UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
Form 10-Q
(Mark One)
☒
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2019
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)
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 ☒
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class
Trading Symbol (s)
Name of Each Exchange on Which Registered
8.125% Series A Cumulative Redeemable Preferred
Shares of Beneficial Interest, $0.01 Par Value
PMT/PA
New York Stock Exchange
8.00% Series B Cumulative Redeemable Preferred
PMT/PB
Common Shares of Beneficial Interest, $0.01 Par Value
PMT
Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date.
Class
Outstanding at May 2, 2019
Common Shares of Beneficial Interest, $0.01 par value
68,412,435
PENNYMAC MORTGAGE INVESTMENT TRUST
FORM 10-Q
March 31, 2019
TABLE OF CONTENTS
Page
Special Note Regarding Forward-Looking Statements
1
PART I. FINANCIAL INFORMATION
4
Item 1.
Financial Statements (Unaudited):
Consolidated Balance Sheets
Consolidated Statements of Income
6
Consolidated Statements of Changes in Shareholders’ Equity
7
Consolidated Statements of Cash Flows
8
Notes to Consolidated Financial Statements
10
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
54
Our Company
Results of Operations
58
Net Investment Income
59
Expenses
68
Balance Sheet Analysis
71
Asset Acquisitions
Investment Portfolio Composition
72
Cash Flows
78
Liquidity and Capital Resources
79
Off-Balance Sheet Arrangements and Aggregate Contractual Obligations
81
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
83
Item 4.
Controls and Procedures
85
PART II. OTHER INFORMATION
86
Legal Proceedings
Item 1A.
Risk Factors
Unregistered Sales of Equity Securities and Use of Proceeds
Defaults Upon Senior Securities
Mine Safety Disclosures
Item 5.
Other Information
Item 6.
Exhibits
87
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q (“Report”) contains certain forward-looking statements that are subject to various risks and uncertainties. Forward-looking statements are generally identifiable by use of forward-looking terminology such as “may,” “will,” “should,” “potential,” “intend,” “expect,” “seek,” “anticipate,” “estimate,” “approximately,” “believe,” “could,” “project,” “predict,” “continue,” “plan” or other similar words or expressions.
Forward-looking statements are based on certain assumptions, discuss future expectations, describe future plans and strategies, contain financial and operating projections or state other forward-looking information. Examples of forward-looking statements include the following:
•
projections of our revenues, income, earnings per share, capital structure or other financial items;
descriptions of our plans or objectives for future operations, products or services;
forecasts of our future economic performance, interest rates, profit margins and our share of future markets; and
descriptions of assumptions underlying or relating to any of the foregoing expectations regarding the timing of generating any revenues.
Our ability to predict results or the actual effect of future events, actions, plans or strategies is inherently uncertain. Although we believe that the expectations reflected in such forward-looking statements are based on reasonable assumptions, our actual results and performance could differ materially from those set forth in the forward-looking statements. There are a number of factors, many of which are beyond our control that could cause actual results to differ significantly from management’s expectations. Some of these factors are discussed below.
You should not place undue reliance on any forward-looking statement and should consider the following uncertainties and risks, as well as the risks and uncertainties discussed elsewhere in this Report and the section entitled “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2018, filed with the Securities and Exchange Commission (“SEC”) on February 26, 2019.
Factors that could cause actual results to differ materially from historical results or those anticipated include, but are not limited to:
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;
the occurrence of natural disasters or other events or circumstances that could impact our operations;
volatility in our industry, the debt or equity markets, the general economy or the real estate finance and real estate markets specifically, whether the result of market events or otherwise;
events or circumstances which undermine confidence in the financial and housing markets or otherwise have a broad impact on financial and housing markets, such as the sudden instability or collapse of large depository institutions or other significant corporations, terrorist attacks, natural or man-made disasters, or threatened or actual armed conflicts;
changes in general business, economic, market, employment and domestic and international political conditions, or in consumer confidence and spending habits from those expected;
declines in real estate or significant changes in U.S. housing prices or activity in the U.S. housing market;
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 we are exposed;
the degree and nature of our competition;
our dependence on our manager and servicer, potential conflicts of interest with such entities and their affiliates, and the performance of such entities;
changes in personnel and lack of availability of qualified personnel at our manager, servicer or their affiliates;
the availability, terms and deployment of short-term and long-term capital;
the adequacy of our cash reserves and working capital;
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;
unanticipated increases or volatility in financing and other costs, including a rise in interest rates;
the performance, financial condition and liquidity of borrowers;
the ability of our servicer, which also provides us with fulfillment services, to approve and monitor correspondent sellers and underwrite loans to investor standards;
incomplete or inaccurate information or documentation provided by customers or counterparties, or adverse changes in the financial condition of our customers and counterparties;
our indemnification and repurchase obligations in connection with mortgage loans we purchase and later sell or securitize;
the quality and enforceability of the collateral documentation evidencing our ownership and rights in the assets in which we invest;
increased rates of delinquency, default and/or decreased recovery rates on our investments;
the performance of mortgage loans underlying mortgage-backed securities (“MBS”) in which we retain 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 MBS or relating to our mortgage servicing rights (“MSRs”), excess servicing spread (“ESS”) 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 we make about uncertainties, contingencies and asset and liability valuations when measuring and reporting upon our financial condition and results of operations;
our ability to maintain appropriate internal control over financial reporting;
our exposure to risks of loss and disruptions in operations resulting from adverse weather conditions and man-made or natural disasters;
technologies for loans and our ability to mitigate security risks and cyber intrusions;
our ability to obtain and/or maintain licenses and other approvals in those jurisdictions where required to conduct our business;
our ability to detect misconduct and fraud;
our ability to comply with various federal, state and local laws and regulations that govern our business;
developments in the secondary markets for our mortgage loan products;
legislative and regulatory changes that impact the mortgage loan industry or housing market;
changes in regulations or the occurrence of other events that impact the business, operations or prospects of government agencies such as the Government National Mortgage Association (“Ginnie Mae”), the Federal Housing Administration (the “FHA”) or the Veterans Administration (the “VA”), the U.S. Department of Agriculture (“USDA”), or government-sponsored entities such as the Federal National Mortgage Association (“Fannie Mae”) or the Federal Home Loan Mortgage Corporation (“Freddie Mac”) (Fannie Mae, Freddie Mac and Ginnie Mae are each referred to as an “Agency” and, collectively, as the “Agencies”), or such changes that increase the cost of doing business with such entities;
the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) and its implementing regulations and regulatory agencies, and any other legislative and regulatory changes that impact the business, operations or governance of mortgage lenders and/or publicly-traded companies;
the Consumer Financial Protection Bureau (“CFPB”) and its issued and future rules and the enforcement thereof;
changes in government support of homeownership;
changes in government or government-sponsored home affordability programs;
limitations imposed on our business and our ability to satisfy complex rules for us to qualify as a real estate investment trust (“REIT”) for U.S. federal income tax purposes and qualify for an exclusion from the Investment Company Act of 1940 (the “Investment Company Act”) and the ability of certain of our subsidiaries to qualify as REITs or as taxable REIT
2
subsidiaries (“TRSs”) for U.S. federal income tax purposes, as applicable, and our ability and the ability of our subsidiaries to operate effectively within the limitations imposed by these rules;
changes in governmental regulations, accounting treatment, tax rates and similar matters (including changes to laws governing the taxation of REITs, or the exclusions from registration as an investment company);
our ability to make distributions to our shareholders in the future;
our failure to deal appropriately with issues that may give rise to reputational risk; and
our organizational structure and certain requirements in our charter documents.
Other factors that could also cause results to differ from our expectations may not be described in this Report or any other document. Each of these factors could by itself, or together with one or more other factors, adversely affect our business, results of operations and/or financial condition.
Forward-looking statements speak only as of the date they are made, and we undertake no obligation to update any forward-looking statement to reflect the impact of circumstances or events that arise after the date the forward-looking statement was made.
3
Item 1. Financial Statements
PENNYMAC MORTGAGE INVESTMENT TRUST AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
March 31,
December 31,
2019
2018
(in thousands, except share information)
ASSETS
Cash
$
68,538
59,845
Short-term investments at fair value
29,751
74,850
Mortgage-backed securities at fair value pledged to creditors
2,589,106
2,610,422
Mortgage loans acquired for sale at fair value (includes $1,414,330 and $1,621,879
pledged to creditors, respectively)
1,435,071
1,643,957
Mortgage loans at fair value (includes $394,361 and $399,266 pledged to creditors, respectively)
398,664
408,305
Excess servicing spread purchased from PennyMac Financial Services, Inc. at fair value
pledged to secure Assets sold to PennyMac Financial Services, Inc. under agreements to
repurchase
205,081
216,110
Derivative assets (includes $97,883 and $87,976 pledged to creditors, respectively)
188,710
167,165
Firm commitment to purchase credit risk transfer securities at fair value
79,784
37,994
Real estate acquired in settlement of loans (includes $18,927 and $40,198
72,175
85,681
Real estate held for investment (includes $30,007 and $23,262 pledged to creditors, respectively)
42,346
43,110
Deposits securing credit risk transfer agreements (includes $1,137,283 and $1,146,501
1,137,283
1,146,501
Mortgage servicing rights at fair value (includes $1,133,736 and $1,139,582
1,156,908
1,162,369
Servicing advances
37,392
67,666
Due from PennyMac Financial Services, Inc.
3,345
4,077
Other
111,833
85,309
Total assets
7,555,987
7,813,361
LIABILITIES
Assets sold under agreements to repurchase
4,179,829
4,777,027
Mortgage loan participation purchase and sale agreements
73,142
178,639
Exchangeable senior notes
248,652
248,350
Notes payable
739,224
445,573
Asset-backed financing of a variable interest entity at fair value
275,509
276,499
Interest-only security payable at fair value
32,564
36,011
Assets sold to PennyMac Financial Services, Inc. under agreements to repurchase
125,929
131,025
Derivative liabilities
8,750
5,914
Accounts payable and accrued liabilities
74,294
70,687
Due to PennyMac Financial Services, Inc.
29,951
33,464
Income taxes payable
32,866
36,526
Liability for losses under representations and warranties
7,688
7,514
Total liabilities
5,828,398
6,247,229
Commitments and contingencies ─ Note 20
SHAREHOLDERS’ EQUITY
Preferred shares of beneficial interest, $0.01 par value per share, authorized 100,000,000 shares,
issued and outstanding 12,400,000 shares, liquidation preference $310,000,000
299,707
Common shares of beneficial interest—authorized, 500,000,000 common shares of $0.01
par value; issued and outstanding, 68,412,435 and 60,951,444 common shares, respectively
684
610
Additional paid-in capital
1,431,887
1,285,533
Accumulated deficit
(4,689
)
(19,718
Total shareholders’ equity
1,727,589
1,566,132
Total liabilities and shareholders’ equity
The accompanying notes are an integral part of these consolidated financial statements.
Assets and liabilities of consolidated variable interest entities (“VIEs”) included in total assets and liabilities (the assets of each VIE can only be used to settle liabilities of that VIE):
(in thousands)
Mortgage loans at fair value
289,552
290,573
Derivative assets
130,447
123,987
Deposits securing credit risk transfer agreements
Other—interest receivable
825
839
1,558,107
1,561,900
Asset-backed financing at fair value
Accounts payable and accrued liabilities—interest payable
308,898
313,349
5
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
Quarter ended March 31,
(in thousands, except per share amounts)
Net investment income
Net gain (loss) on investments:
From nonaffiliates
98,655
(7,733
From PennyMac Financial Services, Inc.
(3,562
7,751
95,093
18
Net gain on mortgage loans acquired for sale:
19,329
4,986
1,994
2,641
21,323
7,627
Mortgage loan origination fees
12,938
7,037
Net mortgage loan servicing fees:
(31,714
55,560
634
595
(31,080
56,155
Interest income:
60,015
37,046
3,066
3,934
63,081
40,980
Interest expense:
To nonaffiliates
52,943
32,840
To PennyMac Financial Services, Inc.
1,796
1,976
54,739
34,816
Net interest income
8,342
6,164
Results of real estate acquired in settlement of loans
(1,480
(3,226
1,482
1,898
106,618
75,673
Earned by PennyMac Financial Services, Inc.:
Mortgage loan fulfillment fees
27,574
11,944
Mortgage loan servicing fees
10,570
11,019
Management fees
7,248
5,696
Mortgage loan origination
2,277
272
Compensation
1,969
1,268
Mortgage loan collection and liquidation
1,584
2,229
Professional services
1,327
1,319
Real estate held for investment
1,054
1,438
3,148
2,650
Total expenses
56,751
37,835
Income before (benefit from) provision for income taxes
49,867
37,838
(Benefit from) provision for income taxes
(3,660
9,652
Net income
53,527
28,186
Dividends on preferred shares
6,234
Net income attributable to common shareholders
47,293
21,952
Earnings per common share
Basic
0.73
0.36
Diluted
0.68
0.35
Weighted average common shares outstanding
64,629
60,761
73,371
69,875
Dividends declared per common share
0.47
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY (UNAUDITED)
Preferred shares
Common shares
Number
Additional
of
Par
paid-in
Accumulated
shares
Amount
value
capital
deficit
Total
Balance at December 31, 2017
12,400
61,334
613
1,290,931
(46,666
1,544,585
Cumulative effect of a change in accounting
principle—Adoption of fair value
accounting for mortgage servicing rights
—
14,361
Balance at January 1, 2018
(32,305
1,558,946
Share-based compensation
220
897
899
Dividends:
Common shares ($0.47 per share)
(28,818
(6,236
Repurchase of common shares
(671
(6
(10,713
(10,719
Balance at March 31, 2018
60,883
609
1,281,115
(39,173
1,542,258
Balance at December 31, 2018
60,951
240
(985
(983
Issuance of common shares
7,221
149,395
149,467
Issuance costs relating to common shares
(2,056
(32,262
Balance at March 31, 2019
68,412
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Cash flows from operating activities
Adjustments to reconcile net income to net cash provided by operating activities:
Net gain on investments
(95,093
(18
Net gain on mortgage loans acquired for sale at fair value
(21,323
(7,627
Net change in fair value of mortgage servicing rights
96,194
(5,125
Accrual of interest on excess servicing spread purchased from PennyMac
Financial Services, Inc.
(3,066
(3,934
Capitalization of interest and fees on mortgage loans at fair value
(762
(2,180
Amortization of debt issuance (premiums) and costs, net
(4,899
236
Accrual of unearned discounts and amortization of premiums on mortgage-backed
securities, mortgage loans at fair value, and asset-backed financing of a VIE
5,252
507
1,480
3,226
Share-based compensation expense
1,617
Purchase of mortgage loans acquired for sale at fair value from nonaffiliates
(15,473,441
(13,524,468
Purchase of mortgage loans acquired for sale at fair value from PennyMac Financial Services, Inc.
(884,510
(781,326
Repurchase of mortgage loans subject to representation and warranties
(2,880
(2,830
Sale to nonaffiliates and repayment of mortgage loans acquired for sale at fair value
9,475,174
5,200,584
Sale of mortgage loans acquired for sale to PennyMac Financial Services, Inc.
6,959,390
9,212,188
Settlement of repurchase agreement derivatives
4,492
Decrease in servicing advances
33,052
17,204
Decrease in due from PennyMac Financial Services, Inc.
713
3,767
Decrease (Increase) in other assets
6,846
(25,462
Increase (decrease) in accounts payable and accrued liabilities
313
(1,229
(Decrease) increase in due to PennyMac Financial Services, Inc.
(3,513
237
(Decrease) increase in income taxes payable
Net cash provided by operating activities
144,903
122,487
Cash flows from investing activities
Net decrease (increase) in short-term investments
45,099
(52,646
Purchase of mortgage-backed securities at fair value
(500,573
Sale and repayment of mortgage-backed securities at fair value
53,682
30,741
Repurchase of mortgage loans at fair value
(1,077
Sale and repayment of mortgage loans at fair value
8,436
276,467
Repayment of excess servicing spread by PennyMac Financial Services, Inc.
10,552
12,291
Net settlement of derivative financial instruments
(4,814
(2,329
Sale of real estate acquired in settlement of loans
16,900
32,437
Distribution from credit risk transfer agreements
30,262
27,655
Deposit of cash securing credit risk transfer agreements
(41,789
Decrease (increase) in margin deposits
16,429
(9,823
Net cash provided by (used in) investing activities
175,469
(227,569
Cash flows from financing activities
Sale of assets under agreements to repurchase
22,303,421
17,446,171
Repurchase of assets sold under agreements to repurchase
(22,901,600
(17,218,539
Issuance of mortgage loan participation certificates
1,661,385
1,208,189
Repayment of mortgage loan participation certificates
(1,766,937
(1,252,708
Issuance of note payable
295,730
Repayment of asset-backed financing of a variable interest entity at fair value
(4,669
(3,915
Advances under assets sold to PennyMac Financial Services, Inc. under
agreements to repurchase
2,293
Repurchase of assets sold to PennyMac Financial Services, Inc. under
agreement to repurchase
(5,096
(3,483
Payment of debt issuance costs
(3,520
(2,306
Payment of dividends to preferred shareholders
Payment of dividends to common shareholders
(28,816
(29,145
Payment of issuance costs related to common shares
Payment of vested share withholdings
(2,600
Payment of contingent underwriting fees payable
(152
Net cash (used in) provided by financing activities
(311,679
129,602
Net increase in cash
8,693
24,520
Cash at beginning of quarter
77,647
Cash at end of quarter
102,167
9
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Note 1—Organization
PennyMac Mortgage Investment Trust (“PMT” or the “Company”) is a specialty finance company, which, through its subsidiaries (all of which are wholly-owned), invests primarily in residential mortgage-related assets. The Company operates in four segments: correspondent production, credit sensitive strategies, interest rate sensitive strategies and corporate:
The correspondent production segment represents the Company’s operations aimed at serving as an intermediary between mortgage lenders and the capital markets by purchasing, pooling and reselling newly originated prime credit quality mortgage loans either directly or in the form of mortgage-backed securities (“MBS”), using the services of PNMAC Capital Management, LLC (“PCM” or the “Manager”) and PennyMac Loan Services, LLC (“PLS”), both indirect controlled subsidiaries of PennyMac Financial Services, Inc. (“PFSI”).
Almost all of the mortgage loans the Company has acquired in its correspondent production activities have been eligible for sale to government-sponsored entities (“GSEs”) such as the Federal National Mortgage Association (“Fannie Mae”) and the Federal Home Loan Mortgage Corporation (“Freddie Mac”) or through government agencies such as the Government National Mortgage Association (“Ginnie Mae”). Fannie Mae, Freddie Mac and Ginnie Mae are each referred to as an “Agency” and, collectively, as the “Agencies.”
The credit sensitive strategies segment represents the Company’s investments in credit risk transfer (“CRT”) arrangements, including CRT agreements (“CRT Agreements”) and CRT securities, distressed mortgage loans, real estate acquired in settlement of mortgage loans (“REO”), real estate held for investment, non-Agency subordinated bonds and small balance commercial real estate mortgage loans.
The interest rate sensitive strategies segment represents the Company’s investments in mortgage servicing rights (“MSRs”), excess servicing spread purchased from PFSI (“ESS”), Agency and senior non-Agency MBS and the related interest rate hedging activities.
The corporate segment includes management fees, corporate expense amounts and certain interest income.
The Company conducts substantially all of its operations and makes substantially all of its investments through its subsidiary, PennyMac Operating Partnership, L.P. (the “Operating Partnership”), and the Operating Partnership’s subsidiaries. A wholly-owned subsidiary of the Company is the sole general partner, and the Company is the sole limited partner, of the Operating Partnership.
The Company believes that it qualifies, and has elected to be taxed, as a real estate investment trust (“REIT”) under the Internal Revenue Code of 1986, as amended. To maintain its tax status as a REIT, the Company is required to distribute at least 90% of its taxable income in the form of qualifying distributions to shareholders.
Note 2—Basis of Presentation
The accompanying 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 (“ASC”) 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. The interim consolidated information should be read together with the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2018 (the “Annual Report”).
The accompanying unaudited consolidated financial statements reflect all normal recurring adjustments necessary to present fairly the financial position, results of operations, and cash flows for the interim periods, but are not necessarily indicative of the results of operations that may be anticipated for the full year. Intercompany accounts and transactions have been eliminated.
Preparation of financial statements in compliance with GAAP requires the Manager to make estimates and judgments that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements, and revenues and expenses during the reporting period. Actual results will likely differ from those estimates.
The Company held no restricted cash during the Quarters presented. Therefore the consolidated statements of cash flows do not include references to restricted cash.
Note 3—Accounting Development
Stock Compensation
The Company adopted Accounting Standard Update 2018-07, Compensation—Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting (“ASU 2018-07”), effective January 1, 2019. ASU 2018-07 expands the scope of the Compensation—Stock Compensation topic of the ASC, which provides accounting guidance relating to share-based payments issued to employees, to include share-based payments issued to non-employees of the Manager and its affiliates for goods or services. Consequently, under ASU 2018-07, the accounting for share-based payments to employees of the Manager and its affiliates is now substantially aligned with the Company’s present accounting for share-based payments to its trustees.
