

—

 

 

 

26,842

 

 

 

—

 

 

 

29,428

 

 

 

61,611

 

Repayments and sales

 

 

(50,541

)

 

 

(5,404

)

 

 

(129

)

 

 

(10,434

)

 

 

—

 

 

 

(34,368

)

 

 

—

 

 

 

(100,876

)

Accrual of unearned discounts

 

 

6,870

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

6,870

 

Amounts received pursuant to sales
   of loans

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

159,456

 

 

 

159,456

 

Changes in fair value included in
income arising from:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Changes in instrument - specific
   credit risk

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

Other factors

 

 

(4,913

)

 

 

(186

)

 

 

(52

)

 

 

23,964

 

 

 

22,774

 

 

 

67,585

 

 

 

(263,676

)

 

 

(154,504

)

 

 

(4,913

)

 

 

(186

)

 

 

(52

)

 

 

23,964

 

 

 

22,774

 

 

 

67,585

 

 

 

(263,676

)

 

 

(154,504

)

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

 

 

35,609

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

(35,609

)

 

 

—

 

Transfers of:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

(51,246

)

 

 

—

 

 

 

—

 

 

 

(51,246

)

Mortgage servicing rights relating to
   delinquent loans to Agency

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

341

 

 

 

341

 

Balance, September 30, 2024

 

$

81,256

 

 

$

6,069

 

 

$

1,950

 

 

$

29,690

 

 

$

5,902

 

 

$

(13,475

)

 

$

3,809,047

 

 

$

3,920,439

 

Changes in fair value recognized during
the period relating to assets still held
at September 30, 2024

 

$

(4,913

)

 

$

(154

)

 

$

(71

)

 

$

13,716

 

 

$

5,902

 

 

$

33,217

 

 

$

(261,304

)

 

$

(213,607

)

 

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

 

 

Liabilities

 

Nine months ended September 30, 2024

 

 

 

(in thousands)

 

Interest-only security payable:

 

 

 

Balance, December 31, 2023

 

$

32,667

 

Changes in fair value included in income arising from:

 

 

 

Changes in instrument - specific credit risk

 

 

—

 

Other factors

 

 

2,431

 

 

 

2,431

 

Balance, September 30, 2024

 

$

35,098

 

Changes in fair value recognized during the period relating
to liability outstanding at September 30, 2024

 

$

2,431

 

 

 

 

25

 

 

 

Nine months ended September 30, 2023

 

Assets (1)

 

Interest-only stripped mortgage-backed securities

 

 

Loans
acquired
for sale

 

 

Loans at
fair
value

 

 

CRT
derivatives

 

 

Interest
rate lock
commitments

 

 

CRT strips

 

 

Mortgage
servicing
rights

 

 

Total

 

 

 

(in thousands)

 

Balance, December 31, 2022

 

$

—

 

 

$

10,708

 

 

$

3,457

 

 

$

(22,098

)

 

$

(478

)

 

$

(137,193

)

 

$

4,012,737

 

 

$

3,867,133

 

Purchases and issuances

 

 

—

 

 

 

4,262

 

 

 

119

 

 

 

—

 

 

 

2,687

 

 

 

—

 

 

 

16,263

 

 

 

23,331

 

Repayments and sales

 

 

—

 

 

 

(9,787

)

 

 

(534

)

 

 

(12,283

)

 

 

—

 

 

 

(35,529

)

 

 

—

 

 

 

(58,133

)

Amounts received pursuant to sales
  of loans

 

 

—

 

 

 

(496

)

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

249,925

 

 

 

249,429

 

Changes in fair value included in
income arising from:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Changes in instrument -
   specific credit risk

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

Other factors

 

 

(14

)

 

 

195

 

 

 

(485

)

 

 

39,123

 

 

 

(3,578

)

 

 

104,130

 

 

 

(64,515

)

 

 

74,856

 

 

 

(14

)

 

 

195

 

 

 

(485

)

 

 

39,123

 

 

 

(3,578

)

 

 

104,130

 

 

 

(64,515

)

 

 

74,856

 

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

 

 

103,547

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

(105,096

)

 

 

(1,549

)

Transfers of:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

—

 

Loans to REO

 

 

—

 

 

 

—

 

 

 

(460

)

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

(460

)

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

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

(1,979

)

 

 

—

 

 

 

—

 

 

 

(1,979

)

Mortgage servicing rights relating to
   delinquent loans to Agency

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

(653

)

 

 

(653

)

Balance, September 30, 2023

 

$

103,533

 

 

$

4,882

 

 

$

2,097

 

 

$

4,742

 

 

$

(3,348

)

 

$

(68,592

)

 

$

4,108,661

 

 

$

4,151,975

 

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

 

$

(14

)

 

$

(74

)

 

$

(1,011

)

 

$

26,619

 

 

$

(3,348

)

 

$

68,601

 

 

$

(64,515

)

 

$

26,258

 

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

 

 

Liabilities

 

Nine months ended September 30, 2023

 

 

 

(in thousands)

 

Interest-only security payable:

 

 

 

Balance, December 31, 2022

 

$

21,925

 

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

 

 

 

Changes in instrument - specific credit risk

 

 

—

 

Other factors

 

 

6,363

 

 

 

6,363

 

Balance, September 30, 2023

 

$

28,288

 

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

 

$

6,363

 

 

26

 

Financial Statement Items Measured at Fair Value under the Fair Value Option

Following are the fair values and related principal amounts due upon maturity of loans accounted for under the fair value option (including loans acquired for sale, loans held in consolidated VIEs, and distressed loans):

 

 

September 30, 2024

 

 

December 31, 2023

 

 

 

Fair value

 

 

Principal
amount due
upon maturity

 

 

Difference

 

 

Fair value

 

 

Principal
amount due
upon maturity

 

 

Difference

 

 

 

(in thousands)

 

Loans acquired for sale at fair value:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Current through 89 days delinquent

 

$

1,665,099

 

 

$

1,619,369

 

 

$

45,730

 

 

$

667,857

 

 

$

648,283

 

 

$

19,574

 

90 or more days delinquent:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Not in foreclosure

 

 

622

 

 

 

873

 

 

 

(251

)

 

 

433

 

 

 

617

 

 

 

(184

)

In foreclosure

 

 

75

 

 

 

96

 

 

 

(21

)

 

 

728

 

 

 

845

 

 

 

(117

)

 

 

697

 

 

 

969

 

 

 

(272

)

 

 

1,161

 

 

 

1,462

 

 

 

(301

)

 

$

1,665,796

 

 

$

1,620,338

 

 

$

45,458

 

 

$

669,018

 

 

$

649,745

 

 

$

19,273

 

Loans at fair value:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Held in consolidated VIEs:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Current through 89 days delinquent

 

$

1,426,511

 

 

$

1,620,842

 

 

$

(194,331

)

 

$

1,430,427

 

 

$

1,697,305

 

 

$

(266,878

)

90 or more days delinquent:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Not in foreclosure

 

 

891

 

 

 

1,122

 

 

 

(231

)

 

 

1,262

 

 

 

1,582

 

 

 

(320

)

In foreclosure

 

 

173

 

 

 

219

 

 

 

(46

)

 

 

—

 

 

 

—

 

 

 

—

 

 

 

1,064

 

 

 

1,341

 

 

 

(277

)

 

 

1,262

 

 

 

1,582

 

 

 

(320

)

 

 

1,427,575

 

 

 

1,622,183

 

 

 

(194,608

)

 

 

1,431,689

 

 

 

1,698,887

 

 

 

(267,198

)

Distressed:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Current through 89 days delinquent

 

 

460

 

 

 

634

 

 

 

(174

)

 

 

569

 

 

 

728

 

 

 

(159

)

90 or more days delinquent:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Not in foreclosure

 

 

1,490

 

 

 

4,332

 

 

 

(2,842

)

 

 

393

 

 

 

2,023

 

 

 

(1,630

)

In foreclosure

 

 

—

 

 

 

—

 

 

 

—

 

 

 

1,169

 

 

 

2,546

 

 

 

(1,377

)

 

 

1,490

 

 

 

4,332

 

 

 

(2,842

)

 

 

1,562

 

 

 

4,569

 

 

 

(3,007

)

 

 

1,950

 

 

 

4,966

 

 

 

(3,016

)

 

 

2,131

 

 

 

5,297

 

 

 

(3,166

)

 

$

1,429,525

 

 

$

1,627,149

 

 

$

(197,624

)

 

$

1,433,820

 

 

$

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:

 

 

Quarter ended September 30, 2024

 

 

 

Net gains (losses) on investments and financings

 

 

Net gains on loans acquired
 for sale

 

 

Net loan
servicing fees

 

 

Net interest
expense

 

 

Total

 

 

 

(in thousands)

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Mortgage-backed securities at fair value

 

$

123,433

 

 

$

—

 

 

$

—

 

 

$

15,663

 

 

$

139,096

 

Loans acquired for sale at fair value

 

 

—

 

 

 

65,611

 

 

 

—

 

 

 

—

 

 

 

65,611

 

Loans at fair value

 

 

75,350

 

 

 

—

 

 

 

—

 

 

 

2,229

 

 

 

77,579

 

Credit risk transfer strips

 

 

14,489

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

14,489

 

MSRs at fair value

 

 

—

 

 

 

—

 

 

 

(184,918

)

 

 

—

 

 

 

(184,918

)

 

$

213,272

 

 

$

65,611

 

 

$

(184,918

)

 

$

17,892

 

 

$

111,857

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest-only security payable at fair value

 

$

(2,390

)

 

$

—

 

 

$

—

 

 

$

—

 

 

$

(2,390

)

Asset-backed financings of VIEs at fair value

 

 

(72,922

)

 

 

—

 

 

 

—

 

 

 

1,026

 

 

 

(71,896

)

 

$

(75,312

)

 

$

—

 

 

$

—

 

 

$

1,026

 

 

$

(74,286

)

 

27

 

 

 

 

Quarter ended September 30, 2023

 

 

 

Net gains (losses) on investments and financings

 

 

Net gains on loans acquired
 for sale

 

 

Net loan
servicing fees

 

 

Net interest
expense

 

 

Total

 

 

 

(in thousands)

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Mortgage-backed securities at fair value

 

$

(144,031

)

 

$

—

 

 

$

—

 

 

$

1,048

 

 

$

(142,983

)

Loans acquired for sale at fair value

 

 

—

 

 

 

(13,106

)

 

 

—

 

 

 

—

 

 

 

(13,106

)

Loans at fair value

 

 

(54,141

)

 

 

—

 

 

 

—

 

 

 

(5,153

)

 

 

(59,294

)

Credit risk transfer strips

 

 

21,218

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

21,218

 

MSRs at fair value

 

 

—

 

 

 

—

 

 

 

160,926

 

 

 

—

 

 

 

160,926

 

 

$

(176,954

)

 

$

(13,106

)

 

$

160,926

 

 

$

(4,105

)

 

$

(33,239

)

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest-only security payable at fair value

 

$

(4,228

)

 

$

—

 

 

$

—

 

 

$

—

 

 

$

(4,228

)

Asset-backed financings at fair value

 

 

58,474

 

 

 

—

 

 

 

—

 

 

 

1,132

 

 

 

59,606

 

 

$

54,246

 

 

$

—

 

 

$

—

 

 

$

1,132

 

 

$

55,378

 

 

 

 

 

Nine months ended September 30, 2024

 

 

 

Net gains (losses) on investments and financings

 

 

Net gains on loans acquired
for sale

 

 

Net loan
servicing fees

 

 

Net interest
expense

 

 

Total

 

 

 

(in thousands)

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Mortgage-backed securities at fair value

 

$

50,310

 

 

$

—

 

 

$

—

 

 

$

25,340

 

 

$

75,650

 

Loans acquired for sale at fair value

 

 

—

 

 

 

67,243

 

 

 

—

 

 

 

—

 

 

 

67,243

 

Loans at fair value

 

 

71,330

 

 

 

—

 

 

 

—

 

 

 

(511

)

 

 

70,819

 

Credit risk transfer strips

 

 

67,585

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

67,585

 

MSRs at fair value

 

 

—

 

 

 

—

 

 

 

(263,676

)

 

 

—

 

 

 

(263,676

)

 

$

189,225

 

 

$

67,243

 

 

$

(263,676

)

 

$

24,829

 

 

$

17,621

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest-only security payable at fair value

 

$

(2,431

)

 

$

—

 

 

$

—

 

 

$

—

 

 

$

(2,431

)

Asset-backed financings at fair value

 

 

(64,151

)

 

 

—

 

 

 

—

 

 

 

1,138

 

 

 

(63,013

)

 

$

(66,582

)

 

$

—

 

 

$

—

 

 

$

1,138

 

 

$

(65,444

)

 

 

 

 

Nine months ended September 30, 2023

 

 

 

Net gains (losses) on investments and financings

 

 

Net gains on loans acquired
for sale

 

 

Net loan
servicing fees

 

 

Net interest
expense

 

 

Total

 

 

 

(in thousands)

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Mortgage-backed securities at fair value

 

$

(127,434

)

 

$

—

 

 

$

—

 

 

$

(1,172

)

 

$

(128,606

)

Loans acquired for sale at fair value

 

 

—

 

 

 

(7,215

)

 

 

—

 

 

 

—

 

 

 

(7,215

)

Loans at fair value

 

 

(61,803

)

 

 

—

 

 

 

—

 

 

 

(6,212

)

 

 

(68,015

)

Credit risk transfer strips

 

 

104,130

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

104,130

 

MSRs at fair value

 

 

—

 

 

 

—

 

 

 

(64,515

)

 

 

—

 

 

 

(64,515

)

 

$

(85,107

)

 

$

(7,215

)

 

$

(64,515

)

 

$

(7,384

)

 

$

(164,221

)

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest-only security payable at fair value

 

$

(6,363

)

 

$

—

 

 

$

—

 

 

$

—

 

 

$

(6,363

)

Asset-backed financings at fair value

 

 

66,108

 

 

 

—

 

 

 

—

 

 

 

666

 

 

 

66,774

 

 

$

59,745

 

 

$

—

 

 

$

—

 

 

$

666

 

 

$

60,411

 

 

 

28

 

Financial Statement Item Measured at Fair Value on a Nonrecurring Basis

Following is a summary of the carrying value of assets that were remeasured during the period based on fair value on a nonrecurring basis:

Real estate acquired in settlement of loans

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Total

 

 

 

(in thousands)

 

September 30, 2024

 

$

—

 

 

$

—

 

 

$

438

 

 

$

438

 

December 31, 2023

 

$

—

 

 

$

—

 

 

$

753

 

 

$

753

 

 

The following table summarizes the fair value changes recognized during the periods on assets held at period end that were remeasured at fair value on a nonrecurring basis:

 

 

Quarter ended September 30,

 

 

Nine months ended September 30,

 

 

 

2024

 

 

2023

 

 

2024

 

 

2023

 

 

 

(in thousands)

 

Real estate acquired in settlement of loans

 

$

9

 

 

$

(258

)

 

$

105

 

 

$

(288

)

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, 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 2028 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 values 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, internal estimates of fair value for the term loans, and pricing services for the Unsecured senior notes. The fair values and carrying values of these liabilities are summarized below:

 

 

September 30, 2024

 

 

December 31, 2023

 

Instrument

 

Carrying value

 

 

Fair value

 

 

Carrying value

 

 

Fair value

 

 

 

(in thousands)

 

Notes payable secured by credit risk transfer
      and mortgage servicing assets

 

$

2,830,108

 

 

$

2,846,037

 

 

$

2,910,605

 

 

$

2,904,678

 

Unsecured senior notes

 

$

814,915

 

 

$

818,647

 

 

$

600,458

 

 

$

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 values 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

29

 

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 values of the Company’s IRLCs are developed by PFSI's capital markets risk management staff and are 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 Company categorizes the majority of its current holdings of MBS, comprised of securities other than IO securities, as “Level 2” fair value assets. Fair value of these securities is established based on quoted market prices for the Company’s MBS holdings or similar securities.
•
The Company categorizes its current holdings of IO securities as “Level 3” fair value assets. The Company uses a discounted cash flow approach to estimate the fair values of its IO securities.

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

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

 

 

 

September 30, 2024

 

 

December 31, 2023

 

Fair value (in thousands)

 

$

81,256

 

 

$

94,231

 

Key inputs (1)

 

 

 

 

 

 

Pricing spread (2)

 

 

 

 

 

 

Range

 

5.9% – 6.5%

 

 

5.1% – 5.1%

 

Weighted average

 

6.5%

 

 

5.1%

 

Annual total prepayment speed (3)

 

 

 

 

 

 

Range

 

11.7% – 12.1%

 

 

10.9% – 11.0%

 

Weighted average

 

11.7%

 

 

10.9%

 

Equivalent life (in years)

 

 

 

 

 

 

Range

 

4.4 – 6.8

 

 

4.7 – 7.2

 

Weighted average

 

6.7

 

 

7.1

 

 

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

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

30

 

Loans

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

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

Derivative and Credit Risk Transfer Strip Assets and Liabilities

CRT Derivatives

The Company categorizes CRT derivatives as “Level 3” fair value assets and liabilities. The fair 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 values of the CRT derivatives are derived by deducting the balances 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 (losses) on investments and financings in the consolidated statements of income.

31

 

Following is a quantitative summary of key unobservable inputs used in the Company’s review and approval of broker-provided fair values for CRT derivatives:

 

 

September 30, 2024

 

 

December 31, 2023

 

 

 

(dollars in thousands)

 

Fair value

 

$

29,690

 

 

$

16,160

 

UPB of loans in reference pools

 

$

5,071,449

 

 

$

5,437,551

 

Key inputs (1)

 

 

 

 

 

 

Discount rate

 

 

 

 

 

 

Range

 

8.4% - 11.7%

 

 

9.0% – 9.7%

 

Weighted average

 

8.7%

 

 

9.6%

 

Voluntary prepayment speed (2)

 

 

 

 

 

 

Range

 

6.8% - 7.1%

 

 

6.9% – 7.6%

 

Weighted average

 

7.1%

 

 

7.4%

 

Involuntary prepayment speed (3)

 

 

 

 

 

 

Range

 

0.1% - 0.1%

 

 

0.2% – 0.8%

 

Weighted average

 

0.1%

 

 

0.3%

 

Remaining loss expectation

 

 

 

 

 

 

Range

 

0.0% - 0.2%

 

 

0.2% – 0.3%

 

Weighted average

 

0.1%

 

 

0.3%

 

 

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

Interest Rate Lock Commitments

The Company categorizes IRLCs as “Level 3” fair value assets and liabilities. The Company estimates the fair values 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 values 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.

Following is a quantitative summary of key unobservable inputs used in the valuation of IRLCs:

 

 

September 30, 2024

 

 

December 31, 2023

 

Fair value (in thousands) (1)

 

$

5,902

 

 

$

7,532

 

Committed amount (in thousands)

 

$

2,062,088

 

 

$

874,017

 

Key inputs (2)

 

 

 

 

 

 

Pull-through rate

 

 

 

 

 

 

Range

 

52.1% - 99.0%

 

 

50.0% - 98.0%

 

Weighted average

 

87.3%

 

 

82.5%

 

MSR fair value expressed as

 

 

 

 

 

 

Servicing fee multiple

 

 

 

 

 

 

Range

 

2.0 - 8.2

 

 

1.7 - 6.5

 

Weighted average

 

5.3

 

 

4.6

 

Percentage of unpaid principal balance

 

 

 

 

 

 

Range

 

0.5% - 2.6%

 

 

0.4% - 2.4%

 

Weighted average

 

2.0%

 

 

1.7%

 

 

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

32

 

Hedging Derivatives

Fair 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 values of hedging derivatives are included in Net loan servicing fees – from nonaffiliates – Mortgage servicing rights hedging results, Net gains on loans acquired for sale, or Net gains (losses) on investments and financings, 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 the recourse obligations. Together, the IO ownership interest and the recourse obligation comprise the CRT strip.

Fair values of the CRT strips are 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 (losses) 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 the broker-provided fair values of the CRT strip liabilities:

 

 

September 30, 2024

 

 

December 31, 2023

 

 

 

(dollars in thousands)

 

Fair value

 

$

13,475

 

 

$

46,692

 

Unpaid principal balance of loans in the reference pools

 

$

16,636,716

 

 

$

17,714,679

 

Key inputs (1)

 

 

 

 

 

 

Discount rate

 

 

 

 

 

 

Range

 

6.9% - 8.7%

 

 

7.9% – 9.6%

 

Weighted average

 

8.4%

 

 

9.4%

 

Voluntary prepayment speed (2)

 

 

 

 

 

 

Range

 

7.3% - 7.4%

 

 

6.6% – 8.2%

 

Weighted average

 

7.3%

 

 

6.8%

 

Involuntary prepayment speed (3)

 

 

 

 

 

 

Range

 

0.1% - 0.2%

 

 

0.2% – 0.3%

 

Weighted average

 

0.1%

 

 

0.2%

 

Remaining loss expectation

 

 

 

 

 

 

Range

 

0.4% - 1.5%

 

 

0.5% – 1.6%

 

Weighted average

 

0.5%

 

 

0.6%

 

 

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

Mortgage Servicing Rights

The Company categorizes MSRs as “Level 3” fair value assets. The Company uses a discounted cash flow approach to estimate the fair 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 significant changes in the MSR fair value measurements. 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.

33

 

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.

