Table of Contents
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 June 30, 2022
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: 001-38727
PennyMac Financial Services, Inc.
(Exact name of registrant as specified in its charter)
Delaware
83-1098934
(State or other jurisdiction of
(IRS Employer
incorporation or organization)
Identification No.)
3043 Townsgate Road, Westlake Village, California
91361
(Address of principal executive offices)
(Zip Code)
(818) 224-7442
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
Common Stock, $0.0001 par value
PFSI
New York Stock Exchange
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer ☒
Accelerated filer ☐
Non-accelerated filer ☐
Smaller reporting company ☐
Emerging growth company ☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date.
Class
Outstanding at August 2, 2022
52,464,912
PENNYMAC FINANCIAL SERVICES, INC.
FORM 10-Q
June 30, 2022
TABLE OF CONTENTS
Page
Special Note Regarding Forward-Looking Statements
3
PART I. FINANCIAL INFORMATION
5
Item 1.
Financial Statements (Unaudited):
Consolidated Balance Sheets
Consolidated Statements of Income
6
Consolidated Statements of Changes in Stockholders’ 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
59
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
77
Item 4.
Controls and Procedures
79
PART II. OTHER INFORMATION
80
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
81
2
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:
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, 2021, filed with the Securities and Exchange Commission (“SEC”) on February 23, 2022.
Factors that could cause actual results to differ materially from historical results or those anticipated include, but are not limited to:
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.
4
Item 1. Financial Statements
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
June 30,
December 31,
2022
2021
(in thousands, except share amounts)
ASSETS
Cash
$
1,415,396
340,069
Short-term investment at fair value
4,961
6,873
Loans held for sale at fair value (includes $3,270,508 and $9,135,577 pledged to creditors)
3,586,810
9,742,483
Derivative assets
103,901
333,695
Servicing advances, net (includes valuation allowance of $66,143 and $120,940; $279,664 and $232,107 pledged to creditors)
570,822
702,160
Mortgage servicing rights at fair value (includes $5,163,544 and $3,856,791 pledged to creditors)
5,217,167
3,878,078
Operating lease right-of-use assets
82,078
89,040
Investment in PennyMac Mortgage Investment Trust at fair value
1,037
1,300
Receivable from PennyMac Mortgage Investment Trust
43,234
40,091
Loans eligible for repurchase
2,778,768
3,026,207
Other (includes $25,547 and $45,294 pledged to creditors)
468,081
616,616
Total assets
14,272,255
18,776,612
LIABILITIES
Assets sold under agreements to repurchase
2,441,816
7,292,735
Mortgage loan participation purchase and sale agreements
502,116
479,845
Obligations under capital lease
—
3,489
Notes payable secured by mortgage servicing assets
1,793,260
1,297,622
Unsecured senior notes
1,778,055
1,776,219
Derivative liabilities
42,702
22,606
Mortgage servicing liabilities at fair value
2,337
2,816
Accounts payable and accrued expenses
317,998
359,413
Operating lease liabilities
102,756
110,003
Payable to PennyMac Mortgage Investment Trust
98,991
228,019
Payable to exchanged Private National Mortgage Acceptance Company, LLC unitholders under tax receivable agreement
27,014
30,530
Income taxes payable
885,721
685,262
Liability for loans eligible for repurchase
Liability for losses under representations and warranties
39,336
43,521
Total liabilities
10,810,870
15,358,287
Commitments and contingencies – Note 16
STOCKHOLDERS’ EQUITY
Common stock—authorized 200,000,000 shares of $0.0001 par value; issued and outstanding, 52,938,854 and 56,867,202 shares, respectively
Additional paid-in capital
125,396
Retained earnings
3,461,380
3,292,923
Total stockholders' equity
3,461,385
3,418,325
Total liabilities and stockholders' equity
The accompanying notes are an integral part of these consolidated financial statements.