The Company issues share-based compensation to certain employees of the Manager and its affiliates. Through December 31, 2018, the Company accounted for share-based payments to employees of the Manager and its affiliates under the guidance of Equity – Equity-Based Payments to Non-Employees topic of the ASC. Under that topic, the measure of cost relating to such grants was generally established based on the fair value of the shares upon vesting of the share-based awards. Accordingly, the Manager’s estimate of compensation costs, and by extension periodic expense amounts, fluctuated with movements in the Company’s common share price during the period that expense relating to the grants is being recognized. As a result of the adoption of ASU 2018-07, the cost of share-based grants made to employees of the Manager and its affiliates are fixed at the date of the grant for restricted share units issued to employees of the Manager and its affiliates and variable to the extent of changes in performance attainment expectations for performance share units issued to all grantees.
Upon adoption of ASU 2018-07, the Company did not record a cumulative effect adjustment to its accumulated deficit.
Note 4—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 and distressed mortgage loans. These investments include assets that are more sensitive to borrower creditworthiness than other mortgage investments such as traditional mortgage loans and mortgage-backed securities.
As detailed in Note 6 – Loan Sales and Variable Interest Entities, the Company also invests in CRT arrangements whereby it sells pools of recently-originated mortgage loans into Fannie Mae-guaranteed securitizations while either:
through May 2018, retaining a portion of the credit risk underlying such mortgage loans as part of the retention of an interest-only (“IO”) ownership interest in such mortgage loans and an obligation to absorb credit losses arising from such mortgage loans (“Recourse Obligations”); or
beginning in June 2018, entering into a firm commitment to purchase CRT securities that absorb losses from defaults of such loans.
The Company’s retention of credit risk through its investment in CRT arrangements subjects it to risks associated with delinquency and foreclosure similar to the risks associated with owning the related mortgage loans, and, in the case of CRT Agreements, exposes the Company to risk of loss greater than the risks associated with selling such mortgage loans to Fannie Mae without the retention of such credit risk.
CRT Agreements are structured such that mortgage loans that reach a specific number of days delinquent will trigger losses chargeable to the CRT Agreements in proportion to the size of the loan and a contractual schedule of loss severity. Therefore, the risks associated with delinquency and foreclosure may in some instances be greater than the risks associated with owning the related mortgage loans because the structure of certain of the CRT Agreements provides that the Company may be required to realize 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).
At the beginning of the aggregation period and before the settlement of the CRT securities, the Company makes a firm commitment to purchase the CRT securities. The Company has elected to account for these commitments at fair value. Accordingly, the Company recognizes the fair value of such commitment as it sells loans subject to the firm commitment, and also recognizes changes in fair value of the firm commitment during the time it is outstanding. Unlike the Company’s investment in CRT Agreements before June 2018, the structure of its investment in CRT securities only requires the Company to absorb incurred losses when the reference mortgage loans realize actual losses.
In addition to the risks specific to credit, the Company is exposed to market risk and, as a result of prevailing market conditions or the economy generally, may be required to recognize losses associated with adverse changes to the fair value of the CRT arrangements.
11
Note 5—Transactions with Related Parties
Operating Activities
Correspondent Production Activities
The Company is provided fulfillment and other services by PLS under an amended and restated mortgage banking services agreement.
Pursuant to the terms of the agreement, the monthly fulfillment fee is an amount that shall equal (a) no greater than the product of (i) 0.35% and (ii) the aggregate initial unpaid principal balance (the “Initial UPB”) of all mortgage loans purchased in such month, plus (b) in the case of all mortgage loans other than mortgage loans sold to or securitized through Fannie Mae or Freddie Mac, no greater than the product of (i) 0.50% and (ii) the aggregate Initial UPB of all such mortgage loans sold and securitized in such month; provided however, that no fulfillment fee shall be due or payable to PLS with respect to any mortgage loans underwritten to the Ginnie Mae MBS Guide.
The Company does not hold the Ginnie Mae approval required to issue securities guaranteed by Ginnie Mae MBS and act as a servicer. Accordingly, under the agreement, PLS currently purchases loans saleable in accordance with the Ginnie Mae MBS Guide “as is” and without recourse of any kind from the Company at cost less any administrative fees paid by the correspondent to the Company plus accrued interest and a sourcing fee ranging from two to three and one-half basis points, generally based on the average number of calendar days loans are held by the Company prior to purchase by PLS.
The mortgage banking services agreement expires on September 12, 2020, subject to automatic renewal for additional 18-month periods, unless terminated earlier in accordance with the terms of the agreement.
The Company purchases newly originated conforming balance non-government insured or guaranteed mortgage loans from PLS under a mortgage loan purchase and sale agreement.
Following is a summary of correspondent production activity between the Company and PLS:
Mortgage loan fulfillment fees earned by PLS
UPB of mortgage loans fulfilled by PLS
8,135,552
4,225,631
Sourcing fees received from PLS included in
Net gain on mortgage loans acquired for sale
UPB of mortgage loans sold to PLS
6,647,338
8,847,873
Purchases of mortgage loans acquired for sale from PLS
884,510
781,326
Tax service fee paid to PLS included in Other expense
2,243
1,208
December 31, 2018
Mortgage loans included in Mortgage loans acquired
for sale at fair value pending sale to PLS
195,839
86,308
Mortgage Loan Servicing
The Company, through its Operating Partnership, has an amended and restated mortgage loan servicing agreement with PLS dated as of September 12, 2016, pursuant to which PLS provides servicing for the Company's portfolio of residential mortgage loans and subservicing for its portfolio of MSRs. The servicing agreement provides for servicing fees earned by PLS that are based on a percentage of the mortgage loan’s unpaid principal balance or fixed per loan monthly amounts based on the delinquency, bankruptcy and/or foreclosure status of the serviced mortgage loan or the REO. PLS is also entitled to market-based fees and charges including boarding and deboarding fees, liquidation and disposition, assumption, modification and origination fees and a percentage of late charges relating to mortgage loans it services for the Company.
The base servicing fee rates for distressed whole mortgage loans range from $30 per month for current loans up to $85 per month for loans where the borrower has declared bankruptcy. The base servicing fee rate for REO is $75 per month.
12
To the extent that the Company rents its REO under an REO rental program, the Company pays PLS an REO rental fee of $30 per month per REO, an REO property lease renewal fee of $100 per lease renewal, and a property management fee in an amount equal to PLS’ cost if property management services and/or any related software costs are outsourced to a third-party property management firm or 9% of gross rental income if PLS provides property management services directly. PLS is also entitled to retain any tenant paid application fees and late rent fees and seek reimbursement for certain third party vendor fees.
Except as otherwise provided in the MSR recapture agreement, when PLS effects a refinancing of a mortgage loan on behalf of the Company and not through a third-party lender and the resulting mortgage loan is readily saleable, or PLS originates a loan to facilitate the disposition of an REO, PLS is entitled to receive from the Company market-based fees and compensation consistent with pricing and terms PLS offers unaffiliated parties on a retail basis.
PLS is required to provide a range of services and activities significantly greater in scope than the services provided in connection with a customary servicing arrangement because the Company has a small number of employees and limited infrastructure. For these services, PLS received a supplemental fee of $25 per month for each distressed whole loan. PLS is entitled to reimbursement for all customary, good faith reasonable and necessary out-of-pocket expenses incurred in the performance of its servicing obligations.
PLS, on behalf of the Company, is entitled to retain any incentive payments made to it and to which it is entitled under the U.S. Department of Treasury’s Home Affordable Modification Plan (“HAMP”); provided, however, that with respect to any such incentive payments paid to PLS under HAMP in connection with a mortgage loan modification for which the Company previously paid PLS a modification fee, PLS shall reimburse the Company an amount equal to the incentive payments.
PLS is also entitled to certain activity-based fees for distressed whole mortgage loans that are charged based on the achievement of certain events. These fees range from $750 for a streamline modification to $1,750 for a full modification or liquidation and $500 for a deed-in-lieu of foreclosure. PLS is not entitled to earn more than one liquidation fee, reperformance fee or modification fee per mortgage loan in any 18-month period.
The base servicing fees for non-distressed mortgage loans subserviced by PLS on the Company’s behalf are also calculated through a monthly per-loan dollar amount, with the actual dollar amount for each loan based on whether the mortgage loan is a fixed-rate or adjustable-rate loan. The base servicing fees for loans subserviced on the Company’s behalf are $7.50 per month for fixed-rate loans and $8.50 per month for adjustable-rate mortgage loans.
To the extent that these non-distressed mortgage loans become delinquent, PLS is entitled to an additional servicing fee per mortgage loan ranging from $10 to $55 per month and based on the delinquency, bankruptcy and foreclosure status of the mortgage 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.
The term of the servicing agreement expires on September 12, 2020, subject to automatic renewal for additional 18-month periods, unless terminated earlier in accordance with the terms of the servicing agreement.
Pursuant to the terms of an amended and restated MSR recapture agreement, if PLS refinances mortgage loans for which the Company previously held the MSRs, PLS is generally required to transfer and convey to one of the Company’s wholly-owned subsidiaries cash in an amount equal to 30% of the fair market value of the MSRs related to all the loans so originated. The MSR recapture agreement expires, unless terminated earlier in accordance with the agreement, on September 12, 2020, subject to automatic renewal for additional 18-month periods.
13
Following is a summary of mortgage loan servicing fees earned by PLS and MSR recapture income earned from PLS:
Mortgage loan servicing fees:
Mortgage loans acquired for sale at fair value
239
178
463
3,119
MSRs
9,868
7,722
Average investment in:
1,633,711
1,046,289
Mortgage loans at fair value:
Distressed mortgage loans
112,923
738,333
Mortgage loans held in a VIE
289,771
314,717
Average MSR portfolio UPB
95,953,915
73,694,438
MSR recapture income recognized included in
Net mortgage loan servicing fees—from PennyMac
Management Fees
The Company has a management agreement with PCM, which was amended and restated effective as of September 12, 2016. Under the management agreement, the Company pays PCM management fees as follows:
A base management fee that is calculated quarterly and is equal to the sum of (i) 1.5% per year of average shareholders’ equity up to $2 billion, (ii) 1.375% per year of average shareholders’ equity in excess of $2 billion and up to $5 billion, and (iii) 1.25% per year of average shareholders’ equity in excess of $5 billion.
A performance incentive fee that is calculated quarterly at a defined annualized percentage of the amount by which “net income,” on a rolling four-quarter basis and before deducting the incentive fee, exceeds certain levels of return on “equity.”
The performance incentive fee is equal to the sum of: (a) 10% of the amount by which “net income” for the quarter exceeds (i) an 8% return on equity plus the high watermark, up to (ii) a 12% return on equity; plus (b) 15% of the amount by which “net income” for the quarter exceeds (i) a 12% return on equity plus the high watermark, up to (ii) a 16% return on equity; plus (c) 20% of the amount by which “net income” for the quarter exceeds a 16% return on equity plus the high watermark.
For the purpose of determining the amount of the performance incentive fee:
“Net income” is defined as net income or loss attributable to common shares of beneficial interest computed in accordance with GAAP and certain other non-cash charges determined after discussions 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.
The “high watermark” is the quarterly adjustment that reflects the amount by which the “net income” (stated as a percentage of return on equity) in that quarter exceeds or falls short of the lesser of 8% and the average Fannie Mae 30-year MBS yield (the target yield) for the four quarters then ended. The “high watermark” starts at zero and is adjusted quarterly. If the “net income” is lower than the target yield, the high watermark is increased by the difference. If the “net income” is higher than the target yield, the high watermark is reduced by the difference. Each time a performance incentive fee is earned, the high watermark returns to zero. As a result, the threshold amounts required for PCM to earn a performance incentive fee are adjusted cumulatively based on the performance of PMT’s “net income” over (or under) the target yield, until the “net income” in excess of the target yield exceeds the then-current cumulative high watermark amount.
The base management fee and the performance incentive fee are both payable quarterly in arrears. The performance incentive fee may be paid in cash or a combination of cash and the Company’s common shares (subject to a limit of no more than 50% paid in common shares), at the Company’s option.
14
The management agreement expires on September 12, 2020, subject to automatic renewal for additional 18-month periods, unless terminated earlier in accordance with the terms of the agreement. 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 immediately preceding the date of termination.
Following is a summary of the base management and performance incentive fees payable to PCM recorded by the Company:
Base management
6,109
Performance incentive
1,139
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.
Expense Reimbursement and Amounts Payable to and Receivable from PCM
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. With respect to the allocation of PCM’s and its affiliates’ compensation expenses, from and after September 12, 2016, PCM shall be reimbursed $120,000 per fiscal quarter, such amount to be reviewed annually and to not preclude reimbursement for any other services performed by PCM or its affiliates.
The Company is required to pay PCM and its affiliates a portion of rent, telephone, utilities, office furniture, equipment, machinery and other office, internal and overhead expenses of PCM and its affiliates required for the Company’s and its subsidiaries’ operations. These expenses are allocated based on the ratio of the Company’s and its subsidiaries’ proportion of gross assets compared to all remaining gross assets managed by PCM as calculated at each fiscal quarter end.
Following is a summary of the Company’s reimbursements to PCM and its affiliates for expenses:
Reimbursement of:
Common overhead incurred by PCM and its affiliates
1,236
1,001
120
Expenses incurred on the Company’s behalf, net
570
573
1,926
1,694
Payments and settlements during the quarter (1)
15,189
7,658
(1)
Payments and settlements include payments and netting settlements made pursuant to master netting agreements between the Company and PFSI for the operating, investment and financing activities itemized in this Note.
Investing Activities
Spread Acquisition and MSR Servicing Agreements
On December 19, 2016, the Company, through a wholly-owned subsidiary, PennyMac Holdings, LLC (“PMH”), amended and restated a master spread acquisition and MSR servicing agreement with PLS (the “Spread Acquisition Agreement”), pursuant to which the Company may purchase from PLS, from time to time, the right to receive participation certificates representing beneficial ownership in ESS arising from Ginnie Mae MSRs acquired by PLS, in which case PLS generally would be required to service or subservice the related mortgage loans for Ginnie Mae. The primary purpose of the amendment and restatement was to facilitate the continued financing of the ESS owned by the Company in connection with the parties’ participation in the GNMA MSR Facility (as defined below).
15
To the extent PLS refinances any of the mortgage loans relating to the ESS the Company has acquired, the Spread Acquisition Agreement also contains recapture provisions requiring that PLS transfer to the Company, at no cost, the ESS relating to a certain percentage of the unpaid principal balance of the newly originated mortgage loans. However, under the Spread Acquisition Agreement, in any month where the transferred ESS relating to newly originated Ginnie Mae mortgage loans is not equivalent to at least 90% of the product of the excess servicing fee rate and the unpaid principal balance of the refinanced mortgage loans, PLS is also required to transfer additional ESS or cash in the amount of such shortfall. Similarly, in any month where the transferred ESS relating to modified Ginnie Mae mortgage loans is not equivalent to at least 90% of the product of the excess servicing fee rate and the unpaid principal balance of the modified mortgage loans, the Spread Acquisition Agreement contains provisions that require PLS to transfer additional ESS or cash in the amount of such shortfall. To the extent the fair market value of the aggregate ESS to be transferred for the applicable month is less than $200,000, PLS may, at its option, settle its recapture liability to the Company in cash in an amount equal to such fair market value in lieu of transferring such ESS.
Following is a summary of investing activities between the Company and PFSI:
ESS:
Received pursuant to a recapture agreement
508
904
Repayments and sales
Interest income
Net (loss) gain included in Net gain (loss) on investments:
Valuation changes
(4,051
6,921
Recapture income
489
830
Excess servicing spread purchased from PennyMac
Financial Services, Inc. at fair value
Financing Activities
PFSI held 75,000 of the Company’s common shares at both March 31, 2019 and December 31, 2018.
Repurchase Agreement with PLS
On December 19, 2016, the Company, through PMH, entered into a master repurchase agreement with PLS (the “PMH Repurchase Agreement”), pursuant to which PMH may borrow from PLS for the purpose of financing PMH’s participation certificates representing beneficial ownership in ESS acquired from PLS under the Spread Acquisition Agreement. PLS then re-pledges such participation certificates to PNMAC GMSR ISSUER TRUST (the “Issuer Trust”) under a master repurchase agreement by and among PLS, the Issuer Trust and Private National Mortgage Acceptance Company, LLC, as guarantor (the “PC Repurchase Agreement”). The Issuer Trust was formed for the purpose of allowing PLS to finance MSRs and ESS relating to such MSRs (the “GNMA MSR Facility”).
In connection with the GNMA MSR Facility, PLS pledges and/or sells to the Issuer Trust participation certificates representing beneficial interests in MSRs and ESS pursuant to the terms of the PC Repurchase Agreement. In return, the Issuer Trust (a) has issued to PLS, pursuant to the terms of an indenture, the Series 2016-MSRVF1 Variable Funding Note, dated December 19, 2016, known as the “PNMAC GMSR ISSUER TRUST MSR Collateralized Notes, Series 2016-MSRVF1” (the “VFN”), and (b) may, from time to time pursuant to the terms of any supplemental indenture, issue to institutional investors additional term notes (“Term Notes”), in each case secured on a pari passu basis by the participation certificates relating to the MSRs and ESS. The maximum principal balance of the VFN is $1 billion.
The principal amount paid by PLS for the participation certificates under the PMH Repurchase Agreement is based upon a percentage of the market value of the underlying ESS. Upon PMH’s repurchase of the participation certificates, PMH is required to repay PLS the principal amount relating thereto plus accrued interest (at a rate reflective of the current market and consistent with the weighted average note rate of the VFN and any outstanding Term Notes) to the date of such repurchase. PLS is then required to repay the Issuer Trust the corresponding amount under the PC Repurchase Agreement.
16
Conditional Reimbursement of Initial Public Offering (“IPO”) Underwriting Fees
In connection with its IPO, the Company conditionally agreed to reimburse PCM up to $2.9 million for underwriting fees paid to the IPO underwriters by PCM on the Company’s behalf (the “Conditional Reimbursement”). Also in connection with its IPO, the Company agreed to pay the IPO underwriters up to $5.9 million in contingent underwriting fees. On February 1, 2019, the term of the reimbursement agreement was extended and now expires on February 1, 2023.
Following is a summary of financing activities between the Company and PFSI:
5,096
3,483
Interest expense
Conditional Reimbursement paid to:
PCM
75
Underwriters
152
Assets sold to PFSI under agreement to repurchase
Conditional Reimbursement payable to PCM included in Accounts
payable and accrued liabilities
726
801
Amounts Receivable from and Payable to PFSI
Amounts receivable from and payable to PFSI are summarized below:
Due from PFSI:
MSR recapture receivable
160
179
3,185
3,898
Due to PFSI:
Fulfillment fees
11,744
10,006
7,238
6,559
4,350
4,841
Allocated expenses and expenses paid by PFSI on PMT’s behalf
3,907
9,066
Correspondent production fees
1,852
2,071
Conditional Reimbursement
Interest on Assets sold to PFSI under agreement to repurchase
134
Note 6—Loan Sales and Variable Interest Entities
The Company is a variable interest holder in various special purpose entities (“VIEs”) that relate to its mortgage loan transfer and financing activities and credit risk investments. These entities are classified as VIEs for accounting purposes. The Company has distinguished its involvement with VIEs between those VIEs which the Company does not consolidate and those VIEs which the Company consolidates.
17
Unconsolidated VIEs with Continuing Involvement
The following table summarizes cash flows between the Company and transferees in transfers of mortgage loans that are accounted for as sales where the Company maintains continuing involvement with the mortgage loans:
Cash flows:
Proceeds from sales
Mortgage loan servicing fees received (1)
61,272
48,732
Net of guarantee fees
The following table summarizes collection status information for mortgage loans that are accounted for as sales where the Company maintains continuing involvement for the dates presented:
UPB of mortgage loans outstanding
98,863,013
91,982,335
UPB of delinquent mortgage loans:
30-89 days delinquent
564,184
614,668
90 or more days delinquent:
Not in foreclosure
157,127
142,871
In foreclosure
39,739
40,445
UPB of mortgage loans in bankruptcy
88,936
75,947
Custodial funds managed by the Company (1)
1,384,404
970,328
Custodial funds include borrower and investor custodial cash accounts relating to mortgage 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 mortgage loans’ borrowers and investors, which are included in Interest income in the Company’s consolidated statements of income.
Consolidated VIEs
Credit Risk Transfer Transactions
The Company has entered into mortgage loan sales arrangements pursuant to which it accepts credit risk relating to certain of its mortgage loan sales. These arrangements include CRT Agreements and sales of mortgage loans that include commitments to purchase CRT securities that absorb credit losses on such mortgage loans.
The Company, through its subsidiary, PennyMac Corp. (“PMC”), entered into CRT Agreements with Fannie Mae, pursuant to which PMC, through subsidiary trust entities, sold pools of mortgage loans into Fannie Mae-guaranteed securitizations while retaining Recourse Obligations in addition to IO ownership interests in such mortgage loans. The transfers of mortgage loans subject to CRT Agreements were accounted for as sales. The Company placed Deposits securing CRT Agreements into the subsidiary trust entities to secure its Recourse Obligations. The Deposits securing CRT Agreements represent the Company’s maximum contractual exposure to claims under its Recourse Obligations and is the sole source of settlement of losses under the CRT Agreements.