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

 

Quarter ended September 30,

 

 

Nine months ended September 30,

 

 

 

2024

 

 

2023

 

 

2024

 

 

2023

 

MSRs recognized (in thousands)

 

$

87,588

 

 

$

58,560

 

 

$

159,456

 

 

$

249,925

 

Unpaid principal balance of underlying loans (in thousands)

 

$

5,130,285

 

 

$

3,052,557

 

 

$

9,203,814

 

 

$

13,458,182

 

Weighted average annual servicing fee rate (in basis points)

 

35

 

 

38

 

 

35

 

 

40

 

Key inputs (1)

 

 

 

 

 

 

 

 

 

 

 

 

Pricing spread (2)

 

 

 

 

 

 

 

 

 

 

 

 

Range

 

5.4% - 7.3%

 

 

5.5% – 8.5%

 

 

5.4% - 8.5%

 

 

5.5% – 8.8%

 

Weighted average

 

5.5%

 

 

5.5%

 

 

5.6%

 

 

5.8%

 

Prepayment speed (3)

 

 

 

 

 

 

 

 

 

 

 

 

Range

 

11.7% - 26.7%

 

 

10.1% – 22.7%

 

 

10.8% - 26.7%

 

 

10.1% – 22.7%

 

Weighted average

 

13.6%

 

 

11.3%

 

 

13.1%

 

 

12.3%

 

Equivalent average life (in years)

 

 

 

 

 

 

 

 

 

 

 

 

Range

 

3.5 – 6.4

 

 

3.2 - 7.2

 

 

3.4 – 7.2

 

 

2.8 - 7.2

 

Weighted average

 

6.3

 

 

7.1

 

 

6.5

 

 

6.8

 

Annual per-loan cost of servicing

 

 

 

 

 

 

 

 

 

 

 

 

Range

 

$68 – $87

 

 

$69 – $71

 

 

$68 – $87

 

 

$68 – $71

 

Weighted average

 

$68

 

 

$71

 

 

$69

 

 

$69

 

 

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

Following is a quantitative summary of key inputs used in the valuation of MSRs as of the dates presented, and the effect on the fair value from adverse changes in those inputs:

 

 

 

September 30, 2024

 

 

December 31, 2023

 

Fair value (in thousands)

 

$

3,809,047

 

 

$

3,919,107

 

Unpaid principal balance of underlying loans (in thousands)

 

$

228,127,324

 

 

$

230,294,583

 

Weighted average annual servicing fee rate (in basis points)

 

28

 

 

28

 

Weighted average note interest rate

 

3.8%

 

 

3.7%

 

Key inputs (1)

 

 

 

 

 

 

Pricing spread (2)

 

 

 

 

 

 

Range

 

5.4% - 8.1%

 

 

5.5% – 8.5%

 

Weighted average

 

5.4%

 

 

5.5%

 

Effect on fair value (in thousands) of (3):

 

 

 

 

 

 

5% adverse change

 

$(46,966)

 

 

$(48,362)

 

10% adverse change

 

$(92,816)

 

 

$(95,575)

 

20% adverse change

 

$(181,313)

 

 

$(186,699)

 

Prepayment speed (4)

 

 

 

 

 

 

Range

 

7.4% - 18.8%

 

 

6.5% – 17.9%

 

Weighted average

 

7.5%

 

 

7.0%

 

Equivalent average life (in years)

 

 

 

 

 

 

Range

 

2.5 – 8.5

 

 

2.7 – 9.4

 

Weighted average

 

8.2

 

 

8.5

 

Effect on fair value (in thousands) of (3):

 

 

 

 

 

 

5% adverse change

 

$(57,286)

 

 

$(53,964)

 

10% adverse change

 

$(112,596)

 

 

$(106,144)

 

20% adverse change

 

$(217,698)

 

 

$(205,509)

 

Annual per-loan cost of servicing

 

 

 

 

 

 

Range

 

$68 – $89

 

 

$70 – $89

 

Weighted average

 

$68

 

 

$70

 

Effect on fair value (in thousands) of (3):

 

 

 

 

 

 

5% adverse change

 

$(16,607)

 

 

$(17,276)

 

10% adverse change

 

$(33,214)

 

 

$(34,551)

 

20% adverse change

 

$(66,428)

 

 

$(69,103)

 

 

34

 

 

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

Real Estate Acquired in Settlement of Loans

REO is measured based on its fair value on a nonrecurring basis and is categorized as a “Level 3” fair value asset. Fair value of REO is established by using a current estimate of fair value from either a broker’s price opinion, a full appraisal, or the price given in a pending contract of sale.

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:

 

 

Quarter ended September 30,

 

 

Nine months ended September 30,

 

 

 

2024

 

 

2023

 

 

2024

 

 

2023

 

 

 

(in thousands)

 

Balance at beginning of period

 

$

4,068,337

 

 

$

4,731,341

 

 

$

4,836,292

 

 

$

4,462,601

 

Purchases

 

 

80,500

 

 

 

64,384

 

 

 

479,960

 

 

 

3,108,701

 

Sales

 

 

(35,667

)

 

 

—

 

 

 

(977,007

)

 

 

(2,629,540

)

Repayments

 

 

(105,493

)

 

 

(90,319

)

 

 

(268,122

)

 

 

(250,733

)

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

 

 

35,609

 

 

 

103,547

 

 

 

35,609

 

 

 

103,547

 

Changes in fair value included in income arising from:

 

 

 

 

 

 

 

 

 

 

 

 

Accrual (amortization) of net purchase premiums
    and discounts

 

 

15,663

 

 

 

1,048

 

 

 

25,340

 

 

 

(1,172

)

Valuation adjustments, net

 

 

123,433

 

 

 

(144,031

)

 

 

50,310

 

 

 

(127,434

)

 

 

139,096

 

 

 

(142,983

)

 

 

75,650

 

 

 

(128,606

)

Balance at end of period

 

$

4,182,382

 

 

$

4,665,970

 

 

$

4,182,382

 

 

$

4,665,970

 

 

 

 

September 30, 2024

 

 

December 31, 2023

 

 

 

(in thousands)

 

Fair value of mortgage-backed securities pledged to secure
    Assets sold under agreements to repurchase

 

$

4,182,382

 

 

$

4,836,292

 

 

35

 

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

 

 

September 30, 2024

 

Security type (1)

 

Principal
balance or notional amount

 

 

Unamortized
net purchase
premiums (discounts)

 

 

Cumulative
valuation
changes

 

 

Fair value

 

 

 

(in thousands)

 

Agency fixed-rate pass-through securities

 

$

3,217,437

 

 

$

(2,344

)

 

$

37,815

 

 

$

3,252,908

 

Principal-only stripped securities

 

 

631,601

 

 

 

(118,563

)

 

 

27,751

 

 

 

540,789

 

Subordinate credit-linked securities

 

 

174,813

 

 

 

(4,744

)

 

 

26,242

 

 

 

196,311

 

Senior non-Agency securities

 

 

115,302

 

 

 

(3,177

)

 

 

(1,007

)

 

 

111,118

 

 

$

4,139,153

 

 

$

(128,828

)

 

$

90,801

 

 

 

4,101,126

 

Interest-only stripped securities

 

$

395,952

 

 

 

 

 

 

 

 

 

81,256

 

 

 

 

 

 

 

 

 

 

 

 

$

4,182,382

 

 

 

 

December 31, 2023

 

Security type (1)

 

Principal
balance or notional amount

 

 

Unamortized
net purchase
premiums (discounts)

 

 

Cumulative
valuation
changes

 

 

Fair value

 

 

 

(in thousands)

 

Agency fixed-rate pass-through securities

 

$

4,311,342

 

 

$

34

 

 

$

(41,320

)

 

$

4,270,056

 

Principal-only stripped securities

 

 

65,573

 

 

 

(18,567

)

 

 

6,330

 

 

 

53,336

 

Subordinate credit-linked securities

 

 

275,963

 

 

 

(3,633

)

 

 

28,850

 

 

 

301,180

 

Senior non-Agency securities

 

 

124,771

 

 

 

(3,567

)

 

 

(3,715

)

 

 

117,489

 

 

$

4,777,649

 

 

$

(25,733

)

 

$

(9,855

)

 

 

4,742,061

 

Interest-only stripped securities

 

$

419,791

 

 

 

 

 

 

 

 

 

94,231

 

 

 

 

 

 

 

 

 

 

 

$

4,836,292

 

 

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

Note 9—Loans Acquired for Sale at Fair Value

Following is a summary of the distribution of the Company’s loans acquired for sale at fair value:

Loan type

 

September 30, 2024

 

 

December 31, 2023

 

 

 

(in thousands)

 

Held for sale to nonaffiliates—GSE eligible (1)

 

$

1,486,193

 

 

$

491,108

 

Held for sale to PLS

 

 

 

 

 

 

GSE eligible

 

 

1,434

 

 

 

62,234

 

Government insured or guaranteed

 

 

113,289

 

 

 

106,069

 

 

 

 

114,723

 

 

 

168,303

 

Jumbo

 

 

58,811

 

 

 

3,289

 

Home equity lines of credit

 

 

1,445

 

 

 

1,803

 

Repurchased pursuant to representations and warranties

 

 

4,624

 

 

 

4,515

 

 

$

1,665,796

 

 

$

669,018

 

Loans pledged to secure:

 

 

 

 

 

 

Assets sold under agreements to repurchase

 

$

1,619,233

 

 

$

659,751

 

Mortgage loan participation purchase and sale agreements

 

 

30,178

 

 

 

—

 

 

$

1,649,411

 

 

$

659,751

 

 

(1)
GSE eligibility refers to the eligibility of loans for sale to Fannie Mae or Freddie Mac. The Company sells or finances a portion of
its GSE eligible loan production to other investors, including PLS.

36

 

Note 10—Loans at Fair Value

Loans at fair value are comprised primarily of loans held in VIEs securing asset-backed financings as described in Note 6 –Variable Interest Entities – Subordinate Mortgage-Backed Securities.

Following is a summary of the distribution of the Company’s loans at fair value:

Loan type

 

September 30, 2024

 

 

December 31, 2023

 

 

 

(in thousands)

 

Loans in VIEs:

 

 

 

 

 

 

Agency-conforming loans secured by investment properties

 

$

1,379,963

 

 

$

1,383,392

 

Fixed interest rate jumbo loans

 

 

47,612

 

 

 

48,297

 

 

 

1,427,575

 

 

 

1,431,689

 

Distressed loans

 

 

1,950

 

 

 

2,131

 

 

$

1,429,525

 

 

$

1,433,820

 

Loans at fair value pledged to secure:

 

 

 

 

 

 

Asset-backed financings at fair value (1)

 

$

1,427,575

 

 

$

1,431,689

 

Assets sold under agreements to repurchase

 

 

147

 

 

 

207

 

 

$

1,427,722

 

 

$

1,431,896

 

 

(1)
As discussed in Note 6 ‒ Variable Interest Entities ‒ Subordinate Mortgage-Backed Securities, the Company holds a portion of the securities issued by the VIEs. At September 30, 2024 and December 31, 2023, $83.4 million and $85.3 million, respectively, of such retained securities were pledged to secure Assets sold under agreements to repurchase.

 

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

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

 

 

September 30, 2024

 

 

December 31, 2023

 

 

 

(in thousands)

 

Derivative assets

 

$

81,844

 

 

$

177,984

 

 

$

81,844

 

 

$

177,984

 

 

 

 

 

 

 

Derivative liabilities

 

$

2,676

 

 

$

4,689

 

Credit risk transfer strip liabilities

 

 

13,475

 

 

 

46,692

 

 

$

16,151

 

 

$

51,381

 

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 the Company’s operations and the Company also enters into derivative transactions as part of its interest rate risk management activities.

Derivative financial instruments created as a result of the Company’s operations include:

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

The Company engages in interest rate risk management activities in an effort to reduce the variability of earnings caused by the effects of changes in interest rates on the fair 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:

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

To manage the price risk resulting from these interest rate risks, the Company uses derivative financial instruments with the intention of moderating the risk that changes in market interest rates will result in unfavorable changes in the fair values of the

37

 

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 strip liabilities and related margin deposits on the consolidated balance sheets:

 

 

September 30, 2024

 

 

December 31, 2023

 

 

 

 

 

 

Fair value

 

 

 

 

 

Fair value

 

 

 

Notional

 

 

Derivative

 

 

Derivative

 

 

Notional

 

 

Derivative

 

 

Derivative

 

Instrument

 

amount (1)

 

 

assets

 

 

liabilities

 

 

amount (1)

 

 

assets

 

 

liabilities

 

 

(in thousands)

 

Hedging derivatives subject to master netting
   arrangements (2):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Call options on interest rate futures purchase
   contracts

 

 

4,700,000

 

 

$

12,844

 

 

$

—

 

 

 

2,315,000

 

 

$

41,712

 

 

$

2,005

 

Put options on interest rate futures purchase
   contracts

 

 

500,000

 

 

 

1,953

 

 

 

—

 

 

 

2,900,000

 

 

 

4,324

 

 

 

—

 

Call options on interest rate futures sell contracts

 

 

—

 

 

 

—

 

 

 

—

 

 

 

500,000

 

 

 

—

 

 

 

1,328

 

Forward purchase contracts

 

 

3,194,957

 

 

 

635

 

 

 

7,452

 

 

 

2,789,324

 

 

 

15,905

 

 

 

490

 

Forward sale contracts

 

 

9,672,080

 

 

 

11,997

 

 

 

11,530

 

 

 

7,219,512

 

 

 

671

 

 

 

50,363

 

MBS call options

 

 

—

 

 

 

—

 

 

 

—

 

 

 

500,000

 

 

 

3,218

 

 

 

—

 

MBS put options

 

 

500,000

 

 

 

1,508

 

 

 

—

 

 

 

450,000

 

 

 

5

 

 

 

—

 

Bond futures

 

 

2,096,000

 

 

 

—

 

 

 

—

 

 

 

2,860,500

 

 

 

—

 

 

 

—

 

Swap futures

 

 

951,200

 

 

 

—

 

 

 

—

 

 

 

1,048,800

 

 

 

—

 

 

 

—

 

Other derivatives not subject to master netting
    arrangements:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

CRT derivatives

 

 

5,071,449

 

 

 

29,690

 

 

 

—

 

 

 

5,437,551

 

 

 

16,160

 

 

 

—

 

Interest rate lock commitments

 

 

2,062,088

 

 

 

7,476

 

 

 

1,574

 

 

 

874,017

 

 

 

7,596

 

 

 

64

 

Total derivative instruments before netting

 

 

 

 

 

66,103

 

 

 

20,556

 

 

 

 

 

 

89,591

 

 

 

54,250

 

Netting

 

 

 

 

 

15,741

 

 

 

(17,880

)

 

 

 

 

 

88,393

 

 

 

(49,561

)

 

 

 

 

$

81,844

 

 

$

2,676

 

 

 

 

 

$

177,984

 

 

$

4,689

 

Margin deposits placed with derivative
   counterparties included in derivative
   balances above, net

 

 

 

 

$

33,620

 

 

 

 

 

 

 

 

$

137,955

 

 

 

 

Derivative assets pledged to secure:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Notes payable secured by credit risk transfer
   and mortgage servicing assets

 

 

 

 

$

29,690

 

 

 

 

 

 

 

 

$

16,160

 

 

 

 

 

(1)Notional amounts provide an indication of the volume of the Company’s derivative activities.

(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 September 30, 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.

38

 

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.

 

 

September 30, 2024

 

 

December 31, 2023

 

 

 

Net amount

 

 

Gross amounts

 

 

 

 

 

Net amount

 

 

Gross amounts

 

 

 

 

 

 

of assets

 

 

not offset in the

 

 

 

 

 

of assets

 

 

not offset in the

 

 

 

 

 

 

presented

 

 

consolidated

 

 

 

 

 

presented

 

 

consolidated

 

 

 

 

 

 

in the

 

 

balance sheet

 

 

 

 

 

in the

 

 

balance sheet

 

 

 

 

 

 

consolidated

 

 

 

 

 

Cash

 

 

 

 

 

consolidated

 

 

 

 

 

Cash

 

 

 

 

 

 

balance

 

 

Financial

 

 

collateral

 

 

Net

 

 

balance

 

 

Financial

 

 

collateral

 

 

Net

 

Counterparty

 

sheet

 

 

instruments

 

 

received

 

 

amount

 

 

sheet

 

 

instruments

 

 

received

 

 

amount

 

 

 

(in thousands)

 

CRT derivatives

 

$

29,690

 

 

$

—

 

 

$

—

 

 

$

29,690

 

 

$

16,160

 

 

$

—

 

 

$

—

 

 

$

16,160

 

Interest rate lock commitments

 

 

7,476

 

 

 

—

 

 

 

—

 

 

 

7,476

 

 

 

7,596

 

 

 

—

 

 

 

—

 

 

 

7,596

 

RJ O’Brien & Associates, LLC

 

 

14,797

 

 

 

—

 

 

 

—

 

 

 

14,797

 

 

 

42,703

 

 

 

—

 

 

 

—

 

 

 

42,703

 

Morgan Stanley & Co. LLC

 

 

10,699

 

 

 

—

 

 

 

—

 

 

 

10,699

 

 

 

79,825

 

 

 

—

 

 

 

—

 

 

 

79,825

 

Wells Fargo Securities, LLC

 

 

7,666

 

 

 

—

 

 

 

—

 

 

 

7,666

 

 

 

7,759

 

 

 

—

 

 

 

—

 

 

 

7,759

 

Bank of America, N.A.

 

 

4,436

 

 

 

—

 

 

 

—

 

 

 

4,436

 

 

 

3,418

 

 

 

—

 

 

 

—

 

 

 

3,418

 

Goldman Sachs & Co. LLC

 

 

2,163

 

 

 

—

 

 

 

—

 

 

 

2,163

 

 

 

18,701

 

 

 

—

 

 

 

—

 

 

 

18,701

 

J.P. Morgan Securities LLC

 

 

1,307

 

 

 

—

 

 

 

—

 

 

 

1,307

 

 

 

997

 

 

 

—

 

 

 

—

 

 

 

997

 

Citigroup Global Markets Inc.

 

 

1,160

 

 

 

—

 

 

 

—

 

 

 

1,160

 

 

 

503

 

 

 

—

 

 

 

—

 

 

 

503

 

Other

 

 

2,450

 

 

 

—

 

 

 

—

 

 

 

2,450

 

 

 

322

 

 

 

—

 

 

 

—

 

 

 

322

 

 

$

81,844

 

 

$

—

 

 

$

—

 

 

$

81,844

 

 

$

177,984

 

 

$

—

 

 

$

—

 

 

$

177,984

 

 

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 with fair values that exceed the liability amounts recorded on the consolidated balance sheet.

 

 

September 30, 2024

 

 

December 31, 2023

 

 

 

Net amount

 

 

Gross amounts

 

 

 

 

 

Net amount

 

 

Gross amounts

 

 

 

 

 

 

of liabilities

 

 

not offset in the

 

 

 

 

 

of liabilities

 

 

not offset in the

 

 

 

 

 

 

presented

 

 

consolidated

 

 

 

 

 

presented

 

 

consolidated

 

 

 

 

 

 

in the

 

 

balance sheet

 

 

 

 

 

in the

 

 

balance sheet

 

 

 

 

 

 

consolidated

 

 

Financial

 

 

Cash

 

 

 

 

 

consolidated

 

 

Financial

 

 

Cash

 

 

 

 

 

 

balance

 

 

instruments

 

 

collateral

 

 

Net

 

 

balance

 

 

instruments

 

 

collateral

 

 

Net

 

Counterparty

 

sheet

 

 

(1)

 

 

pledged

 

 

amount

 

 

sheet

 

 

(1)

 

 

pledged

 

 

amount

 

 

 

(in thousands)

 

Interest rate lock commitments

 

$

1,574

 

 

$

—

 

 

$

—

 

 

$

1,574

 

 

$

64

 

 

$

—

 

 

$

—

 

 

$

64

 

J.P. Morgan Securities LLC

 

 

1,631,801

 

 

 

(1,631,801

)

 

 

—

 

 

 

—

 

 

 

1,521,072

 

 

 

(1,521,072

)

 

 

—

 

 

 

—

 

Bank of America, N.A.

 

 

809,476

 

 

 

(809,476

)

 

 

—

 

 

 

—

 

 

 

785,756

 

 

 

(785,756

)

 

 

—

 

 

 

—

 

Wells Fargo Securities, LLC

 

 

803,927

 

 

 

(803,927

)

 

 

—

 

 

 

—

 

 

 

569,129

 

 

 

(569,129

)

 

 

—

 

 

 

—

 

Barclays Capital Inc.

 

 

578,798

 

 

 

(578,798

)

 

 

—

 

 

 

—

 

 

 

807,404

 

 

 

(803,641

)

 

 

—

 

 

 

3,763

 

Santander US Capital

 

 

362,604

 

 

 

(362,539

)

 

 

—

 

 

 

65

 

 

 

292,091

 

 

 

(292,091

)

 

 

—

 

 

 

—

 

Citigroup Global Markets Inc.

 

 

310,707

 

 

 

(310,707

)

 

 

—

 

 

 

—

 

 

 

147,093

 

 

 

(147,093

)

 

 

—

 

 

 

—

 

Daiwa Capital Markets

 

 

230,033

 

 

 

(230,033

)

 

 

—

 

 

 

—

 

 

 

340,975

 

 

 

(340,975

)

 

 

—

 

 

 

—

 

Goldman Sachs & Co. LLC

 

 

227,545

 

 

 

(227,545

)

 

 

—

 

 

 

—

 

 

 

145,007

 

 

 

(145,007

)

 

 

—

 

 

 

—

 

RBC Capital Markets, L.P.

 

 

212,560

 

 

 

(212,560

)

 

 

—

 

 

 

—

 

 

 

128,602

 

 

 

(128,602

)

 

 

—

 

 

 

—

 

Atlas Securitized Products, L.P.