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
Quarter ended June 30,
Six months ended June 30,
(in thousands, except earnings per share)
Revenues
Net gains on loans held for sale at fair value:
From non-affiliates
227,319
594,196
535,430
1,362,785
From PennyMac Mortgage Investment Trust
(4,752)
(11,548)
(14,404)
(25,796)
222,567
582,648
521,026
1,336,989
Loan origination fees:
37,541
90,163
103,057
186,008
2,404
7,128
4,746
15,320
39,945
97,291
107,803
201,328
Fulfillment fees from PennyMac Mortgage Investment Trust
20,646
54,020
37,400
114,855
Net loan servicing fees:
Loan servicing fees:
259,338
208,275
504,147
419,028
20,335
20,015
41,423
39,108
Other
22,677
31,731
48,038
61,330
302,350
260,021
593,608
519,466
Change in fair value of mortgage servicing rights and mortgage servicing liabilities
112,102
(336,268)
325,013
(112,805)
Change in fair value of excess servicing spread financing payable to PennyMac Mortgage Investment Trust
(1,037)
Mortgage servicing rights hedging results
(176,005)
91,118
(393,865)
(351,033)
(63,903)
(245,150)
(68,852)
(464,875)
Net loan servicing fees
238,447
14,871
524,756
54,591
Net interest expense:
Interest income:
49,864
80,797
103,746
162,491
387
162,878
Interest expense:
To non-affiliates
71,127
102,431
148,434
208,864
To PennyMac Mortgage Investment Trust
1,280
210,144
Net interest expense
(21,263)
(21,634)
(44,688)
(47,266)
Management fees from PennyMac Mortgage Investment Trust
7,910
11,913
16,027
20,362
Change in fair value of investment in and dividends received from PennyMac Mortgage Investment Trust
(194)
144
(192)
545
Results of real estate acquired in settlement of loans
810
540
1,353
1,320
2,647
2,459
5,534
4,214
Total net revenues
511,515
742,252
1,169,019
1,686,938
Expenses
Compensation
198,192
265,067
443,739
523,896
Loan origination
44,931
75,675
120,264
163,067
Technology
34,621
34,236
69,407
67,908
Professional services
20,793
24,834
40,896
38,120
Marketing and advertising
13,007
10,213
35,410
16,878
Occupancy and equipment
9,371
9,029
18,840
18,067
Servicing
3,051
31,290
1,805
50,473
10,023
12,393
26,612
23,006
Total expenses
333,989
462,737
756,973
901,415
Income before provision for income taxes
177,526
279,515
412,046
785,523
Provision for income taxes
48,363
75,286
109,290
204,426
Net income
129,163
204,229
302,756
581,097
Earnings per share
Basic
2.38
3.10
5.51
8.61
Diluted
2.28
2.94
5.23
8.16
Weighted average shares outstanding
54,167
65,890
54,995
67,493
56,642
69,399
57,892
71,248
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (UNAUDITED)
Quarter ended June 30, 2022
Additional
Total
Number of
Par
paid-in
Retained
stockholders'
shares
value
capital
earnings
equity
(in thousands)
Balance, March 31, 2022
55,342
3,441,597
3,441,603
Stock-based compensation
23
15,352
Issuance of common stock in settlement of directors' fees
1
51
Repurchase of common stock
(2,427)
(1)
(15,403)
(98,241)
(113,645)
Common stock dividend ($0.20 per share)
(11,139)
Balance, June 30, 2022
52,939
Quarter ended June 30, 2021
Balance, March 31, 2021
66,961
762,585
2,704,822
3,467,414
96
10,621
50
(2,574)
(154,919)
(154,920)
(13,565)
Balance, June 30, 2021
64,484
618,337
2,895,486
3,513,829
Six months ended June 30, 2022
Balance, December 31, 2021
56,867
817
17,823
102
(4,747)
(143,321)
(111,735)
(255,057)
Common stock dividends ($0.40 per share)
(22,564)
Six months ended June 30, 2021
Balance, December 31, 2020
70,906
1,047,052
2,342,329
3,389,388
803
14,622
101
(7,227)
(443,438)
(443,439)
(27,940)
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Cash flow from operating activities
Adjustments to reconcile net income to net cash provided by operating activities:
Net gains on loans held for sale at fair value
(521,026)
(1,336,989)
Change in fair value of mortgage servicing rights, mortgage servicing liabilities and excess servicing spread
(325,013)
113,842
393,865
351,033
Capitalization of interest and advances on loans held for sale
(2,817)
(1,925)
Accrual of interest on excess servicing spread financing payable to PennyMac Mortgage Investment Trust
Amortization of debt issuance costs
10,133
13,977
Change in fair value of investment in common shares of PennyMac Mortgage Investment Trust
263
(475)
Results of real estate acquired in settlement in loans
(1,353)
(1,320)
Stock-based compensation expense