The Company’s exposure to losses under its Recourse Obligation was initially established at 3.5% of the UPB of the mortgage loans sold under the CRT Agreements. As the UPB of the underlying mortgage loans subject to each CRT Agreement is reduced through repayments, the percentage exposure of each CRT Agreement will increase to a maximum of 4.5% of outstanding UPB, although the total dollar amount of exposure to losses does not increase. Gains and losses on derivatives related to CRT Agreements are included in Net gain (loss) on investments in the consolidated statements of income. The final sales of mortgage loans subject to the CRT Agreements were made during 2018.
Following is a summary of the CRT Agreements:
UPB of mortgage loans sold under CRT Agreements
3,210,478
Deposits securing CRT Agreements
41,789
Increase (decrease) in commitments to fund Deposits
securing CRT Agreements resulting from sale of
mortgage loans under CRT Agreements
70,486
112,275
Interest earned on Deposits securing CRT Agreements
6,775
2,031
Gains recognized on CRT Agreements included in
Net gain (loss) on investments
Realized
21,043
Resulting from valuation changes
6,460
5,355
27,503
24,684
Change in fair value of Interest-only security
payable at fair value
3,447
(2,133
30,950
22,551
Payments made to settle losses
895
828
UPB of mortgage loans subject to credit guarantee obligations
29,265,550
29,934,003
Collection status (in UPB):
Delinquency
Current
28,989,452
29,633,133
30—89 days delinquent
198,833
228,296
90—180 days delinquent
41,299
39,826
180 or more days delinquent
2,704
4,208
Foreclosure
3,734
5,180
Bankruptcy
29,528
23,360
Carrying value of CRT Agreements:
CRT Agreement assets pledged to secure:
770,451
73,148
87,976
366,831
24,735
Effective in June 2018, the Company began entering into a different CRT arrangement. Under the new arrangement, the Company sells mortgage loans subject to agreements that require the Company to purchase securities that absorb credit losses on such mortgage loans. The Company has elected to account for the firm commitments to purchase such CRT securities at fair value. The Company recognizes these purchase commitments initially as a component of Gain on sale of mortgage loans; subsequent changes in fair value are recognized in Net gain (loss) on investments.
19
Following is a summary of activity under these purchase commitments:
Quarter ended March 31, 2019
UPB of mortgage loans sold
7,702,080
Increase in expected face amount of firm commitment to
purchase CRT securities backed by mortgage loans sold
281,917
Fair value of firm commitment recognized in Gain
on sale of mortgage loans
19,600
Gains recognized on firm commitment included in
22,190
Face amount of firm commitment to purchase CRT securities
886,969
605,052
Fair value of firm commitment
UPB of mortgage loans sold subject to firm commitment to
purchase CRT securities related to such loans
23,652,494
16,392,300
23,564,883
16,329,044
76,198
61,035
8,084
2,221
1,599
1,730
1,258
Jumbo Mortgage Loan Financing
On September 30, 2013, the Company completed a securitization transaction in which PMT Loan Trust 2013-J1, a VIE, issued $537.0 million in UPB of certificates backed by fixed-rate prime jumbo mortgage loans, at a 3.9% weighted yield. The fair value of the certificates retained by the Company was $14.0 million and $14.1 million as of March 31, 2019 and December 31, 2018, respectively. The Company includes the balance of certificates issued to nonaffiliates in Asset backed financing of a variable interest entity at fair value.
Note 7—Fair Value
The Company’s consolidated financial statements include assets and liabilities that are measured at or based on their fair values. Measurement at 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 the asset or liability and are developed based on market data obtained from sources independent of the Company.
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 assets and liabilities, 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 to 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.
20
Fair Value Accounting Elections
The Manager identified all of the Company’s non-cash financial assets, firm commitment to purchase credit risk transfer securities 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 the Company’s asset-backed financing of a VIE and interest only security payable at fair value to be accounted for at fair value to reflect the generally offsetting changes in fair value of these borrowings to changes in fair value of the assets at fair value collateralizing these financings. For other borrowings, the Company has determined that historical cost accounting is more appropriate because under this method debt issuance costs are amortized over the term of the debt facility, thereby matching the debt issuance cost to the periods benefiting from the availability of the debt.
Financial Statement Items Measured at Fair Value on a Recurring Basis
Following is a summary of financial statement items that are measured at fair value on a recurring basis:
Level 1
Level 2
Level 3
Assets:
Short-term investments
Mortgage-backed securities at fair value
1,416,710
18,361
109,112
Excess servicing spread purchased from PFSI
Derivative assets:
CRT Agreements
Interest rate lock commitments
11,341
Repurchase agreement derivatives
17,701
Forward purchase contracts
26,570
Forward sale contracts
2,428
MBS put options
4,780
MBS call options
5,331
Call options on interest rate futures
10,699
Total derivative assets before netting
39,109
159,489
209,297
Netting
(20,587
Total derivative assets after netting
Firm commitment to purchase credit risk transfer
securities at fair value
Mortgage servicing rights at fair value
40,450
4,334,477
1,728,735
6,083,075
Liabilities:
Asset-backed financing of a VIE at fair value
Derivative liabilities:
884
3,435
Forward sales contracts
20,490
Total derivative liabilities before netting
23,925
24,809
(16,059
Total derivative liabilities after netting
299,434
33,448
316,823
21
1,626,483
17,474
117,732
12,162
14,511
14,845
218
945
5,137
Put options on interest rate futures
5,315
16,021
150,660
171,996
(4,831
80,165
4,543,499
1,702,339
6,321,172
174
43
29,273
29,316
29,490
(23,576
305,815
36,185
318,424
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 quarters presented:
Mortgage
loans
acquired for
sale at fair
loans at
fair value
Excess
servicing
spread
CRT
Agreement
derivatives
Interest rate
lock commitments
Repurchase
agreement
Firm
commitment
to purchase
CRT securities
rights
Assets
Balance, December 31, 2018
11,988
1,702,165
Purchases and issuances
3,331
1,077
2,971
7,913
15,292
(3,222
(3,609
(10,552
(21,043
(4,492
(42,918
Capitalization of interest and fees
762
3,828
Capitalization of advances
457
ESS received pursuant to a
recapture agreement with PFSI
Amounts received as proceeds from sales of mortgage loans
131,868
151,468
Changes in fair value included in
income arising from:
Changes in instrument-specific
credit risk
1,059
Other factors
(12
(574
25,531
(231
(137,329
(66,973
485
(65,914
Transfers of mortgage loans to REO
(7,792
Transfers of mortgage loans
acquired for sale at fair value
from "Level 2" to "Level 3" (2)
790
Transfers of interest rate lock
commitments to mortgage
loans acquired for sale
(30,033
Balance, March 31, 2019
10,457
1,727,851
Changes in fair value recognized
during the quarter relating to
assets still held at March 31, 2019
(54
329
(101,998
For the purpose of this table, the interest rate lock commitment (“IRLC”) asset and liability positions are shown net.
(2)
During the quarter ended March 31, 2019, the Manager identified certain “Level 2” fair value mortgage loans acquired for sale that were not saleable into the prime mortgage market and therefore transferred them to “Level 3”.
Interest-only
security payable
Changes in fair value included in income arising from:
Changes in instrument-specific credit risk
(3,447
Changes in fair value recognized during the quarter relating to liability
outstanding at March 31, 2019
23
Quarter ended March 31, 2018
loans at fair
Balance, December 31, 2017
8,135
768,433
236,534
98,640
4,632
3,748
91,459
1,211,581
Cumulative effect of a change in
accounting principle — Adoption
of fair value accounting for mortgage
servicing rights
773,035
Balance, January 1, 2018
864,494
1,984,616
2,831
4,609
2,164
9,604
(3,539
(272,513
(12,291
(19,329
(8
(307,680
2,180
6,114
1,677
ESS received pursuant to a recapture
agreement with PFSI
Amounts received as proceeds from
sales of mortgage loans
66,546
2,681
103
(12,632
(19,467
25,973
25,570
(9,951
28,251
(21,439
Transfers of mortgage loans acquired
for sale at fair value from "Level 2"
to "Level 3" (2)
commitments to mortgage loans
acquired for sale
12,935
Balance, March 31, 2018
7,690
468,387
236,002
103,995
2,709
5,892
957,013
1,781,688
Changes in fair value recognized during
the quarter relating to assets still held at
March 31, 2018
(14
(9,040
77
31,981
For the purpose of this table, the IRLC asset and liability positions are shown net.
During the quarter ended March 31, 2018, the Manager identified certain “Level 2” fair value mortgage loans acquired for sale that were not saleable into the prime mortgage market and therefore transferred them to “Level 3”.
24
7,070
7,796
outstanding at March 31, 2018
The Company had transfers among the fair value levels arising from transfers of IRLCs to mortgage loans held for sale at fair value upon purchase of the respective mortgage loans.
Following are the fair values and related principal amounts due upon maturity of mortgage loans accounted for under the fair value option (including mortgage loans acquired for sale, mortgage loans held in a consolidated VIE, and distressed mortgage loans):
Fair value
Principal
amount due
upon maturity
Difference
Mortgage loans acquired for sale at fair value:
Current through 89 days delinquent:
1,434,210
1,377,712
56,498
1,643,465
1,580,504
62,961
377
490
(113
492
484
504
(20
861
994
(133
1,378,706
56,365
1,580,996
Mortgage loans held in a consolidated VIE:
Current through 89 days delinquent
288,670
289,006
(336
294,617
(4,044
882
883
(1
289,889
(337
Distressed mortgage loans at fair value:
33,202
48,119
(14,917
28,806
43,043
(14,237
32,009
63,474
(31,465
37,288
71,732
(34,444
43,901
74,894
(30,993
51,638
86,259
(34,621
75,910
138,368
(62,458
88,926
157,991
(69,065
186,487
(77,375
201,034
(83,302
476,376
(77,712
495,651
(87,346
25
Following are the changes in fair value included in current period income by consolidated statement of income line item for financial statement items accounted for under the fair value option:
Net mortgage loan
servicing fees
Net gain on
mortgage loans
Net gain (loss)
on investments
Net interest
income
36,922
(4,556
32,366
37,803
4,070
4,953
ESS at fair value
41,790
MSRs at fair value
57,403
59,131
(607
(21,402
(2,857
(821
(3,678
590
(22,397
440
(21,957
(23,678
(15,530
1,774
(13,756
10,855
(31,006
6,148
(22,563
Interest-only security payable
6,183
339
6,522
6,909
Financial Statement Item Measured at Fair Value on a Nonrecurring Basis — Real estate acquired in settlement of loans
Following is a summary of the carrying value of REO that was re-measured based on fair value on a nonrecurring basis:
Real estate acquired in settlement of loans
29,377
24,515
26
The following table summarizes the fair value changes recognized during the quarter on REO held at quarter end that were remeasured at fair value on a nonrecurring basis:
Real estate asset acquired in settlement of loans
(2,438
(4,769
The Company evaluates its REO for impairment with reference to the respective properties’ fair values less cost to sell. The initial carrying value of the REO is measured at cost as indicated by the purchase price in the case of purchased REO or as measured by the fair value of the mortgage loan immediately before REO acquisition in the case of acquisition in settlement of a mortgage loan. REO may be subsequently revalued 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, Exchangeable senior notes, Notes payable and Assets sold to PennyMac Financial Services, Inc. under agreements to repurchase are classified as “Level 3” fair value liabilities due to the Company’s reliance on unobservable inputs to estimate these instruments’ fair values.
The Manager has concluded that the fair values of these borrowings other than Exchangeable senior notes and Notes payable approximate the agreements’ carrying values due to the borrowing agreements’ variable interest rates and short maturities.
Following are the fair values of the other borrowings:
Instrument
Source of fair value
Broker indications
250,634
247,172
Broker quotes
746,293
Discounted cash flow analysis
444,403
Valuation Governance
Most of the Company’s assets, its Asset-backed financing of a VIE, Interest-only security payable and Derivative liabilities 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 fair value of these assets and liabilities to specialized staff and subjects the valuation process to significant senior management oversight. PFSI’s Financial Analysis and Valuation group (the “FAV group”) is responsible for estimating the fair values of “Level 3” fair value assets and liabilities other than IRLCs and maintaining its valuation policies and procedures. The fair value of the Company’s IRLCs is developed by the Manager’s Capital Markets Risk Management staff and is reviewed by the Manager’s Capital Markets Operations group.
With respect to the non-IRLC “Level 3” valuations, the FAV group reports to PFSI’s senior management valuation committee, which oversees the valuations. The FAV group monitors the models used for valuation of the Company’s “Level 3” fair value assets and liabilities, including the models’ performance versus actual results, and reports those results to PFSI’s senior management valuation committee. PFSI’s senior management valuation committee includes the Company’s executive chairman, chief executive, chief financial, chief risk and deputy chief financial officers.
The FAV group is responsible for reporting to PFSI’s senior management valuation committee on the changes in the valuation of the non-IRLC “Level 3” fair value assets and liabilities, including major factors affecting the valuation and any changes in model
27
methods and inputs. To assess the reasonableness of its valuations, the FAV group presents an analysis of the effect on the valuation of changes to the significant inputs to the models.
Valuation Techniques and Inputs
The following is a description of the techniques and inputs used in estimating the fair values of “Level 2” and “Level 3” fair value assets and liabilities:
Mortgage-Backed Securities
The Company categorizes its current holdings of MBS as “Level 2” fair value assets. Fair value of these MBS is established based on quoted market prices for the Company’s MBS holdings or similar securities. Changes in the fair value of MBS are included in Net gain (loss) on investments in the consolidated statements of income.
Mortgage Loans
Fair value of mortgage loans is estimated based on whether the mortgage loans are saleable into active markets:
Mortgage loans that are saleable into active markets, comprised of most of the Company’s mortgage loans acquired for sale at fair value and all of the mortgage loans at fair value held in a VIE, are categorized as “Level 2” fair value assets. For mortgage loans acquired for sale, the fair values are established using the loans’ quoted market or contracted price or market price equivalent. For the mortgage loans at fair value held in a VIE, the quoted fair values of all of the individual securities issued by the securitization trust are used to derive a fair value for the mortgage loans. The Company obtains indications of fair value from nonaffiliated brokers based on comparable securities and validates the brokers’ indications of fair value using pricing models and inputs the Company believes are similar to the models and inputs used by other market participants.
Mortgage loans that are not saleable into active markets, comprised primarily of distressed mortgage loans, are categorized as “Level 3” fair value assets and their fair values are estimated using a discounted cash flow approach. Inputs to the discounted cash flow model include current interest rates, loan amount, payment status, property type, discount rates and forecasts of future interest rates, home prices, prepayment speeds, default speeds, loss severities or contracted selling price when applicable.
Changes in fair value attributable to changes in instrument-specific credit risk are measured by the effect on fair value of the change in the respective mortgage loan’s delinquency status and performance history at quarter-end from the later of the beginning of the quarter or acquisition date.
The significant unobservable inputs used in the fair value measurement of the Company’s mortgage loans at fair value are discount rate, home price projections, voluntary prepayment speeds and default speeds. Significant changes in any of those inputs in isolation could result in a significant change to the mortgage loans’ fair value measurement. Increases in home price projections are generally accompanied by an increase in voluntary prepayment speeds. Changes in the fair value of mortgage loans at fair value are included in Net gain (loss) on investments in the consolidated statements of income.
Following is a quantitative summary of key inputs used in the valuation of the Company’s “Level 3” mortgage loans at fair value:
Key inputs (1)
Discount rate
Range
3.1% – 19.6%
2.8% – 19.6%
Weighted average
10.8%
12.0%
Twelve-month projected housing price index change
3.3% – 3.7%
3.1% – 3.7%
3.5%
3.4%
Voluntary prepayment speed (2)
1.9% – 8.2%
0.9% – 8.3%
3.1%
3.2%
Total prepayment speed (3)
8.6% – 21.5%
8.3% – 22.0%
16.7%
18.3%
Weighted-average inputs are based on fair value amounts of the mortgage loans.
28
Prepayment speed is measured using Life Voluntary Conditional Prepayment Rate (“CPR”).
(3)
Total prepayment speed is measured using Life Total CPR.
Excess Servicing Spread Purchased from PFSI
The Company categorizes ESS as a “Level 3” fair value asset. The Company uses a discounted cash flow approach to estimate the fair value of ESS. The key inputs used in the estimation of the fair value of ESS include pricing spread (discount rate) and prepayment speed. Significant changes to those inputs in isolation may result in a significant change in the ESS fair value measurement. Changes in these key inputs are not necessarily directly related. Changes in the fair value of ESS are included in Net gain (loss) on investments in the consolidated statements of income.
Following are the key inputs used in determining the fair value of ESS:
UPB of underlying mortgage loans (in thousands)
22,664,211
23,196,033
Average servicing fee rate (in basis points)
34
Average ESS rate (in basis points)
Pricing spread (2)
3.0% - 3.3%
2.8% - 3.2%
Annual total prepayment speed (3)
8.5% - 29.9%
8.2% - 29.5%
10.4%
9.7%
Life (in years)
1.5 - 7.4
1.6 - 7.6
6.5
6.8
Weighted-average inputs are based on UPB of the underlying mortgage loans.
Pricing spread represents a margin that is applied to a reference forward rate to develop periodic discount rates. The Company applies pricing spreads to the forward rates implied by the United States Dollar London Interbank Offered Rate (“LIBOR”) swap curve for purposes of discounting cash flows relating to ESS.
Prepayment speed is measured using Life Total CPR.
Derivative Financial Instruments
Interest Rate Lock Commitments
The Company categorizes IRLCs as “Level 3” fair value assets and liabilities. The Company estimates the fair value of IRLCs based on quoted Agency MBS prices, its estimate of the fair value of the MSRs it expects to receive in the sale of the mortgage loan and the probability that the mortgage loan will be purchased under the commitment (the “pull-through rate”).
The significant unobservable inputs used in the fair value measurement of the Company’s IRLCs are the pull-through rate and the MSR component of the Company’s estimate of the fair value of the mortgage loans it has committed to purchase. Significant changes in the pull-through rate or the MSR component of the IRLCs, in isolation, may result in a significant change in the IRLCs’ fair value. The financial effects of changes in these inputs are generally inversely correlated as increasing interest rates have a positive effect on the fair value of the MSR component of IRLC fair value, but also increase the pull-through rate for the mortgage loan principal and interest payment cash flow component that has decreased in fair value. Changes in fair value of IRLCs are included in Net gain on mortgage loans acquired for sale in the consolidated statements of income.
29
Following is a quantitative summary of key unobservable inputs used in the valuation of IRLCs:
Pull-through rate
42.1% - 100%
45.4% - 100%
89.8%
91.8%
MSR fair value expressed as
Servicing fee multiple
1.9 - 5.7
2.4 - 5.6
4.3
Percentage of UPB
0.6% - 2.9%
0.6% - 3.6%
1.4%
2.2%
Weighted-average inputs are based on the committed amounts.
The Company categorizes CRT Agreement derivatives as “Level 3” fair value assets. The fair value of CRT Agreements is based on indications of fair value provided to the Company by nonaffiliated brokers for the certificates representing the beneficial interest in CRT Agreements which include the deposits securing the CRT Agreements, the Recourse Obligations and the IO ownership interest. Together, the Recourse Obligations and the IO ownership comprise the CRT Agreement derivative. Fair value of the CRT Agreement derivative is derived by deducting the balance of the Deposits securing CRT Agreements from the indication of fair value of the certificates provided by the nonaffiliated brokers.
The significant unobservable inputs into the valuation of CRT Agreement derivatives are the discount rate, voluntary and involuntary prepayment speeds and the remaining loss expectations of the reference mortgage loans. Changes in fair value of CRT Agreements are included in Net gain (loss) on investments.
Following is a quantitative summary of key unobservable inputs used in the Company’s review and approval of broker-provided fair values for CRT Agreements:
5.8% – 6.8%
6.6% – 7.5%
6.6%
7.3%
12.8% – 14.7%
9.0% – 10.6%
13.9%
9.9%
Involuntary prepayment speed (3)
0.2% – 0.3%
0.2% – 0.2%
0.3%
0.2%
Remaining loss expectation (4)
0.1% – 0.2%
0.1%
Weighted average inputs are based on fair value amounts of the CRT Agreements.
Voluntary prepayment speed is measured using Life Voluntary CPR.
Involuntary prepayment speed is measured using Life Involuntary CPR.
(4)
Remaining loss expectation is measured as expected future contractual losses divided by the UPB of the reference mortgage loans.
30
Repurchase Agreement Derivatives
The Company has a master repurchase agreement that includes incentives for financing mortgage loans approved for satisfying certain consumer relief characteristics. These incentives are classified as embedded derivatives for accounting purposes and are reported separately from the repurchase agreements. The Company classifies repurchase agreement derivatives as “Level 3” fair value assets.