 

 

206,873

 

 

 

(206,873

)

 

 

—

 

 

 

—

 

 

 

783,456

 

 

 

(783,456

)

 

 

—

 

 

 

—

 

Morgan Stanley & Co. LLC

 

 

201,862

 

 

 

(201,862

)

 

 

—

 

 

 

—

 

 

 

25,814

 

 

 

(25,814

)

 

 

—

 

 

 

—

 

Mizuho Financial Group

 

 

98,686

 

 

 

(98,121

)

 

 

—

 

 

 

565

 

 

 

67,637

 

 

 

(67,110

)

 

 

—

 

 

 

527

 

BNP Paribas

 

 

77,277

 

 

 

(77,277

)

 

 

—

 

 

 

—

 

 

 

10,121

 

 

 

(10,121

)

 

 

—

 

 

 

—

 

Nomura Holdings America, Inc

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

8,135

 

 

 

(7,940

)

 

 

—

 

 

 

195

 

Other

 

 

472

 

 

 

—

 

 

 

—

 

 

 

472

 

 

 

140

 

 

 

—

 

 

 

—

 

 

 

140

 

 

$

5,754,195

 

 

$

(5,751,519

)

 

$

—

 

 

$

2,676

 

 

$

5,632,496

 

 

$

(5,627,807

)

 

$

—

 

 

$

4,689

 

 

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

39

 

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:

 

 

 

 

Quarter ended September 30,

 

 

Nine months ended September 30,

 

Derivative activity

 

Consolidated statements of income line

 

2024

 

 

2023

 

 

2024

 

 

2023

 

 

 

 

 

(in thousands)

 

Interest rate lock commitments

 

Net gains on loans acquired for sale (1)

 

$

4,349

 

 

$

(2,050

)

 

$

(1,631

)

 

$

(2,870

)

CRT derivatives

 

Net gains (losses) on investments
  and financings

 

$

8,735

 

 

$

13,164

 

 

$

23,964

 

 

$

39,123

 

Hedged item:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Assets sold under agreements
   to repurchase

 

Net gains (losses) on investments
  and financings

 

$

—

 

 

$

—

 

 

$

20,098

 

 

$

—

 

Interest rate lock
   commitments and
   loans acquired for sale

 

Net gains on loans acquired for sale

 

$

(45,471

)

 

$

24,092

 

 

$

(35,698

)

 

$

22,742

 

Mortgage servicing rights

 

Net loan servicing fees

 

$

(67,220

)

 

$

(50,689

)

 

$

(175,399

)

 

$

(81,584

)

 

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

Note 12—Mortgage Servicing Rights

Following is a summary of MSRs:

 

 

Quarter ended September 30,

 

 

Nine months ended September 30,

 

 

 

2024

 

 

2023

 

 

2024

 

 

2023

 

 

(in thousands)

 

Balance at beginning of period

 

$

3,941,861

 

 

$

3,977,938

 

 

$

3,919,107

 

 

$

4,012,737

 

Purchases

 

 

—

 

 

 

16,263

 

 

 

29,428

 

 

 

16,263

 

MSRs resulting from loan sales

 

 

87,588

 

 

 

58,560

 

 

 

159,456

 

 

 

249,925

 

Transfers to Agency of mortgage servicing
   rights relating to delinquent loans

 

 

125

 

 

 

70

 

 

 

341

 

 

 

(653

)

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

 

 

(35,609

)

 

 

(105,096

)

 

 

(35,609

)

 

 

(105,096

)

Changes in fair value:

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

(84,306

)

 

 

263,139

 

 

 

33,303

 

 

 

232,414

 

Other changes in fair value (2)

 

 

(100,612

)

 

 

(102,213

)

 

 

(296,979

)

 

 

(296,929

)

 

 

(184,918

)

 

 

160,926

 

 

 

(263,676

)

 

 

(64,515

)

Balance at end of period

 

$

3,809,047

 

 

$

4,108,661

 

 

$

3,809,047

 

 

$

4,108,661

 

 

 

 

September 30, 2024

 

 

December 31, 2023

 

 

 

(in thousands)

 

Fair value of mortgage servicing rights pledged to secure Assets
     sold under agreements to repurchase and Notes payable
    secured by credit risk transfer and mortgage servicing assets

 

$

3,756,894

 

 

$

3,871,249

 

 

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

40

 

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:

 

 

Quarter ended September 30,

 

 

Nine months ended September 30,

 

 

 

2024

 

 

2023

 

 

2024

 

 

2023

 

 

 

(in thousands)

 

Contractually specified servicing fees

 

$

162,605

 

 

$

166,809

 

 

$

485,089

 

 

$

496,522

 

Ancillary and other fees:

 

 

 

 

 

 

 

 

 

 

 

 

Late charges

 

 

1,044

 

 

 

878

 

 

 

3,019

 

 

 

2,442

 

Other

 

 

2,968

 

 

 

2,874

 

 

 

6,819

 

 

 

12,079

 

 

 

4,012

 

 

 

3,752

 

 

 

9,838

 

 

 

14,521

 

 

$

166,617

 

 

$

170,561

 

 

$

494,927

 

 

$

511,043

 

Average UPB of underlying loans

 

$

227,804,449

 

 

$

231,333,064

 

 

$

229,174,686

 

 

$

231,333,990

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Note 13— Other Assets

Other assets are summarized below:

 

 

September 30, 2024

 

 

December 31, 2023

 

 

 

(dollars in thousands)

 

Margin deposits

 

$

116,155

 

 

$

124,293

 

Interest receivable

 

 

39,593

 

 

 

37,305

 

Servicing fees receivable

 

 

11,791

 

 

 

14,603

 

Correspondent lending receivables

 

 

8,202

 

 

 

6,313

 

Other receivables

 

 

13,966

 

 

 

7,199

 

Real estate acquired in settlement of loans

 

 

3,401

 

 

 

4,541

 

Other

 

 

31,698

 

 

 

58,284

 

 

 

$

224,806

 

 

$

252,538

 

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

 

$

1,230

 

 

$

1,905

 

 

Note 14— Short-Term Debt

The borrowing facilities described throughout these Notes 14 and 15 contain various covenants, including financial covenants relating to the Company and its subsidiaries’ net worth, debt-to-equity ratio, and liquidity. The Company believes that it was in compliance with these covenants as of September 30, 2024.

Assets Sold Under Agreements to Repurchase

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

 

 

Quarter ended September 30,

 

 

Nine months ended September 30,

 

 

 

2024

 

 

2023

 

 

2024

 

 

2023

 

 

 

(dollars in thousands)

 

Weighted average interest rate (1)

 

 

6.02

%

 

 

5.97

%

 

 

6.09

%

 

 

5.81

%

Average balance

 

$

5,513,519

 

 

$

5,714,082

 

 

$

5,225,906

 

 

$

6,451,377

 

Total interest expense

 

$

86,900

 

 

$

87,414

 

 

$

244,821

 

 

$

284,027

 

Maximum daily amount outstanding

 

$

6,474,799

 

 

$

6,318,746

 

 

$

7,624,113

 

 

$

9,412,768

 

 

(1)
Excludes the effect of amortization of debt issuance costs and non-utilization fees of $3.4 million and $6.4 million for the quarter and nine months ended September 30, 2024, respectively, and $1.4 million and $3.8 million for the quarter and nine months ended September 30, 2023, respectively.

 

41

 

 

 

September 30, 2024

 

 

December 31, 2023

 

 

 

(dollars in thousands)

 

Carrying value:

 

 

 

 

 

 

Unpaid principal balance

 

$

5,751,519

 

 

$

5,627,807

 

Unamortized debt issuance costs

 

 

(3,058

)

 

 

(3,249

)

 

 

$

5,748,461

 

 

$

5,624,558

 

Weighted average interest rate

 

 

5.55

%

 

 

6.14

%

Available borrowing capacity (1):

 

 

 

 

 

 

Committed

 

$

597,072

 

 

$

634,147

 

Uncommitted

 

 

4,944,783

 

 

 

5,221,706

 

 

$

5,541,855

 

 

$

5,855,853

 

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

 

$

36,657

 

 

$

(116,358

)

Assets securing agreements to repurchase:

 

 

 

 

 

 

Mortgage-backed securities

 

$

4,182,382

 

 

$

4,836,292

 

Loans acquired for sale at fair value

 

$

1,619,233

 

 

$

659,751

 

Loans at fair value:

 

 

 

 

 

 

Securities retained in asset-backed financings

 

$

83,417

 

 

$

85,344

 

Distressed

 

$

147

 

 

$

207

 

Deposits securing credit risk transfer arrangements

 

$

71,975

 

 

$

77,417

 

Mortgage servicing rights (2)

 

$

1,935,890

 

 

$

2,000,574

 

Servicing advances

 

$

34,364

 

 

$

101,927

 

Real estate acquired in settlement of loans

 

$

1,230

 

 

$

1,905

 

 

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

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

Remaining maturity at September 30, 2024 (1)

 

Unpaid
principal
balance

 

 

 

(in thousands)

 

Within 30 days

 

$

287,565

 

Over 30 to 90 days

 

 

4,071,705

 

Over 90 days to 180 days

 

 

1,240,249

 

Over 180 days to 1 year

 

 

—

 

Over 1 year to 2 years

 

 

152,000

 

 

$

5,751,519

 

Weighted average maturity (in months)

 

 

2.6

 

 

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

42

 

The amount at risk (the fair value of the assets pledged plus the related margin deposit, less the amount advanced by the counterparty and interest payable) and maturity information relating to the Company’s assets sold under agreements to repurchase is summarized by pledged asset and counterparty below as of September 30, 2024:

Loans, REO and MSRs

 

 

 

 

 

Weighted-average maturity

Counterparty

 

Amount at risk

 

 

Advances

 

Facility

 

 

(in thousands)

 

 

 

 

 

Goldman Sachs & Co. LLC

 

$

94,042

 

 

December 23, 2024

 

January 26, 2026

Citibank, N.A.

 

$

44,524

 

 

November 9, 2024

 

June 11, 2026

Bank of America, N.A.

 

$

43,142

 

 

October 11, 2024

 

June 10, 2026

JPMorgan Chase & Co.

 

$

10,946

 

 

November 9, 2024

 

June 28, 2026

Atlas Securitized Products, L.P.

 

$

51,541

 

 

November 24, 2024

 

June 26, 2026

Wells Fargo Securities, LLC

 

$

7,448

 

 

December 19, 2024

 

October 15, 2025

Barclays Capital Inc.

 

$

10,112

 

 

December 23, 2024

 

March 6, 2026

RBC Capital Markets, L.P.

 

$

10,722

 

 

January 1, 2025

 

August 11, 2025

Morgan Stanley & Co. LLC

 

$

9,549

 

 

December 19, 2024

 

May 22, 2026

BNP Paribas

 

$

3,207

 

 

December 23, 2024

 

September 30, 2025

 

Securities

Counterparty

 

Amount at risk

 

 

Weighted average maturity

 

 

(in thousands)

 

 

 

Citibank, N.A.

 

$

45,724

 

 

December 27, 2024

Bank of America, N.A.

 

$

29,249

 

 

November 14, 2024

JPMorgan Chase & Co.

 

$

58,000

 

 

November 11, 2024

Wells Fargo Securities, LLC

 

$

33,220

 

 

January 23, 2025

Barclays Capital Inc.

 

$

24,401

 

 

November 27, 2024

Santander US Capital

 

$

19,410

 

 

December 23, 2024

Daiwa Capital Markets America Inc.

 

$

6,617

 

 

January 2, 2025

Mizuho Financial Group

 

$

5,448

 

 

January 6, 2025

 

 

 

 

 

 

 

CRT arrangements

Counterparty

 

Amount at risk

 

 

Weighted average maturity

 

 

(in thousands)

 

 

 

Goldman Sachs & Co. LLC

 

$

22,378

 

 

January 8, 2025

Mortgage Loan Participation Purchase and Sale Agreement

One of the borrowing facilities secured by loans acquired for sale is in the form of a mortgage loan participation purchase and sale agreement. Participation certificates, each of which represents an undivided beneficial ownership interest in a pool of loans that have been pooled with Fannie Mae or Freddie Mac, are sold to the lender pending the securitization of such loans and the sale of the resulting security. The commitment between the Company and a nonaffiliate to sell such security is also assigned to the lender at the time a participation certificate is sold.

The purchase price paid by the lender for each participation certificate is based on the trade price of the security, plus an amount of interest expected to accrue on the security to its anticipated delivery date, minus a present value adjustment, any related hedging costs and a holdback amount. The holdback amount is based on a percentage of the purchase price and is not required to be paid to the Company until the settlement of the security and its delivery to the lender.

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

 

 

Quarter ended September 30,

 

 

Nine months ended September 30,

 

 

 

2024

 

 

2023

 

 

2024

 

 

2023

 

 

 

(dollars in thousands)

 

Average balance

 

$

32,353

 

 

$

22,043

 

 

$

18,829

 

 

$

20,991

 

Weighted average interest rate (1)

 

 

6.59

%

 

 

6.69

%

 

 

6.66

%

 

 

6.46

%

Total interest expense

 

$

568

 

 

$

403

 

 

$

1,033

 

 

$

1,109

 

Maximum daily amount outstanding

 

$

78,068

 

 

$

46,303

 

 

$

78,068

 

 

$

90,565

 

 

43

 

 

(1)
Excludes the effect of amortization of debt issuance costs of $31,000 and $94,000, respectively, for the quarter and nine months ended September 30, 2024 and 2023.

 

 

 

September 30, 2024

 

 

 

(dollars in thousands)

 

Carrying value:

 

 

 

Amount outstanding

 

$

28,878

 

Unamortized debt issuance costs

 

 

(88

)

 

$

28,790

 

Weighted average interest rate

 

 

6.10

%

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

 

$

30,178

 

 

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
Term
Notes

 

Issuance date

 

Issuance amount

 

 

Unpaid principal
balance

 

 

Annual interest rate spread (1)

 

Maturity date

 

 

 

 

(in thousands)

 

 

 

 

 

2024 3R

 

August 28, 2024

 

$

158,500

 

 

$

155,474

 

 

3.10%

 

September 27, 2028

2024 2R

 

April 4, 2024

 

$

247,000

 

 

 

235,364

 

 

3.35%

 

March 29, 2027

2024 1R

 

March 6, 2024

 

$

306,000

 

 

 

289,886

 

 

3.50%

 

March 1, 2027

2020 1R

 

February 14, 2020

 

$

350,000

 

 

 

46,100

 

 

3.35%

 

February 27, 2025

2019 3R

 

October 16, 2019

 

$

375,000

 

 

 

42,918

 

 

3.70%

 

October 29, 2024

 

 

 

 

 

 

$

769,742

 

 

 

 

 

 

(1)
Interest rates are charged at a spread to the Secured Overnight Financing Rate ("SOFR").

Fannie Mae MSR Financing

The Company, through two subsidiaries, PMT ISSUER TRUST-FMSR and PMT CO-ISSUER TRUST-FMSR (together, the "Issuer Trusts"), finances MSRs owned by PMC and the related excess servicing spread ("ESS") owned by PennyMac Holdings, LLC (“PMH”), another subsidiary of PMT, through a combination of repurchase agreements and term financing.

The repurchase agreements financings 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 combined committed borrowing capacity of $775 million 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 VFNs are secured by certain participation certificates relating to Fannie Mae MSRs and ESS and rank pari passu with each other.

44

 

Following is a summary of the term financing of the Company’s Fannie Mae MSRs:

 

 

 

 

 

 

 

 

 

Maturity date

Issuance

 

Issuance date

 

Unpaid principal
balance

 

 

Annual interest rate spread(1)

 

Stated

 

Optional extension (2)

 

 

 

 

(in thousands)

 

 

 

 

 

 

 

Term Loans

 

 

 

 

 

 

 

 

 

2023

 

May 25, 2023

 

$

370,000

 

 

3.00%

 

May 25, 2028

 

May 25, 2029

Term Notes

 

 

 

 

 

 

 

 

 

2024

 

June 27, 2024

 

 

355,000

 

 

2.75%

 

December 27, 2027

 

June 26, 2028

2021

 

March 30, 2021

 

 

350,000

 

 

3.00%

 

March 25, 2026

 

March 27, 2028

 

 

 

 

$

1,075,000

 

 

 

 

 

 

 

 

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

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
July 2026. 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- 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:

 

 

Quarter ended September 30,

 

 

Nine months ended September 30,

 

 

 

2024

 

 

2023

 

 

2024

 

 

2023

 

 

 

(dollars in thousands)

 

Average balance

 

$

2,854,487

 

 

$

3,106,809

 

 

$

2,871,883

 

 

$

2,995,752

 

Weighted average interest rate (1)

 

 

8.60

%

 

 

8.70

%

 

 

8.84

%

 

 

8.28

%

Total interest expense

 

$

66,305

 

 

$

69,952

 

 

$

198,760

 

 

$

191,049

 

Maximum daily amount outstanding

 

$

3,183,237

 

 

$

3,380,951

 

 

$

3,327,400

 

 

$

3,403,116

 

 

(1)
Excludes the effect of amortization of debt issuance costs of $4.6 million and $8.7 million for the quarter and nine months ended September 30, 2024, respectively, and $1.9 million and $5.4 million for the quarter and nine months ended September 30, 2023, respectively.

 

 

 

 

September 30, 2024

 

 

December 31, 2023

 

 

 

(dollars in thousands)

 

Carrying value:

 

 

 

 

 

 

Unpaid principal balance:

 

 

 

 

 

 

CRT arrangement financing

 

$

769,742

 

 

$

747,662

 

Fannie Mae MSR financing

 

 

1,075,000

 

 

 

1,025,000

 

Freddie Mac MSR and servicing advance receivable financing

 

 

995,000

 

 

 

1,145,000

 

 

 

 

2,839,742

 

 

 

2,917,662

 

Unamortized debt issuance costs

 

 

(9,634

)

 

 

(7,057

)

 

$

2,830,108

 

 

$

2,910,605

 

Weighted average interest rate

 

 

8.08

%

 

 

8.73

%

Assets securing notes payable:

 

 

 

 

 

 

MSRs (1)

 

$

3,756,894

 

 

$

3,871,249

 

Servicing advances

 

$

24,757

 

 

$

79,274

 

CRT Agreements:

 

 

 

 

 

 

Deposits securing CRT arrangements

 

$

1,063,472

 

 

$

1,132,081

 

Derivative assets

 

$

29,690

 

 

$

16,160

 

 

45

 

 

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

Unsecured Senior Notes

Exchangeable Senior Notes

PMC has issued $216.5 million aggregate principal amount of exchangeable senior notes due 2029 (the “2029 Exchangeable Notes”), $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”). The 2029 Exchangeable Notes, the 2026 Exchangeable Notes and the 2024 Exchangeable Notes are referred to collectively as the “Exchangeable Notes”. The Exchangeable Notes are summarized below:

Initial issuance date

 

Unpaid principal balance

 

 

Annual interest rate

 

Conversion rates (1)

 

Maturity date (2)

 

(in thousands)

 

 

 

 

 

 

 

May 24, 2024

 

$

216,500

 

 

8.50%

 

63.3332

 

June 1, 2029

March 5, 2021

 

 

345,000

 

 

5.50%

 

46.1063

 

March 15, 2026

November 7, 2019

 

 

210,000

 

 

5.50%

 

40.1010

 

November 1, 2024

 

 

$

771,500

 

 

 

 

 

 

 

 

(1)
Common Shares per $1,000 principal amount.
(2)
Unless repurchased or exchanged in accordance with their terms before such date.

Effective June 21, 2024, the Company and PMC entered into a supplemental indenture pursuant to which PMC made an irrevocable election to eliminate its option to elect physical share settle on any exchange of the 2024 Exchangeable Notes and the 2026 Exchangeable Notes. As a result of entering into the supplemental indenture, the 2024 Exchangeable Notes and the 2026 Exchangeable Notes are exchangeable for: (1) cash for the principal amount of the notes to be exchanged; and (2) cash, Common Shares or a combination of cash and Common Shares, at the Company’s election, for the remainder, if any, of the exchange obligation in excess of the principal amount of the notes being exchanged, at any time until the close of business on the second scheduled trading day immediately preceding the maturity date.

The Exchangeable Notes are fully and unconditionally guaranteed by the Company.

2028 Senior Notes

In September 2023, the Company issued $53.5 million principal amount of unsecured 8.50% senior notes due

September 30, 2028 (the "2028 Senior Notes”). Interest on the 2028 Senior Notes is payable quarterly.

On or after September 30, 2025, PMT may redeem for cash all or any portion of the 2028 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 2028 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.

Following is financial information relating to the unsecured senior notes:

 

 

Quarter ended September 30,

 

 

Nine months ended September 30,

 

 

 

2024

 

 

2023

 

 

2024

 

 

2023

 

 

 

(in thousands)

 

Average balance

 

$

825,000

 

 

$

553,338

 

 

$

710,496

 

 

$

549,063

 

Weighted average interest rate (1)

 

 

6.45

%

 

 

5.56

%

 

 

6.16

%

 

 

5.60

%

Interest expense

 

$

14,571

 

 

$

8,541

 

 

$

35,884

 

 

$

25,316

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 2024

 

 

December 31, 2023

 

 

 

 

 

 

 

 

 

(in thousands)

 

 

 

 

 

 

 

Carrying value:

 

 

 

 

 

 

 

 

 

 

 

 

Unpaid principal balance

 

$

825,000

 

 

$

608,500

 

 

 

 

 

 

 

Unamortized debt issuance costs

 

 

(10,085

)

 

 

(8,042

)

 

 

 

 

 

 

 

$

814,915

 

 

$

600,458

 

 

 

 

 

 

 

 

46

 

 

(1)
Excludes the effect of amortization of debt issuance costs of $1.2 million and $3.1 million for the quarter and nine months ended September 30, 2024, respectively, and $790,000 and $2.3 million for the quarter and nine months ended September 30, 2023, respectively.

Asset-Backed Financings of Variable Interest Entities at Fair Value

Following is a summary of financial information relating to the asset-backed financings of VIEs at fair value described in Note 6 ‒ Variable Interest Entities ‒ Subordinate Mortgage-Backed Securities:

 

 

Quarter ended September 30,

 

 

Nine months ended September 30,

 

 

 

2024

 

 

2023

 

 

2024

 

 

2023

 

 

 

(dollars in thousands)

 

Average balance

 

$

1,542,753

 

 

$

1,342,093

 

 

$

1,561,810

 

 

$

1,381,994

 

Total interest expense

 

$

10,838

 

 

$

13,652

 

 

$

34,918

 

 

$

38,796

 

Weighted average interest rate (1)

 

 

3.06

%

 

 

3.70

%

 

 

3.08

%

 

 

3.69

%

 

(1)
Excludes the effect of (accrual) amortization of net issuance premiums and debt issuance costs of $(1.0) million and $(1.1) million for the quarter and nine months ended September 30, 2024, respectively, and $1.1 million and $666,000 for the quarter and nine months ended September 30, 2023, respectively.

 

 

 

September 30, 2024

 

 

December 31, 2023

 

 

 

(dollars in thousands)

 

Fair value

 

$

1,334,797

 

 

$

1,336,731

 

Unpaid principal balance

 

$

1,527,681

 

 

$

1,590,003

 

Weighted average interest rate

 

 

3.22

%

 

 

3.22

%

The asset-backed financings are non-recourse liabilities and are secured solely by the assets of consolidated VIEs and not by any other assets of the Company. The assets of the VIEs are the only source of funds for repayment of the asset-backed financings.

Maturities of Long-Term Debt

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

 

 

 

 

Twelve months ended September 30,

 

 

 

 

 

Total

 

 

2025

 

 

2026

 

 

2027

 

 

2028

 

 

2029

 

 

Thereafter

 

 

(in thousands)

 

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

$

2,839,742

 

 

$

89,018

 

 

$

1,345,000

 

 

$

525,250

 

 

$

880,474

 

 

$

—

 

 

$

—

 

Unsecured senior notes

 

825,000

 

 

 

210,000

 

 

 

345,000

 

 

 

—

 

 

 

53,500

 

 

 

216,500

 

 

 

—

 

Asset-backed financings at fair value (2)

 

1,527,681

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

1,527,681

 

Interest-only security payable at fair value (2)

 

35,098

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

35,098

 

Total

$

5,227,521

 

 

$

299,018

 

 

$

1,690,000

 

 

$

525,250

 

 

$

933,974

 

 

$

216,500

 

 

$

1,562,779

 

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

47

 

Note 16—Liability for Losses Under Representations and Warranties

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

 

 

Quarter ended September 30,

 

 

Nine months ended September 30,

 

 

 

2024

 

 

2023

 

 

2024

 

 

2023

 

 

 

(in thousands)

 

Balance, beginning of period

 

$

13,183

 

 

$

37,069

 

 

$

26,143

 

 

$

39,471

 

Provision for losses:

 

 

 

 

 

 

 

 

 

 

 

 

Pursuant to loan sales

 

 

459

 

 

 

448

 

 

 

917

 

 

 

2,126

 

Reduction in liability due to change in estimate

 

 

(5,180

)

 

 

(4,365

)

 

 

(18,598

)

 

 

(7,920

)

Losses incurred

 

 

(147

)

 

 

—

 

 

 

(147

)

 

 

(525

)

Balance, end of period

 

$

8,315

 

 

$

33,152

 

 

$

8,315

 

 

$

33,152

 

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

 

 

 

 

 

 

 

$

223,245,804

 

 

$

228,679,429

 

 

Note 17—Commitments and Contingencies

Commitments

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

 

 

September 30, 2024

 

 

 

(in thousands)

 

Commitments to purchase loans acquired for sale

 

$

2,062,088

 

 

Legal Proceedings

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.