24,223
19,771
Reversal of provision for servicing advance losses
(51,293)
(33,590)
Impairment of capitalized software
728
Depreciation and amortization
14,375
14,967
Amortization of right-of-use assets
7,755
6,918
Purchase of loans held for sale from PennyMac Mortgage Investment Trust
(23,982,890)
(35,474,697)
Origination of loans held for sale
(15,128,696)
(27,731,285)
Purchase of loans held for sale from non-affiliates
(1,215,388)
(2,664,336)
Purchase of loans from Ginnie Mae securities and early buyout investors
(4,752,678)
(11,562,768)
Sale to non-affiliates and principal payments of loans held for sale
50,841,788
79,007,900
Sale of loans held for sale to PennyMac Mortgage Investment Trust
298,862
Repurchase of loans subject to representations and warranties
(45,176)
(43,914)
Decrease in servicing advances
128,940
12,543
(Increase) decrease in receivable from PennyMac Mortgage Investment Trust
(3,998)
18,058
Sale of real estate acquired in settlement of loans
9,937
9,503
Decrease in other assets
134,692
63,006
(Decrease) increase in accounts payable and accrued expenses
(54,033)
61,121
Decrease in operating lease liabilities
(8,040)
(8,265)
Decrease in payable to PennyMac Mortgage Investment Trust
(140,615)
(28,584)
Payments to exchanged Private National Mortgage Acceptance Company, LLC unitholders under tax receivable agreement
(3,516)
(3,350)
Increase (decrease) in income taxes payable
200,459
(52,648)
Net cash provided by operating activities
6,131,516
1,331,598
Statements continue on the next page
(Continued) CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Cash flow from investing activities
Decrease in short-term investment
1,912
11,497
Net change in assets purchased from PMT under agreement to resell
80,862
Net settlement of derivative financial instruments used for hedging of mortgage servicing rights
(574,109)
(345,621)
Acquisition of capitalized software
(39,267)
(21,594)
Decrease in margin deposits
188,176
134,666
Purchase of furniture, fixtures, equipment and leasehold improvements
(4,089)
(5,049)
Net cash used in investing activities
(427,377)
(145,239)
Cash flow from financing activities
Sale of assets under agreements to repurchase
42,087,498
69,437,269
Repurchase of assets sold under agreements to repurchase
(46,938,843)
(70,839,012)
Issuance of mortgage loan participation purchase and sale certificates
9,556,801
12,508,356
Repayment of mortgage loan participation purchase and sale certificates
(9,533,871)
(12,517,580)
Repayment of obligations under capital lease
(3,489)
(4,187)
Issuance of notes payable secured by mortgage servicing assets
500,000
Issuance of unsecured senior notes
650,000
Repayment of excess servicing spread financing
(134,624)
Payment of debt issuance costs
(12,892)
(18,648)
Issuance of common stock pursuant to exercise of stock options
1,380
3,397
Payment of withholding taxes relating to stock-based compensation
(7,780)
(8,546)
Payment of dividend to holders of common stock
Net cash used in financing activities
(4,628,817)
(1,394,954)
Net increase (decrease) in cash and restricted cash
1,075,322
(208,595)
Cash and restricted cash at beginning of period
340,093
532,781
Cash and restricted cash at end of period
1,415,415
324,186
Cash and restricted cash at end of period are comprised of the following:
324,158
Restricted cash included in Other assets
19
28
Supplemental cash flow information:
Cash paid for interest
154,745
208,015
Cash (refunds received) paid for income taxes, net
(91,169)
257,074
Non-cash investing activities:
Mortgage servicing rights resulting from loan sales
1,014,555
953,895
Operating right-of-use assets recognized
793
7,813
Non-cash financing activities:
Mortgage servicing liabilities resulting from loan sales
64,383
Issuance of Excess servicing spread payable to PennyMac Mortgage Investment Trust pursuant to a recapture agreement
557
9
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Note 1—Organization
PennyMac Financial Services, Inc. (“PFSI,” or the “Company”) is a holding corporation and its primary assets are equity interests in Private National Mortgage Acceptance Company, LLC (“PNMAC”). The Company is the managing member of PNMAC, and it operates and controls all of the businesses and consolidates the financial results of PNMAC and its subsidiaries.