The significant unobservable inputs into the valuation of repurchase agreement derivative assets are the discount rate and the expected approval rate of the mortgage loans financed under the master repurchase agreement. The resulting ratio included in the Company’s fair value estimate was 97% at both March 31, 2019 and December 31, 2018. Changes in fair value of repurchase agreement derivatives are included in Interest expense in the consolidated statements of income.
Hedging Derivatives
Fair values of derivative financial instruments based on exchange traded market prices 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 market are categorized by the Company as “Level 2” fair value assets and liabilities. Changes in the fair value of hedging derivatives are included in Net gain (loss) on investments, Net gain on mortgage loans acquired for sale, or Net mortgage loan servicing fees, as applicable, in the consolidated statements of income.
Firm commitment to purchase CRT securities
The Company categorizes its firm commitment to purchase CRT securities as a “Level 3” fair value asset. The fair value of the firm commitment is estimated using a discounted cash flow approach to estimate the fair value of the CRT securities to be purchased less the contractual purchase price. Key inputs used in the estimation of fair value of the firm commitment are the discount rate and the voluntary and involuntary prepayment speeds of the reference mortgage loans. The firm commitment to purchase CRT securities is recognized initially as a component of Gain on sale of mortgage loans acquired for sale. Subsequent changes in fair value are recorded in Net gain (loss) on investments.
Following is a quantitative summary of key unobservable inputs in the valuation of firm commitment to purchase CRT securities:
7.0%
7.9%
15.8%
12.4%
Weighted average inputs are based on the UPB of the underlying mortgage loans.
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 the Manager’s staff appraisers when the Company obtains multiple indications of fair value and there is a significant difference between the fair values received. The Manager’s staff appraisers will attempt to resolve the difference between the indications of fair value. In circumstances where the appraisers are not able to generate adequate data to support a fair value conclusion, the staff appraisers will order 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.
Mortgage Servicing Rights
MSRs are categorized as “Level 3” fair value assets. The Company uses a discounted cash flow approach to estimate the fair value of MSRs. The key inputs used in the estimation of the fair value of MSRs include the applicable pricing spread, the prepayment and default rates of the underlying mortgage loans and the annual per-loan cost to service mortgage loans, all of which are
31
unobservable. Significant changes to any of those inputs in isolation could result in a significant change in the MSR fair value measurement. Changes in these key inputs are not necessarily directly related. Changes in the fair value of MSRs are included in Net mortgage loan servicing fees in the consolidated statements of income.
MSRs are generally subject to loss in fair value when mortgage interest rates decrease. Decreasing mortgage interest rates normally encourage increased mortgage refinancing activity. Increased refinancing activity reduces the expected life of the underlying mortgage loans, thereby reducing the cash flows expected to accrue to the MSRs. 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:
(MSR recognized and UPB of underlying mortgage loan amounts in thousands)
MSR recognized
UPB of underlying mortgage loans
9,245,177
5,114,741
Weighted average annual servicing
fee rate (in basis points)
32
5.8% – 9.5%
7.4% – 12.6%
5.8%
7.5%
Prepayment speed (3)
4.9% – 42.2%
3.2% – 22.8%
12.2%
8.1%
1.8 – 10.5
3.5 – 11.9
6.6
8.4
Annual per-loan cost of servicing
$78 – $78
$79 – $79
$78
$79
Pricing spread represents a margin that is applied to a reference forward rate to develop periodic discount rates. The Company applies pricing spreads to the forward rates implied by the United States LIBOR swap curve for purposes of discounting cash flows relating to MSRs.
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:
(Carrying value, UPB of underlying mortgage loans and effect on fair value amounts in thousands)
Carrying value
Key inputs (1):
99,279,532
92,410,226
Weighted average note interest rate
4.3%
4.2%
5.9% – 11.1%
5.7% – 10.7%
6.0%
Effect on fair value of:
5% adverse change
$(13,604)
$(13,872)
10% adverse change
$(26,895)
$(27,428)
20% adverse change
$(52,576)
$(53,626)
9.1% – 29.9%
8.1% – 27.1%
11.6%
9.8%
2.6 - 6.5
2.7 - 7.3
6.4
7.1
$(24,983)
$(21,661)
$(48,861)
$(42,458)
$(93,573)
$(81,660)
$77 – $78
$(8,151)
$(8,298)
$(16,302)
$(16,597)
$(32,605)
$(33,194)
Weighted-average inputs are based on the UPB of the underlying mortgage loans.
Pricing spread represents a margin that is applied to a reference forward rate to develop periodic discount rates. The Company applies pricing spreads to the forward rates implied by the United States Dollar LIBOR swap curve for purposes of discounting cash flows relating to MSRs.
The preceding 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 the 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 made by the Company to account for changing circumstances. For these reasons, the preceding estimates should not be viewed as earnings forecasts.
33
Note 8—Mortgage Backed Securities
Following is a summary of activity in the Company’s investment in MBS:
Loan type
Balance at beginning of quarter
989,461
Purchases
500,573
Sale and repayment
(53,682
(30,741
Amortization of premiums
(440
Valuation adjustments
(22,837
Balance at end of quarter
1,436,456
Following is a summary of the Company’s investment in MBS:
balance
Unamortized purchase
premiums
valuation
changes
Agency: (1)
Fannie Mae
2,007,629
35,579
13,966
2,057,174
2,050,769
39,488
(14,920
2,075,337
Freddie Mac
520,193
6,054
5,685
531,932
530,734
6,702
(2,351
535,085
2,527,822
41,633
19,651
2,581,503
46,190
(17,271
All MBS are fixed-rate pass-through securities with maturities of more than ten years.
All MBS are pledged to secure Assets sold under agreements to repurchase at both March 31, 2019 and December 31, 2018.
Note 9—Mortgage Loans Acquired for Sale at Fair Value
Mortgage loans acquired for sale at fair value is comprised of recently originated mortgage loans purchased by the Company for resale. Following is a summary of the distribution of the Company’s mortgage loans acquired for sale at fair value:
Agency-eligible
1,215,942
1,495,954
Held for sale to PLS — Government insured or guaranteed
Jumbo
4,929
44,221
Commercial real estate
8,595
8,559
Home equity lines of credit
450
Repurchased pursuant to representations and warranties
9,316
8,915
Mortgage loans pledged to secure:
1,338,015
1,436,437
76,315
185,442
1,414,330
1,621,879
The Company is not approved by Ginnie Mae as an issuer of Ginnie Mae-guaranteed securities which are backed by government-insured or guaranteed mortgage loans. The Company transfers government-insured or guaranteed mortgage loans that it purchases from correspondent sellers to PLS, which is a Ginnie Mae-approved issuer, and earns a sourcing fee ranging from two to three and one-half basis points, generally based on the average number of calendar days that mortgage loans are held before being bought by PLS.
Note 10—Mortgage Loans at Fair Value
Mortgage loans at fair value are comprised of mortgage loans that are not acquired for sale and, to the extent they are not held in a VIE securing an asset-backed financing, may be sold at a later date pursuant to the Manager’s determination that such a sale represents the most advantageous disposition strategy for the identified mortgage loan.
Following is a summary of the distribution of the Company’s mortgage loans at fair value:
Fair
Unpaid
principal
Fixed interest rate jumbo mortgage loans held in a VIE
Distressed mortgage loans:
Nonperforming
Performing
475,493
Mortgage loans at fair value pledged to secure:
104,809
108,693
394,361
399,266
Note 11—Derivative Activities
The Company holds and issues derivative financial instruments in connection with its operating activities. Derivative financial instruments are created as a result of certain of the Company’s operations and the Company also enters into derivative transactions as part of its interest rate risk management activities.
Derivative financial instruments created as a result of the Company’s operations include:
IRLCs that are created when the Company commits to purchase mortgage loans acquired for sale;
CRT Agreements whereby the Company retains a Recourse Obligation relating to certain mortgage loans it sells into Fannie Mae guaranteed securitizations as part of the retention of an IO ownership interest in such mortgage loans; and
Derivatives that are embedded in a master repurchase agreement that provides for the Company to receive interest expense offsets if it finances mortgage loans approved as satisfying certain consumer credit relief characteristics under the master repurchase agreement. The master repurchase agreement is subject to a rolling six-month term through August 18, 2019, unless terminated earlier by the lender. There can be no assurance that the lender will not terminate this agreement before its stated maturity.
The Company engages in interest rate risk management activities in an effort to reduce the variability of earnings caused by the effects of changes in interest rates on the fair value of certain of its assets and liabilities. The Company is exposed to price risk relative to the IRLCs it issues to correspondent sellers and to the mortgage loans it purchases as a result of issuing the IRLCs. The Company bears price risk from the time an IRLC is issued to a correspondent seller until the time the purchased mortgage loan is sold:
The Company is exposed to loss if market mortgage interest rates increase, because market interest rate increases generally cause the fair value of the IRLC or mortgage loan acquired for sale to decrease.
The Company is exposed to losses if market mortgage interest rates decrease, because market interest rate decreases generally cause the fair value of MSRs to decrease. Market mortgage interest rate decreases generally encourage mortgage refinancing activity, which reduces the expected life of the mortgage loans underlying the MSRs, causing the fair value of MSRs to decrease.
To manage the price risk resulting from these interest rate risks, the Company uses derivative financial instruments with the intention of moderating the risk that changes in market interest rates will result in unfavorable changes in the fair value of the Company’s inventory of mortgage loans acquired for sale, mortgage loans held in a VIE, IRLCs, MSRs and MBS financing.
The Company records all derivative financial instruments at fair value and records changes in fair value in current period income.
35
Derivative Notional Amounts and Fair Value of Derivatives
The Company had the following derivative assets and liabilities recorded within Derivative assets and Derivative liabilities and related margin deposits recorded in Other assets on the consolidated balance sheets:
Notional
Derivative
amount
assets
liabilities
Derivatives not designated as hedging instruments:
Not subject to master netting arrangements:
2,037,160
1,688,516
Subject to master netting agreements─used
for hedging purposes:
5,126,069
3,072,223
4,941,484
4,595,241
4,150,000
2,550,000
3,100,000
500,000
1,475,000
512,500
950,000
1,102,500
Swap futures
150,000
Bond futures
165,000
815,000
Total derivative instruments before netting
Margin deposits (received from) placed with
derivatives counterparties, net
(4,528
18,744
Derivative assets pledged to secure Assets sold
under agreements to repurchase
97,883
The following tables summarize the notional amount activity for derivative contracts used to hedge the Company’s inventory of mortgage loans acquired for sale, mortgage loans at fair value held in a VIE, IRLCs, MSRs and MBS financing.
Notional amount,
beginning
Dispositions/
end
of quarter
Additions
expirations
33,419,932
(31,366,086
42,338,646
(41,992,403
9,600,000
(8,000,000
5,400,000
(2,800,000
3,537,500
(2,575,000
5,352,500
(5,505,000
2,702,400
(3,352,400
36
1,996,235
19,833,104
(19,318,639
2,510,700
2,565,271
24,410,334
(24,677,803
2,297,802
2,375,000
4,125,000
(4,750,000
1,750,000
550,000
3,325,000
(3,600,000
275,000
(275,000
450,000
Eurodollar future sale contracts
937,000
114,597
(203,933
847,664
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 subject to a legally enforceable master netting arrangement. The derivative financial instruments that are not subject to master netting arrangements are IRLCs, CRT Agreement derivatives and repurchase agreement derivatives. As of March 31, 2019 and December 31, 2018, 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.
Offsetting of Derivative Assets
Following is a summary of net derivative assets:
Gross
amounts
recognized
offset
in the
consolidated
sheet
Net
of assets
presented
CRT Agreement derivatives
Subject to master netting arrangements:
49,808
29,221
21,336
16,505
37
Derivative Assets, Financial Instruments and Collateral Held by Counterparty
The following table summarizes by significant counterparty the amount of derivative asset positions after considering master netting arrangements and financial instruments or cash pledged that do not meet the accounting guidance qualifying for setoff accounting:
Net amount
Gross amounts
not offset in the
balance sheet
Financial
collateral
instruments
received
Deutsche Bank Securities LLC
RJ O’Brien & Associates, LLC
J.P. Morgan Securities LLC
4,853
107
Wells Fargo Securities, LLC
4,139
2,800
Federal National Mortgage Association
2,654
5,619
Bank of America, N.A.
2,449
Goldman Sachs
2,396
Citigroup Global Markets Inc.
1,726
971
Mitsubishi UFJ Sec
167
257
Credit Suisse Securities (USA) LLC
579
Morgan Stanley & Co. LLC
243
138
614
Offsetting of Derivative Liabilities and Financial Liabilities
Following is a summary of net derivative liabilities and assets sold under agreements to repurchase. Assets sold under agreements to repurchase do not qualify for setoff accounting.
of liabilities
Not subject to master netting arrangements —
7,866
5,740
Assets sold under agreements to repurchase:
UPB
4,179,308
4,777,486
Unamortized debt issuance costs
521
(459
4,204,638
4,188,579
4,806,517
4,782,941
38
Derivative Liabilities, Financial Liabilities and Collateral Pledged by Counterparty
The following table summarizes by significant counterparty the amount of derivative liabilities and assets sold under agreements to repurchase after considering master netting arrangements and financial instruments or cash pledged that do not meet the accounting guidance qualifying for setoff accounting. All assets sold under agreements to repurchase represent sufficient collateral or exceed the liability amount recorded on the consolidated balance sheet.
pledged
1,431,886
(1,431,886
1,441,934
(1,441,934
1,165,071
(1,165,071
1,307,923
(1,307,584
461,298
(461,298
495,974
(495,974
Mizuho Securities
263,233
(263,233
270,708
(270,708
Daiwa Capital Markets
253,521
(253,498
254,332
(254,332
198,479
(198,329
150
512,662
(512,662
BNP Paribas
151,560
(151,457
162,636
(162,357
279
97,291
(92,986
4,305
105,366
(105,366
80,085
(79,287
798
99,626
(98,644
982
68,791
(68,791
70,130
(70,130
RBC Capital Markets, L.P.
13,472
(13,472
57,795
(57,795
Federal National Mortgage
Association
1,412
1,075
4,128
4,188,058
(4,179,308
4,783,400
(4,777,486
Following are the net gains (losses) recognized by the Company on derivative financial instruments and the consolidated statements of income line items where such gains and losses are included:
Derivative activity
Income statement line
28,502
(14,858
231
Hedged item:
Interest rate lock commitments and
mortgage loans acquired for sale
(34,345
32,810
Mortgage servicing rights
Net mortgage loan servicing fees
41,135
(20,848
Fixed-rate assets and LIBOR-
indexed repurchase agreements
7,380
1,460
39
Note 12—Real Estate Acquired in Settlement of Loans
Following is a summary of financial information relating to REO:
162,865
Transfers:
From mortgage loans at fair value and
advances
4,550
16,363
From real estate held for investment
324
To real estate held for investment
(2,059
Results of REO:
Valuation adjustments, net
(3,561
(5,359
Gain on sale, net
2,081
2,133
Sales
(16,900
(32,437
141,506
REO pledged to secure assets sold under
18,927
1,939
REO held in a consolidated subsidiary whose
stock is pledged to secure financings of such
properties
38,259
40,198
Note 13—Mortgage Servicing Rights
Following is a summary of MSRs:
Transfer of mortgage servicing rights from mortgage servicing rights
carried at lower of amortized cost or fair value pursuant to a
change in accounting principle
Balance after reclassification
MSRs resulting from mortgage loan sales
Changes in fair value:
Due to changes in valuation inputs used in valuation model (1)
(96,508
52,611
Other changes in fair value (2)
(40,821
(26,638
Fair value of mortgage servicing rights pledged to
secure Assets sold under agreements to
repurchase and Notes payable
1,133,736
1,139,582
Principally reflects changes in pricing spread (discount rate) and prepayment speed inputs, primarily due to changes in market interest rates.
Represents changes due to realization of expected cash flows.
40
Servicing fees relating to MSRs are recorded in Net mortgage loan servicing fees on the Company’s consolidated statements of income and are summarized below:
Contractually-specified servicing fees
Ancillary and other fees:
Late charges
330
214
2,878
1,489
64,480
50,435
Note 14—Assets Sold Under Agreements to Repurchase
Following is a summary of financial information relating to assets sold under agreements to repurchase:
(dollars in thousands)
Weighted average interest rate (1)
3.49
%
3.20
Average balance
4,844,689
3,077,914
Total interest expense (2)
36,851
24,507
Maximum daily amount outstanding
5,210,162
3,655,250
Excludes the effect of amortization of net debt issuance premiums of $ 5.7 million and $169,000 for the quarters ended March 31, 2019 and March 31, 2018, respectively.
The Company’s interest expense relating to assets sold under agreements to repurchase for the quarters ended March 31, 2019 and 2018, includes recognition of incentives it received for financing certain of its mortgage loans acquired for sale satisfying certain consumer debt relief characteristics under a master repurchase agreement. During the quarters ended March 31, 2019 and March 31, 2018, the Company recognized $7.5 million and $2.4 million, respectively, in such incentives as reductions of Interest expense. The master repurchase agreement expires on August 21, 2019, unless terminated earlier at the option of the lender. The Company expects that it will cease to accrue the incentives under the repurchase agreement in the second quarter of 2019
Carrying value:
Unpaid principal balance
Unamortized debt issuance premiums and (costs), net
Weighted average interest rate
3.31
3.38
Available borrowing capacity (1):
Committed
959,720
783,415
Uncommitted
2,498,773
2,325,246
3,458,493
3,108,661
Margin deposits placed with counterparties included in Other assets
36,831
43,676
Assets securing agreements to repurchase:
Mortgage-backed securities
CRT Agreements:
30,007
23,262
MSRs (2)
952,392
945,042
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.
41
Beneficial interests in Fannie Mae MSRs are pledged as collateral for both Assets sold under agreements to repurchase and Notes payable.
Following is a summary of maturities of outstanding assets sold under agreements to repurchase by facility maturity date:
Remaining maturity at March 31, 2019
Contractual balance
Within 30 days
1,912,626
Over 30 to 90 days
1,432,187
Over 90 days to 180 days
800,629
Over 180 days to one year
33,866
Weighted average maturity (in months)
1.8
The Company is subject to margin calls during the period the repurchase agreements are outstanding and therefore may be required to repay a portion of the borrowings before the respective repurchase agreements mature if the fair value (as determined by the applicable lender) of the assets securing those repurchase agreements decreases.
The amount at risk (the fair value of the assets pledged plus the related margin deposit, less the amount advanced by the counterparty and interest payable) and maturity information relating to the Company’s assets sold under agreements to repurchase is summarized by pledged asset and counterparty below as of March 31, 2019:
Mortgage loans, REO and MSRs sold under agreements to repurchase
Counterparty
Amount at risk
maturity
Facility maturity
Credit Suisse First Boston Mortgage Capital LLC
382,436
December 20, 2020
15,034
April 26, 2019
Deutsche Bank
160,578
June 22, 2019
August 18, 2019
Citibank, N.A.
49,199
June 7, 2019
25,689
May 1, 2019
July 1, 2019
BNP Paribas Corporate & Institutional Banking
8,805
June 20, 2019
August 2, 2019
Morgan Stanley
5,351
June 17, 2019
August 23, 2019
Royal Bank of Canada
662
May 31, 2019
Securities sold under agreements to repurchase
Weighted average maturity
51,003
April 22, 2019
JPMorgan Chase & Co.
43,618
May 29, 2019
Daiwa Capital Markets America Inc.
14,921
May 4, 2019
12,521
June 6, 2019
Wells Fargo, N.A.
5,327
April 20, 2019
2,078
April 29, 2019
CRT Agreements sold under agreements to repurchase
204,877
April 5, 2019
42
Note 15—Mortgage Loan Participation Purchase and Sale Agreements
Certain borrowing facilities secured by mortgage loans acquired for sale are in the form of mortgage loan participation purchase and sale agreements. Participation certificates, each of which represents an undivided beneficial ownership interest in a pool of mortgage loans that have been pooled with Fannie Mae or Freddie Mac, are sold to a lender pending the securitization of such mortgage 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.
Mortgage loan participation purchase and sale agreements are summarized below:
3.70
2.49
56,210
45,661
Total interest expense
574
314
207,065
77,404
Excludes the effect of amortization of debt issuance costs of $55,000 and $0 for the quarters ended March 31, 2019 and March 31, 2018, respectively.
Amount outstanding
73,175
178,726
(33
(87
3.74
3.77
Mortgage loans acquired for sale pledged to secure
mortgage loan participation purchase and sale agreements
Note 16—Exchangeable Senior Notes
PMC issued in a private offering $250 million aggregate principal amount of exchangeable senior notes (“Exchangeable Notes”) due May 1, 2020. The Exchangeable Notes bear interest at a rate of 5.375% per year, payable semiannually. The Exchangeable Notes are exchangeable into common shares of the Company at a rate of 33.8667 common shares per $1,000 principal amount of the Exchangeable Notes as of March 31, 2019, which is an increase over the initial exchange rate of 33.5149. The increase in the calculated exchange rate was the result of quarterly cash dividends exceeding the quarterly dividend threshold amount of $0.57 per share in prior reporting periods, as provided in the related indenture.