 

Litigation

On June 14, 2024, a purported shareholder of the Company’s Series A Preferred Shares and Series B Preferred Shares (each, as defined hereafter) filed a complaint in a putative class action in the United States District Court for the Central District of California, captioned Roberto Verthelyi v. PennyMac Mortgage Investment Trust and PNMAC Capital Management, LLC, Case No. 2:24-cv-05028 (the “Verthelyi Action”). The Verthelyi Action alleges, among other things, that the Company (and its external investment advisor, PCM), committed unlawful and unfair acts in violation of California’s Unfair Competition Law by replacing its floating three-month London Inter-bank Offered Rate ("LIBOR") dividend rate for the Series A and Series B Preferred Shares with a fixed rate, in violation of the LIBOR Act, 12 U.S.C. § 5801 et seq., and the LIBOR Rule, 12 C.F.R. § 253 et seq.

The Verthelyi Action seeks injunctive relief requiring the Company to implement SOFR as a replacement to the three-month LIBOR rate and damages for the putative class in the form of restitution, interest, disgorgement and other relief. The Company believes it has interpreted the Articles Supplementary to its Series A and Series B Preferred Shares consistent with their terms and, more specifically, the interest rate fallback provisions contained therein, as applied under the LIBOR Act and the LIBOR rules, and that the Verthelyi Action is without merit. Accordingly, while no assurance can be provided as to the ultimate outcome of this claim, the Company and PCM plan to vigorously defend the matter. Pursuant to the terms of the Third Amended and Restated Management Agreement, dated as of June 30, 2020, by and between the Company and PCM, the Company has assumed the defense of PCM in the Verthelyi Action. The Company and PCM each filed a motion to dismiss the complaint on August 20, 2024.

48

 

Note 18—Shareholders’ Equity

Preferred Shares of Beneficial Interest

Preferred shares of beneficial interest are summarized below:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Dividends per share, period ended September 30,

 

Preferred

 

 

 

Number of

 

 

Liquidation

 

 

Issuance

 

 

Carrying

 

 

Quarter

 

 

Nine months

 

Shares

 

Description (1)

 

shares

 

 

preference

 

 

discount

 

 

value

 

 

2024

 

 

2023

 

 

2024

 

 

2023

 

 

 

(in thousands, except dividends per share)

 

Series A

 

8.125% Issued March 2017

 

 

4,600

 

 

$

115,000

 

 

$

3,828

 

 

$

111,172

 

 

$

0.51

 

 

$

0.51

 

 

$

1.53

 

 

$

1.53

 

Series B

 

8.00% Issued July 2017

 

 

7,800

 

 

 

195,000

 

 

 

6,465

 

 

 

188,535

 

 

$

0.50

 

 

$

0.50

 

 

$

1.50

 

 

$

1.50

 

Series C

 

6.75% Issued August 2021

 

 

10,000

 

 

 

250,000

 

 

 

8,225

 

 

 

241,775

 

 

$

0.42

 

 

$

0.42

 

 

$

1.26

 

 

$

1.26

 

 

 

 

 

22,400

 

 

$

560,000

 

 

$

18,518

 

 

$

541,482

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1)
Par value is $0.01 per share.

In 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, are being 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 and the Series B Preferred Shares became redeemable on June 15, 2024. The Series C Cumulative Redeemable Preferred Shares will not be redeemable before August 24, 2026, except in connection with the Company’s qualification as a REIT for U.S. federal income tax purposes or upon the occurrence of a change of control. On or after the date the preferred shares become redeemable, or 120 days after the first date on which such change of control occurs, the Company may, at its option, redeem any or all of the preferred shares at $25.00 per share plus any accumulated and unpaid dividends to, but not including, the redemption date. No preferred shares were redeemed during the quarter and nine months ended September 30, 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

On June 14, 2024, the Company filed a shelf registration statement and a prospectus supplement, and entered into separate equity distribution agreements to sell from time to time, through an ATM equity offering program under which the counterparties will act as sales agents and/or principals, the Company’s Common Shares having an aggregate offering price of up to $200 million. As of September 30, 2024, the Company had not sold any Common Shares under the ATM equity offering program.

Common Share Repurchase Program

The Company has a Common Share repurchase program with a repurchase authorization of $500 million before transaction fees.

The following table summarizes the Company’s Common Share repurchase activity:

 

 

Nine months ended September 30,

 

 

Cumulative

 

 

 

2024

 

 

2023

 

 

total (1)

 

 

(in thousands)

 

Common Shares repurchased

 

 

—

 

 

 

2,274

 

 

 

29,102

 

Cost of Common Shares repurchased (2)

 

$

—

 

 

$

27,011

 

 

$

427,229

 

 

(1)
Amounts represent the Common Share repurchase program total from its inception in August 2015 through September 30, 2024.
(2)
Cumulative total cost of Common Shares repurchased includes $582,000 of transaction fees.

49

 

Note 19— Net Gains (Losses) on Investments and Financings

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

 

 

Quarter ended September 30,

 

 

Nine months ended September 30,

 

 

 

2024

 

 

2023

 

 

2024

 

 

2023

 

 

 

(in thousands)

 

Mortgage-backed securities

 

$

123,433

 

 

$

(144,031

)

 

$

50,310

 

 

$

(127,434

)

Loans:

 

 

 

 

 

 

 

 

 

 

 

 

Held in VIEs

 

 

75,360

 

 

 

(54,082

)

 

 

71,381

 

 

 

(61,318

)

Distressed

 

 

(10

)

 

 

(59

)

 

 

(51

)

 

 

(485

)

CRT arrangements

 

 

20,834

 

 

 

30,154

 

 

 

89,118

 

 

 

136,890

 

Asset-backed financings

 

 

(72,922

)

 

 

58,474

 

 

 

(64,151

)

 

 

66,108

 

Hedging derivatives

 

 

—

 

 

 

—

 

 

 

20,098

 

 

 

—

 

 

$

146,695

 

 

$

(109,544

)

 

$

166,705

 

 

$

13,761

 

 

Note 20— Net Gains on Loans Acquired for Sale

Net gains on loans acquired for sale are summarized below:

 

 

Quarter ended September 30,

 

 

Nine months ended September 30,

 

 

 

2024

 

 

2023

 

 

2024

 

 

2023

 

 

 

(in thousands)

 

From nonaffiliates:

 

 

 

 

 

 

 

 

 

 

 

 

Cash losses:

 

 

 

 

 

 

 

 

 

 

 

 

Sales of loans

 

$

(23,594

)

 

$

(71,105

)

 

$

(94,999

)

 

$

(260,697

)

Hedging activities

 

 

(72,868

)

 

 

(30,155

)

 

 

(116,797

)

 

 

(52,822

)

 

 

(96,462

)

 

 

(101,260

)

 

 

(211,796

)

 

 

(313,519

)

Non-cash gains:

 

 

 

 

 

 

 

 

 

 

 

 

Receipt of MSRs in mortgage loan sale transactions

 

 

87,588

 

 

 

58,560

 

 

 

159,456

 

 

 

249,925

 

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

 

 

 

 

 

 

 

 

 

 

 

 

Pursuant to loans sales

 

 

(459

)

 

 

(448

)

 

 

(917

)

 

 

(2,126

)

Reduction of liability due to change in estimate

 

 

5,180

 

 

 

4,365

 

 

 

18,598

 

 

 

7,920

 

 

 

4,721

 

 

 

3,917

 

 

 

17,681

 

 

 

5,794

 

Changes in fair value of loans and derivatives

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate lock commitments

 

 

4,349

 

 

 

(2,050

)

 

 

(1,631

)

 

 

(2,870

)

Loans

 

 

(9,528

)

 

 

(1,710

)

 

 

(3,721

)

 

 

4,569

 

Hedging derivatives

 

 

27,397

 

 

 

54,247

 

 

 

81,099

 

 

 

75,564

 

 

 

22,218

 

 

 

50,487

 

 

 

75,747

 

 

 

77,263

 

 

 

114,527

 

 

 

112,964

 

 

 

252,884

 

 

 

332,982

 

Total from nonaffiliates

 

 

18,065

 

 

 

11,704

 

 

 

41,088

 

 

 

19,463

 

From PFSI ‒ cash gains

 

 

1,994

 

 

 

1,854

 

 

 

5,649

 

 

 

5,014

 

 

$

20,059

 

 

$

13,558

 

 

$

46,737

 

 

$

24,477

 

 

 

 

50

 

Note 21—Net Interest Expense

Net interest expense is summarized below:

 

 

Quarter ended September 30,

 

 

Nine months ended September 30,

 

 

 

2024

 

 

2023

 

 

2024

 

 

2023

 

 

 

(in thousands)

 

Interest income:

 

 

 

 

 

 

 

 

 

 

 

 

Cash and short-term investments

 

$

7,590

 

 

$

6,288

 

 

$

22,867

 

 

$

19,311

 

Mortgage-backed securities

 

 

66,573

 

 

 

66,563

 

 

 

184,762

 

 

 

180,244

 

Loans acquired for sale at fair value

 

 

23,900

 

 

 

14,720

 

 

 

50,804

 

 

 

77,487

 

Loans at fair value

 

 

16,044

 

 

 

9,514

 

 

 

41,617

 

 

 

38,348

 

Deposits securing CRT arrangements

 

 

15,042

 

 

 

16,419

 

 

 

46,121

 

 

 

46,410

 

Placement fees relating to custodial funds

 

 

47,256

 

 

 

44,005

 

 

 

124,226

 

 

 

110,602

 

Other

 

 

329

 

 

 

1,417

 

 

 

1,731

 

 

 

2,227

 

 

 

176,734

 

 

 

158,926

 

 

 

472,128

 

 

 

474,629

 

Interest expense:

 

 

 

 

 

 

 

 

 

 

 

 

Assets sold under agreements to repurchase

 

 

86,900

 

 

 

87,414

 

 

 

244,821

 

 

 

284,027

 

Mortgage loan participation purchase and sale agreements

 

 

568

 

 

 

403

 

 

 

1,033

 

 

 

1,109

 

Notes payable secured by credit risk transfer and
   mortgage servicing assets

 

 

66,305

 

 

 

69,952

 

 

 

198,760

 

 

 

191,049

 

Unsecured senior notes

 

 

14,571

 

 

 

8,541

 

 

 

35,884

 

 

 

25,316

 

Asset-backed financings at fair value

 

 

10,838

 

 

 

13,652

 

 

 

34,918

 

 

 

38,796

 

Interest shortfall on repayments of loans serviced
   for Agency securitizations

 

 

1,913

 

 

 

1,503

 

 

 

5,011

 

 

 

4,322

 

Interest on loan impound deposits

 

 

2,285

 

 

 

2,079

 

 

 

5,284

 

 

 

4,737

 

Other

 

 

791

 

 

 

374

 

 

 

1,828

 

 

 

1,089

 

 

 

 

184,171

 

 

 

183,918

 

 

 

527,539

 

 

 

550,445

 

 

 

$

(7,437

)

 

$

(24,992

)

 

$

(55,411

)

 

$

(75,816

)

 

Note 22—Share-Based Compensation

The Company has an equity incentive plan, adopted in 2019, that provides for the issuance of equity based awards based on 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 equity incentive 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 equity incentive 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 equity incentive plan if:

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

Restricted share units have been awarded to trustees and officers of the Company and to other employees of PFSI and its subsidiaries at no cost to the grantees. Such awards generally vest over a one- to three-year period.

51

 

The following table summarizes the Company’s share-based compensation activity:

 

Quarter ended September 30,

 

 

Nine months ended September 30,

 

 

 

2024

 

 

2023

 

 

2024

 

 

2023

 

 

 

(in thousands)

 

Grants:

 

 

 

 

 

 

 

 

 

 

 

 

Restricted share units

 

 

—

 

 

 

—

 

 

 

182

 

 

 

172

 

Performance share units

 

 

—

 

 

 

—

 

 

 

140

 

 

 

166

 

 

 

—

 

 

 

—

 

 

 

322

 

 

 

338

 

Grant date fair value:

 

 

 

 

 

 

 

 

 

 

 

 

Restricted share units

 

$

—

 

 

$

—

 

 

$

2,605

 

 

$

2,212

 

Performance share units

 

 

—

 

 

 

—

 

 

 

2,007

 

 

 

2,088

 

 

$

—

 

 

$

—

 

 

$

4,612

 

 

$

4,300

 

Vestings:

 

 

 

 

 

 

 

 

 

 

 

 

Restricted share units

 

 

—

 

 

 

—

 

 

 

164

 

 

 

140

 

Performance share units (1)

 

 

—

 

 

 

—

 

 

 

203

 

 

 

48

 

 

 

—

 

 

 

—

 

 

 

367

 

 

 

188

 

Forfeitures:

 

 

 

 

 

 

 

 

 

 

 

 

Restricted share units

 

 

—

 

 

 

—

 

 

 

3

 

 

 

6

 

Performance share units

 

 

—

 

 

 

—

 

 

 

4

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

7

 

 

 

6

 

Compensation expense relating to share-based grants

 

$

816

 

 

$

1,420

 

 

$

3,008

 

 

$

3,421

 

 

(1)
The actual number of performance-based restricted share units (“RSUs”) that vested during the nine months ended September 30, 2024 was 203,110 Common Shares, which is approximately 140% of the originally granted performance-based RSUs.

 

 

 

September 30, 2024

 

 

 

Restricted share units

 

 

Performance share units

 

Shares expected to vest:

 

 

Number of restricted shares units (in thousands)

 

 

265

 

 

 

251

 

Grant date average fair value per unit

 

$

14.10

 

 

$

14.04

 

 

Note 23—Income Taxes

The Company’s effective tax rate was (56.1)% and (30.8)% with consolidated pretax income of $26.5 million and $87.5 million for the quarter and nine months ended September 30, 2024. The Company’s taxable REIT subsidiary (“TRS”) recognized a tax benefit of $15.5 million on a pretax loss of $64.7 million and tax benefit of $27.5 million on a pretax loss of $115.6 million for the quarter and nine months ended September 30, 2024. For the same periods in 2023, the TRS recognized a tax expense of $57.1 million on pretax income of $234.0 million and tax expense of $56.5 million on pretax income of $221.9 million. The Company’s reported consolidated pretax income was $118.4 million for the quarter ended September 30, 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 September 30, 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 ended September 30, 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. 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.

52

 

Basic earnings per share is determined by dividing net income available to common shareholders (net income reduced by preferred dividends and income attributable to the participating securities) by the weighted average Common Shares outstanding during the period.

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.

As discussed in Note 15— Long-Term Debt, effective June 21, 2024, the Company entered into a supplemental indenture affecting the terms of conversion of the 2024 Exchangeable Notes and the 2026 Exchangeable Notes. As a result of entering into the supplemental indenture, beginning with the quarter and the six months ended June 30, 2024, the number of shares included in the diluted weighted average shares outstanding will represent the number of shares required to settle the obligation in excess of the unpaid balance of the notes being exchanged.

The following table summarizes the basic and diluted earnings per share calculations:

 

 

Quarter ended September 30,

 

 

Nine months ended September 30,

 

 

 

2024

 

 

2023

 

 

2024

 

 

2023

 

 

 

(in thousands except per share amounts)

 

Net income

 

$

41,407

 

 

$

61,422

 

 

$

114,449

 

 

$

146,743

 

Dividends on preferred shares

 

 

(10,455

)

 

 

(10,455

)

 

 

(31,364

)

 

 

(31,364

)

Effect of participating securities—share-based compensation
   awards

 

 

(106

)

 

 

(147

)

 

 

(323

)

 

 

(332

)

Net income attributable to common shareholders

 

 

30,846

 

 

 

50,820

 

 

 

82,762

 

 

 

115,047

 

Interest on Exchangeable Notes, net of income taxes

 

 

—

 

 

 

6,359

 

 

 

—

 

 

 

18,773

 

Loss attributable to participating securities

 

 

—

 

 

 

(4

)

 

 

—

 

 

 

(35

)

Diluted net income attributable to common shareholders

 

$

30,846

 

 

$

57,175

 

 

$

82,762

 

 

$

133,785

 

Weighted average basic shares outstanding

 

 

86,861

 

 

 

86,760

 

 

 

86,800

 

 

 

87,613

 

Dilutive securities:

 

 

 

 

 

 

 

 

 

 

 

 

Shares issuable pursuant to exchange of the Exchangeable Notes

 

 

—

 

 

 

24,328

 

 

 

—

 

 

 

24,328

 

Diluted weighted average shares outstanding

 

 

86,861

 

 

 

111,088

 

 

 

86,800

 

 

 

111,941

 

Basic earnings per share

 

$

0.36

 

 

$

0.59

 

 

$

0.95

 

 

$

1.31

 

Diluted earnings per share

 

$

0.36

 

 

$

0.51

 

 

$

0.95

 

 

$

1.20

 

 

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:

 

 

 

Quarter ended September 30,

 

 

Nine months ended September 30,

 

 

 

2024

 

 

2023

 

 

2024

 

 

2023

 

 

 

(in thousands)

 

Shares issuable under share-based compensation plan

 

 

151

 

 

 

188

 

 

 

210

 

 

 

166

 

 

53

 

Note 25—Segments

The Company operates in four segments as described in Note 1 ‒ Organization.

The Company’s reportable segments are identified based on PMT’s investment strategies. The Company’s chief operating decision maker is its chief executive officer. The following disclosures about the Company’s business segments are presented consistent with the way the Company’s chief operating decision maker organizes and evaluates financial information for making operating decisions and assessing performance.

Financial highlights by operating segment are summarized below:

 

 

Credit

 

 

Interest rate

 

 

 

 

 

 

 

 

 

 

 

 

sensitive

 

 

sensitive

 

 

Correspondent

 

 

 

 

 

 

 

 Quarter ended September 30, 2024

 

strategies

 

 

strategies

 

 

production

 

 

Corporate

 

 

Total

 

 

 

(in thousands)

 

Net investment income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net gains (losses) on investments and financings

 

$

27,113

 

 

$

119,582

 

 

$

—

 

 

$

—

 

 

$

146,695

 

Net gains on loans acquired for sale

 

 

—

 

 

 

—

 

 

 

20,059

 

 

 

—

 

 

 

20,059

 

Net loan servicing fees

 

 

—

 

 

 

(85,080

)

 

 

—

 

 

 

—

 

 

 

(85,080

)

Net interest expense:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest income

 

 

21,389

 

 

 

128,458

 

 

 

23,853

 

 

 

3,034

 

 

 

176,734

 

Interest expense

 

 

21,921

 

 

 

136,873

 

 

 

24,273

 

 

 

1,104

 

 

 

184,171

 

 

 

(532

)

 

 

(8,415

)

 

 

(420

)

 

 

1,930

 

 

 

(7,437

)

Other

 

 

(65

)

 

 

—

 

 

 

6,692

 

 

 

—

 

 

 

6,627

 

 

 

26,516

 

 

 

26,087

 

 

 

26,331

 

 

 

1,930

 

 

 

80,864

 

Expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loan fulfillment and servicing fees
   payable to PFSI

 

 

20

 

 

 

22,220

 

 

 

11,492

 

 

 

—

 

 

 

33,732

 

Management fees

 

 

—

 

 

 

—

 

 

 

—

 

 

 

7,153

 

 

 

7,153

 

Other

 

 

47

 

 

 

3,376

 

 

 

1,590

 

 

 

8,432

 

 

 

13,445

 

 

 

67

 

 

 

25,596

 

 

 

13,082

 

 

 

15,585

 

 

 

54,330

 

Pretax income

 

$

26,449

 

 

$

491

 

 

$

13,249

 

 

$

(13,655

)

 

$

26,534

 

Total assets at end of quarter

 

$

1,453,245

 

 

$

9,429,883

 

 

$

1,724,696

 

 

$

447,830

 

 

$

13,055,654

 

 

 

 

Credit

 

 

Interest rate

 

 

 

 

 

 

 

 

 

 

 

 

sensitive

 

 

sensitive

 

 

Correspondent

 

 

 

 

 

 

 

Quarter ended September 30, 2023

 

strategies

 

 

strategies

 

 

production

 

 

Corporate

 

 

Total

 

 

 

(in thousands)

 

Net investment income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net gains (losses) on investments and financings

 

$

38,772

 

 

$

(148,316

)

 

$

—

 

 

$

—

 

 

$

(109,544

)

Net gains on loans acquired for sale

 

 

—

 

 

 

—

 

 

 

13,558

 

 

 

—

 

 

 

13,558

 

Net loan servicing fees

 

 

—

 

 

 

281,298

 

 

 

—

 

 

 

—

 

 

 

281,298

 

Net interest expense:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest income

 

 

26,235

 

 

 

114,430

 

 

 

14,656

 

 

 

3,605

 

 

 

158,926

 

Interest expense

 

 

23,235

 

 

 

142,942

 

 

 

16,388

 

 

 

1,353

 

 

 

183,918

 

 

 

3,000

 

 

 

(28,512

)

 

 

(1,732

)

 

 

2,252

 

 

 

(24,992

)

Other

 

 

(251

)

 

 

—

 

 

 

3,360

 

 

 

—

 

 

 

3,109

 

 

 

41,521

 

 

 

104,470

 

 

 

15,186

 

 

 

2,252

 

 

 

163,429

 

Expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loan fulfillment and servicing fees
   payable to PFSI

 

 

33

 

 

 

20,224

 

 

 

5,531

 

 

 

—

 

 

 

25,788

 

Management fees

 

 

—

 

 

 

—

 

 

 

—

 

 

 

7,175

 

 

 

7,175

 

Other

 

 

492

 

 

 

2,683

 

 

 

809

 

 

 

8,062

 

 

 

12,046

 

 

 

525

 

 

 

22,907

 

 

 

6,340

 

 

 

15,237

 

 

 

45,009

 

Pretax income

 

$

40,996

 

 

$

81,563

 

 

$

8,846

 

 

$

(12,985

)

 

$

118,420

 

Total assets at end of quarter

 

$

1,620,322

 

 

$

10,079,073

 

 

$

1,134,812

 

 

$

389,129

 

 

$

13,223,336

 

 

54

 

 

 

 

Credit

 

 

Interest rate

 

 

 

 

 

 

 

 

 

 

 

 

sensitive

 

 

sensitive

 

 

Correspondent

 

 

 

 

 

 

 

Nine months ended September 30, 2024

 

strategies

 

 

strategies

 

 

production

 

 

Corporate

 

 

Total

 

 

 

(in thousands)

 

Net investment income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net gains (losses) on investments and financings

 

$

104,114

 

 

$

62,591

 

 

$

—

 

 

$

—

 

 

$

166,705

 

Net gains on loans acquired for sale

 

 

—

 

 

 

—

 

 

 

46,737

 

 

 

—

 

 

 

46,737

 

Net loan servicing fees

 

 

—

 

 

 

57,119

 

 

 

—

 

 

 

—

 

 

 

57,119

 

Net interest expense:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest income

 

 

68,520

 

 

 

343,954

 

 

 

50,652

 

 

 

9,002

 

 

 

472,128

 

Interest expense

 

 

69,204

 