PNMAC is a Delaware limited liability company which, through its subsidiaries, engages in mortgage banking and investment management activities. PNMAC’s mortgage banking activities consist of residential mortgage loan production and servicing. PNMAC’s investment management activities and a portion of its loan servicing activities are conducted on behalf of PennyMac Mortgage Investment Trust (“PMT”), a publicly-traded real estate mortgage investment trust that invests primarily in mortgage-related assets. PNMAC’s primary wholly owned subsidiaries are:
PLS is approved as a seller/servicer of mortgage loans by the Federal National Mortgage Association (“Fannie Mae”) and the Federal Home Loan Mortgage Corporation (“Freddie Mac”) and as an issuer of securities guaranteed by the Government National Mortgage Association (“Ginnie Mae”). PLS is a licensed Federal Housing Administration (“FHA”) Nonsupervised Title II Lender with the U.S. Department of Housing and Urban Development (“HUD”) and a lender/servicer with the U.S. Department of Veterans Affairs (“VA”) and U.S. Department of Agriculture (“USDA”) (each of the above an “Agency” and collectively the “Agencies”).
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 Accounting Standards Codification for interim financial information and with the Securities and Exchange Commission’s instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, these consolidated financial statements and notes do not include all of the information required by GAAP for complete financial statements. This interim consolidated information should be read together with the Company’s Annual Report on Form 10-K for the year ended December 31, 2021.
The accompanying consolidated financial statements reflect all normal recurring adjustments necessary to present fairly the financial position, income, and cash flows for the interim periods presented, but are not necessarily indicative of income to be anticipated for the full year ending December 31, 2022. Intercompany accounts and transactions have been eliminated.
Preparation of financial statements in compliance with GAAP requires management to make judgments and estimates that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements, and revenues and expenses during the reporting period. Actual results will likely differ from those estimates.
Note 3—Concentration of Risk
A portion of the Company’s activities relate to PMT. Revenues generated from PMT (generally comprised of gains on loans held for sale, loan origination and fulfillment fees, loan servicing fees, change in fair value of excess servicing spread financing (“ESS”), net interest, management fees, change in fair value of investment in and dividends received from PMT, and expense allocations received from PMT) totaled 9% and 11% of total net revenue for the quarters ended June 30, 2022 and 2021, respectively, and 8% and 10% for the six months ended June 30, 2022 and 2021, respectively. The Company also purchased 66% and 54% of its newly originated loan production from PMT during the quarters ended June 30, 2022 and 2021, respectively, and 59% and 54% during the six months ended June 30, 2022 and 2021, respectively.
Note 4—Related Party Transactions
Transactions with PMT
Operating Activities
Mortgage Loan Production Activities and Mortgage Servicing Rights (“MSRs”) Recapture
The Company sells newly originated loans to PMT under a mortgage loan purchase agreement. The Company has typically utilized the mortgage loan purchase agreement for the purpose of selling to PMT conforming balance non-government insured or guaranteed loans, as well as prime jumbo residential mortgage loans.
MSR Recapture
Pursuant to the terms of an MSR recapture agreement by and between the Company and PMT, which was amended and restated for a term of five years effective July 1, 2020, if the Company refinances mortgage loans for which PMT holds the MSRs, the Company is generally required to transfer and convey to PMT cash in an amount equal to:
The “recapture rate” means, during each month, the ratio of (i) the aggregate unpaid principal balance of all recaptured mortgage loans, to (ii) the aggregate unpaid principal balance of all mortgage loans for which the Company held the MSRs and that were refinanced or otherwise paid off in such month. The Company has also agreed to allocate sufficient resources to target a recapture rate of at least 15%.