Following is financial information relating to the Exchangeable Notes:
250,000
3,661
3,644
(1,348
(1,650
Note 17—Notes Payable
On March 29, 2019, the Company through its indirect subsidiary, PMT CREDIT RISK TRANSFER TRUST 2019-1R (“2019-1R Trust”), issued an aggregate principal amount of $295.7 million in secured term notes (the “2019-1R Notes”) to qualified institutional buyers under Rule 144A of the Securities Act of 1933, as amended. The 2019-1R Notes bear interest at a rate equal to one-month LIBOR plus 2.00% per annum, with an initial payment date that occurred on April 29, 2019 and, with respect to each calendar month thereafter, a payment date that shall occur on the second business day following the latest underlying payment date of all of the underlying series in that calendar month. The 2019-1R Notes mature on March 29, 2022 or, if extended pursuant to the terms of the related indenture, March 29, 2024 (unless earlier redeemed in accordance with their terms).
On April 25, 2018, the Company, through its indirect subsidiary, PMT ISSUER TRUST-FMSR (“FMSR Issuer Trust”), issued an aggregate principal amount of $450 million in secured term notes (the “2018-FT1 Notes”) to qualified institutional buyers under Rule 144A of the Securities Act of 1933, as amended. The 2018-FT1 Notes bear interest at a rate equal to one-month LIBOR plus 2.35% per annum, payable each month beginning in May 2018, on the 25th day of such month or, if such 25th day is not a business day, the next business day. The 2018-FT1 Notes mature on April 25, 2023 or, if extended pursuant to the terms of the related term note indenture supplement, April 25, 2025 (unless earlier redeemed in accordance with their terms). The 2018-FT1 Notes rank pari passu with the Series 2017-VF1 Note dated December 20, 2017 (the “FMSR VFN”) pledged to Credit Suisse under an agreement to repurchase. The 2018-FT1 Notes and the FMSR VFN are secured by certain participation certificates relating to Fannie Mae MSRs and ESS relating to such MSRs.
On February 1, 2018, the Company, through PMC and PMH, entered into a Loan and Security Agreement with Credit Suisse First Boston Mortgage Capital LLC (“Credit Suisse”), pursuant to which PMC and PMH may finance certain mortgage servicing rights (inclusive of any related excess servicing spread arising therefrom and that may be transferred from PMC to PMH from time to time) relating to mortgage loans pooled into Freddie Mac securities (collectively, the “Freddie MSRs”), in an aggregate loan amount not to exceed $175 million, all of which is committed. The note matures on February 1, 2020.
On March 24, 2017, the Company, through PMC and PMH, entered into a Loan and Security Agreement with Barclays Bank PLC (“Barclays”), pursuant to which PMC and PMH may finance certain mortgage servicing rights (inclusive of any related excess servicing spread arising therefrom and that may be transferred from PMC to PMH from time to time) relating to mortgage loans pooled into Freddie Mac securities (collectively, the “Freddie MSRs”), in an aggregate loan amount not to exceed $170 million, all of which is committed. The note matured and was repaid on February 1, 2018.
Following is a summary of financial information relating to the notes payable:
4.89
465,377
5,823
745,730
Excludes the effect of amortization of debt issuance costs of $256,000 for the quarter ended March 31, 2019.
(6,506
(4,427
4.75
4.86
Assets securing notes payable:
MSRs (1)
Beneficial interests in Fannie Mae MSRs are pledged as collateral both Assets sold under agreements to repurchase and Notes payable.
44
Note 18—Asset-Backed Financing of a Variable Interest Entity at Fair Value
Following is a summary of financial information relating to the asset-backed financing of a VIE:
275,787
297,682
3,268
2,296
3.55
3.54
277,254
281,922
3.51
The asset-backed financing of a VIE is a non-recourse liability and secured solely by the assets of a consolidated VIE and not by any other assets of the Company. The assets of the VIE are the only source of funds for repayment of the certificates.
Note 19—Liability for Losses Under Representations and Warranties
Following is a summary of the Company’s liability for losses under representations and warranties:
Balance, beginning of quarter
8,678
Provision for losses:
Pursuant to mortgage loan sales
720
572
Reduction in liability due to change in estimate
(528
(1,042
(Losses incurred) recoveries, net
Balance, end of quarter
8,249
UPB of mortgage loans subject to representations and
warranties at end of quarter
96,514,379
74,554,838
Note 20—Commitments and Contingencies
Litigation
From time to time, the Company may be involved in various proceedings, claims and legal actions arising in the ordinary course of business. As of March 31, 2019, the Company was not involved in any such proceedings, claims or legal actions that in the Company’s view would reasonably be likely to have a material adverse effect on the Company.
Commitments
The following table summarizes the Company’s outstanding contractual commitments:
Commitments to purchase mortgage loans acquired for sale
Face amount firm commitment to purchase credit risk transfer
securities
45
Note 21—Shareholders’ Equity
Preferred Shares of Beneficial Interest
Preferred shares of beneficial interest are summarized below:
Dividends per share
Series
Description (1)
Number of shares
Liquidation preference
Issuance discount
Fixed-to-floating rate cumulative redeemable preferred
(in thousands, except dividends per share)
A
8.125% Issued March 2017
4,600
115,000
111,172
0.51
B
8.00% Issued July 2017
7,800
195,000
6,465
188,535
0.50
310,000
10,293
Par value is $0.01 per share for both series.
During March 2017, the Company issued 4.6 million of its 8.125% Series A Fixed-to-Floating Rate Cumulative Redeemable Preferred Shares of Beneficial Interest, $0.01 par value per share (the “Series A Preferred Shares”). From, and including, the date of original issuance to, but not including, March 15, 2024, the Company pays cumulative dividends on the Series A Preferred Shares at a fixed rate of 8.125% per annum based on the $25.00 per share liquidation preference. From, and including, March 15, 2024 and thereafter, the Company will pay cumulative dividends on the Series A Preferred Shares at a floating rate equal to three-month LIBOR as calculated on each applicable dividend determination date plus a spread of 5.831% per annum based on the $25.00 per share liquidation preference.
During July 2017, the Company issued 7.8 million of its 8.00% Series B Fixed-to-Floating Rate Cumulative Redeemable Preferred Shares of Beneficial Interest, $0.01 par value per share (the “Series B Preferred Shares” and, together with the Series A Preferred Shares, the “Preferred Shares”). From, and including, the date of original issuance to, but not including, June 15, 2024, the Company pays cumulative dividends on the Series B Preferred Shares at a fixed rate of 8.00% per annum based on the $25.00 per share liquidation preference. From, and including, June 15, 2024 and thereafter, the Company will pay cumulative dividends on the Series B Preferred Shares at a floating rate equal to three-month LIBOR as calculated on each applicable dividend determination date plus a spread of 5.99% per annum based on the $25.00 per share liquidation preference.
The Company pays quarterly cumulative dividends on the Preferred Shares on the 15th day of each March, June, September and December, provided that if any dividend payment date is not a business day, then the dividend that would otherwise be payable on that dividend payment date may be paid on the following business day.
The Series A and Series B Preferred Shares will not be redeemable before March 15, 2024 and June 15, 2024, respectively, except in connection with the Company’s qualification as a REIT for U.S. federal income tax purposes or upon the occurrence of a change of control. On or after the date the Preferred Shares become redeemable, or 120 days after the first date on which such change of control occurred, the Company may, at its option, redeem any or all of the Preferred Shares at $25.00 per share plus any accumulated and unpaid dividends thereon to, but not including, the redemption date.
The Preferred Shares have no stated maturity, are not subject to any sinking fund or mandatory redemption and will remain outstanding indefinitely unless redeemed or repurchased by the Company or converted into common shares in connection with a change of control by the holders of the Preferred Shares.
Common Share Issuances
On February 11, 2019, the Company, the Operating Partnership, and the Manager entered into a Purchase Agreement (the “Purchase Agreement”) with Credit Suisse Securities (USA) LLC, Deutsche Bank Securities Inc., Merrill Lynch, Pierce, Fenner & Smith Incorporated, Morgan Stanley & Co. LLC and Goldman Sachs & Co. LLC collectively, the (“Underwriters”), relating to the issuance and sale by the Company, and the purchase by the Underwriters, severally, of 7,000,000 common shares for $20.41 per share (before expenses). The Company received $142.8 million in net proceeds from the issuance and sale of the common shares.
On March 14, 2019, the Company entered into separate equity distribution agreements (each an “Equity Distribution Agreement”) with each of Barclays Capital Inc., Credit Suisse Securities (USA) LLC and JMP Securities LLC (each an “Agent” and collectively, the “Agents”) to sell from time to time, through "at the market" (ATM) equity offering program under which the Agents will act as sales agent and/or principal, the Company’s common shares having an aggregate offering price of up to $200,000,000. As of March 31, 2019, the Company sold a total of 221,000 common shares at an average price of $20.76 per share, providing net proceeds to the Company of approximately $4.5 million, net of sales commissions and fees of $46,000.
46
As of March 31, 2019, the Company had approximately $195.5 million of common shares available for issuance under its ATM equity offering program.
Common Share Repurchases
During August 2015, the Company’s board of trustees authorized a common share repurchase program. Under the program, as amended, the Company may repurchase up to $300 million of its outstanding common shares.
The following table summarizes the Company’s share repurchase activity:
Cumulative
total (1)
Common shares repurchased
671
14,731
Cost of common shares repurchased
10,719
216,625
Amounts represent the share repurchase program total from its inception in August 2015 through March 31, 2019.
The repurchased common shares were canceled upon settlement of the repurchase transactions and returned to the authorized but unissued common share pool.
Conditional Reimbursement of IPO Underwriting Costs
As more fully described in Note 5—Transactions with Related Parties, the Company has a Reimbursement Agreement, by and among the Company, the Operating Partnership and the Manager. The Reimbursement Agreement provides that, to the extent the Company is required to pay the Manager performance incentive fees under the management agreement, the Company will reimburse the Manager for underwriting costs it paid on the IPO offering date at a rate of $10 in reimbursement for every $100 of performance incentive fees earned. The Company paid reimbursements totaling $75,000 during the quarter ended March 31, 2019.
The Reimbursement Agreement also provides for the payment to the IPO underwriters of the amount that the Company agreed to pay to them at the time of the IPO if the Company satisfied certain performance measures over a specified period. As the Manager earns performance incentive fees under the management agreement, the IPO underwriters will be paid at a rate of $20 of payments for every $100 of performance incentive fees earned by PCM. The Company made payments under the Reimbursement Agreement totaling $152,000 during the quarter ended March 31, 2019. The Reimbursement Agreement was amended and now expires on February 1, 2023.
Note 22— Net Gain (Loss) on Investments
From nonaffiliates:
Held in a VIE
3,585
(5,579
Distressed
Hedging derivatives
From PFSI—ESS
47
Note 23—Net Gain on Mortgage Loans Acquired for Sale
Net gain on mortgage loans acquired for sale is summarized below:
Cash loss:
Mortgage loans
(101,721
(95,767
Hedging activities
(14,315
33,746
(116,036
(62,021
Non-cash gain:
Recognition of fair value of firm commitment to purchase credit risk transfer security
Receipt of MSRs in mortgage loan sale transactions
Provision for losses relating to representations and warranties provided in mortgage
loan sales:
Pursuant to mortgage loans sales
(720
(572
528
1,042
(192
470
Change in fair value of financial instruments held at end of quarter:
IRLCs
(1,531
(1,924
5,650
2,851
(20,030
(936
(15,911
(9
135,365
67,007
Total from nonaffiliates
From PFSI—cash gain
Note 24— Net Mortgage Loan Servicing Fees
Net mortgage loan servicing fees are summarized below:
Servicing fees (1)
Ancillary and other fees
3,208
1,703
Effect of MSRs fair value changes:
Realization of cashflows
Market changes
Gains (losses) on hedging derivatives
(96,194
5,125
Net mortgage servicing fees from non-affiliates
From PFSI—MSR recapture income
Average servicing portfolio UPB
95,844,879
Includes contractually specified servicing fees, net of Agency guarantee fees.
48
Note 25—Net Interest Income
Net interest income is summarized below:
670
73
19,452
8,791
20,438
11,332
2,924
2,603
1,248
7,899
Placement fees relating to custodial funds
8,266
4,215
242
102
To nonaffiliates:
Assets sold under agreements to repurchase (1)
Exchangeable Notes
Asset-backed financings of a VIE at fair value
Interest shortfall on repayments of mortgage loans
serviced for Agency securitizations
2,271
1,594
Interest on mortgage loan impound deposits
495
To PFSI—Assets sold under agreement to repurchase
In 2017, the Company entered into a master repurchase agreement that provides the Company with incentives to finance mortgage loans approved for satisfying certain consumer relief characteristics as provided in the agreement. During the quarters ended March 31, 2019 and 2018, the Company recognized $7.5 million and $2.4 million, respectively, in such incentives as reductions of interest expense, respectively. The master repurchase agreement expires on August 21, 2019, unless terminated earlier at the option of the lender. The Company expects that it will cease to accrue the incentives under the repurchase agreement in the second quarter of 2019.
49
Note 26—Share-Based Compensation Plans
As of March 31, 2019 and December 31, 2018, the Company had one share-based compensation plan. The following table summarizes the Company’s share-based compensation activity:
Grants:
Restricted share units
96
129
Performance share units
116
Total share units granted
175
245
Grant date fair value:
Restricted share units granted
1,978
2,300
Performance share units granted
1,631
1,542
Total grant date value of share units granted
3,609
3,842
Vestings:
226
192
141
Total share units vested
367
Compensation expense relating to share-based grants
There were no forfeitures of grants during the quarters presented.
Note 27—Other Expenses
Other expenses are summarized below:
Common overhead allocation from PFSI
Safekeeping
736
360
Bank service charges
568
545
Technology
373
378
Insurance
280
305
(45
61
Note 28—Income Taxes
The Company’s effective tax rates were (7.3)% and 25.5% for the quarters ended March 31, 2019 and 2018, respectively. The Company’s taxable REIT subsidiary (“TRS”) recognized a tax benefit of $3.9 million on a pretax loss of $17.4 million while the Company’s consolidated pretax income was $49.9 million for the quarter ended March 31, 2019. For the same period in 2018, the Company’s TRS recognized tax expense of $9.4 million on a pretax income of $34.6 million, while the Company’s consolidated pretax income was $37.8 million. The relative values between the tax benefit or expense at the TRS and the Company’s consolidated pretax income generally drive the fluctuation in the effective tax rate. The primary difference between the Company’s effective tax rate and the statutory tax rate is attributable to nontaxable REIT income resulting from the dividends paid deduction.
In general, cash dividends declared by the Company will be considered ordinary income to the shareholders for income tax purposes. Some portion of the dividends may be characterized as capital gain distributions or a return of capital. For tax years beginning after December 31, 2017, the 2017 Tax Cuts and Jobs Act (subject to certain limitations) provides a 20% deduction from taxable income for ordinary REIT dividends.
Note 29—Earnings Per Share
The Company grants restricted share units which entitle the recipients to receive dividend equivalents during the vesting period on a basis equivalent to the dividends paid to holders of common shares. Unvested share-based compensation awards containing non-
50
forfeitable rights to receive dividends or dividend equivalents (collectively, “dividends”) are classified as “participating securities” and are included in the basic earnings per share calculation using the two-class method.
Under the two-class method, all earnings (distributed and undistributed) are allocated to common shares and participating securities based on their respective rights to receive dividends. Basic earnings per share is determined by dividing net income available to common shareholders (net income reduced by preferred dividends and income attributable to the participating securities) by the weighted average common shares outstanding during the period.
Diluted earnings per share is determined by dividing net income attributable to diluted shareholders, which adds back to net income the interest expense, net of applicable income taxes, on the Company’s Exchangeable Notes, by the weighted average common shares outstanding, assuming all dilutive securities were issued.
The following table summarizes the basic and diluted earnings per share calculations:
(in thousands except per share amounts)
(6,234
Effect of participating securities—share-based compensation awards
(184
(202
47,109
21,750
Interest on Exchangeable Notes, net of income taxes
2,655
Income attributable to participating securities
184
Diluted net income attributable to common shareholders
50,002
24,405
Weighted average basic shares outstanding
Dilutive securities:
Shares under share-based compensation plan
275
647
Shares issuable pursuant to exchange of the Exchangeable Notes
8,467
Diluted weighted average number of shares outstanding
Basic earnings per share
Diluted earnings per share
Calculation of diluted earnings per share requires certain potentially dilutive shares to be excluded when the inclusion of such shares in the diluted earnings per share calculation would be antidilutive. The following table summarizes the potentially dilutive shares excluded from the diluted earnings per share calculation:
Shares issuable under share-based compensation plan
209
Note 30—Segments
The Company operates in four segments: correspondent production, credit sensitive strategies, interest rate sensitive strategies and corporate:
The correspondent production segment represents the Company’s operations aimed at serving as an intermediary between mortgage lenders and the capital markets by purchasing, pooling and reselling newly originated prime credit quality mortgage loans either directly or in the form of MBS, using the services of the Manager and PLS.
The credit sensitive strategies segment represents the Company’s investments in CRT Agreements, firm commitments to purchase CRT securities, distressed mortgage loans, REO, real estate held for investment, non-Agency subordinated bonds and small balance commercial real estate mortgage loans.
The interest rate sensitive strategies segment represents the Company’s investments in MSRs, ESS, Agency and senior non-Agency MBS and the related interest rate hedging activities.
51
Financial highlights by operating segment are summarized below:
Credit
Correspondent
sensitive
production
strategies
Corporate
Net investment income:
53,808
41,285
Net gain on mortgage loans acquired for sale (1)
10,226
11,097
Net interest income (expense):
20,316
8,256
34,079
430
(9,662
(12,022
(33,055
(54,739
10,654
(3,766
1,024
Other income (loss)
12,964
(30
12,940
33,844
61,109
11,229
436
Expenses:
Mortgage loan fulfillment and servicing fees
payable to PFSI
27,573
465
10,106
38,144
318
6,120
11,359
30,223
2,736
10,424
13,368
Pretax income (loss)
3,621
58,373
805
(12,932
Total assets at period end
1,511,887
1,617,022
4,326,579
100,499
During the quarter ended March 31, 2019, the chief operating decision maker began attributing a portion of the initial fair value the Company recognizes relating to its firm commitment to purchase CRT securities upon the sale of mortgage loans to the correspondent production segment in recognition of pricing changes in the correspondent production segment. Accordingly, the Company allocated $8.6 million of the initial firm commitment gain to Net gain on mortgage loans acquired for sale in the correspondent production segment and $11.1 million in credit sensitive strategy segment during the quarter in the credit sensitive strategies segment.
12,414
(12,396
Net gain (loss) on mortgage loans acquired for
sale
7,599
56,148
Net interest income:
11,169
10,208
19,428
(6,798
(10,664
(17,354
(34,816
4,371
(456
2,074
7,073
(1,389
5,709
19,043
10,604
45,826
200
3,085
7,934
22,963
469
3,913
108
4,686
9,176
12,413
6,998
8,042
10,382
6,630
3,606
37,784
(10,182
Total assets at year end
1,141,457
1,485,492
2,989,692
173,845
5,790,486
52
Note 31—Supplemental Cash Flow Information
Payments:
Income tax, net
Interest
67,466
32,112
Cumulative effect on accumulated deficit of conversion to fair value
19,713
Non-cash investing activities:
Transfer of mortgage loans and advances to real estate
acquired in settlement of loans
Transfer of real estate acquired in settlement of mortgage
loans to real estate held for investment
2,059
Transfer from real estate held for investment to real estate
424
Receipt of mortgage servicing rights as proceeds from sales of
mortgage loans at fair value
Receipt of excess servicing spread pursuant to recapture agreement
with PennyMac Financial Services, Inc.
Capitalization of servicing advances pursuant to mortgage loan
modifications
Non-cash financing activities:
Dividends declared, not paid
32,262
28,818
Note 32—Regulatory Capital and Liquidity Requirements
PMC is a seller/servicer for Fannie Mae and Freddie Mac. The Company is required to comply with the following minimum capital and liquidity eligibility requirements to remain in good standing with each Agency:
A minimum net worth of $2.5 million plus 25 basis points of UPB for all mortgage loans serviced;
A tangible net worth/total assets ratio greater than or equal to 6%; and
Liquidity equal to or exceeding 3.5 basis points multiplied by the aggregate UPB of all mortgages secured by 1-4 unit residential properties serviced for Freddie Mac and Fannie Mae (“Agency Mortgage Servicing”) plus 200 basis points multiplied by the sum of nonperforming (90 or more days delinquent) Agency Mortgage Servicing that exceeds 6% of Agency Mortgage Servicing.
Such Agencies’ capital and liquidity amounts and requirements, the calculations of which are defined by each entity, are summarized below:
Net Worth (1)
Tangible Net Worth /
Total Assets Ratio (1)
Liquidity (1)
Fannie Mae and Freddie Mac
Actual
Required
515,013
255,487
65,992
33,991
528,506
238,915
58,144
31,678
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 33—Subsequent Events
Management has evaluated all events and transactions through the date the Company issued these consolidated financial statements. During this period, there have been no material events that would require recognition in our consolidated financial statements or disclosure in the notes to the consolidated financial statements.