 

 

403,262

 

 

 

51,541

 

 

 

3,532

 

 

 

527,539

 

 

 

(684

)

 

 

(59,308

)

 

 

(889

)

 

 

5,470

 

 

 

(55,411

)

Other

 

 

(155

)

 

 

—

 

 

 

11,272

 

 

 

—

 

 

 

11,117

 

 

 

103,275

 

 

 

60,402

 

 

 

57,120

 

 

 

5,470

 

 

 

226,267

 

Expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loan fulfillment and servicing fees
   payable to PFSI

 

 

60

 

 

 

62,706

 

 

 

19,935

 

 

 

—

 

 

 

82,701

 

Management fees

 

 

—

 

 

 

—

 

 

 

—

 

 

 

21,474

 

 

 

21,474

 

Other

 

 

202

 

 

 

7,574

 

 

 

2,716

 

 

 

24,076

 

 

 

34,568

 

 

 

262

 

 

 

70,280

 

 

 

22,651

 

 

 

45,550

 

 

 

138,743

 

Pretax income

 

$

103,013

 

 

$

(9,878

)

 

$

34,469

 

 

$

(40,080

)

 

$

87,524

 

Total assets at end of period

 

$

1,453,245

 

 

$

9,429,883

 

 

$

1,724,696

 

 

$

447,830

 

 

$

13,055,654

 

 

 

 

 

Credit

 

 

Interest rate

 

 

 

 

 

 

 

 

 

 

 

 

sensitive

 

 

sensitive

 

 

Correspondent

 

 

 

 

 

 

 

Nine months ended September 30, 2023

 

strategies

 

 

strategies

 

 

production

 

 

Corporate

 

 

Total

 

 

 

(in thousands)

 

Net investment income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net gains (losses) on investments and financings

 

$

161,867

 

 

$

(148,106

)

 

$

—

 

 

$

—

 

 

$

13,761

 

Net gains on loans acquired for sale

 

 

—

 

 

 

—

 

 

 

24,477

 

 

 

—

 

 

 

24,477

 

Net loan servicing fees

 

 

—

 

 

 

366,438

 

 

 

—

 

 

 

—

 

 

 

366,438

 

Net interest expense:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest income

 

 

72,775

 

 

 

315,168

 

 

 

77,292

 

 

 

9,394

 

 

 

474,629

 

Interest expense

 

 

62,790

 

 

 

406,098

 

 

 

78,259

 

 

 

3,298

 

 

 

550,445

 

 

 

9,985

 

 

 

(90,930

)

 

 

(967

)

 

 

6,096

 

 

 

(75,816

)

Other

 

 

(251

)

 

 

—

 

 

 

15,638

 

 

 

—

 

 

 

15,387

 

 

 

171,601

 

 

 

127,402

 

 

 

39,148

 

 

 

6,096

 

 

 

344,247

 

Expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loan fulfillment and servicing fees
   payable to PFSI

 

 

142

 

 

 

60,881

 

 

 

22,895

 

 

 

—

 

 

 

83,918

 

Management fees

 

 

—

 

 

 

—

 

 

 

—

 

 

 

21,510

 

 

 

21,510

 

Other

 

 

2,039

 

 

 

5,155

 

 

 

4,224

 

 

 

23,327

 

 

 

34,745

 

 

 

2,181

 

 

 

66,036

 

 

 

27,119

 

 

 

44,837

 

 

 

140,173

 

Pretax income

 

$

169,420

 

 

$

61,366

 

 

$

12,029

 

 

$

(38,741

)

 

$

204,074

 

Total assets at end of period

 

$

1,620,322

 

 

$

10,079,073

 

 

$

1,134,812

 

 

$

389,129

 

 

$

13,223,336

 

 

 

 

55

 

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

 

 

Actual

 

 

Required

 

 

Actual

 

 

Required

 

 

 

(dollars in thousands)

 

September 30, 2024

 

$

865,895

 

 

$

580,944

 

 

 

13

%

 

 

6

%

 

$

587,218

 

 

$

219,026

 

December 31, 2023

 

$

874,628

 

 

$

584,131

 

 

 

15

%

 

 

6

%

 

$

450,210

 

 

$

210,691

 

 

(1)
Calculated in accordance with the Agencies’ requirements.

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.

 

56

 

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.

Our Company

We are a specialty finance company that invests in mortgage-related assets. Our objective is to provide attractive risk-adjusted returns to our investors over the long-term, primarily through dividends and secondarily through capital appreciation. A significant portion of our investment portfolio is comprised of mortgage-related assets that we have created through our correspondent production activities, including mortgage servicing rights (“MSRs”), subordinate mortgage-backed securities (“MBS”), and credit risk transfer (“CRT”) arrangements, which 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-related assets. Our loans and MSRs are serviced by PennyMac Loan Services, LLC (“PLS”). PCM and PLS are both wholly-owned subsidiaries of PennyMac Financial Services, Inc. (“PFSI”), a publicly-traded mortgage banking and investment management company separately listed on the New York Stock Exchange.

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

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

We primarily sell the loans we acquire through our correspondent production activities to government-sponsored entities ("GSEs") such as the Federal National Mortgage Association (“Fannie Mae”) and the Federal Home Loan Mortgage Corporation (“Freddie Mac”) or to PLS for sale into securitizations guaranteed by the Government National Mortgage Association ("Ginnie Mae"), or the GSEs. Fannie Mae, Freddie Mac and Ginnie Mae are each referred to as an “Agency” and, collectively, as the “Agencies.”

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

Our Investment Activities

Credit Sensitive Investments

CRT Arrangements

We have previously entered into loan sales arrangements with Fannie Mae pursuant to which we 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 those loans and comprise the Company’s investments in CRT arrangements.

57

 

We held net CRT-related investments (comprised of deposits securing CRT arrangements, CRT derivatives, CRT strips and an interest-only security payable) totaling approximately $1.1 billion at September 30, 2024.

Subordinate Credit-Linked Mortgage-Backed Securities

Subordinate credit-linked MBS provide us with a higher yield than senior MBS securities. However, we incur 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 nine months ended September 30, 2024. We held subordinate credit-linked MBS with fair values totaling approximately $196.3 million at September 30, 2024.

As the result of the Company’s consolidation of the variable interest entities that issued certain of the subordinate MBS as described in Note 6 – Variable Interest Entities – Subordinate Mortgage-Backed Securities to the consolidated financial statements included in this Report, we include loans underlying these and similar transactions with unpaid principal balances (“UPBs”) totaling approximately
$1.6 billion on our consolidated balance sheet as of September 30, 2024.

Interest Rate Sensitive Investments

Our interest rate sensitive investments include:

•
Mortgage servicing rights. During the nine months ended September 30, 2024, we received approximately $159.5 million of MSRs as proceeds from sales of loans acquired for sale. We held approximately $3.8 billion of MSRs at fair value at

September 30, 2024.

•
REIT-eligible Agency, senior non-Agency, and Agency IO and PO stripped MBS. During the nine months ended September 30, 2024, we purchased approximately $516.0 million of Agency PO stripped and IO stripped MBS and sold $869.4 million of fixed-rate pass-through securities and IO stripped MBS. We held Agency fixed-rate pass-through, senior non-Agency, and Agency IO stripped and PO stripped MBS with fair values totaling approximately $4.0 billion at September 30, 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:

 

 

Quarter ended September 30,

 

 

Nine months ended September 30,

 

 

 

2024

 

 

2023

 

 

2024

 

 

2023

 

 

 

(in thousands)

 

Sales of loans acquired for sale:

 

 

 

 

 

 

 

 

 

 

 

 

To nonaffiliates

 

$

5,172,208

 

 

$

3,107,613

 

 

$

9,340,802

 

 

$

13,576,673

 

To PennyMac Financial Services, Inc.

 

 

20,341,142

 

 

 

18,725,228

 

 

 

57,502,461

 

 

 

50,812,386

 

 

$

25,513,350

 

 

$

21,832,841

 

 

$

66,843,263

 

 

$

64,389,059

 

Net gains on loans acquired for sale

 

$

20,059

 

 

$

13,558

 

 

$

46,737

 

 

$

24,477

 

Investment activities resulting from correspondent production:

 

 

 

 

 

 

 

 

 

 

 

 

Receipt of MSRs as proceeds from sales of loans

 

$

87,588

 

 

$

58,560

 

 

$

159,456

 

 

$

249,925

 

During the nine months ended September 30, 2024, we purchased newly originated prime credit quality residential loans with fair values totaling $67.9 billion as compared to $63.7 billion for the nine months ended September 30, 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 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. We may also sell conventional loans that we purchase to PLS subject to our and PLS's mutual agreement. During the nine months ended September 30, 2024, we sold $30.2 billion and $26.3 billion UPB of government guaranteed or insured loans and conventional loans, respectively, to PLS in order to optimize our use and allocation of capital.

Our purchase volume included $57.5 billion and $50.8 billion of loans we sold to PLS during the nine months ended September 30, 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 nine months ended September 30, 2024, we received sourcing fees totaling $5.6 million, relating to $56.5 billion, in UPB of loans that we sold to PLS.

58

 

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, loans at fair value and CRT strips), our derivatives, 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:

 

 

Quarter ended September 30,

 

 

Nine months ended September 30,

 

 

 

2024

 

 

2023

 

 

2024

 

 

2023

 

 

 

(dollars in thousands)

 

Net gains on investments and financings:

 

 

 

 

 

 

 

 

 

 

 

 

Mortgage-backed securities

 

$

123,433

 

 

$

(144,031

)

 

$

50,310

 

 

$

(127,434

)

Loans:

 

 

 

 

 

 

 

 

 

 

 

 

Held in variable interest entities

 

 

75,360

 

 

 

(54,082

)

 

 

71,381

 

 

 

(61,318

)

Distressed

 

 

(10

)

 

 

(88

)

 

 

(51

)

 

 

(515

)

CRT arrangements

 

 

8,959

 

 

 

19,090

 

 

 

46,933

 

 

 

95,220

 

Interest-only security payable at fair value

 

 

(2,390

)

 

 

(4,228

)

 

 

(2,431

)

 

 

(6,363

)

Asset-backed financings at fair value

 

 

(72,922

)

 

 

58,474

 

 

 

(64,151

)

 

 

66,108

 

 

 

132,430

 

 

 

(124,865

)

 

 

101,991

 

 

 

(34,302

)

Net gains on loans acquired for sale (1)

 

 

114,527

 

 

 

112,964

 

 

 

252,884

 

 

 

332,982

 

Net loan servicing fees‒MSR valuation adjustments (2)

 

 

(78,905

)

 

 

162,605

 

 

 

122,378

 

 

 

(35,444

)

 

$

168,052

 

 

$

150,704

 

 

$

477,253

 

 

$

263,236

 

Net investment income

 

$

80,864

 

 

$

163,429

 

 

$

226,267

 

 

$

344,247

 

Non-cash items as a percentage of net investment income

 

 

208

%

 

 

92

%

 

 

211

%

 

 

76

%

 

(1)
Amount represents MSRs received, liability for representations and warranties incurred in loan sales transactions and changes in fair value of loans, interest rate lock commitments (“IRLCs”) and hedging derivatives held at the end of the quarter.
(2)
Includes fair value changes due to changes in fair value inputs and fair value changes related to MSR derivative hedging instruments held at the end of the period.

We receive or pay cash relating to:

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

59

 

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

Results of Operations

Business Trends

The U.S. Federal Reserve has begun to reduce the federal funds rate from its highest level since 2007 as inflationary pressures have abated, and longer term interest rates have declined slightly from their most elevated levels in recent years. Elevated interest rates have constrained growth in the size of the mortgage origination market from $1.5 trillion in 2023 to an estimated $1.7 trillion in 2024, but forecasted declining interest rates are projected to increased the refinancing activity and are projected to drive the origination market higher to $2.3 trillion in 2025, according to mortgage origination economists.

Declining interest rates and increasing opportunity for refinancing in recent periods have driven increased mortgage production activity in the most recent quarter, and also led to increasing prepayment speeds on our mortgage servicing portfolio from the historically slow prepayment speeds experienced earlier in the year. Higher interest rate levels have increased the costs of floating rate borrowings and interest income from placement fees we receive relating to custodial funds that we manage on deposits and loans held for sale as compared to the same period in the prior year, although we would expect these to begin declining as well as if the Federal Reserve reduces the federal funds rate as expected. We have also continued our sales of conventional loans to PLS during the nine months ended September 30, 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.

The recent period of inflationary pressure and 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.

We are aggregating Agency eligible non-owner occupied loans and evaluating investment opportunities in the private label securitization market.

60

 

 

The following is a summary of our key performance measures:

 

 

Quarter ended September 30,

 

 

Nine months ended September 30,

 

 

 

2024

 

 

2023

 

 

2024

 

 

2023

 

 

 

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

 

Net gains (losses) on investments and financings

 

$

146,695

 

 

$

(109,544

)

 

$

166,705

 

 

$

13,761

 

Loan production income (1)

 

 

26,699

 

 

 

16,784

 

 

 

57,836

 

 

 

39,704

 

Net loan servicing fees

 

 

(85,080

)

 

 

281,298

 

 

 

57,119

 

 

 

366,438

 

Net interest expense

 

 

(7,437

)

 

 

(24,992

)

 

 

(55,411

)

 

 

(75,816

)

Other

 

 

(13

)

 

 

(117

)

 

 

18

 

 

 

160

 

Net investment income

 

 

80,864

 

 

 

163,429

 

 

 

226,267

 

 

 

344,247

 

Expenses

 

 

54,330

 

 

 

45,009

 

 

 

138,743

 

 

 

140,173

 

Pretax income

 

 

26,534

 

 

 

118,420

 

 

 

87,524

 

 

 

204,074

 

(Benefit from) provision for income taxes

 

 

(14,873

)

 

 

56,998

 

 

 

(26,925

)

 

 

57,331

 

Net income

 

 

41,407

 

 

 

61,422

 

 

 

114,449

 

 

 

146,743

 

Dividends on preferred shares

 

 

10,455

 

 

 

10,455

 

 

 

31,364

 

 

 

31,364

 

Net income attributable to common shareholders

 

$

30,952

 

 

$

50,967

 

 

$

83,085

 

 

$

115,379

 

Pretax income by segment:

 

 

 

 

 

 

 

 

 

 

 

 

Credit sensitive strategies

 

$

26,449

 

 

$

40,996

 

 

$

103,013

 

 

$

169,420

 

Interest rate sensitive strategies

 

 

491

 

 

 

81,563

 

 

 

(9,878

)

 

 

61,366

 

Correspondent production

 

 

13,249

 

 

 

8,846

 

 

 

34,469

 

 

 

12,029

 

Corporate

 

 

(13,655

)

 

 

(12,985

)

 

 

(40,080

)

 

 

(38,741

)

 

$

26,534

 

 

$

118,420

 

 

$

87,524

 

 

$

204,074

 

Annualized return on average common shareholders'
   equity

 

 

8.8

%

 

 

14.5

%

 

 

7.8

%

 

 

10.8

%

Earnings per common share

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

0.36

 

 

$

0.59

 

 

$

0.95

 

 

$

1.31

 

Diluted

 

$

0.36

 

 

$

0.51

 

 

$

0.95

 

 

$

1.20

 

Dividends per common share

 

$

0.40

 

 

$

0.40

 

 

$

1.20

 

 

$

1.20

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 2024

 

 

December 31, 2023

 

 

 

 

 

 

 

Total assets

 

$

13,055,654

 

 

$

13,113,887

 

 

 

 

 

 

 

Book value per common share

 

$

15.85

 

 

$

16.13

 

 

 

 

 

 

 

Closing price per common share

 

$

14.26

 

 

$

14.95

 

 

 

 

 

 

 

 

(1)
Includes net gains on sales of loans and loan origination fees.

 

Our consolidated net income decreased by $20.0 million and $32.3 million during the quarter and nine months ended September 30, 2024, as compared to the quarter and nine months ended September 30, 2023 reflecting the fair value performance of our MSRs and reduced CRT-related investment gains, offset by increased gains on MBS and benefits from income taxes.

 

The decreases in the quarterly and nine months pretax results are summarized below:

•
Our credit sensitive strategies segment recognized a $9.3 million and $47.8 million decrease in net gains on our CRT arrangements during the quarter and nine months ended September 30, 2024, respectively, as market credit spreads tightened less compared to the same periods in 2023.
•
Our interest rate sensitive strategies segment recognized a $366.4 million and $309.3 million decrease in net servicing fees during the quarter and nine months ended September 30, 2024, respectively, resulting from increased net MSR valuation losses compared to the quarter and nine months ended September 30, 2023, caused by a decrease in market interest rates during the periods in 2024. These decreases were partially offset by a $277.7 million and $218.4 million increase in valuation gains on MBS and hedging derivatives during the quarter and nine months ended September 30, 2024, respectively, as well as a $20.1 million and $31.6 million decrease in net interest expense.
•
Our correspondent production segment recognized a $6.5 million and $22.3 million increase in our net gains on sales of loans during the quarter and nine months ended September 30, 2024, respectively, reflecting increased gain on sale margins for mortgage loans and a reduction of our liability for representations and warranties 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.

61

 

Net Investment Income

Our net investment income is summarized below:

 

 

Quarter ended September 30,

 

 

Nine months ended September 30,

 

 

 

2024

 

 

2023

 

 

2024

 

 

2023

 

 

 

(in thousands)

 

Net gains (losses) on investments and financings

 

$

146,695

 

 

$

(109,544

)

 

$

166,705

 

 

$

13,761

 

Net gains on loans acquired for sale

 

 

20,059

 

 

 

13,558

 

 

 

46,737

 

 

 

24,477

 

Loan origination fees

 

 

6,640

 

 

 

3,226

 

 

 

11,099

 

 

 

15,227

 

Net loan servicing fees

 

 

(85,080

)

 

 

281,298

 

 

 

57,119

 

 

 

366,438

 

Net interest expense

 

 

(7,437

)

 

 

(24,992

)

 

 

(55,411

)

 

 

(75,816

)

Other

 

 

(13

)

 

 

(117

)

 

 

18

 

 

 

160

 

 

$

80,864

 

 

$

163,429

 

 

$

226,267

 

 

$

344,247

 

 

Net Gains (Losses) on Investments and Financings

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

 

 

Quarter ended September 30,

 

 

Nine months ended September 30,

 

 

 

2024

 

 

2023

 

 

2024

 

 

2023

 

 

 

(in thousands)

 

Mortgage-backed securities

 

$

123,433

 

 

$

(144,031

)

 

$

50,310

 

 

$

(127,434

)

Loans at fair value:

 

 

 

 

 

 

 

 

 

 

 

 

Held in consolidated variable interest entities

 

 

75,360

 

 

 

(54,082

)

 

 

71,381

 

 

 

(61,318

)

Distressed

 

 

(10

)

 

 

(59

)

 

 

(51

)

 

 

(485

)

CRT arrangements

 

 

20,834

 

 

 

30,154

 

 

 

89,118

 

 

 

136,890

 

Asset-backed financings at fair value

 

 

(72,922

)

 

 

58,474

 

 

 

(64,151

)

 

 

66,108

 

Hedging derivatives

 

 

—

 

 

 

—

 

 

 

20,098

 

 

 

—

 

 

$

146,695

 

 

$

(109,544

)

 

$

166,705

 

 

$

13,761

 

The increase in net gains on investments for the quarter and nine months ended September 30, 2024, as compared to the same periods in 2023, was primarily due to improved performance from our investments in MBS as interest rates decreased, partially offset by reduced gains in our CRT arrangements as credit spreads did not tighten as much as during the nine months ended September 30, 2024 as compared to the nine months ended September 30, 2023.

Mortgage-Backed Securities

During the quarter and nine months ended September 30, 2024, we recognized net valuation gains of $123.4 million and $50.3 million, respectively, as compared to net valuation losses of $144.0 million and $127.4 million for the same periods in 2023.

The increased gains recognized during the quarter ended September 30, 2024 reflect decreasing interest rates during the quarter and nine months ended September 30, 2024 as compared to increasing interest rates during the quarter ended September 30, 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 combined net valuation gains of $2.4 million and $7.2 million during the quarter and nine months ended September 30, 2024, as compared to a net valuation gains of $4.4 million and $4.8 million during the quarter and nine months ended September 30, 2023. The net gain during the quarter and nine months ended September 30, 2024, reflects the effect of credit spread 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, as well as the effect of decreasing interest rates.

62

 

CRT Arrangements

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

 

 

Quarter ended September 30,

 

 

Nine months ended September 30,

 

 

 

2024

 

 

2023

 

 

2024

 

 

2023

 

 

 

(in thousands)

 

Net investment income:

 

 

 

 

 

 

 

 

 

 

 

 

Net gains (losses) on investments and financings

 

 

 

 

 

 

 

 

 

 

 

 

CRT derivatives and strips:

 

 

 

 

 

 

 

 

 

 

 

 

CRT derivatives

 

 

 

 

 

 

 

 

 

 

 

 

Realized

 

$

3,275

 

 

$

4,051

 

 

$

10,248

 

 

$

12,504

 

Valuation changes

 

 

5,460

 

 

 

9,113

 

 

 

13,716

 

 

 

26,619

 

 

 

8,735

 

 

 

13,164

 

 

 

23,964

 

 

 

39,123

 

CRT strips

 

 

 

 

 

 

 

 

 

 

 

 

Realized

 

 

10,990

 

 

 

11,241

 

 

 

34,368

 

 

 

35,529

 

Valuation changes

 

 

3,499

 

 

 

9,977

 

 

 

33,217

 

 

 

68,601

 

 

 

14,489

 

 

 

21,218

 

 

 

67,585

 

 

 

104,130

 

Interest-only security payable at fair value

 

 

(2,390

)

 

 

(4,228

)

 

 

(2,431

)

 

 

(6,363

)

 

 

20,834

 

 

 

30,154

 

 

 

89,118

 

 

 

136,890

 

Interest income — Deposits securing CRT arrangements

 

 

15,042

 

 

 

16,419

 

 

 

46,121

 

 

 

46,410

 

 

$

35,876

 

 

$

46,573

 

 

$

135,239

 

 

$

183,300

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net payments made to settle losses on CRT arrangements

 

$

827

 

 

$

496

 

 

$

1,140

 

 

$

2,252

 

 

 

 

September 30, 2024

 

 

December 31, 2023

 

 

 

(in thousands)

 

Carrying value of CRT arrangements:

 

 

 

 

 

 

Derivative assets - CRT derivatives

 

$

29,690

 

 

$

16,160

 

CRT strip liabilities

 

 

(13,475

)

 

 

(46,692

)

Deposits securing CRT arrangements

 

 

1,135,447

 

 

 

1,209,498

 

Interest-only security payable at fair value

 

 

(35,098

)

 

 

(32,667

)

 

 

$

1,116,564

 

 

$

1,146,299

 

 

 

 

 

 

 

CRT arrangement assets pledged to secure borrowings:

 

 

 

 

 

 

Derivative assets

 

$

29,690

 

 

$

16,160

 

Deposits securing CRT arrangements (1)

 

$

1,135,447

 

 

$

1,209,498

 

 

 

 

 

 

 

UPB of loans underlying CRT arrangements

 

$

21,708,165

 

 

$

23,152,230

 

Collection status (UPB):

 

 

 

 

Delinquency

 

 

 

 

 

 

Current

 

$

21,105,679

 

 

$

22,531,905

 

30-89 days delinquent

 

$

424,102

 

 

$

411,991

 

90-180 days delinquent

 

$

119,236

 

 

$

120,011

 

180 or more days delinquent

 

$

42,283

 

 

$

64,647

 

Foreclosure

 

$

16,865

 

 

$

23,676

 

Bankruptcy

 

$

64,331

 

 

$

58,696

 

 

(1)
Deposits securing credit risk transfer arrangements also secure $13.5 million and $46.7 million in CRT strip at September 30, 2024 and December 31, 2023, respectively.