Fulfillment Services
The Company provides PMT with certain mortgage banking services, including fulfillment and disposition-related services, for which it receives a monthly fulfillment fee. Pursuant to the terms of a mortgage banking services agreement, the fulfillment fees shall not exceed the following:
11
Sourcing Fees
PMT does not hold the Ginnie Mae approval required to issue Ginnie Mae mortgage-backed securities (“MBS”) and act as a servicer. Accordingly, under the mortgage banking services agreement, the Company purchases mortgage loans underwritten in accordance with the Ginnie Mae MBS Guide “as is” and without recourse of any kind from PMT at PMT’s cost less an administrative fee plus accrued interest and a sourcing fee ranging from one to two basis points, generally based on the average number of calendar days the loans are held by PMT before being purchased by the Company.
While the Company purchases these mortgage loans “as is” and without recourse of any kind from PMT, where the Company has a claim for repurchase, indemnity or otherwise against a correspondent seller, it is entitled, at its sole expense, to pursue any such claim through or in the name of PMT.
Following is a summary of loan production activities, including recapture, between the Company and PMT:
Net losses on loans held for sale to PMT (primarily cash)
(1,429)
(2,820)
Mortgage servicing rights and excess servicing spread recapture incurred
(3,323)
(11,584)
Sale of loans held for sale to PMT
39,824
Tax service fees earned from PMT included in Loan origination fees
Fulfillment fee revenue
Unpaid principal balance ("UPB") of loans fulfilled for PMT subject to fulfillment fees
10,323,700
30,479,292
20,092,962
64,241,132
Sourcing fees included in cost of loans purchased from PMT
1,063
1,630
2,359
3,368
Unpaid principal balance of loans purchased from PMT
10,634,209
16,297,216
23,381,988
33,856,791
Loan Servicing
The Company and PMT have entered into a loan servicing agreement (the “Servicing Agreement”), pursuant to which the Company provides subservicing for PMT’s MSRs and loans held for sale (prime servicing) and its portfolio of residential mortgage loans purchased with credit deterioration (special servicing). The Servicing Agreement provides for servicing fees of per-loan monthly amounts based on the delinquency, bankruptcy and/or foreclosure status of the serviced loan or the real estate acquired in settlement of loans (“REO”). The Company also remains entitled to customary ancillary income and market-based fees and charges relating to loans it services for PMT. These include boarding and deboarding fees, liquidation and disposition fees, assumption, modification and origination fees and a percentage of late charges.
Prime Servicing
12
Special Servicing (Distressed loans)
Following is a summary of loan servicing fees earned from PMT:
Loan type serviced:
Loans acquired for sale
258
630
522
1,173
Loans at fair value
106
316
217
Mortgage servicing rights
19,971
19,305
40,585
37,718
The Servicing Agreement expires on June 30, 2025.
Investment Management Activities
The Company has a management agreement with PMT (the “Management Agreement”), pursuant to which the Company oversees PMT’s business affairs in conformity with the investment policies that are approved and monitored by its board of trustees, for which PFSI collects a base management fee and may collect a performance incentive fee. The Management Agreement provides that:
The performance incentive fee is equal to the sum of: (a) 10% of the amount by which PMT’s “net income” for the quarter exceeds (i) an 8% return on “equity” plus the “high watermark,” up to (ii) a 12% return on PMT’s “equity”; plus (b) 15% of the amount by which PMT’s “net income” for the quarter exceeds (i) a 12% return on PMT’s “equity” plus the “high watermark,” up to (ii) a 16% return on PMT’s “equity”; plus (c) 20% of the amount by which PMT’s “net income” for the quarter exceeds a 16% return on “equity” plus the “high watermark.”
13
For the purpose of determining the amount of the performance incentive fee:
“Net income” is defined as net income or loss attributable to PMT’s common shares of beneficial interest computed in accordance with GAAP adjusted for certain other non-cash charges determined after discussions between the Company and PMT’s independent trustees and approval by a majority of PMT’s independent trustees.
“Equity” is the weighted average of the issue price per common share of all of PMT’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. 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 the Company 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, and a performance incentive fee is earned.
The base management fee and the performance incentive fee are both receivable quarterly in arrears. The performance incentive fee may be paid in cash or a combination of cash and PMT’s common shares (subject to a limit of no more than 50% paid in common shares), at PMT’s option.