53
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.
Statements contained in this Quarterly Report on Form 10-Q 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 Quarterly Report on Form 10-Q and our other filings with the United States Securities and Exchange Commission (“SEC”). The forward-looking statements contained in this Quarterly Report on Form 10-Q are made as of the date hereof and we assume no obligation to update or supplement any forward-looking statements.
The following discussion and analysis provides information that we believe is relevant to an assessment and understanding of our consolidated results of operations and financial condition. Unless the context indicates otherwise, references in this Quarterly Report on Form 10-Q to the words “we,” “us,” “our” and the “Company” refer to PMT.
We are a specialty finance company that invests primarily in residential mortgage loans and 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. Our investment focus is on mortgage-related assets that we create through our correspondent production activities, including mortgage servicing rights (“MSRs”) and credit risk transfer (“CRT”) arrangements, which include CRT agreements (“CRT Agreements”) and CRT securities that absorb credit losses on certain of the mortgage loans we sell. We also invest in mortgage-backed securities (“MBS”), and hold excess servicing spread (“ESS”) on MSRs acquired by PennyMac Loan Services, LLC (“PLS”). We have also historically invested in distressed mortgage assets (mortgage loans and real estate acquired in settlement of mortgage loans) as well as other credit sensitive assets, including loans that finance multifamily and other commercial real estate, which are no longer a significant portion of our investments.
We are externally managed by PNMAC Capital Management, LLC (“PCM”), an investment adviser that specializes in and focuses on U.S. mortgage assets. Most of our mortgage loan portfolio is serviced by PLS.
Correspondent Production
Our correspondent production activities involve the acquisition and sale of newly originated prime credit quality residential mortgage loans. Correspondent production serves as the source of our investments in MSRs, CRT Agreements and commitments to purchase credit risk transfer securities, and are summarized below:
Sales of mortgage loans acquired for sale:
16,434,564
14,412,772
Investment activities driven by correspondent production:
Receipt of MSRs as proceeds from sales of mortgage loans
Investments in CRT arrangements
Increase in face amount of firm commitment to
purchase CRT securities
Deposits of cash and change in commitments to
fund Deposits securing CRT Agreements resulting
from sale of mortgage loans under CRT Agreements
and settlement of outstanding commitments
Total investments in CRT arrangements
To the extent that we purchase mortgage loans that are insured by the U.S. Department of Housing and Urban Development (“HUD”) through the Federal Housing Administration (the “FHA”), or insured or guaranteed by the Veterans Administration (the “VA”) or U.S. Department of Agriculture (“USDA”), we and PLS have agreed that PLS will fulfill and purchase such mortgage loans, as PLS is a Ginnie Mae-approved issuer of government-guaranteed MBS and we are not. This arrangement has enabled us to compete with other correspondent aggregators that purchase both government and conventional mortgage loans. We receive a sourcing fee from PLS ranging from two to three and one-half basis points, generally based on the average number of calendar days that mortgage loans are held by us prior to purchase by PLS, on the unpaid principal balance (“UPB”) of each mortgage loan that we sell to PLS.
We have transferred certain correspondent production loans into a private label securitization, and retained a portion of the securities created in the securitization transaction. Our private label securitization is accounted for as a financing arrangement. Sales of securities included in the securitization are treated as issuances of debt.
Credit Sensitive Investments
CRT Arrangements
We believe that CRT Agreements and CRT securities are long-term investments that can produce attractive risk-adjusted returns through our own mortgage production while aligning with Fannie Mae’s strategic goal to attract private capital investment in its credit risk. We believe there is significant potential for investment in front-end credit risk transfer and MSRs that result from our correspondent production activities. During the quarter ended March 31, 2019, we made commitments to purchase CRT securities with UPB of $281.9 million. We held CRT-related investments (composed of deposits securing CRT Agreements, derivative assets and firm commitment to purchase CRT securities) totaling $1.5 billion at March 31, 2019. During the quarter ended March 31, 2018, we funded investments in CRT Agreements totaling $41.8 million, and held CRT-related investments (composed of deposits securing CRT Agreements and derivative assets) totaling $726.3 million at March 31, 2018.
Distressed Mortgage Assets
We have invested in distressed mortgage loans through direct acquisitions of mortgage loan portfolios from institutions such as banks and mortgage companies. We seek to maximize the fair value of these distressed mortgage loans using means that are appropriate for the particular loan, including both proprietary and nonproprietary loan modification programs, special servicing and other initiatives focused on avoiding foreclosure, when possible. When we are unable to effect a cure for a mortgage loan delinquency, our objective is timely acquisition and/or liquidation of the property securing the mortgage loan through the use, in part, of short sales and deed-in-lieu-of-foreclosure programs. We may elect to hold certain real estate acquired in settlement of loans (“REO”) as income-producing properties for extended periods as a means of maximizing our returns on such properties. We seek to maximize our returns on distressed mortgage assets through individual loan and property resolutions, as well as bulk sales.
During the quarter ended March 31, 2019, we received proceeds from liquidations, payoffs, paydowns and sales from our portfolio of distressed mortgage loans and REO totaling $16.7 million, including loan sales totaling $216,000. During the quarter ended March 31, 2018, we received proceeds from liquidations, payoffs, paydowns and sales from our portfolio of distressed mortgage loans and REO totaling $305.2 million, including bulk sales totaling $258.2 million in fair value of distressed mortgage loans.
Interest Rate Sensitive Investments
Our interest rate sensitive investments include:
Mortgage servicing rights. During the quarter ended March 31, 2019, we received $131.9 million of MSRs as proceeds from sales of mortgage loans acquired for sale. We held $1.2 billion of MSRs at fair value at March 31, 2019.
REIT-eligible mortgage-backed or mortgage-related securities. We did not purchase MBS during the quarter ended March 31, 2019. We held MBS with fair values totaling $2.6 billion at March 31, 2019.
ESS relating to MSRs held by PFSI. We received ESS with fair value totaling $508,000 during the quarter ended March 31, 2019, pursuant to a recapture agreement with PLS. We held ESS with a fair value totaling $205.1 million at March 31, 2019.
Capital Structure
On February 11, 2019, the Company, the Operating Partnership, and the Manager entered into a Purchase Agreement (the “Purchase Agreement”) with Credit Suisse Securities (USA) LLC, Deutsche Bank Securities Inc., Merrill Lynch, Pierce, Fenner & Smith Incorporated, Morgan Stanley & Co. LLC and Goldman Sachs & Co. LLC (each, an “Underwriter” and collectively, the
55
“Underwriters”), relating to the issuance and sale by the Company, and the purchase by the Underwriters, severally, of 7,000,000 common shares of beneficial interest, par value $0.01 per share at a purchase price of $20.41 per share (before expenses). The Company received a $142.8 million in net proceeds related to the equity offering.
On March 14, 2019, the Company entered into separate equity distribution agreements (each an “Equity Distribution Agreement”) with each of Barclays Capital Inc., Credit Suisse Securities (USA) LLC and JMP Securities LLC (each an “Agent” and collectively, the “Agents”) to sell from time to time, through "at the market" (ATM) equity offering program under which the Agents will act as sales agent and/or principals, relating to the Company’s common shares of beneficial interest, par value $0.01 per share, having an aggregate offering price of up to $200,000,000 (the “Shares”). As of March 31, 2019, the Company had sold a total of 221,000 of its common shares at an average price of $20.76 per share, providing net proceeds to the Company of approximately $4.5 million, net of sales commission and fees of $46,000. As of March 31, 2019, the Company had approximately $195.5 million of common shares available for issuance under its ATM equity offering program.
Our board of trustees has authorized a repurchase program under which we may repurchase up to $300 million of our outstanding common shares. We have repurchased a cumulative total of 14.7 million common shares at a cost of $216.6 million under the program. The repurchased common shares were canceled upon settlement of the repurchase transactions and returned to the authorized but unissued share pool. We did not repurchase common shares during the quarter ended March 31, 2019.
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 have made 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.
Non-Cash Income
A substantial portion of our net investment income includes non-cash items, including fair value adjustments, recognition of the fair value of assets created and liabilities incurred in mortgage loan sale transactions and the capitalization and amortization of certain assets and liabilities. Because we have elected, or are required by generally accepted accounting principles, to record our financial assets (comprised of MBS, mortgage loans acquired for sale at fair value, mortgage loans at fair value and ESS), our firm commitment to purchase credit risk transfer securities, our derivatives, our MSRs, and our asset-backed financing 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.
56
The amounts of non-cash income (loss) items included in net investment income are as follows:
Net mortgage loan servicing fees—MSR valuation adjustments
Fair value of commitment to purchase credit risk transfer securities
Provision for losses relating to representations and warranties provided in mortgage loan sales:
Change in fair value during the year of financial instruments held at quarter end:
Mortgage loans acquired for sale
Mortgage loans:
Held in a variable interest entity
923
(9,271
ESS
Asset-backed financing of a VIE
67,108
(20,091
Net interest income—Capitalization of interest pursuant to mortgage loan modifications
65,906
75,069
Non-cash items as a percentage of net investment income
62
99
We receive or pay cash relating to our investments as follows:
We receive cash related to MSRs in the form of mortgage loan servicing fees.
We receive proceeds on the sale of mortgage loans acquired for sale that include both cash and our estimate of the fair value of MSRs and a firm commitment to purchase CRT securities, and we recognize a liability for potential losses relating to representations and warranties created in the mortgage loan sales transactions. We pay cash relating to our provision for representations and warranties when we repurchase mortgage loans or settle loss claims from investors.
We receive cash relating to our investments in MBS through monthly principal and interest payments from the issuer of such securities.
We receive cash relating to CRT Agreements through a portion of both the interest payments collected on mortgage loans in the CRT Agreements’ reference pools and the deposits securing the agreements that are released as principal on such mortgage loans is repaid.
We receive or pay cash relating to hedging instruments when the instruments mature or when we effectively cancel the transactions through an offsetting trade.
We receive cash relating to mortgage loan investments when the investments are paid down, paid off or sold, when payments of principal and interest occur on such mortgage loans or when the property securing the mortgage loan has been sold.
57
The following is a summary of our key performance measures:
(in thousands, except per common share amounts)
(56,751
(37,835
Pre-tax income
Benefit from (provision for) income taxes
3,660
(9,652
Pre-tax income (loss) by segment:
Correspondent production
Credit sensitive strategies
Interest rate sensitive strategies
Annualized return on average common shareholder's equity
14.0
7.0
Earnings per common share:
Dividends per common share
Per common share closing prices:
During the quarter:
High
21.32
18.03
Low
18.84
15.57
At quarter end
20.71
Book value per common share
20.72
20.61
During the quarter ended March 31, 2019, we recorded net income of $53.5 million, or $0.68 per diluted share. Our net income for the quarter ended March 31, 2019 reflects net gain on investments of $95.1 million, net gain on mortgage loans acquired for sale of $21.3 million, mortgage loan origination fees of $12.9 million, and net interest income of $8.3 million, partially offset by negative net mortgage loan servicing fees of $31.1 million.
During the quarter ended March 31, 2018, we recorded net income of $28.2 million, or $0.35 per diluted share. Our net income for the quarter ended March 31, 2018 reflects net mortgage loan servicing fees of $56.2 million, supplemented by net gain on mortgage loans acquired for sale of $7.6 million, mortgage loan origination fees of $7.0 million, net interest income of $6.2 million and net gain on investments of $18,000.
Our net income for the quarters ended March 31, 2019 and March 31, 2018 includes recognition of incentives we received for financing certain of our mortgage loans acquired for sale satisfying certain relief characteristics under a master repurchase agreement. During the quarter ended March 31, 2019, we recognized $7.5 million as a reduction of interest expense compared to $2.4 million in such incentives during the same period in 2018. The master repurchase agreement expires on August 21, 2019, unless terminated earlier at the option of the lender. We expect that we will cease to accrue the incentives under the repurchase agreement in the second quarter of 2019.
Our net income during the quarter ended March 31, 2019 was higher than the same period in 2018, due to an increase in pretax income in our credit sensitive strategies segment of $54.8 million. During the quarter ended March 31, 2019, our credit sensitive strategies segment recognized net investment income totaling $61.1 million, compared to $10.6 million during the same period in 2018, primarily due to gains from our investments in CRT arrangements which reflect both growth in our investment in CRT Agreements and commitment to purchase CRT securities and a tightening of credit spreads (credit spreads represent the yield
premium demanded by investors for securities similar to CRT Agreements as compared to a U.S. Treasury security) in the quarter ended March 31, 2019.
Pretax income in our interest rate sensitive strategies activities decreased by $37.0 million during the quarter ended March 31, 2019, as compared to the same period in 2018, from $37.8 million to $805,000 due to the effect of decreasing interest rates on the fair value of our investments in MSRs and ESS. This negative effect was partially offset by increased fair value gains from our investments in MBS, which benefited from the lower interest rates.
Our net investment income is summarized below:
Net gain on mortgage loans held for sale
Net mortgage loan origination fees
Following is a discussion of the changes in our net investment income:
Net Gain on Investments
Net gain (loss) on investments is summarized below:
From non-affiliates:
The increase in net gain on investments during the quarter ended March 31, 2019, as compared to the same period in 2018 was caused primarily by increased gains from our investments in MBS and CRT arrangements during the quarter ended March 31, 2019, as compared to the same period in 2018.
During the quarter ended March 31, 2019, we recognized net valuation gains on MBS of $36.9 million, as compared to net valuation losses of $22.4 million for the quarter ended March 31, 2018. The gains we recorded for the quarter ended March 31, 2019 reflect the influence of decreasing interest rates during 2019, as compared to the same period in 2018 and the growth of our investment in MBS. Our average investment in MBS at fair value increased by $1.5 billion or 142% during the quarter ended March 31, 2019, as compared to the same quarter during 2018.
Mortgage Loans at Fair Value – Distressed
Net gains (losses) on our investment in distressed mortgage loans at fair value are summarized below:
Valuation changes:
Performing loans
388
(4,169
Nonperforming loans
535
(5,102
(Loss) gain on payoffs
(214
235
Loss on sale
(224
(915
Average portfolio balance at fair value
Interest and fees capitalized
Number of mortgage loans relating to gain/(loss) recognized on sales
1,144
UPB of mortgage loans relating to gain/(loss) recognized on sales
677
351,630
Valuation changes amounted to gains of $923,000 in the quarter ended March 31, 2019, as compared to losses of $9.3 million for the same quarter in 2018. The valuation changes on performing mortgage loans reflect the effects of capitalization of delinquent interest on loans we modify. When we capitalize interest in a loan modification, we increase the carrying value of the mortgage loan. The interest income we recognize is offset by a valuation loss of corresponding magnitude. Changes in other inputs may result in further valuation changes to the mortgage loan, and subsequent performance of a modified mortgage loan will be reflected in its future fair value. During the quarter ended March 31, 2019, we capitalized interest totaling $762,000 as compared to $2.2 million for the quarter ended March 31, 2019.
Our disposition strategy for mortgage loans at fair value includes identification of the most financially beneficial resolution for each loan. Such resolutions may include modification or sale of the mortgage loan or acquisition of the property securing the distressed mortgage loan. During the quarters ended March 31, 2019 and 2018, we received proceeds from the sale of mortgage loans at fair value totaling $216,000 and $258.2 million, respectively. We believe that while future resolution activity will include mortgage loan sales, a significant portion of our remaining portfolio of distressed mortgage loans will require resolution through ongoing collection activities and borrower performance.
60
CRT Transactions
The activity in and balances relating to our CRT Agreements and firm commitment to purchase credit risk transfer security are summarized below:
Deposits of cash securing CRT Agreements
Increase in commitments to fund Deposits securing credit
risk transfer agreements resulting from sale of mortgage loans
Total new investments in CRT Agreements
Gains recognized on CRT Agreements included in:
Change in fair value of Interest-only security payable at fair value
CRT Securities
Net gain on firm commitments to purchase
UPB of mortgage loans sold subject to credit risk transfer security
UPB of mortgage loans subject to Recourse Obligations
Carrying value of investments in CRT Agreements (1)
1,267,730
1,270,488
CRT Interest-only security payable at fair value
Commitments to fund Deposits securing CRT Agreements
UPB of mortgage loans outstanding sold subject to Firm commitment
to purchase credit risk transfer security
Face amount of firm commitment to purchase credit risk transfer securities (UPB)
Fair value of firm commitment to purchase credit risk transfer security
Carrying value of investments in CRT Agreements includes Deposits securing CRT Agreements and CRT derivatives.
The increase in gains recognized on CRT Agreements is due to larger decreases in credit spreads and interest rates during the quarter ended March 31, 2019 compared to the quarter ended March 31, 2018. The gains we recognized on our firm commitments to purchase CRT securities reflects the effect of credit spread tightening we observed during the quarter ended March 31, 2019, on the fair value of previously recognized as well as carry recognized in the value of the commitment over time.
ESS Purchased from PFSI
We recognized fair value losses relating to our investment in ESS totaling $3.6 million for the quarter ended March 31, 2019, as compared to fair value gains of $7.8 million for the quarter ended March 31, 2018. The change in valuation results during 2019 as compared to 2018 reflects the different interest rate environments that prevailed during the period. The lower interest rates that prevailed during the quarter ended March 31, 2019 resulted in increased prepayment expectations for the mortgage loans underlying the ESS. Such prepayment expectations result in reduced cash flow expectations, negatively affecting the assets’ fair values.
Net Gain on Mortgage Loans Acquired for Sale
Our net gain on mortgage loans acquired for sale is summarized below:
Provision for losses relating to representations and
warranties provided in mortgage loan sales:
Recognition of fair value of commitment to purchase
credit risk transfer security relating to loans sold
Change in fair value during the year of financial instruments held at year end:
Total from non—affiliates
Interest rate lock commitments issued on loans acquired for sale to nonaffiliates
8,986,956
4,404,895
Mortgage loans acquired for sale:
8,256,869
4,232,308
To PFSI
6,826,566
8,833,752
15,083,435
13,066,060
The changes in gain on mortgage loans acquired for sale during the quarter ended March 31, 2019, as compared to the same period in 2018, reflects the value of our commitment to invest in the credit risk of our mortgage loan production. We included $19.6 million in gain on sale of mortgage loans related to our continued involvement in the credit risk relating to the mortgage loans we sold during the quarter ended March 31, 2019. Our commitment to invest in this credit risk contributed significantly to our gain on sale of mortgage loans, as the mortgage market remained intensely competitive through the quarter ended March 31, 2019.
Our net gain on mortgage loans acquired for sale includes both cash and non-cash elements. We receive proceeds on sale that include both cash and our estimate of the fair value of MSRs we receive and our estimate of our firm commitment to purchase CRT securities relating to our mortgage loan production. How the Company measures and updates MSRs and our firm commitment to purchase credit risk transfer securities as detailed in Note 7 — Fair Value — Valuation Techniques and Inputs to the consolidated financial statements included in this Report.
We also recognize a liability for potential losses relating to representations and warranties created in the mortgage loan sales transactions. Our agreements with the purchasers include representations and warranties related to the mortgage loans we sell. The representations and warranties require adherence to purchaser and insurer origination and underwriting guidelines, including but not limited to the validity of the lien securing the mortgage loan, property eligibility, borrower credit, income and asset requirements, and compliance with applicable federal, state and local law.
In the event of a breach of our representations and warranties, we may be required to either repurchase the mortgage loans with the identified defects or indemnify the investor or insurer against credit losses attributable to the loan with indemnified defects. In such cases, we bear any subsequent credit loss on the mortgage loans. Our credit loss may be reduced by any recourse we have to correspondent sellers that, in turn, had sold such mortgage loans to us and breached similar or other representations and warranties. In such event, we have the right to seek a recovery of related repurchase losses from that correspondent seller.
Following is a summary of the indemnification and repurchase activity and mortgage loans subject to representations and warranties:
Indemnification activity:
Mortgage loans indemnified at beginning of quarter
7,075
5,926
New indemnifications
Less: Indemnified mortgage loans repaid or refinanced
627
555
Mortgage loans indemnified at end of quarter
6,544
5,371
Mortgage loans with deposits received from correspondent sellers
collateralizing prospective indemnification losses at end of quarter
847
1,145
Repurchase activity:
Mortgage loans repurchased
3,689
2,830
Less:
Mortgage loans repurchased by correspondent sellers
2,478
3,167
Mortgage loans repaid by borrowers
90
256
Net mortgage loans repurchased (repurchased by
correspondent sellers or repaid by borrowers)
1,121
(593
Net losses charged (recovery credited) to liability for
representations and warranties
(41
At end of quarter:
Mortgage loans subject to representations and warranties
Liability for representations and warranties
The losses we have recorded to date have been moderated by our ability to recover most of the losses inherent in the repurchased mortgage loans from the correspondent sellers. As the outstanding balance of mortgage loans we purchase and sell subject to representations and warranties increases, as the mortgage loans sold season, as our correspondent sellers’ ability and willingness to repurchase mortgage loans and as our investors’ and guarantors’ loss mitigation strategies 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 estimated future defaults, mortgage loan repurchase rates, the potential severity of loss in the event of default and the probability of reimbursement by the correspondent mortgage loan seller. We establish a liability at the time mortgage loans are sold and review our liability estimate on a periodic basis.