The performance of our investments in CRT arrangements during the quarter and nine months ended September 30, 2024 and 2023 reflect credit spread tightening for CRT securities in the credit markets.

63

 

Net Gains on Loans Acquired for Sale

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

 

 

Quarter ended September 30,

 

 

Nine months ended September 30,

 

 

 

2024

 

 

2023

 

 

2024

 

 

2023

 

 

 

(in thousands)

 

From non-affiliates:

 

 

 

 

 

 

 

 

 

 

 

 

Cash losses:

 

 

 

 

 

 

 

 

 

 

 

 

Sales of loans

 

$

(23,594

)

 

$

(71,105

)

 

$

(94,999

)

 

$

(260,697

)

Hedging activities

 

 

(72,868

)

 

 

(30,155

)

 

 

(116,797

)

 

 

(52,822

)

 

 

(96,462

)

 

 

(101,260

)

 

 

(211,796

)

 

 

(313,519

)

Non-cash gains:

 

 

 

 

 

 

 

 

 

 

 

 

Receipt of MSRs in loan sale transactions

 

 

87,588

 

 

 

58,560

 

 

 

159,456

 

 

 

249,925

 

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

 

 

 

 

 

 

 

 

 

 

 

 

Pursuant to loan sales

 

 

(459

)

 

 

(448

)

 

 

(917

)

 

 

(2,126

)

Reduction in liability due to change in estimate

 

 

5,180

 

 

 

4,365

 

 

 

18,598

 

 

 

7,920

 

 

 

4,721

 

 

 

3,917

 

 

 

17,681

 

 

 

5,794

 

Changes in fair value of financial instruments during
   the period:

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate lock commitments

 

 

4,349

 

 

 

(2,050

)

 

 

(1,631

)

 

 

(2,870

)

Loans

 

 

(9,528

)

 

 

(1,710

)

 

 

(3,721

)

 

 

4,569

 

Hedging derivatives

 

 

27,397

 

 

 

54,247

 

 

 

81,099

 

 

 

75,564

 

 

 

22,218

 

 

 

50,487

 

 

 

75,747

 

 

 

77,263

 

 

 

114,527

 

 

 

112,964

 

 

 

252,884

 

 

 

332,982

 

Total from nonaffiliates

 

 

18,065

 

 

 

11,704

 

 

 

41,088

 

 

 

19,463

 

From PFSI—cash

 

 

1,994

 

 

 

1,854

 

 

 

5,649

 

 

 

5,014

 

 

$

20,059

 

 

$

13,558

 

 

$

46,737

 

 

$

24,477

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate lock commitments issued on loans acquired
    for sale:

 

 

 

 

 

 

 

 

 

 

 

 

To nonaffiliates

 

$

7,373,266

 

 

$

3,492,877

 

 

$

12,447,372

 

 

$

14,402,777

 

To PFSI

 

 

8,229,074

 

 

 

10,333,029

 

 

 

26,756,917

 

 

 

21,637,229

 

 

 

$

15,602,340

 

 

$

13,825,906

 

 

$

39,204,289

 

 

$

36,040,006

 

Acquisition of loans for sale (UPB):

 

 

 

 

 

 

 

 

 

 

 

 

To nonaffiliates

 

$

5,948,057

 

 

$

2,760,001

 

 

$

9,949,135

 

 

$

12,418,084

 

To PFSI

 

 

19,880,534

 

 

 

18,780,719

 

 

 

56,544,379

 

 

 

50,461,568

 

 

$

25,828,591

 

 

$

21,540,720

 

 

$

66,493,514

 

 

$

62,879,652

 

 

The changes in Net gains on loans acquired for sale during the quarter and nine months ended September 30, 2024, as compared to the same periods in 2023, reflect increased gain on sale margins for mortgage loans supplemented by the effect of a reduction in our liability for representations and warranties.

Non-cash elements of gain on sale of loans:

Interest Rate Lock Commitments

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 values of our IRLCs as the loan acquisition process progresses until we complete the acquisitions or the commitments are 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 values of our loans when we complete the purchases of the loans. The methods and key inputs we use to measure the fair values of IRLCs are summarized in Note 7 – Fair value – Valuation Techniques and Inputs to the consolidated financial statements included in this Report.

64

 

The MSRs and liabilities 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 income in subsequent periods. Subsequent changes in the fair value of our MSRs significantly affect our income.

Mortgage Servicing Rights

The methods we use to measure and update the measurements of our MSRs as well as the effect of changes in valuation inputs on MSR fair value are detailed in Note 7 – Fair value – Valuation Techniques and Inputs to the consolidated financial statements included in this Report.

Liability for Losses Under Representations and Warranties

We recognize liabilities 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 we provide 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 laws.

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 losses on the loans. Our credit losses 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 loan sales of $459,000 and $917,000, respectively, for the quarter and nine months ended September 30, 2024 and $448,000 and $2.1 million, respectively, for the quarter and nine months ended September 30, 2023.

Following is a summary of the indemnification, repurchase and loss activity and loans subject to representations and warranties:

 

 

Quarter ended September 30,

 

 

Nine months ended September 30,

 

 

 

2024

 

 

2023

 

 

2024

 

 

2023

 

 

 

(in thousands)

 

Indemnification activity (UPB):

 

 

 

 

 

 

 

 

 

 

 

 

Loans indemnified at beginning of period

 

$

15,178

 

 

$

12,148

 

 

$

12,124

 

 

$

8,108

 

New indemnifications

 

 

343

 

 

 

1,734

 

 

 

3,397

 

 

 

6,522

 

Less: indemnified loans sold, repaid or refinanced

 

 

540

 

 

 

1,980

 

 

 

540

 

 

 

2,728

 

Loans indemnified at end of period

 

$

14,981

 

 

$

11,902

 

 

$

14,981

 

 

$

11,902

 

Indemnified loans indemnified by correspondent lenders at
  end of period

 

 

 

 

 

 

 

$

5,772

 

 

$

4,076

 

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

 

 

 

 

 

 

 

$

5,488

 

 

$

4,190

 

Repurchase activity (UPB):

 

 

 

 

 

 

 

 

 

 

 

 

Loans repurchased

 

$

7,612

 

 

$

13,908

 

 

$

25,383

 

 

$

50,849

 

Less:

 

 

 

 

 

 

 

 

 

 

 

 

Loans repurchased by correspondent sellers

 

 

7,621

 

 

 

14,383

 

 

 

19,622

 

 

 

46,063

 

Loans resold or repaid by borrowers

 

 

1,810

 

 

 

1,469

 

 

 

5,267

 

 

 

11,081

 

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

 

$

(1,819

)

 

$

(1,944

)

 

$

494

 

 

$

(6,295

)

Losses charged to liability for representations and warranties

 

$

147

 

 

$

—

 

 

$

147

 

 

$

525

 

At end of period:

 

 

 

 

 

 

 

 

 

 

 

 

Loans subject to representations and warranties

 

 

 

 

 

 

 

$

223,245,804

 

 

$

228,679,429

 

Liability for representations and warranties

 

 

 

 

 

 

 

$

8,315

 

 

$

33,152

 

 

65

 

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, severities of loss in the event of default and the probabilities of reimbursement by the correspondent loan sellers. 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 $5.2 million and $18.6 million reductions in the liability for representations and warranties during the quarter and nine months ended September 30, 2024, respectively, and $4.4 million and $7.9 during the quarter and nine months ended September 30, 2023, respectively, 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. Loan origination fees increased during the quarter ended September 30, 2024 compared to the same period in 2023, as we purchased more loans for sale to nonaffiliates during the quarter ended September 30, 2024. Loan origination fees decreased during the nine months ended September 30, 2024, compared to the same period in 2023, reflecting the overall decrease in our purchase volume of loans for sale to nonaffiliates during the nine months ended September 30, 2024.

Net Loan Servicing Fees

Our net loan servicing fees have two primary components: fees earned for servicing loans and the effects of MSR valuation changes, net of hedging results, as summarized below:

 

 

Quarter ended September 30,

 

 

Nine months ended September 30,

 

 

 

2024

 

 

2023

 

 

2024

 

 

2023

 

 

 

(in thousands)

 

Loan servicing fees

 

$

166,617

 

 

$

170,561

 

 

$

494,927

 

 

$

511,043

 

Effect of MSRs and hedging results

 

 

(251,697

)

 

 

110,737

 

 

 

(437,808

)

 

 

(144,605

)

Net loan servicing fees

 

$

(85,080

)

 

$

281,298

 

 

$

57,119

 

 

$

366,438

 

Loan Servicing Fees

Following is a summary of our loan servicing fees:

 

 

Quarter ended September 30,

 

 

Nine months ended September 30,

 

 

 

2024

 

 

2023

 

 

2024

 

 

2023

 

 

 

(in thousands)

 

Contractually specified servicing fees

 

$

162,605

 

 

$

166,809

 

 

$

485,089

 

 

$

496,522

 

Ancillary and other fees:

 

 

 

 

 

 

 

 

 

 

 

 

Late charges

 

 

1,044

 

 

 

878

 

 

 

3,019

 

 

 

2,442

 

Other

 

 

2,968

 

 

 

2,874

 

 

 

6,819

 

 

 

12,079

 

 

 

4,012

 

 

 

3,752

 

 

 

9,838

 

 

 

14,521

 

 

$

166,617

 

 

$

170,561

 

 

$

494,927

 

 

$

511,043

 

Average UPB of underlying loans

 

$

227,804,449

 

 

$

231,333,064

 

 

$

229,174,686

 

 

$

231,333,990

 

Loan servicing fees that relate to our MSRs 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

66

 

these fees from borrower payments. Other loan servicing fees are comprised primarily of borrower-contracted fees, such as late charges and reconveyance fees, and incentive fees we receive from the Agencies for loss mitigation activities as well as fees we charge to correspondent lenders for loans repaid by the borrower shortly after purchase.

The change in contractually-specified fees during the quarter and nine months ended September 30, 2024, as compared to the same periods in 2023, is due primarily to a slight reduction in our MSR servicing portfolio, reflecting the shift of a portion of our loan sales from third party sales with servicing rights retained to sales to PLS which include the transfer of servicing rights to PLS.

Mortgage Servicing Rights and Hedging

We have elected to carry our servicing assets at fair value. Changes in fair value have two components: changes due to realization of the servicing cashflows 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:

 

 

 

Quarter ended September 30,

 

 

Nine months ended September 30,

 

 

 

2024

 

 

2023

 

 

2024

 

 

2023

 

 

(in thousands)

 

Change in fair value of MSRs

 

 

 

 

 

 

 

 

 

 

 

 

Changes in valuation inputs used in valuation model

 

$

(84,306

)

 

$

263,139

 

 

$

33,303

 

 

$

232,414

 

Recapture income from PFSI

 

 

441

 

 

 

500

 

 

 

1,267

 

 

 

1,494

 

Hedging results

 

 

(67,220

)

 

 

(50,689

)

 

 

(175,399

)

 

 

(81,584

)

 

 

(151,085

)

 

 

212,950

 

 

 

(140,829

)

 

 

152,324

 

Realization of cash flows

 

 

(100,612

)

 

 

(102,213

)

 

 

(296,979

)

 

 

(296,929

)

 

$

(251,697

)

 

$

110,737

 

 

$

(437,808

)

 

$

(144,605

)

Average balance of mortgage servicing rights

 

$

3,876,497

 

 

$

4,054,265

 

 

$

3,935,371

 

 

$

4,014,783

 

 

Changes in fair value due to changes in valuation inputs used in our valuation model during the quarter and nine months ended September 30, 2024 reflect the effects of expectations for faster future prepayments of the underlying loans.

The decrease in loan recapture income from PFSI reflects the decrease in refinancing activity in our MSR portfolio during the quarter and nine months ended September 30, 2024, as compared to the same periods in 2023. We have an agreement with PFSI that allows us to receive a recapture fee when PFSI refinances a loan for which we held the MSRs. 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 rate changes during the quarter and nine months ended September 30, 2024 that are attributable to the effects of interest rate volatility and elevated hedge costs on the fair value of the hedging instruments. Hedging results reflect valuation losses in hedges against interest rates during the quarter and nine months ended September 30, 2024, that are attributable to the effects of interest rate volatility and elevated hedge costs on the fair value of the hedging instruments. PMT’s hedging activities are intended to manage its net exposure across all interest rate sensitive strategies, which include MSRs, MBS and related tax impacts. For the quarter ended September 30, 2024, the loss in net loan servicing fees due to changes in valuation inputs to the valuation model and hedging results due to interest rate decreases and volatility, along with related tax impacts, were largely offset by gains on mortgage-backed securities recorded in net investment income also due to the effect of decreasing interest rates.

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.

The following table summarizes for the dates presented collection status information for loans in our originated MSR portfolio:

 

 

September 30, 2024

 

 

December 31, 2023

 

 

 

(in thousands)

 

UPB of loans outstanding

 

$

224,586,882

 

 

$

228,838,471

 

Collection status (UPB)

 

 

 

 

 

 

Delinquency:

 

 

 

 

 

 

30-89 days delinquent

 

$

2,510,113

 

 

$

2,184,500

 

90 or more days delinquent:

 

 

 

 

 

 

Not in foreclosure

 

$

891,525

 

 

$

1,029,962

 

In foreclosure

 

$

105,065

 

 

$

85,045

 

Bankruptcy

 

$

256,683

 

 

$

185,320

 

Custodial funds managed by the Company (1)

 

$

3,019,441

 

 

$

1,759,974

 

 

67

 

 

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

 

Following is a summary of characteristics of our MSR servicing portfolio as of September 30, 2024:

 

 

 

 

 

 

 

 

 

Average

 

 

Loan type

 

Unpaid principal balance

 

 

Loan count

 

 

Note rate

 

 

Seasoning (months)

 

 

Remaining
maturity (months)

 

 

Loan size

 

 

FICO credit score at origination

 

 

Original LTV (1)

 

 

Current LTV (1)

 

 

60+ Delinquency (by UPB)

 

 

 

(Dollars and loan count in thousands)

 

Agency:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fannie Mae

 

$

113,315,411

 

 

 

435

 

 

 

3.8

%

 

 

47

 

 

 

302

 

 

$

261

 

 

 

757

 

 

 

75

%

 

 

52

%

 

 

0.9

%

Freddie Mac

 

 

110,793,124

 

 

 

394

 

 

 

3.8

%

 

 

38

 

 

 

309

 

 

$

282

 

 

 

761

 

 

 

74

%

 

 

56

%

 

 

0.5

%

Other (2)

 

 

4,018,789

 

 

 

15

 

 

 

4.9

%

 

 

36

 

 

 

321

 

 

$

262

 

 

 

760

 

 

 

72

%

 

 

56

%

 

 

0.7

%

 

 

$

228,127,324

 

 

 

844

 

 

 

3.8

%

 

 

42

 

 

 

305

 

 

$

270

 

 

 

759

 

 

 

75

%

 

 

54

%

 

 

0.7

%

 

(1)
Loan-to-value.
(2)
Represents MSRs on conventional loans sold to private investors.

Net Interest Expense

Net interest expense is summarized below:

 

Quarter ended September 30, 2024

 

 

Quarter ended September 30, 2023

 

 

Interest

 

 

 

 

 

Interest

 

 

Interest

 

 

 

 

 

Interest

 

 

income/

 

 

Average

 

 

yield/

 

 

income/

 

 

Average

 

 

yield/

 

 

expense

 

 

balance

 

 

cost %

 

 

expense

 

 

balance

 

 

cost %

 

 

(dollars in thousands)

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and short-term investments

$

7,590

 

 

$

502,592

 

 

 

6.01

%

 

$

6,288

 

 

$

431,256

 

 

 

5.80

%

Mortgage-backed securities

 

66,573

 

 

 

4,105,749

 

 

 

6.45

%

 

 

66,563

 

 

 

4,711,723

 

 

 

5.62

%

Loans acquired for sale

 

23,900

 

 

 

1,069,653

 

 

 

8.89

%

 

 

14,720

 

 

 

868,808

 

 

 

6.74

%

Loans at fair value

 

16,044

 

 

 

1,388,368

 

 

 

4.60

%

 

 

9,514

 

 

 

1,437,418

 

 

 

2.63

%

Deposits securing CRT arrangements

 

15,042

 

 

 

1,157,694

 

 

 

5.17

%

 

 

16,419

 

 

 

1,255,966

 

 

 

5.20

%

 

129,149

 

 

 

8,224,056

 

 

 

6.25

%

 

 

113,504

 

 

 

8,705,171

 

 

 

5.19

%

Placement fees relating to custodial funds

 

47,256

 

 

 

 

 

 

 

 

 

44,005

 

 

 

 

 

 

 

Other

 

329

 

 

 

 

 

 

 

 

 

1,417

 

 

 

 

 

 

 

$

176,734

 

 

$

8,224,056

 

 

 

8.55

%

 

$

158,926

 

 

$

8,705,171

 

 

 

7.26

%

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Assets sold under agreements to repurchase

$

86,900

 

 

$

5,513,519

 

 

 

6.27

%

 

$

87,414

 

 

$

5,714,082

 

 

 

6.09

%

Mortgage loan participation purchase and sale
   agreements

 

568

 

 

 

32,353

 

 

 

6.98

%

 

 

403

 

 

 

22,043

 

 

 

7.27

%

Notes payable secured by credit risk transfer
    and mortgage servicing assets

 

66,305

 

 

 

2,854,487

 

 

 

9.24

%

 

 

69,952

 

 

 

3,106,809

 

 

 

8.96

%

Senior notes

 

14,571

 

 

 

825,000

 

 

 

7.03

%

 

 

8,541

 

 

 

553,338

 

 

 

6.14

%

Asset-backed financings

 

10,838

 

 

 

1,542,753

 

 

 

2.79

%

 

 

13,652

 

 

 

1,342,093

 

 

 

4.05

%

 

179,182

 

 

 

10,768,112

 

 

 

6.62

%

 

 

179,962

 

 

 

10,738,365

 

 

 

6.67

%

Interest shortfall on repayments of loans serviced
   for Agency securitizations

 

1,913

 

 

 

 

 

 

 

 

 

1,503

 

 

 

 

 

 

 

Interest on loan impound deposits

 

2,285

 

 

 

 

 

 

 

 

 

2,079

 

 

 

 

 

 

 

Other

 

791

 

 

 

 

 

 

 

 

 

374

 

 

 

 

 

 

 

 

184,171

 

 

$

10,768,112

 

 

 

6.80

%

 

 

183,918

 

 

$

10,738,365

 

 

 

6.81

%

 

$

(7,437

)

 

 

 

 

 

 

 

$

(24,992

)

 

 

 

 

 

 

 

68

 

 

 

Nine months ended September 30, 2024

 

 

Nine months ended September 30, 2023

 

 

Interest

 

 

 

 

 

Interest

 

 

Interest

 

 

 

 

 

Interest

 

 

income/

 

 

Average

 

 

yield/

 

 

income/

 

 

Average

 

 

yield/

 

 

expense

 

 

balance

 

 

cost %

 

 

expense

 

 

balance

 

 

cost %

 

 

(dollars in thousands)

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and short-term investments

$

22,867

 

 

$

535,677

 

 

 

5.70

%

 

$

19,311

 

 

$

511,194

 

 

 

5.06

%

Mortgage-backed securities

 

184,762

 

 

 

4,087,442

 

 

 

6.04

%

 

 

180,244

 

 

 

4,603,082

 

 

 

5.25

%

Loans acquired for sale

 

50,804

 

 

 

1,002,719

 

 

 

6.77

%

 

 

77,487

 

 

 

1,613,347

 

 

 

6.44

%

Loans at fair value

 

41,617

 

 

 

1,401,643

 

 

 

3.97

%

 

 

38,348

 

 

 

1,479,525

 

 

 

3.47

%

Deposits securing CRT arrangements

 

46,121

 

 

 

1,176,798

 

 

 

5.24

%

 

 

46,410

 

 

 

1,285,327

 

 

 

4.84

%

 

346,171

 

 

 

8,204,279

 

 

 

5.64

%

 

 

361,800

 

 

 

9,492,475

 

 

 

5.11

%

Placement fees relating to custodial funds

 

124,226

 

 

 

 

 

 

 

 

 

110,602

 

 

 

 

 

 

 

Other

 

1,731

 

 

 

 

 

 

 

 

 

2,227

 

 

 

 

 

 

 

$

472,128

 

 

$

8,204,279

 

 

 

7.69

%

 

$

474,629

 

 

$

9,492,475

 

 

 

6.70

%

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Assets sold under agreements to repurchase

$

244,821

 

 

$

5,225,906

 

 

 

6.26

%

 

$

284,027

 

 

$

6,451,377

 

 

 

5.90

%

Mortgage loan participation purchase and sale
   agreements

 

1,033

 

 

 

18,829

 

 

 

7.33

%

 

 

1,109

 

 

 

20,991

 

 

 

7.08

%

Notes payable secured by credit risk transfer
    and mortgage servicing assets

 

198,760

 

 

 

2,871,883

 

 

 

9.24

%

 

 

191,049

 

 

 

2,995,752

 

 

 

8.55

%

Unsecured senior notes

 

35,884

 

 

 

710,496

 

 

 

6.75

%

 

 

25,316

 

 

 

549,063

 

 

 

6.18

%

Asset-backed financings

 

34,918

 

 

 

1,561,810

 

 

 

2.99

%

 

 

38,796

 

 

 

1,381,994

 

 

 

3.76

%

 

515,416

 

 

 

10,388,924

 

 

 

6.63

%

 

 

540,297

 

 

 

11,399,177

 

 

 

6.35

%

Interest shortfall on repayments
   of loans serviced for Agency securitizations

 

5,011

 

 

 

 

 

 

 

 

 

4,322

 

 

 

 

 

 

 

Interest on loan impound deposits

 

5,284

 

 

 

 

 

 

 

 

 

4,737

 

 

 

 

 

 

 

Other

 

1,828

 

 

 

 

 

 

 

 

 

1,089

 

 

 

 

 

 

 

 

527,539

 

 

$

10,388,924

 

 

 

6.78

%

 

 

550,445

 

 

$

11,399,177

 

 

 

6.47

%

 

$

(55,411

)

 

 

 

 

 

 

 

$

(75,816

)

 

 

 

 

 

 

 

69

 

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

 

 

Quarter ended September 30, 2024

 

 

Nine months ended September 30, 2024

 

 

 

vs.