The amount of the liability for representations and warranties is difficult to estimate and requires considerable judgment. The level of mortgage loan repurchase losses is dependent on economic factors, investor loss mitigation strategies, our ability to recover any losses inherent in the repurchased mortgage loan from the correspondent seller and other external conditions that may change over the lives of the underlying mortgage loans. We may be required to incur losses related to such representations and warranties for several periods after the mortgage loans are sold or liquidated.
We record adjustments to our recorded 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.
63
Adjustments to our liability for representations and warranties are included as a component of our Net gains on mortgage loans acquired for sale at fair value. We recorded a $0.5 million reduction in liability for representations and warranties during the quarter ended March 31, 2019, due to the effects of certain mortgage loans reaching specified performance histories identified by the Agencies as sufficient to limit repurchase claims relating to such mortgage loans.
Mortgage Loan Origination Fees
Mortgage loan origination fees represent fees we charge correspondent sellers relating to our purchase of mortgage loans from those sellers. The changes in the amount of these fees during the quarter ended March 31, 2019, as compared to the same quarter in 2018, reflects an increase in our purchases of loans with delivery fees.
Net Mortgage Loan Servicing Fees
Our correspondent production activity is the primary source of our mortgage loan servicing portfolio. When we sell mortgage loans, we generally enter into a contract to service those loans and we recognize the fair value of such contracts as MSRs. Under these contracts, we are required to perform mortgage loan servicing functions in exchange for fees and the right to other compensation.
The servicing functions, which are performed on our behalf by PLS, typically include, among other responsibilities, collecting and remitting mortgage loan payments; responding to borrower inquiries; accounting for the mortgage loan; holding and remitting custodial (impound) funds for payment of property taxes and insurance premiums; counseling delinquent mortgagors; and supervising foreclosures and property dispositions.
Gain (losses) on hedging derivatives, net
Average servicing portfolio
Includes contractually specified servicing fees, net of guarantee fees.
Net mortgage loan servicing fees decreased during the quarter ended March 31, 2019, as compared to the same period in 2018 by $87.2 million. The decrease in net mortgage loan servicing fees during the quarter ended March 31, 2019, compared to the same quarter in 2018, was primarily attributable to the negative effect of the decrease in fair value of our MSRs as a result of decreasing interest rates during 2019 compared to 2018. The change in fair value attributable to market inputs such as projected prepayment speeds decreased $149.1 million, primarily due to the decrease in interest rates during the quarter ended March 31, 2019 as compared to the higher interest rates that prevailed during the quarter ended March 31, 2018. The loss was partially offset by an increase in hedging gains of $62.0 million during the quarter ended March 31, 2019 as compared to the quarter ended March 31, 2018. Mortgage servicing fees (including ancillary and other fees) increased $14.0 million, reflecting the growth of our servicing portfolio. This increase was offset by a $14.2 million increase in realization of cash flows. Realization of cash flows increased disproportionately to the increase in servicing fees due to acceleration of the rate of realization caused by the increased prepayment expectations that accompany decreasing interest rates.
64
We have entered into an MSR recapture agreement that requires PLS to transfer to us cash in an amount equal to 30% of the fair market value of the MSRs related to all the loans so originated. We recognized MSR recapture income during the quarter ended March 31, 2019 of $634,000 as compared to $595,000, for the quarter ended March 31, 2018.
Net Interest Income
Interest income/expense
Discount/
Average
Coupon
fees (1)
yield/cost %
36,074
7.43
24,008
2,593,543
3.00
5.00
Held by variable interest entity
2,803
121
4.04
621
4.42
3,430
742
4,172
402,694
4.14
ESS from PFSI
214,419
5.72
1,142,819
2.37
58,387
(3,814
54,573
6,023,260
3.62
66,895
4.19
Assets sold under agreements to repurchase (2)
42,262
(5,411
3.04
Mortgage loan participation purchase and sale
agreements
520
4.08
3,359
302
5.86
5,568
255
455,519
5.11
2,447
821
4.74
128,549
5.67
55,952
(3,979
51,973
6,010,754
3.46
Interest shortfall on repayments of mortgage loans serviced
for Agency securitizations
58,718
3.64
8,177
165
Net interest margin
0.55
Net interest spread
Amounts in this column represent capitalization of interest on delinquent mortgage loans, amortization of premiums and accrual of unearned discounts for assets and amortization of debt issuance costs and premiums for liabilities.
In 2017, we entered into a master repurchase agreement that provides us with incentives to finance mortgage loans approved for satisfying certain consumer relief characteristics as provided in the agreement. During the quarter ended March 31, 2019, the Company included $7.5 million of such incentives as a reduction to Interest expense. The master repurchase agreement expires on August 21, 2019, unless terminated earlier at the option of the lender. We expect that we will cease to accrue the incentives under the repurchase agreement in the second quarter of 2019.
65
24,653
1.18
9,231
1,069,971
3.29
4.33
3,009
(406
5,763
2,136
4.28
8,772
10,502
1,053,050
3.99
239,923
6.56
601,980
1.35
35,373
1,290
36,663
4,035,866
3.68
39,690
4.06
19,703
4,804
3.18
283
45,561
2.76
285
5.83
2,635
(339
3.09
Borrowing from PFSI
142,151
5.56
27,956
4,781
32,737
3,813,308
3.43
30,035
3.65
9,655
(3,491
0.61
0.41
In 2017, we entered into a master repurchase agreement that provides us with incentives to finance mortgage loans approved for satisfying certain consumer relief characteristics as provided in the agreement. During the quarter ended March 31, 2018, we included $2.4 million of such incentives as a reduction to Interest expense. The master repurchase agreement is subject to a rolling six-month term through August 21, 2019, unless terminated earlier at the option of the lender. We expect that we will cease to accrue the incentives under the repurchase agreement in the second quarter of 2019.
66
The effects of changes in the yields and costs and composition of our investments on our interest income are summarized below:
vs.
Increase (decrease)
due to changes in
Rate
Volume
change
549
597
(829
11,490
10,661
1,971
7,135
9,106
539
(218
321
253
(6,904
(6,651
792
(7,122
(6,330
(474
(394
(868
2,170
2,574
4,744
4,179
13,731
17,910
4,051
140
17,922
22,101
(1,140
13,484
12,344
Mortgage loan participation purchase
and sale agreement
260
1,152
(180
972
(190
19,022
19,236
Interest shortfall on repayments of mortgage
loans serviced for Agency securitizations
19,709
19,923
3,965
(1,787
2,178
The increase in net interest income during the quarter ended March 31, 2019, as compared to the quarter ended March 31, 2018, reflects growth in our investments in MBS and mortgage loans acquired for sale along with increased earnings from the placement fees we received relating to the custodial funds we manage on behalf of borrowers and investors. These increases were partially offset by a continuing shift in our earning assets from our highest yielding assets – distressed mortgage loans – to lower-yielding MBS and mortgage loans acquired for sale.
Included in net interest income for the quarters ended March 31, 2019 and 2018 are $7.5 million and $2.4 million of incentives we recognized relating to a master repurchase agreement. The master repurchase agreement expires on August 21, 2019, unless terminated earlier at the option of the lender. We expect that we will cease to accrue the incentives under the repurchase agreement in the second quarter of 2019. We expect that the loss of such incentive income will be partially offset by an improvement in pricing margins, although there can be no assurance in that regard.
During the quarter ended March 31, 2019, we recognized interest income on distressed mortgage loans and mortgage loans held by VIEs totaling $4.2 million, including $762,000 of interest capitalized pursuant to loan modifications, which compares to $10.5 million including $2.2 million of interest capitalized pursuant to loan modifications, in the quarter ended March 31, 2018. This decrease reflects the significant liquidation of our investment in distressed mortgage loans during 2018.
During the quarter ended March 31, 2019, we incurred interest expense totaling $54.7 million as compared to $34.8 million during the quarter ended March 31, 2018. Our interest cost on interest-bearing liabilities was 3.46% for the quarter ended March 31, 2019 and 3.43% for the quarter ended March 31, 2018. The increase in interest expense primarily reflects the effects of increases in
67
the advance rates we achieved on financed assets. These increases were partially offset by the benefits we realized from the financing incentives included in the master repurchase agreement discussed above.
Results of Real Estate Acquired in Settlement of Loans
Results of REO includes the gains or losses we record upon sale of the properties as well as valuation adjustments we record during the period we hold those properties. During the quarter ended March 31, 2019, we recorded net losses of $1.5 million, as compared to $3.2 million, for the same period in 2018, in Results of real estate acquired in settlement of loans. This decrease in losses reflects the ongoing liquidation of our investments in distressed mortgage assets. REO balances have decreased from $162.7 million at December 31, 2017 to $72.2 million at March 31, 2019.
Results of REO are summarized below:
Proceeds from sales of REO
Results of real estate acquired in settlement of loans:
Number of properties sold
80
224
Average carrying value of REO
78,900
153,653
At quarter end:
Number of properties
227
487
Losses from REOs during the quarter ended March 31, 2019 decreased from the same period in 2018. The decrease in losses from REOs during the quarter ended March 31, 2019, as compared to the same period in 2018, was due primarily to the smaller overall REO portfolio during 2019 as compared to the same period in 2018.
Our expenses are summarized below:
Expenses increased $18.9 million, or 50%, during the quarter ended March 31, 2019, as compared to the same quarter in 2019, primarily due to increased fulfillment fees attributable to both increases in our production volume and to an increase in the average fulfillment fee rate we incurred during the quarter ended March 31, 2019 as compared to the quarter ended March 31, 2018.
Mortgage Loan Fulfillment Fees
Mortgage 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 mortgage loans. The fee is calculated as a percentage of the UPB of the mortgage loans purchased. Mortgage loan fulfillment fees and related fulfillment volume are summarized below:
Fulfillment fee expense
Average fulfillment fee rate (in basis points)
The increase in loan fulfillment fees of $15.6 million during the quarter ended March 31, 2019, as compared to the same period in 2018, is primarily due to an increase in the volume of mortgage loans fulfilled for us by PFSI, combined with an increase in the average fulfillment fee rate charged by PFSI due to a decrease in discretionary reductions made by PFSI to facilitate successful loan acquisitions by us.
Mortgage Loan Servicing Fees
Mortgage loan servicing fees payable to PLS are summarized below:
Mortgage loan servicing fees decreased by $449,000 during the quarter ended March 31, 2019, as compared to the same period in 2018. We incur mortgage loan servicing fees primarily in support of our MSR portfolio and investment in mortgage loans at fair value. The decrease in mortgage loan servicing fees was primarily due to reductions in the distressed mortgage loan portfolio resulting from continuing loan sales and liquidations throughout 2018. This decrease was partially offset by the increase in servicing fees resulting from the ongoing growth of our MSR portfolio. Servicing fee rates relating to distressed mortgage loans are significantly higher than those relating to MSRs due to the higher cost of servicing such loans. Therefore, reductions in the balance of distressed mortgage loans had a proportionately more significant effect on mortgage loan servicing fees than the additions of new MSRs.
The components of our management fee payable to PCM are summarized below:
Base
Average shareholders' equity amounts used to calculate
management fee expense
1,651,648
1,539,900
69
Management fees increased by $1.6 million during the quarter ended March 31, 2019, as compared to the same period in 2018, primarily due to recognition of a performance incentive fee, which is based on our profitability in relation to our common shareholders’ equity. The performance incentive fee reflects improvements in our return on common shareholders’ equity during 2019 as compared to 2018. The increase in the performance incentive fee was supplemented by an increase in the base management fee due to modestly higher average shareholders’ equity during the quarter ended March 31, 2019, as compared to the same period in 2018.
Compensation expense increased $701,000 during the quarter ended March 31, 2019, as compared to the same period in 2018. The change was primarily due to an increase in share-based compensation expense, reflecting changes in performance expectations relating to the performance-based restricted share unit awards outstanding as of the quarter ended March 31, 2019.
Mortgage Loan Collection and Liquidation
Mortgage loan collection and liquidation expenses decreased $645,000 during the quarter ended March 31, 2019, as compared to the same period in 2018, due to the significant reductions in our portfolio of distressed mortgage loans as the result of our sales of such assets.
Other Expenses
Income Taxes
We have elected to treat PMC as a taxable REIT subsidiary (“TRS”). Income from a TRS is only included as a component of REIT taxable income to the extent that the TRS makes dividend distributions of income to us. A TRS is subject to corporate federal and state income tax. Accordingly, a provision for income taxes for PMC is included in the accompanying consolidated statements of operations.
Our effective tax rates were (7.3) % and 25.5% for the quarters ended March 31, 2019 and 2018, respectively. Our TRS recognized a tax benefit of $3.9 million on a loss of $17.4 million while our consolidated pretax income was $49.9 million for the quarter ended March 31, 2019. For the same period in 2018, the TRS recognized tax expense of $9.4 million on income of $34.6 million while our consolidated pretax income was $37.8 million. The relative values between the tax benefit or expense at the TRS and our consolidated pretax income drive the fluctuation in the effective tax rate. The primary difference between our effective tax rate and the statutory tax rate is due to nontaxable REIT income resulting from the dividends paid deduction.
70
Following is a summary of key balance sheet items as of the dates presented:
Investments:
Short-term
Real estate
114,521
128,791
7,334,879
7,596,464
152,570
157,052
Liabilities
Borrowings:
Short-term debt
4,378,900
5,081,691
Long-term debt
1,295,949
1,011,433
5,674,849
6,093,124
153,549
154,105
Shareholders’ equity
Total assets decreased by approximately $257.4 million, or 3%, during the period from December 31, 2018 through March 31, 2019, primarily due to a $208.9 million decrease in mortgage loans acquired for sale, along with a $21.3 million decrease in MBS and a $14.3 million decrease in real estate.
Our asset acquisitions are summarized below.
Following is a summary of our correspondent production acquisitions at fair value:
Correspondent mortgage loan purchases:
9,287,632
5,106,242
Government-insured or guaranteed-for sale to PLS
7,066,892
9,189,632
5,454
Commercial mortgage loans
7,263
16,360,428
14,303,137
During the quarter ended March 31, 2019, we purchased for sale $16.4 billion in fair value of correspondent production loans as compared to $14.3 billion in fair value of correspondent production loans during the quarter ended March 31, 2018. Our ability to
maintain the level of correspondent production reflects our ability to invest in credit risk inherent in our mortgage loan production, the continuing expansion of our correspondent seller network and our efforts aimed at maximizing the share of our correspondent sellers’ production that is sold to us.
Our ability to continue the expansion of our correspondent production business is subject to, among other factors, our ability to source additional mortgage loan volume, our ability to obtain additional inventory financing and our ability to fund the portion of the mortgage loans not financed, either through cash flows from business activities or the raising of additional equity capital. There can be no assurance that we will be successful in increasing our borrowing capacity or in obtaining the additional equity capital necessary or that we will be able to identify additional sources of mortgage loans.
Other Investment Activities
Following is a summary of our acquisitions of mortgage-related investments held in our interest rate sensitive strategies and credit-sensitive strategies segments:
Interest rate sensitive assets:
MSRs received in mortgage loan sales and purchased
MBS
ESS received pursuant to a recapture agreement
132,376
568,023
Credit sensitive assets:
Firm commitment to purchase credit risk transfer securities
323,707
Deposits and commitments to fund deposits relating to CRT Agreements
456,083
680,298
Our acquisitions during the quarters ended March 31, 2019 and 2018 were financed through the use of a combination of proceeds from borrowings, liquidations of existing investments and proceeds from equity issuances. We continue to identify additional means of increasing our investment portfolio through cash flow from our business activities, existing investments, borrowings, and transactions that minimize current cash outlays. However, we expect that, over time, our ability to continue our investment portfolio growth will depend on our ability to raise additional equity capital.
Following is a summary of our MBS holdings:
Life
Market
(in years)
yield
Agency:
5.9
3.8
3.2
7.5
3.5
3.7
3.3
8.3
Following is a summary of the composition of the mortgage loans underlying our investment in CRT Agreements and our firm commitment to purchase CRT securities.
Following is a summary of our CRT Agreements:
December 31, 2017
Deposits securing CRT agreements
588,867
(36,011
(7,070
1,234,477
680,437
26,845,392
26,540,953
179,144
101,114
5,146
5,463
13,572
Following is a summary of the composition of the mortgage loans underlying our investment in CRT Agreements as of March 31, 2019:
Year of origination
2017
2016
2015
(in millions)
UPB:
Outstanding
3,847
13,511
8,976
2,932
29,266
Originally delivered
4,118
15,307
11,515
4,928
35,868
Cumulative defaults
1.1
10.0
17.2
16.8
45.1
Cumulative losses
0.9
0.7
1.5
1.4
4.5
Original debt-to income ratio
<25%
396
1,638
368
3,638
25 - 30%
412
389
3,675
30 - 35%
2,213
1,601
4,897
35 - 40%
664
2,677
1,810
643
5,794
40 - 45%
844
3,342
2,357
843
7,386
>45%
976
2,003
161
3,876
37.7
36.2
35.1
35.3
36.0
Origination FICO score
600 - 649
270
650 - 699
698
1,806
1,052
503
4,059
700 - 749
1,307
4,507
2,902
959
9,675
750 or greater
1,779
7,076
4,950
1,429
15,234
N/A
740
747
750
743
Origination LTV
<80 %
1,320
4,098
3,518
1,067
10,003
80-85 %
3,733
2,306
7,805
85-90 %
211
527
159
1,633
90-95 %
429
1,740
1,033
3,580
95-100 %
863
3,204
1,592
586
6,245
82.5
83.1
81.3
82.1
82.4
Current LTV (1)
2,317
9,008
7,770
2,686
21,781
1,955
833
3,391
598
1,805
300
2,764
419
641
1,133
91
>100%
77.8
75.1
68.3
65.3
72.4
Based on current UPB compared to estimated fair value of the property securing the mortgage loan.
Geographic distribution
CA
534
1,825
2,148
5,097
TX
262
952
996
2,646
FL
1,130
216
2,410
VA
191
705
695
303
1,894
MD
548
170
1,665
2,325
8,163
3,849
1,217
15,554
Regional geographic concentration (1)
Midwest
301
755
223
2,527
Northeast
327
1,481
966
3,151
Southeast
1,229
4,337
2,612
890
9,069
Southwest
817
1,632
615
5,773
West
1,173
3,736
3,011
827
8,748
Midwest consists of IL, IN, IA, MI, MN, NE, ND, OH, SD, WI; 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; Southwest consists of AZ, AR, CO, KS, LA, MO, NM, OK, TX, UT; West consists of AK, CA, GU, HI, ID, MT, NV, OR, WA and WY.
74
Collection status
Current - 89 Days
13,493
8,959
2,922
29,216
90 - 179 Days
180+ Days
Following is a summary of our firm commitment to purchase CRT securities:
Following is a summary of the composition of the mortgage loans underlying our firm commitment to purchase CRT securities as of the quarter ended March 31, 2019:
Original Debt-to income ratio
2,237
2,299
3,270
4,201
5,479
6,167
23,653
38.1
284
3,252
7,786
12,299
746
<80
7,055
80-85
5,833
85-90
1,315
90-95
2,920
95-100
6,530
83.7
11,330
2,591
2,817
4,847
1,979
89
3,497
2,256
1,360
AZ
1,261
WA
1,081
14,198
1,869
1,982
7,881
4,934
6,987
76
23,641
-
Following is a summary of the distribution of our portfolio of distressed mortgage loans at fair value:
Current loan-to
note
-value (1)
total
rate
Less than 80%
11,676
3.12
29,746
5.22
8,851
3.37
36,472
5.06
80% - 99.99%
8,073
2.59
18,248
5.35
7,026
2.63
21,630
5.41
100% - 119.99%
4,415
2.30
13,762
4.24
4,464
2.40
16,781
4.69
120% or greater
9,038
2.02
14,154
3.14
8,465
2.13
14,043
100
2.50
4.40
2.58
4.54
Current loan-to-value is calculated based on the unpaid principal balance of the mortgage loan and our estimate of the value of the mortgaged property.
Geographic
distribution
New York
8,015
2.22
27,456
5.07
8,273
2.27
32,819
5.21
Florida
3,684
1.99
8,452
4.31
3,417
1.98
10,446
4.77
California
4,447
2.84
5,908
3.97
3,995
3.08
7,190
4.17
New Jersey
4,927
2.31
3,773
3.27
4,235
4,055
3.71
Hawaii
531
1.42
4,500
0
6,605
Massachusetts
1,324
2.85
5,126
4.61
855
2.52
5,667
4.57
1,435
3,250
3.80
1,549
2.53
2,791
3.81
8,839
17,445
3.79
6,482
3.69
19,353
3.61
Following is a summary of our REO by property type:
Property type
% total
1 - 4 dwelling units
62,137
71,318
Condominium/Townhome/Co-op
6,259
9,060
Planned unit development
3,779
5,303
17,190
20,068
14,206
17,060
8,914
11,829
6,651
Illinois
4,778
4,631
3,785
5,789
16,651
18,534
Our cash flows for the quarters ended March 31, 2019 and 2018 are summarized below:
Change
Operating activities
22,416
Investing activities
403,038
Financing activities
(441,281
Net cash flows
(15,827
Our cash flows resulted in a net increase in cash of $8.7 million during the quarter ended March 31, 2019, as discussed below.