 

 

vs.

 

 

 

Quarter ended September 30, 2023

 

 

Nine months ended September 30, 2023

 

 

 

Increase (decrease)
due to changes in

 

 

Increase (decrease)
due to changes in

 

 

 

Rate

 

 

Volume

 

 

Total

 

 

Rate

 

 

Volume

 

 

Total

 

 

 

(in thousands)

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and short-term investments

 

$

231

 

 

$

1,071

 

 

$

1,302

 

 

$

2,576

 

 

$

980

 

 

$

3,556

 

Mortgage-backed securities

 

 

9,159

 

 

 

(9,149

)

 

 

10

 

 

 

25,801

 

 

 

(21,283

)

 

 

4,518

 

Loans acquired for sale

 

 

5,321

 

 

 

3,859

 

 

 

9,180

 

 

 

3,826

 

 

 

(30,509

)

 

 

(26,683

)

Loans at fair value

 

 

6,865

 

 

 

(335

)

 

 

6,530

 

 

 

5,335

 

 

 

(2,066

)

 

 

3,269

 

Deposits securing CRT arrangements

 

 

(100

)

 

 

(1,277

)

 

 

(1,377

)

 

 

3,721

 

 

 

(4,010

)

 

 

(289

)

 

 

21,476

 

 

 

(5,831

)

 

 

15,645

 

 

 

41,259

 

 

 

(56,888

)

 

 

(15,629

)

Placement fees relating to custodial funds

 

 

 

 

 

 

 

 

3,251

 

 

 

 

 

 

 

 

 

13,624

 

Other

 

 

 

 

 

 

 

 

(1,088

)

 

 

 

 

 

 

 

 

(496

)

 

$

21,476

 

 

$

(5,831

)

 

$

17,808

 

 

$

41,259

 

 

$

(56,888

)

 

$

(2,501

)

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Assets sold under agreements to repurchase

 

$

2,604

 

 

$

(3,118

)

 

$

(514

)

 

$

16,630

 

 

$

(55,836

)

 

$

(39,206

)

Mortgage loan participation purchase and
   sale agreements

 

 

(17

)

 

 

182

 

 

 

165

 

 

 

39

 

 

 

(115

)

 

 

(76

)

Notes payable secured by credit risk
   transfer and mortgage servicing assets

 

 

2,164

 

 

 

(5,811

)

 

 

(3,647

)

 

 

15,621

 

 

 

(7,910

)

 

 

7,711

 

Senior notes

 

 

1,369

 

 

 

4,661

 

 

 

6,030

 

 

 

2,506

 

 

 

8,062

 

 

 

10,568

 

Asset-backed financings

 

 

(4,649

)

 

 

1,835

 

 

 

(2,814

)

 

 

(8,595

)

 

 

4,717

 

 

 

(3,878

)

 

 

1,471

 

 

 

(2,251

)

 

 

(780

)

 

 

26,201

 

 

 

(51,082

)

 

 

(24,881

)

Interest shortfall on repayments of loans
   serviced for Agency securitizations

 

 

 

 

 

 

 

 

410

 

 

 

 

 

 

 

 

 

689

 

Interest on loan impound deposits

 

 

 

 

 

 

 

 

206

 

 

 

 

 

 

 

 

 

547

 

Other

 

 

 

 

 

 

 

 

417

 

 

 

 

 

 

 

 

 

739

 

 

 

1,471

 

 

 

(2,251

)

 

 

253

 

 

 

26,201

 

 

 

(51,082

)

 

 

(22,906

)

 

 

$

20,005

 

 

$

(3,580

)

 

$

17,555

 

 

$

15,058

 

 

$

(5,806

)

 

$

20,405

 

 

The decrease in net interest expense during the quarter and nine months ended September 30, 2024, as compared to the same periods in 2023, is due to yields on our interest-earning assets increasing more than the cost of our interest-bearing liabilities and the increase in earnings from placement fees relating to custodial funds managed for borrowers and investors.

Expenses

Our expenses are summarized below:

 

 

Quarter ended September 30,

 

 

Nine months ended September 30,

 

 

 

2024

 

 

2023

 

 

2024

 

 

2023

 

 

 

(in thousands)

 

Earned by PennyMac Financial Services, Inc.:

 

 

 

 

 

 

 

 

 

 

 

 

Loan servicing fees

 

$

22,240

 

 

$

20,257

 

 

$

62,766

 

 

$

61,023

 

Management fees

 

 

7,153

 

 

 

7,175

 

 

 

21,474

 

 

 

21,510

 

Loan fulfillment fees

 

 

11,492

 

 

 

5,531

 

 

 

19,935

 

 

 

22,895

 

Professional services

 

 

2,614

 

 

 

2,133

 

 

 

6,738

 

 

 

5,537

 

Compensation

 

 

1,326

 

 

 

1,961

 

 

 

4,611

 

 

 

4,779

 

Loan collection and liquidation

 

 

2,257

 

 

 

1,890

 

 

 

4,297

 

 

 

3,378

 

Safekeeping

 

 

1,174

 

 

 

467

 

 

 

3,067

 

 

 

2,707

 

Loan origination

 

 

1,408

 

 

 

710

 

 

 

2,414

 

 

 

3,785

 

Other

 

 

4,666

 

 

 

4,885

 

 

 

13,441

 

 

 

14,559

 

 

$

54,330

 

 

$

45,009

 

 

$

138,743

 

 

$

140,173

 

 

70

 

Expenses increased $9.3 million and decreased $1.4 million, or 21% and 1%, respectively, during the quarter and nine months ended September 30, 2024, as compared to the same periods in 2023, primarily due to increased loan fulfillment fees reflecting increased production for sale to nonaffiliates during the quarter ended September 30, 2024 and decreased loan fulfillment fees, reflecting reduced loan production for sale to nonaffiliates, during the nine months ended September 30, 2024.

Loan Servicing Fees

Loan servicing fees payable to PLS are summarized below:

 

 

Quarter ended September 30,

 

 

Nine months ended September 30,

 

 

 

2024

 

 

2023

 

 

2024

 

 

2023

 

 

 

(in thousands)

 

Loan servicing fees:

 

 

 

 

 

 

 

 

 

 

 

 

Loans acquired for sale

 

$

158

 

 

$

112

 

 

$

342

 

 

$

569

 

Loans at fair value

 

 

60

 

 

 

33

 

 

 

185

 

 

 

184

 

Mortgage servicing rights

 

 

22,022

 

 

 

20,112

 

 

 

62,239

 

 

 

60,270

 

 

$

22,240

 

 

$

20,257

 

 

$

62,766

 

 

$

61,023

 

Average investment in loans:

 

 

 

 

 

 

 

 

 

 

 

 

Acquired for sale

 

$

1,069,653

 

 

$

868,808

 

 

$

1,002,719

 

 

$

1,613,347

 

At fair value

 

$

1,388,368

 

 

$

1,437,418

 

 

$

1,401,643

 

 

$

1,479,525

 

Average MSR portfolio unpaid principal balance

 

$

227,804,449

 

 

$

231,333,064

 

 

$

229,174,686

 

 

$

231,333,990

 

 

 

 

 

 

 

 

 

 

 

 

 

 

MSR recapture fees

 

$

441

 

 

$

500

 

 

$

1,267

 

 

$

1,494

 

UPB of loans recaptured

 

$

71,370

 

 

$

77,403

 

 

$

207,651

 

 

$

270,720

 

Loan servicing fees increased by $2.0 million and $1.74 million during the quarter and nine months ended September 30, 2024, respectively, as compared to the same periods in 2023.

Management Fees

 

Management fees decreased by $22,000 and $36,000 during the quarter and nine months ended September 30, 2024, respectively, as compared to the same periods in 2023. Management fees decreased due to lower average shareholders’ equity during the quarter and nine months ended September 30, 2024.

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 and are summarized below:

 

 

Quarter ended September 30,

 

 

Nine months ended September 30,

 

 

 

2024

 

 

2023

 

 

2024

 

 

2023

 

 

 

(in thousands)

 

Loan fulfillment fees earned by PLS

 

$

11,492

 

 

$

5,531

 

 

$

19,935

 

 

$

22,895

 

UPB of loans fulfilled by PLS

 

$

5,948,057

 

 

$

2,760,000

 

 

$

9,949,135

 

 

$

12,418,084

 

Fulfillment fees increased $6.0 million and decreased $3.0 million during the quarter and nine months ended September 30, 2024, respectively, as compared to the same periods in 2023. The increase during the quarter ended September 30, 2024 was due to an increase in the volume of loans purchased for sale to nonaffiliates as compared to the overall decrease in loans purchased for sale to nonaffiliates volume during the nine months ended September 30, 2023. 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 increased $698,000 and decreased $1.4 million, during the quarter and nine months ended September 30, 2024, respectively, as compared to the same periods in 2023, primarily reflecting an increase during the quarter ended September 30, 2024 in the volume of loans purchased for sale to nonaffiliates as compared to the overall decrease in the volume of loans purchased for sale to nonaffiliates during the nine months ended September 30, 2023.

71

 

Other Expenses

Other expenses are summarized below:

 

 

 

Quarter ended September 30,

 

 

Nine months ended September 30,

 

 

 

2024

 

 

2023

 

 

2024

 

 

2023

 

 

 

(in thousands)

 

Common overhead allocation from PFSI

 

$

1,867

 

 

$

1,489

 

 

$

5,811

 

 

$

5,450

 

Bank service charges

 

 

622

 

 

 

483

 

 

 

1,662

 

 

 

1,478

 

Technology

 

 

511

 

 

 

601

 

 

 

1,449

 

 

 

1,521

 

Insurance

 

 

436

 

 

 

472

 

 

 

1,390

 

 

 

1,494

 

Other

 

 

1,230

 

 

 

1,840

 

 

 

3,129

 

 

 

4,616

 

 

$

4,666

 

 

$

4,885

 

 

$

13,441

 

 

$

14,559

 

 

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 (56.1)% and (30.8)% with consolidated pretax income of $26.5 million and $87.5 million for the quarter and nine months ended September 30, 2024. The Company’s TRS recognized a tax benefit of $15.5 million on a pretax loss of $64.7 million and tax benefit of $27.5 million on a pretax loss of $115.6 million for the quarter and nine months ended September 30, 2024. For the same periods in 2023, the TRS recognized a tax expense of $57.1 million on pretax income of $234.0 million and a tax expense of $56.5 million on pretax income of $221.9 million. The Company’s reported consolidated pretax income was $118.4 million for the quarter ended September 30, 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 September 30, 2024, the valuation allowance remains zero as a result of cumulative GAAP income at the TRS for the three-year period ended September 30, 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. The 2017 Tax Cuts and Jobs Act (subject to certain limitations) provides a 20% deduction from taxable income for ordinary REIT dividends.

72

 

Balance Sheet Analysis

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

 

 

September 30,

 

 

December 31,

 

 

 

2024

 

 

2023

 

 

 

(in thousands)

 

Assets

 

 

 

 

 

 

Cash and short-term investments

 

$

447,145

 

 

$

409,423

 

Mortgage-backed securities at fair value

 

 

4,182,382

 

 

 

4,836,292

 

Loans acquired for sale at fair value

 

 

1,665,796

 

 

 

669,018

 

Loans at fair value

 

 

1,429,525

 

 

 

1,433,820

 

Derivative assets

 

 

81,844

 

 

 

177,984

 

Deposits securing credit risk transfer arrangements

 

 

1,135,447

 

 

 

1,209,498

 

Mortgage servicing rights

 

 

3,809,047

 

 

 

3,919,107

 

 

 

12,751,186

 

 

 

12,655,142

 

Other

 

 

304,468

 

 

 

458,745

 

Total assets

 

$

13,055,654

 

 

$

13,113,887

 

Liabilities

 

 

 

 

 

 

Debt:

 

 

 

 

 

 

Short-term

 

$

5,777,251

 

 

$

5,624,558

 

Long-term

 

 

5,014,918

 

 

 

4,880,461

 

 

 

10,792,169

 

 

 

10,505,019

 

Other

 

 

326,698

 

 

 

651,778

 

Total liabilities

 

 

11,118,867

 

 

 

11,156,797

 

Shareholders’ equity

 

 

1,936,787

 

 

 

1,957,090

 

Total liabilities and shareholders’ equity

 

$

13,055,654

 

 

$

13,113,887

 

Total assets decreased by approximately $58.2 million during the period from December 31, 2023 through September 30, 2024, primarily due to a $653.9 million reduction in Mortgage-backed securities at fair value and a $110.1 million decrease in MSR fair value partially offset by an increase of $996.8 million in Loans acquired for sale at fair value.

Asset Acquisitions

Our asset acquisitions are summarized below.

Correspondent Production

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

 

 

Quarter ended September 30,

 

 

Nine months ended September 30,

 

 

 

2024

 

 

2023

 

 

2024

 

 

2023

 

 

 

(in thousands)

 

Correspondent loan purchases:

 

 

 

 

 

 

 

 

 

 

 

 

GSE-Eligible Loans (1)

 

$

14,384,633

 

 

$

12,810,679

 

 

$

36,834,544

 

 

$

33,722,514

 

Government insured or guaranteed (2)

 

 

12,047,525

 

 

 

8,945,053

 

 

 

30,892,013

 

 

 

29,975,859

 

Jumbo loans

 

 

97,982

 

 

 

—

 

 

 

134,886

 

 

 

1,002

 

Advances to home equity lines of credit

 

 

—

 

 

 

52

 

 

 

—

 

 

 

102

 

 

$

26,530,140

 

 

$

21,755,784

 

 

$

67,861,443

 

 

$

63,699,477

 

 

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

 

During the quarter and nine months ended September 30, 2024, we purchased for sale $26.5 billion and $67.9 billion, respectively, in fair value of correspondent production loans as compared to $21.8 billion and $63.7 billion during the same periods in 2023.

73

 

Other Investment Activities

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

 

 

Quarter ended September 30,

 

 

Nine months ended September 30,

 

 

 

2024

 

 

2023

 

 

2024

 

 

2023

 

 

 

(in thousands)

 

Credit sensitive assets:

 

 

 

 

 

 

 

 

 

 

 

 

Subordinate credit-linked securities

 

$

—

 

 

$

6,555

 

 

$

(111,044

)

 

$

70,616

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate sensitive assets:

 

 

 

 

 

 

 

 

 

 

 

 

Agency fixed-rate pass-through securities

 

 

—

 

 

 

—

 

 

 

(830,296

)

 

 

308,742

 

Principal-only stripped mortgage-backed securities

 

 

80,442

 

 

 

—

 

 

 

479,902

 

 

 

—

 

Senior non-Agency securities

 

 

—

 

 

 

57,829

 

 

 

—

 

 

 

99,803

 

Interest-only stripped mortgage-backed securities

 

 

—

 

 

 

103,547

 

 

 

—

 

 

 

103,547

 

Mortgage servicing rights:

 

 

 

 

 

 

 

 

 

 

 

 

Purchases

 

 

—

 

 

 

16,263

 

 

 

29,428

 

 

 

16,263

 

Received in loan sales (1)

 

 

51,979

 

 

 

(46,536

)

 

 

123,847

 

 

 

144,829

 

 

 

132,421

 

 

 

131,103

 

 

 

(197,119

)

 

 

673,184

 

 

$

132,421

 

 

$

137,658

 

 

$

(308,163

)

 

$

743,800

 

 

(1)
Net of exchange of mortgage servicing spread for interest-only stripped mortgage-backed securities.

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

Investment Portfolio Composition

Mortgage-Backed Securities

Following is a summary of our MBS holdings:

 

 

September 30, 2024

 

 

December 31, 2023

 

 

 

 

 

 

 

 

 

Average

 

 

 

 

 

 

 

 

Average

 

 

 

Fair

 

 

Principal/

 

 

Life

 

 

 

 

 

Fair

 

 

Principal/

 

 

Life

 

 

 

 

 

 

value

 

 

notional

 

 

(in years)

 

 

Coupon

 

 

value

 

 

notional

 

 

(in years)

 

 

Coupon

 

 

 

(dollars in thousands)

 

Agency pass-through securities

 

$

3,252,908

 

 

$

3,217,437

 

 

 

6.8

 

 

 

5.4

%

 

$

4,270,056

 

 

$

4,311,342

 

 

 

7.6

 

 

 

5.1

%

Principal-only stripped securities

 

 

540,789

 

 

 

631,601

 

 

 

2.8

 

 

 

0.1

%

 

 

53,336

 

 

 

65,573

 

 

 

3.3

 

 

 

0.0

%

Subordinate credit-linked securities

 

 

196,311

 

 

 

174,813

 

 

 

5.5

 

 

 

13.1

%

 

 

301,180

 

 

 

275,963

 

 

 

4.3

 

 

 

12.4

%

Senior non-Agency securities

 

 

111,118

 

 

 

115,302

 

 

 

7.0

 

 

 

5.1

%

 

 

117,489

 

 

 

124,771

 

 

 

7.0

 

 

 

5.1

%

Interest-only stripped securities

 

 

81,256

 

 

 

395,952

 

 

 

6.9

 

 

 

4.9

%

 

 

94,231

 

 

 

419,791

 

 

 

7.3

 

 

 

4.9

%

 

 

$

4,182,382

 

 

$

4,535,105

 

 

 

 

 

 

 

 

$

4,836,292

 

 

$

5,197,440

 

 

 

 

 

 

 

 

Credit Risk Transfer Arrangements

Following is a summary of our investment in CRT arrangements:

 

 

 

September 30, 2024

 

 

December 31, 2023

 

 

 

(in thousands)

 

Carrying value of CRT arrangements:

 

 

 

 

 

 

Derivative assets - CRT derivatives

 

$

29,690

 

 

$

16,160

 

Derivative and credit risk transfer strip liabilities- CRT strips

 

 

(13,475

)

 

 

(46,692

)

Deposits securing CRT arrangements

 

 

1,135,447

 

 

 

1,209,498

 

Interest-only security payable at fair value

 

 

(35,098

)

 

 

(32,667

)

 

$

1,116,564

 

 

$

1,146,299

 

UPB of loans subject to credit guarantee obligations

 

$

21,708,165

 

 

$

23,152,230

 

 

74

 

Following is a summary of the composition of the loans underlying our investment in CRT arrangements as of September 30, 2024:

 

 

Year of origination

 

 

 

2020

 

 

2019

 

 

2018

 

 

2017

 

 

2016

 

 

2015

 

 

Total

 

 

 

(in millions)

 

UPB:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Outstanding

 

$

4,449

 

 

$

10,098

 

 

$

2,602

 

 

$

2,198

 

 

$

1,800

 

 

$

561

 

 

$

21,708

 

Liquidations:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balances

 

$

1.0

 

 

$

8.4

 

 

$

59.2

 

 

$

163.5

 

 

$

123.2

 

 

$

61.4

 

 

$

416.7

 

Losses

 

$

—

 

 

$

0.9

 

 

$

5.7

 

 

$

20.4

 

 

$

13.1

 

 

$

7.4

 

 

$

47.5

 

Modifications:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balances

 

$

68.6

 

 

$

554.4

 

 

$

306.9

 

 

$

—

 

 

$

—

 

 

$

—

 

 

$

929.9

 

Losses

 

$

1.8

 

 

$

19.4

 

 

$

14.9

 

 

$

—

 

 

$

—

 

 

$

—

 

 

$

36.1

 

Weighted average:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Original debt-to
   income ratio

 

 

33.5

%

 

 

35.9

%

 

 

39.1

%

 

 

36.5

%

 

 

35.1

%

 

 

35.7

%

 

 

35.8

%

Origination FICO
  credit score

 

 

765

 

 

 

754

 

 

 

736

 

 

 

745

 

 

 

751

 

 

 

743

 

 

 

753

 

Origination loan-to
  value ratio

 

 

80.7

%

 

 

83.3

%

 

 

83.5

%

 

 

82.4

%

 

 

80.6

%

 

 

80.9

%

 

 

82.4

%

Current loan-to value
  ratio (1)

 

 

50.0

%

 

 

49.8

%

 

 

47.5

%

 

 

42.5

%

 

 

38.5

%

 

 

36.0

%

 

 

47.5

%

 

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

 

 

 

Year of origination

 

Distribution by state

 

2020

 

 

2019

 

 

2018

 

 

2017

 

 

2016

 

 

2015

 

 

Total

 

 

 

(in millions)

 

California

 

$

467

 

 

$

1,001

 

 

$

328

 

 

$

234

 

 

$

351

 

 

$

107

 

 

$

2,488

 

Florida

 

 

488

 

 

 

965

 

 

 

335

 

 

 

229

 

 

 

191

 

 

 

50

 

 

 

2,258

 

Texas

 

 

527

 

 

 

871

 

 

 

208

 

 

 

187

 

 

 

222

 

 

 

83

 

 

 

2,098

 

Virginia

 

 

239

 

 

 

449

 

 

 

94

 

 

 

101

 

 

 

125

 

 

 

54

 

 

 

1,062

 

Maryland

 

 

177

 

 

 

433

 

 

 

119

 

 

 

127

 

 

 

119

 

 

 

31

 

 

 

1,006

 

Other

 

 

2,551

 

 

 

6,379

 

 

 

1,518

 

 

 

1,320

 

 

 

792

 

 

 

236

 

 

 

12,796

 

 

$

4,449

 

 

$

10,098

 

 

$

2,602

 

 

$

2,198

 

 

$

1,800

 

 

$

561

 

 

$

21,708

 

 

 

 

Year of origination

 

Regional geographic
distribution (1)

 

2020

 

 

2019

 

 

2018

 

 

2017

 

 

2016

 

 

2015

 

 

Total

 

 

 

(in millions)

 

Northeast

 

$

414

 

 

$

1,269

 

 

$

307

 

 

$

323

 

 

$

233

 

 

$

84

 

 

$

2,630

 

Southeast

 

 

1,509

 

 

 

3,449

 

 

 

932

 

 

 

753

 

 

 

564

 

 

 

171

 

 

 

7,378

 

Midwest

 

 

413

 

 

 

1,062

 

 

 

223

 

 

 

209

 

 

 

162

 

 

 

40

 

 

 

2,109

 

Southwest

 

 

1,157

 

 

 

2,222

 

 

 

487

 

 

 

428

 

 

 

332

 

 

 

116

 

 

 

4,742

 

West

 

 

956

 

 

 

2,096

 

 

 

653

 

 

 

485

 

 

 

509

 

 

 

150

 

 

 

4,849

 

 

 

$

4,449

 

 

$

10,098

 

 

$

2,602

 

 

$

2,198

 

 

$

1,800

 

 

$

561

 

 

$

21,708

 

 

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

 

75

 

 

 

Year of origination

 

Collection status

 

2020

 

 

2019

 

 

2018

 

 

2017

 

 

2016

 

 

2015

 

 

Total

 

 

 

(in millions)

 

Delinquency

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Current - 89 Days

 

$

4,429

 

 

$

10,012

 

 

$

2,552

 

 

$

2,185

 

 

$

1,793

 

 

$

559

 

 

$

21,530

 

90 - 179 Days

 

 

13

 

 

 

53

 

 

 

32

 

 

 

12

 

 

 

7

 

 

 

2

 

 

 

119

 

180+ Days

 

 

5

 

 

 

24

 

 

 

13

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

42

 

Foreclosure

 

 

2

 

 

 

9

 

 

 

5

 

 

 

1

 

 

 

—

 

 

 

—

 

 

 

17

 

 

$

4,449

 

 

$

10,098

 

 

$

2,602

 

 

$

2,198

 

 

$

1,800

 

 

$

561

 

 

$

21,708

 

Bankruptcy

 

$

4

 

 

$

31

 

 

$

16

 

 

$

5

 

 

$

7

 

 

$

1

 

 

$

64

 

 

Cash Flows

Our cash flows for the periods ended September 30, 2024 and 2023 are summarized below:

 

 

Nine months ended September 30,

 

 

 

2024

 

 

2023

 

 

 

(in thousands)

 

Operating activities

 

$

(1,082,381

)

 

$

807,162

 

Investing activities

 

 

1,078,349

 

 

 

60,482

 

Financing activities

 

 

67,305

 

 

 

(743,114

)

Net cash flows

 

$

63,273

 

 

$

124,530

 

Our cash flows resulted in a net increase in cash of $63.3 million during the nine months ended September 30, 2024, as discussed below.

Operating activities

Cash used in operating activities totaled $1.1 billion during the nine months ended September 30, 2024, as compared to cash provided by our operating activities of $807.2 million during the nine months ended September 30, 2023. Cash flows from operating activities are influenced by cash flows from loans acquired for sale as shown below:

 

 

Nine months ended September 30,

 

 

 

2024

 

 

2023

 

 

 

(in thousands)

 

Operating cash flows from:

 

 

 

 

 

 

Loans acquired for sale

 

$

(1,043,498

)

 

$

639,045

 

Other

 

 

(38,883

)

 

 

168,117

 

 

$

(1,082,381

)

 

$

807,162

 

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 during the nine months ended September 30, 2024, as compared to a decrease during the same period in 2023.

Investing activities

Net cash provided by our investing activities was $1.1 billion for the nine months ended September 30, 2024, as compared to net cash provided by our investing activities of $60.5 million for the nine months ended September 30, 2023, primarily due to our net sale of MBS.

Financing activities

Net cash provided by our financing activities was $67.3 million for the nine months ended September 30, 2024, as compared to net cash used in our financing activities of $743.1 million for the nine months ended September 30, 2023. This change primarily reflects relative stability in the size of our balance sheet during the nine months ended September 30, 2024.

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.

76

 

Liquidity and Capital Resources

Our liquidity reflects our ability to meet our current obligations (including the purchase of loans from correspondent sellers, our operating expenses and, when applicable, retirement of, and margin calls relating to, our debt and derivatives positions), make investments as our Manager identifies them, pursue our share repurchase program and make distributions to our shareholders. We generally need to distribute at least 90% of our taxable income each year (subject to certain adjustments) to our shareholders to qualify as a REIT under the Internal Revenue Code. This distribution requirement limits our ability to retain earnings and thereby replenish or increase capital to support our activities.

We expect our primary sources of liquidity to be cash flows from our investment portfolio, including cash earnings on our investments, cash flows from business activities, liquidation of existing investments and proceeds from borrowings and/or additional equity offerings. When we finance a particular asset, the amount borrowed is less than the asset’s fair value and we must provide the cash in the amount of such difference. Our ability to continue making investments is dependent on our ability to invest the cash representing such difference.

On March 15, 2024, the Company, PMT ISSUER TRUST-FMSR and PMT CO-ISSUER TRUST-FMSR (together, 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.

On April 4, 2024, we issued in a private offering $247 million aggregate principal amount of CRT term notes that mature on March 29, 2027 at a rate of 3.35% over the Secured Overnight Financing Rate.

On May 24, 2024 and June 4, 2024, PMC issued in a private offering $216.5 million aggregate principal amount of exchangeable senior notes due 2029 (the “2029 Exchangeable Notes”) that mature on June 1, 2029 at a rate of 8.500% per year. The 2029 Exchangeable Notes are fully and unconditionally guaranteed by PMT. Upon exchange, PMC will pay cash up to the aggregate principal amount of the Exchangeable Notes to be exchanged and pay or deliver, as the case may be, cash, PMT’s common shares of beneficial interest (“Common Shares”), or a combination thereof, at PMT’s election, in respect of the remainder, if any, of its exchange obligation in excess of the aggregate principal amount of the Exchangeable Notes to be exchanged. The exchange rate initially equals 63.3332 Common Shares per $1,000 principal amount of the 2029 Exchangeable Notes.

On June 27, 2024, the Company, the Issuer Trusts, PMC and PMH issued an aggregate principal amount of $355 million in secured term notes (the “Series 2024-FT1 Term Notes”) as part of the structured finance transaction that PMC and PMH use to finance Fannie Mae mortgage servicing rights and related excess servicing spread and servicing advance receivables. The initial 3.5 year term of the Series 2024-FT1 Term Notes is set to mature on December 27, 2027, unless the Company exercises a six-month optional extension.

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.

77

 

Our debt financing as of September 30, 2024 is summarized below:

 

 

Assets financed

 

Financing

 

MBS

 

 

Loans acquired
for sale

 

 

Loans at
 fair value

 

 

CRT assets

 

 

Servicing assets (1)

 

 

REO

 

 

Total

 

 

 

(in thousands)

 

Borrowings

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Short term

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Assets sold under agreements to
   repurchase

 

$

3,981,417

 

 

$

1,505,024

 

 

$

61,149

 

 

$

50,808

 

 

$

150,063

 

 

$

—

 

 

$

5,748,461

 

Mortgage loan participation
   purchase and sale agreements

 

 

—

 

 

 

28,790

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

28,790

 

Long term

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Notes payable secured by CRT
   arrangements and MSRs

 

 

—

 

 

 

—

 

 

 

—

 

 

 

766,415

 

 

 

2,063,693

 

 

 

—

 

 

 

2,830,108

 

Asset-backed financings
  at fair value

 

 

—

 

 

 

—

 

 

 

1,334,797

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

1,334,797

 

Interest-only security payable

 

 

—

 

 

 

—

 

 

 

—

 

 

 

35,098

 

 

 

—

 

 

 

—

 

 

 

35,098

 

   Total secured borrowings

 

 

3,981,417

 

 

 

1,533,814

 

 

 

1,395,946

 

 

 

852,321

 

 

 

2,213,756

 

 

 

—

 

 

 

9,977,254

 

Unsecured senior notes

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

814,915

 

Total borrowings

 

$

3,981,417

 

 

$

1,533,814

 

 

$

1,395,946

 

 

$

852,321

 

 

$

2,213,756

 

 

$

—

 

 

 

10,792,169

 

Shareholders' equity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1,936,787

 

Total financing

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

12,728,956

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Assets pledged to secure borrowings

 

$

4,182,382

 

 

$

1,649,411

 

 

$

1,427,722

 

 

$

1,165,137

 

 

$

3,816,015

 

 

$

1,230

 

 

$

12,241,897

 

Debt-to-equity ratio:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Excluding non-recourse debt

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

4.9:1

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

5.6:1

 

 

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

Sales of Assets Under Agreements to Repurchase

Our repurchase agreements represent the sales of assets together with agreements for us to buy back the assets at a later date. Following is a summary of the activities in our repurchase agreements financing:

 

 

Quarter ended September 30,

 

 

Nine months ended September 30,

 

Assets sold under agreements to repurchase

 

2024

 

 

2023

 

 

2024

 

 

2023

 

 

 

(in thousands)

 

Average balance outstanding

 

$

5,513,519

 

 

$

5,714,082

 

 

$

5,225,906

 

 

$

6,451,377

 

Maximum daily balance outstanding

 

$

6,474,799

 

 

$

6,318,746

 

 

$

7,624,113

 

 

$

9,412,768

 

Ending balance

 

 

 

 

 

 

 

$

5,751,519

 

 

$

6,020,716

 

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 $11.3 billion at September 30, 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 transactions relating to loans and REO under agreements to repurchase generally provide for terms of approximately one to two years;
•
The transactions relating to loans under mortgage loan participation purchase and sale agreements provide for terms of approximately one year;
•
The transactions relating to assets under notes payable provide for terms ranging from two to five years; and
•
All repurchase agreements that matured between September 30, 2024 and the date of this Report have been renewed, extended or replaced.

78

 

The amount at risk (the fair value of the assets pledged plus the related margin deposit, less the amount advanced by the counterparty and accrued interest) relating to our Assets sold under agreements to repurchase is summarized by counterparty below as of September 30, 2024:

Counterparty

 

Amount at risk

 

 

(in thousands)

 

Goldman Sachs & Co. LLC

 

$

116,420

 

Citibank, N.A.

 

 

90,248

 

Bank of America, N.A.

 

 

72,391

 

JPMorgan Chase & Co.

 

 

68,946

 

Atlas Securitized Products, L.P.

 

 

51,541

 

Wells Fargo Securities, LLC

 

 

40,668

 

Barclays Capital Inc.

 

 

34,513

 

Santander US Capital

 

 

19,410

 

RBC Capital Markets, L.P.

 

 

10,722

 

Morgan Stanley & Co. LLC

 

 

9,549

 

Daiwa Capital Markets America Inc.

 

 

6,617

 

Mizuho Financial Group

 

 

5,448

 

BNP Paribas

 

 

3,207

 

 

$

529,680

 

 

Unsecured Senior Notes

In September 2023, we issued $53.5 million principal amount of our unsecured 8.50% senior notes due September 30, 2028 (the “2028 Senior Notes”). The 2028 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 2028 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 2028 Senior Notes.

The 2028 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 2028 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 2028 Senior Notes will not be required to exercise their remedies against us before they proceed directly against PMC. PMC’s obligations under the guarantee are limited to the maximum amount that will not, after giving effect to all other contingent and fixed liabilities of PMC, result in the guarantee constituting a fraudulent transfer or conveyance. The PMC Guarantee will:

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

79

 

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

 

 

 

September 30, 2024

 

 

 

(in thousands)

 

Loans acquired for sale at fair value

 

$

1,665,796

 

Mortgage servicing rights at fair value

 

 

3,818,037

 

Other assets

 

 

 

From nonaffiliates

 

 

722,298

 

From PFSI

 

 

8,537

 

From non-issuer or non-guarantor subsidiaries

 

 

513,414

 

Total assets

 

$

6,728,082

 

 

 

 

 

Total liabilities

 

 

 

Payable to nonaffiliates

 

$

1,692,092

 

Payable to non-issuer or non-guarantor subsidiaries

 

 

4,650,634

 

Payable to PFSI

 

 

23,754

 

 

 

$

6,366,480

 

 

 

 

 

 

Nine months ended September 30, 2024

 

 

(in thousands)

 

Net investment income

 

 

From nonaffiliates

$

184,070

 

From PFSI

 

6,916

 

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

 

(246,713

)

Expenses

 

 

From nonaffiliates

 

17,207

 

From PFSI

 

98,883

 

Pre-tax loss

 

(171,817

)

Benefit from income taxes

 

(42,353

)

Net loss

$

(129,464

)

 

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

Debt Covenants

Our debt financing agreements require us and certain of our subsidiaries to comply with various financial covenants. As of the filing of this Report, these financial covenants include the following:

•
a minimum of $75 million in unrestricted cash and cash equivalents among the Company and/or our subsidiaries; a minimum of $75 million in unrestricted cash and cash equivalents among our Operating Partnership and its consolidated subsidiaries; a minimum of $25 million in unrestricted cash and cash equivalents between PMC and PMH; a minimum of $25 million in unrestricted cash and cash equivalents at PMC; and a minimum of $10 million in unrestricted cash and cash equivalents at PMH;
•
a minimum tangible net worth for the Company of $1.25 billion; a minimum tangible net worth for our Operating Partnership of $1.25 billion; a minimum tangible net worth for PMH of $250 million; and a minimum tangible net worth for PMC of $300 million;
•
a maximum ratio of total indebtedness to tangible net worth of less than 10:1 for PMC and PMH and 10:1 for the Company and our Operating Partnership; and
•
at least two warehouse or repurchase facilities that finance amounts and assets similar to those being financed under our existing debt financing agreements.

Although these financial covenants limit the amount of indebtedness we may incur and impact our liquidity through minimum cash reserve requirements, we believe that these covenants currently provide us with sufficient flexibility to successfully operate our business and obtain the financing necessary to achieve that purpose.

80

 

PLS is also subject to various financial covenants, both as a borrower under its own financing arrangements and as our servicer under certain of our debt financing agreements. The most significant of these financial covenants currently include the following:

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

Many of our debt financing agreements contain a condition precedent to obtaining additional funding that requires us to maintain positive net income for at least one (1) of the previous two consecutive quarters, or other similar measures. For the most recent fiscal quarter, the Company is compliant with all such conditions. However, we may be required to obtain waivers from certain lenders in the future if this condition precedent is not met.

Our debt financing agreements also contain margin call provisions that, upon notice from the applicable lender at its option, require us to transfer cash or, in some instances, additional assets in an amount sufficient to eliminate any margin deficit. A margin deficit will generally result from any decline in the market value (as determined by the applicable lender) of the assets subject to the related financing agreement, although in some instances we may agree with the lender upon certain thresholds (in dollar amounts or percentages based on the market value of the assets) that must be exceeded before a margin deficit will arise. Upon notice from the applicable lender, we will generally be required to satisfy the margin call on the day of such notice or within one business day thereafter, depending on the timing of the notice.

Regulatory Capital and Liquidity Requirements

In addition to the financial covenants imposed upon us and PLS as our servicer under our debt financing agreements, we, through PMC and/or PLS, as applicable, are also subject to liquidity and net worth requirements established by the Federal Housing Finance Agency (“FHFA”) for Agency 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 our servicer is in compliance with the Agency's pending requirements as of September 30, 2024.

We continue 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 and Aggregate Contractual Obligations

Off-Balance Sheet Arrangements

As of September 30, 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 September 30, 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.

81

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Market risk is the exposure to loss resulting from changes in interest rates, foreign currency exchange rates, commodity prices, equity prices, real estate values and other market-based risks. The primary market risks that we are exposed to are real estate risk, credit risk, interest rate risk, prepayment risk, inflation risk and market value risk.

Our primary trading asset is our inventory of loans acquired for sale. We believe that such assets’ fair values respond primarily to changes in the market interest rates for comparable recently-originated loans. Our other market-risk assets are a substantial portion of our investments and are primarily comprised of MSRs, CRT arrangements and MBS. We believe that the fair values of MSRs and MBS also respond primarily to changes in the market interest rates for comparable loans or yields on MBS. Changes in interest rates are reflected in the prepayment speeds underlying these investments and in the pricing spread (an element of the discount rate) used in their valuation. We believe that the primary market risks to the fair values of our investment in CRT arrangements are changes in market credit spreads and the fair value of the real estate securing the loans underlying such arrangements.

The following sensitivity analyses are limited in that they were performed at a particular point in time; only contemplate the movements in the indicated variables; do not incorporate changes to other variables; are subject to the accuracy of various models and assumptions used; and do not incorporate other factors that would affect our overall financial performance in such scenarios, including operational adjustments made by management to account for changing circumstances. For these reasons, the following estimates should not be viewed as earnings forecasts.

Mortgage-backed securities at fair value

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

 

 

50

 

 

75

 

 

200

 

 

 

(in thousands)

 

Change in fair value

 

$

78,397

 

 

$

110,601

 

 

$

84,388

 

 

$

(108,066

)

 

$

(166,104

)

 

$

(471,181

)

 

Mortgage Servicing Rights

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

 

 

 

(in thousands)

 

Pricing spread

 

$

199,795

 

 

$

97,431

 

 

$

48,119

 

 

$

(46,966

)

 

$

(92,816

)

 

$

(181,313

)

Prepayment speed

 

$

251,348

 

 

$

120,970

 

 

$

59,378

 

 

$

(57,286

)

 

$

(112,596

)

 

$

(217,698

)

Annual per-loan cost of servicing

 

$

66,428

 

 

$

33,214

 

 

$

16,607

 

 

$

(16,607

)

 

$

(33,214

)

 

$

(66,428

)

 

CRT Arrangements

Following is a summary of the effect on fair value of various changes to the pricing spread input used to estimate the fair value of our CRT arrangements given several shifts in pricing spread:

Pricing spread shift in basis points

 

-100

 

 

-50

 

 

-25

 

 

25

 

 

50

 

 

100

 

 

 

(in thousands)

 

Change in fair value

 

$

41,006

 

 

$

20,198

 

 

$

10,024

 

 

$

(9,877

)

 

$

(19,609

)

 

$

(38,652

)

 

Following is a summary of the effect on fair value of various instantaneous changes in home values from those used to estimate the fair value of our CRT arrangements given several shifts:

Property value shift in %

 

-15%

 

 

-10%

 

 

-5%

 

 

5%

 

 

10%

 

 

15%

 

 

 

(in thousands)

 

Change in fair value

 

$

(10,310

)

 

$

(6,176

)

 

$

(2,784

)

 

$

2,300

 

 

$

4,196

 

 

$

5,757

 

 

82

 

Item 4. Controls and Procedures

Disclosure Controls and Procedures

We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our reports filed under the Securities Exchange Act of 1934 (the “Exchange Act”) is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosures. However, no matter how well a control system is designed and operated, it can provide only reasonable, not absolute, assurance that it will detect or uncover failures within the Company to disclose material information otherwise required to be set forth in our periodic reports.

Our management has conducted an evaluation, with the participation of our Chief Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures as of the end of the period covered by this Report as required by paragraph (b) of Rules 13a-15 and 15d-15 under the Exchange Act. Based on our evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures were effective, as of the end of the period covered by this Report, to provide reasonable assurance that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the applicable rules and forms, and that it is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.

Changes in Internal Control over Financial Reporting

There have been no changes in our internal control over financial reporting during the quarter ended September 30, 2024 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

83

 

PART II. OTHER INFORMATION

From time to time, we may be involved in various legal actions, claims and proceedings arising in the ordinary course of our business. See Note 17 — Commitments and Contingencies, to the financial statements contained in this report for a discussion of legal actions, claims and proceedings that are incorporated by reference into this Item.

Item 1A. Risk Factors

There are no material changes from the risk factors set forth under Item 1A of 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 and nine months ended September 30, 2024.

The following table provides information about our repurchases of common shares of beneficial interest (“Common Shares”) during the quarter ended September 30, 2024:

Period

 

Total
number of
shares
purchased

 

 

Average
price paid
per share

 

 

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

 

 

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

 

 

 

(in thousands, except average price paid per share)

 

July 1, 2024 – July 31, 2024

 

 

—

 

 

$

—

 

 

 

—

 

 

$

73,353

 

August 1, 2024 – August 31, 2024

 

 

—

 

 

$

—

 

 

 

—

 

 

$

73,353

 

September 1, 2024 – September 30, 2024

 

 

—

 

 

$

—

 

 

 

—

 

 

$

73,353

 

 

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

Item 3. Defaults Upon Senior Securities

None

Item 4. Mine Safety Disclosures

Not applicable

Item 5. Other Information

(c) Trading Plans

During the quarter ended September 30, 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).

84

 

Item 6. Exhibits

 

 

 

 

 

 

Incorporated by Reference from the

Below-Listed Form (Each Filed under

SEC File Number 001-34416)

Exhibit No.

 

Exhibit Description

 

Form

 

Filing Date

 

 

 

 

 

 

 

  3.1

 

Declaration of Trust of PennyMac Mortgage Investment Trust, as amended and restated.

 

10-Q

 

November 6, 2009

 

 

 

 

 

 

 

  3.2

 

Second Amended and Restated Bylaws of PennyMac Mortgage Investment Trust

 

8-K

 

March 16, 2018

 

 

 

 

 

 

 

  3.3

 

Articles Supplementary classifying and designating the 8.125% Series A Fixed-to-Floating Rate Cumulative Redeemable Preferred Shares of Beneficial Interest.

 

8-A

 

March 7, 2017

 

 

 

 

 

 

 

  3.4

 

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

 

8-A

 

June 30, 2017

 

 

 

 

 

 

 

  3.5

 

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

 

8-A

 

August 20, 2021

 

 

 

 

 

 

 

10.1^

 

First Amendment to Master Repurchase Agreement, dated as of October 18, 2024, among PMC FMSR VFN Funding, LLC, PMH FMSR VFN Funding, LLC, PennyMac Corp., PennyMac Holdings, LLC, and Goldman Sachs Bank, USA.

 

*

 

 

 

 

 

 

 

 

 

31.1

 

Certification of David A. Spector pursuant to Rule 13a-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

 

*

 

 

 

 

 

 

 

 

 

31.2

 

Certification of Daniel S. Perotti pursuant to Rule 13a-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

 

*

 

 

 

 

 

 

 

 

 

32.1**

 

Certification of David A. Spector pursuant to Rule 13a-14(b) and 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

**

 

 

 

 

 

 

 

 

 

32.2**

 

Certification of Daniel S. Perotti pursuant to Rule 13a-14(b) and 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

**

 

 

 

 

 

 

 

 

 

101

 

Interactive data files pursuant to Rule 405 of Regulation S-T: (i) the Consolidated Balance Sheets as of September 30, 2024 and December 31, 2023 (ii) the Consolidated Statements of Income For the quarter and nine months ended September 30, 2024 and September 30, 2023, (iii) the Consolidated Statements of Changes in Shareholders' Equity For the quarter and nine months ended September 30, 2024 and September 30, 2023, (iv) the Consolidated Statements of Cash Flows for the nine months ended September 30, 2024 and September 30, 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

 

 

 

 

101.CAL

 

Inline XBRL Taxonomy Extension Calculation Linkbase Document

 

 

 

 

101.DEF

 

Inline XBRL Taxonomy Extension Definition Linkbase Document

 

 

 

 

101.LAB

 

Inline XBRL Taxonomy Extension Label Linkbase Document

 

 

 

 

101.PRE

 

Inline XBRL Taxonomy Extension Definition Linkbase Document

 

 

 

 

104

 

Cover Page Interactive Data File (embedded within the Inline XBRL document)

 

 

 

 

 

* Filed herewith.

^ Portions of the exhibit have been redacted.

** 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.

 

85

 

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: October 30, 2024

 

By:

 

/s/ David A. Spector

 

 

 

 

David A. Spector

 

 

 

 

Chairman and Chief Executive Officer

(Principal Executive Officer)

 

 

 

 

 

Dated: October 30, 2024

 

By:

 

/s/ Daniel S. Perotti

 

 

 

 

Daniel S. Perotti

 

 

 

 

Senior Managing Director and Chief Financial Officer

(Principal Financial Officer)

 

86

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