Cash provided by operating activities totaled $144.9 million during the quarter ended March 31, 2019, as compared to cash provided by operating activities of $122.5 million during the quarter ended March 31, 2018. Cash flows from operating activities primarily reflect cash flows from mortgage loans acquired for sale as shown below:
Operating cash flows from:
73,733
104,148
71,170
18,339
Cash flows from mortgage loans acquired for sale primarily reflect changes in the level of inventory from the beginning to end of the quarters presented.
Net cash provided by our investing activities was $175.5 million for the quarter ended March 31, 2019, as compared to cash used in investing activities of $227.6 million for the quarter ended March 31, 2018. For the quarter ended March 31,2018, we used cash of $500.6 million to purchase MBS and made deposits of cash collateral securing CRT Agreements transactions, partially offset by $276.5 million in proceeds from the sale of distressed mortgage loans. Our cash flows from investing activities for the quarter ended March 31, 2019 did not include the significant level of purchase activity that occurred during the quarter ended March 31, 2018.
Net cash used in financing activities was $311.7 million for the quarter ended March 31, 2019, as compared to net cash provided by financing activities of $129.6 million for the quarter ended March 31, 2018. This change reflects the repayment of borrowings used to finance our reduced inventory of mortgage loans held for sale during the quarter ended March 31, 2019, compared to increases in borrowing used to finance our increased investments in MBS during the quarter ended March 31, 2018.
As discussed below in Liquidity and Capital Resources, our Manager continues to evaluate and pursue 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 flows from the liquidation of our investments, which include accumulated gains recorded during the periods we hold those investments, along with our cash earnings, are adequate to fund our operating expenses and dividend payment requirements. However, we manage our liquidity in the aggregate and are reinvesting our cash flows in new investments as well as using such cash to fund our dividend requirements.
Our liquidity reflects our ability to meet our current obligations (including the purchase of loans from correspondent sellers, our operating expenses and, when applicable, retirement of, and margin calls relating to, our debt and derivatives positions), make investments as our Manager identifies them, pursue our share repurchase program and make distributions to our shareholders. We generally need to distribute at least 90% of our taxable income each year (subject to certain adjustments) to our shareholders to qualify as a REIT under the Internal Revenue Code. This distribution requirement limits our ability to retain earnings and thereby replenish or increase capital to support our activities.
We expect our primary sources of liquidity to be cash flows from our investment portfolio, including cash earnings on our investments, cash flows from business activities, liquidation proceeds from distressed assets, 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.
Our current debt financing strategy is to finance our assets where we believe such borrowing is prudent, appropriate and available. We have made collateralized borrowings in the form of sales of assets under agreements to repurchase, mortgage loan participation purchase and sale agreements and notes payable. More recently, we have secured term financing for our MSRs and a portion of our CRT Agreements which has allowed us to more closely match the term of our borrowings to the expected lives of the assets securing those borrowings.
Because a significant portion of our current debt facilities consists of short-term borrowings, we expect to 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 of March 31, 2019 and December 31, 2018, we financed our investments in MBS, mortgage loans acquired for sale at fair value, mortgage loans at fair value, mortgage loans at fair value held by a VIE, MSRs, ESS, REO and CRT Agreement assets with sales under agreements to repurchase, mortgage loan participation purchase and sale agreements, notes payable, asset sold to PFSI under agreement to repurchase and asset-backed financing. Our leverage ratio, defined as all borrowings divided by shareholders’ equity at the date presented, was 3.29 and 3.89 at March 31, 2019 and December 31, 2018, respectively.
Our repurchase agreements represent the sales of assets together with agreements for us to buy back the assets at a later date. Following is a summary of the activities in our repurchase agreements financing:
Average balance outstanding
Maximum daily balance outstanding
Ending balance
3,409,440
The difference between the maximum and average daily amounts outstanding is primarily due to timing of loan purchases and sales in our correspondent acquisition business. The total facility size of our assets sold under agreements to repurchase was approximately $7.8 billion at March 31, 2019.
As discussed above, all of our repurchase agreements, and mortgage loan participation purchase and sale agreements have short-term maturities:
The transactions relating to mortgage loans and REO under agreements to repurchase generally provide for terms of approximately one year.
The transactions relating to mortgage 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.
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:
profitability at the Company for at least one (1) of the previous two consecutive fiscal quarters, and at the Company and our Operating Partnership over the prior three (3) calendar quarters;
a minimum of $40 million in unrestricted cash and cash equivalents among the Company and/or our subsidiaries; a minimum of $40 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; and a minimum of $10 million in unrestricted cash and cash equivalents at each of PMC and PMH;
a minimum tangible net worth for the Company of $860 million; a minimum tangible net worth for our Operating Partnership of $860 million; a minimum tangible net worth for PMH of $250 million; and a minimum tangible net worth for PMC of $150 million;
a maximum ratio of total liabilities to tangible net worth of less than 10:1 for PMC and PMH and 5:1 for the Company and our Operating Partnership; and
at least two warehouse or repurchase facilities that finance amounts and assets similar to those being financed under our existing debt financing agreements.
Although these financial covenants limit the amount of indebtedness we may incur and impact our liquidity through minimum cash reserve requirements, we believe that these covenants currently provide us with sufficient flexibility to successfully operate our business and obtain the financing necessary to achieve that purpose.
PLS is also subject to various financial covenants, both as a borrower under its own financing arrangements and as our servicer under certain of our debt financing agreements. The most significant of these financial covenants currently include the following:
positive net income for at least one (1) of the previous two consecutive fiscal quarters, measured quarterly and as of the end of each fiscal quarter;
a minimum in unrestricted cash and cash equivalents of $40 million;
a minimum tangible net worth of $500 million; and
a maximum ratio of total liabilities to tangible net worth of 10:1.
In addition to the financial covenants imposed upon us and PLS under our debt financing agreements, we and/or PLS, as applicable, are also subject to liquidity and net worth requirements established by FHFA for Agency sellers/servicers and Ginnie Mae for single-family issuers. FHFA and Ginnie Mae have established minimum liquidity and net worth requirements for approved non-depository single-family sellers/servicers in the case of FHFA, and for approved single-family issuers in the case of Ginnie Mae, as summarized below:
A minimum net worth of a base of $2.5 million plus 25 basis points of UPB for total 1-4 unit residential mortgage loans serviced.
A tangible net worth/total assets ratio greater than or equal to 6%.
Liquidity equal to or exceeding 3.5 basis points multiplied by the aggregate UPB of all mortgages secured by 1-4 unit residential properties serviced for Freddie Mac, Fannie Mae and Ginnie Mae (“Agency Mortgage Servicing”) plus 200 basis points multiplied by the sum of nonperforming (90 or more days delinquent) Agency Mortgage Servicing that exceed 6% of Agency Mortgage Servicing.
In the case of PLS, liquidity equal to the greater of $1.0 million or 0.10% (10 basis points) of its outstanding Ginnie Mae single-family securities, which must be met with cash and cash equivalents.
In the case of PLS, net worth equal to $2.5 million plus 0.35% (35 basis points) of its outstanding Ginnie Mae single-family obligations.
We and/or PLS, as applicable, are obligated to maintain these financial covenants pursuant to our MSR financing agreements.
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.
Our Manager continues to explore a variety of additional means of financing our growth, including debt financing through bank warehouse lines of credit, repurchase agreements, term financing, securitization transactions and additional equity offerings. However, there can be no assurance as to how much additional financing capacity such efforts will produce, what form the financing will take or that such efforts will be successful.
Off-Balance Sheet Arrangements
As of March 31, 2019, we have not entered into any off-balance sheet arrangements.
Contractual Obligations
As of March 31, 2019, we had contractual obligations aggregating to $8.9 billion comprised of borrowings, interest expense on long term debt from our Exchangeable Notes and asset-backed financing of a VIE, and commitments to purchase mortgage loans from correspondent sellers. Payment obligations under these agreements, including expected interest payments on long-term debt, are summarized below:
.
Payments due by period
Contractual obligations
Less than
1 year
1 - 3
years
3 - 5
More
than
5 years
Commitments to purchase mortgage loans from
correspondent sellers
Face amount of firm commitment to purchase CRT
Short‒term debt
4,378,412
Long‒term debt
1,297,753
302,023
Interest expense on long term debt (1)
291,770
54,630
93,638
49,529
93,973
8,892,064
7,357,171
343,638
795,259
395,996
Interest expense on long term debt includes interest for the Asset-backed financing of a VIE, the Exchangeable Notes and the Term Notes.
All debt financing arrangements that matured between March 31, 2019 and the date of this Report have been renewed, extended or replaced.
The amount at risk (the fair value of the assets pledged plus the related margin deposit, less the amount advanced by the counterparty and accrued interest) relating to our assets sold under agreements to repurchase is summarized by counterparty below as of March 31, 2019:
399,548
248,495
76,692
Morgan Stanley Bank, N.A.
982,099
82
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 mortgage loans acquired for sale. We believe that such assets’ fair values respond primarily to changes in the market interest rates for comparable recently-originated mortgage loans. Our other market-risk assets are a substantial portion of our investments and are primarily comprised of distressed mortgage loans, MSRs, ESS, CRT Agreements and MBS. We believe that the fair values of MSRs, ESS and MBS also respond primarily to changes in the market interest rates for comparable mortgage loans or yields on MBS. We believe that the fair values of our investment in distressed mortgage loans respond primarily to changes in the fair value of the real estate securing such loans.
The following sensitivity analyses are limited in that they were performed at a particular point in time; only contemplate the movements in the indicated variables; do not incorporate changes to other variables; are subject to the accuracy of various models and assumptions used; and do not incorporate other factors that would affect our overall financial performance in such scenarios, including operational adjustments made by management to account for changing circumstances. For these reasons, the following estimates should not be viewed as earnings forecasts.
The following table summarizes the estimated change in fair value of our mortgage-backed securities as of March 31, 2019, given several hypothetical (instantaneous) changes in interest rates and parallel shifts in the yield curve:
Interest rate shift in basis points
-200
-75
-50
(dollar in thousands)
2,646,800
2,638,441
2,627,519
2,533,636
2,501,443
2,316,328
Change in fair value:
57,694
49,335
38,413
(55,470
(87,663
(272,778
1.9%
1.5%
(2.1)%
(3.4)%
(10.5)%
The following tables summarize the estimated change in fair value of MSRs as of March 31, 2019, given several shifts in pricing spreads, prepayment speed and annual per-loan cost of servicing:
Pricing spread shift in %
-20%
-10%
-5%
+5%
+10%
+20%
1,214,675
1,185,099
1,170,837
1,143,304
1,130,013
1,104,332
57,767
28,191
13,928
(13,604
(26,895
(52,576
5.0%
2.4%
1.2%
(1.2)%
(2.3)%
(4.5)%
Prepayment speed shift in %
1,269,600
1,210,509
1,183,075
1,131,925
1,108,047
1,063,336
112,652
53,601
26,167
(24,983
(48,861
(93,573
4.6%
2.3%
(2.2)%
(4.2)%
(8.1)%
Per-loan servicing cost shift in %
1,189,513
1,173,211
1,165,059
1,148,757
1,140,606
1,124,303
32,605
16,302
8,151
(8,151
(16,302
(32,605
2.8%
0.7%
(0.7)%
(1.4)%
(2.8)%
Excess servicing spread
The following tables summarize the estimated change in fair value of our ESS as of March 31, 2019, given several shifts in pricing spreads and prepayment speed:
210,894
207,949
206,505
203,675
202,288
199,566
5,813
2,868
1,424
(1,406
(2,793
(5,515
(2.7)%
225,659
214,934
209,905
200,451
196,004
187,620
20,578
9,583
4,824
(4,630
(9,077
(17,461
10.0%
4.8%
(4.4)%
(8.5)%
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 Agreements given several shifts in pricing spread:
Pricing spread shift in basis points
-100
-25
1,285,536
1,259,959
1,247,466
1,223,053
1,211,125
1,187,810
50,371
24,794
12,301
(12,113
(24,040
(47,355
4.1%
2.0%
1.0%
(1.0)%
(2.0)%
(3.8)%
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 Agreements given several shifts:
Property value shift in %
-15%
5%
10%
15%
1,217,033
1,226,210
1,232,344
1,238,222
1,238,753
1,238,101
(18,979
(9,803
(3,668
2,210
2,741
2,088
(1.5)%
(0.8)%
(0.3)%
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 firm commitment to purchase CRT securities given several shifts in pricing spread:
119,283
99,206
89,415
70,311
60,991
42,798
39,499
19,421
9,631
(9,474
(18,794
(36,986
49.5%
24.3%
12.1%
(11.9)%
(23.6)%
(46.4)%
84
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 Firm commitment to purchase CRT securities giving several shifts:
64,142
72,321
77,134
81,227
81,908
82,006
(15,643
(7,463
(2,650
1,442
2,124
2,222
(19.6)%
(9.4)%
(3.3)%
1.8%
2.7%
Mortgage Loans at Fair Value
The following table summarizes the estimated change in fair value of our mortgage loans at fair value held by VIE as of March 31, 2019, net of the effect of changes in fair value of the related asset-backed financing of the VIE at fair value, given several hypothetical (instantaneous) changes in interest rates and parallel shifts in the yield curve:
289,735
289,818
289,768
289,234
289,055
288,075
183
266
(318
(497
(1,477
(0.1)%
(0.2)%
(0.5)%
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.
Internal Control over Financial Reporting
There has been no change in our internal control over financial reporting during the quarter ended March 31, 2019 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
Item 1. Legal Proceedings
From time to time, we may be involved in various legal actions, claims and proceedings arising in the ordinary course of business. As of March 31, 2019, we were not involved in any material legal actions, claims or proceedings.
Item 1A. Risk Factors
There are no material changes from the risk factors set forth under Item 1A. “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2018, filed with the SEC on February 26, 2019.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
There were no sales of unregistered equity securities during the quarter ended March 31, 2019.
The following table provides information about our common share repurchases during the quarter ended March 31, 2019:
Period
number of
purchased
price paid
per share
Total number of
purchased as
part of publicly
announced plans
or programs (1)
available for
future share
repurchases
under the
plans or
programs (1)
January 1, 2019 – March 31, 2019
83,375
During 2015, our board of trustees authorized a common share repurchase program. Under the program, as amended, we may repurchase up to $300 million of our outstanding common shares. Under the program, we have discretion to determine the dollar amount of common shares to be repurchased and the timing of any repurchases in compliance with applicable law and regulation. The program does not have an expiration date. Amounts presented reflect balances as of the end of the applicable period.
Item 3. Defaults Upon Senior Securities
None
Item 4. Mine Safety Disclosures
Not applicable
Item 5. Other Information
Item 6. Exhibits
Incorporated by Reference from the
Below-Listed Form (Each Filed under SEC
File Number 14-64423)
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
Second Amended and Restated Bylaws of PennyMac Mortgage Investment Trust
8-K
March 16, 2018
Articles Supplementary classifying and designating the 8.125% Series A Fixed-to-Floating Rate Cumulative Redeemable Preferred Shares of Beneficial Interest.
8-A
March 7, 2017
3.4
Articles Supplementary classifying and designating the 8.00% Series B Fixed-to-Floating Rate Cumulative Redeemable Preferred Shares of Beneficial Interest.
June 30, 2017
10.1#
Amendment Number Two to the Amended and Restated Master Repurchase Agreement, dated as of May 1, 2018, by and among PennyMac Corp., PennyMac Loan Services, LLC and Citibank, N.A.
August 7, 2018
10.2#
Amendment Number Three to the Amended and Restated Master Repurchase Agreement, dated as of May 9, 2018, by and among PennyMac Corp. PennyMac Loan Services, LLC, and Citibank, N.A.
10.3#
Amendment Number Four to the Amended and Restated Master Repurchase Agreement, dated as of May 14, 2018, by and among PennyMac Corp., PennyMac Operating Partnership, L.P. and PennyMac Loan Services, LLC and Citibank, N.A.
May 18, 2018
10.4#
Amendment No. 13 to Mortgage Loan Participation Purchase and Sale Agreement, dated as of May 23, 2017, among Bank of America, N.A., PennyMac Corp., PennyMac Mortgage Investment Trust and PennyMac Operating Partnership, L.P.
August 8, 2017
10.5#
Master Repurchase Agreement, dated as of July 9, 2014, among Bank of America, N.A., PennyMac Operating Partnership, L.P. and PennyMac Mortgage Investment Trust.
July 14, 2014
10.6#
Amendment Number One to Second Amended and Restated Loan and Security Agreement, dated as of March 2, 2018, by and among PennyMac Corp., PennyMac Holdings, LLC and Citibank, N.A.
May 7, 2018
10.7#
Amendment Number Two to the Second Amended and Restated Loan and Security Agreement, dated as of May 1, 2018, by and among PennyMac Corp., PennyMac Holdings, LLC and Citibank, N.A.
10.8#
Amendment Number Three to the Second Amended and Restated Loan and Security Agreement, dated as of May 9, 2018, by and among PennyMac Corp., PennyMac Holdings, LLC and Citibank, N.A.
10.9#
Amendment Number Four to the Second Amended and Restated Loan and Security Agreement, dated as of May 14, 2018, by and among PennyMac Holdings, LLC, PennyMac Corp. and Citibank, N.A.
10.10#
Amendment Number Five to the Second Amended and Restated Loan and Security Agreement, dated as of June 8, 2018, by and among PennyMac Corp., PennyMac Holdings, LLC and Citibank, N.A.
10.11
Amendment Number Twelve to the Master Repurchase Agreement, dated as of August 24, 2018, among PennyMac Corp., PennyMac Operating Partnership, L.P., Morgan Stanley Bank N.A. and Morgan Stanley Mortgage Capital Holdings LLC.
*
10.12
HELOC Flow Purchase and Servicing Agreement, dated as of February 25, 2019, by and between PennyMac Loan Services, LLC and PennyMac Corp.
10.13
Third Amended and Restated Master Repurchase Agreement, dated as of March 14, 2019, by and among Credit Suisse First Boston Mortgage Capital LLC, Credit Suisse AG, Cayman Islands Branch, Alpine Securitzation LTD, PennyMac Corp., PennyMac Holdings, LLC, PennyMac Operating Partnership, L.P., PMC REO Financing Trust, PMC REO Trust 2015-1, and PennyMac Mortgage Investment Trust.
10.14
Amendment No. 1 to Third Amended and Restated Master Repurchase Agreement, dated as of April 26, 2019, by and among Credit Suisse First Boston Mortgage Capital LLC, Credit Suisse AG, Alpine Securitization LTD, PennyMac Holdings, LLC, PennyMac Corp., PennyMac Operating Partnership, L.P., PMC REO Financing Trust, PMC REO Trust 2015-1 and PennyMac Mortgage Investment Trust.
10.15
Third Amended and Restated Guaranty, dated as of March 14, 2019, by PennyMac Mortgage Investment Trust and PennyMac Operating Partnership, L.P. in favor of Credit Suisse First Boston Mortgage Capital LLC.
10.16
Amendment No. 2 to Second Amended and Restated Master Repurchase Agreement, dated as of April 26, 2019, by and among Credit Suisse First Boston Mortgage Capital LLC, Credit Suisse AG, Alpine Securitization LTD, PennyMac Operating Partnership, L.P. and PennyMac Mortgage Investment Trust.
10.17†
PenyMac Mortgage Investment Trust 2009 Equity Incentive Plan Form of Restricted Share Unit Award Agreement for Non-Employee Trustees (2019).
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 Andrew S. Chang 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 Andrew S. Chang pursuant to Rule 13a-14(b) and 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101
Interactive data files pursuant to Rule 405 of Regulation S-T: (i) the Consolidated Balance Sheets as of March 31, 2018 and December 31, 2018 (ii) the Consolidated Statements of Income for the quarters ended March 31, 2019 and 2018, (iii) the Consolidated Statements of Changes in Stockholders’ Equity for the quarters ended March 31, 2019 and 2018, (iv) the Consolidated Statements of Cash Flows for the quarters ended March 31, 2019 and 2018 and (v) the Notes to the Consolidated Financial Statements.
#
Refiled herewith to provide an updated hyperlink to the appropriate prior filing.
Filed herewith.
The certifications attached hereto as Exhibits 32.1 and 32.2 are furnished to the SEC pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and shall not be deemed filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, nor shall it be deemed incorporated by reference in any filing under the Securities Act of 1933, except as shall be expressly set forth by specific reference in such filing.
†
Indicates management contract or compensatory plan or arrangement.
88
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Pennymac Mortgage Investment Trust
(Registrant)
Dated: May 3, 2019
By:
/S/ David A. Spector
David A. Spector
President and Chief Executive Officer
(Principal Executive Officer)
/S/ Andrew S. Chang
Andrew S. Chang
Senior Managing Director and Chief Financial Officer
(Principal Financial Officer)