In the event of termination of the Management Agreement between PMT and the Company, the Company 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 the Company, 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 earned from PMT:
Base management
8,648
17,097
Performance incentive
3,265
Expense Reimbursement
Under the Management Agreement, PMT reimburses the Company for its organizational and operating expenses, including third-party expenses, incurred on PMT’s behalf, it being understood that the Company 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 PMT. With respect to the allocation of the Company’s and its affiliates’ personnel compensation, the Company is reimbursed $165,000 per fiscal quarter, such amount to be reviewed annually and not preclude reimbursement for any other services performed by the Company or its affiliates.
PMT is also required to pay its pro rata portion of rent, telephone, utilities, office furniture, equipment, machinery and other office, internal and overhead expenses of the Company and its affiliates required for PMT’s and its subsidiaries’ operations. These expenses are allocated based on the ratio of PMT’s proportion of gross assets compared to all remaining gross assets owned or managed by the Company as calculated at each fiscal quarter end.
14
The Company received reimbursements from PMT for expenses as follows:
Reimbursement of:
Expenses incurred on PMT's behalf, net
2,834
7,804
8,191
9,140
Common overhead incurred by the Company
1,809
1,268
3,673
1,839
165
330
4,808
9,237
12,194
11,309
Payments and settlements during the period (1)
29,562
74,441
69,326
187,182
Investing Activities
Master Repurchase Agreement
On December 19, 2016, the Company, through PLS, entered into a master repurchase agreement with one of PMT’s wholly-owned subsidiaries, PennyMac Holdings, LLC (“PMH”) (the “PMH Repurchase Agreement”), pursuant to which PMH may borrow from the Company for the purpose of financing PMH’s participation certificates representing beneficial ownership in ESS. 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 PNMAC, 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 the first quarter of 2021, PLS repurchased the ESS from PMH at fair market value, effectively terminating the borrowing arrangements allowing PMH to finance its participation certificates representing beneficial ownership in ESS. Such ESS is now included in PLS's participation certificates representing beneficial ownership in ESS and MSRs, which PLS pledges in connection with the GNMA MSR Facility.
PMT Common Stock
The Company owns 75,000 common shares of beneficial interest of PMT.
Following is a summary of investing activities between the Company and PMT:
Interest income relating to Assets purchased from PennyMac Mortgage Investment Trust under agreements to resell
Common shares of beneficial interest of PennyMac Mortgage Investment Trust:
Fair value
Number of shares
75
15
Financing Activities
Spread Acquisition and MSR Servicing Agreements
The Company has a master spread acquisition and MSR servicing agreement with PMT (the “Spread Acquisition Agreement”) pursuant to which the Company may sell to PMT, from time to time, the right to receive participation certificates representing beneficial ownership in ESS arising from Ginnie Mae MSRs acquired by the Company, in which case the Company generally would be required to service or subservice the related mortgage loans for Ginnie Mae.
To the extent the Company refinances any of the mortgage loans relating to the ESS it has issued, the Spread Acquisition Agreement also contains recapture provisions requiring that the Company transfer to PMT, 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 equal to at least 90% of the product of the excess servicing fee rate and the unpaid principal balance of the refinanced mortgage loans, the Company 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 equal 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 the Company 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, the Company may, at its option, settle its obligation to PMT in cash in an amount equal to such fair market value in lieu of transferring such ESS.
During the six months ended June 30, 2021, the Company repaid its outstanding ESS financing through the repurchase of the ESS from PMT.
Following is a summary of financing activities between the Company and PMT:
Six months ended
June 30, 2021
Excess servicing spread financing:
Balance at beginning of period
131,750
Issuance pursuant to recapture agreement
Accrual of interest
Change in fair value
Repayment
Balance at end of period
Recapture incurred pursuant to refinancings by the Company of mortgage loans subject to excess servicing spread financing included in Net gains on loans held for sale at fair value
614
16
Receivable from and Payable to PMT
Amounts receivable from and payable to PMT are summarized below:
Receivable from PMT:
Allocated expenses and expenses incurred on PMT's behalf
12,053
15,431
Fulfillment fees
10,511
Management fees
8,918
Servicing fees
6,725
6,848
Correspondent production fees
6,035
8,894
Payable to PMT:
Amounts advanced by PMT to fund its servicing advances
95,409
212,066
3,582
15,953
Exchanged Private National Mortgage Acceptance Company, LLC Unitholders
On May 8, 2013, the Company entered into a tax receivable agreement with certain former owners of PNMAC that provides for the payment from time to time by the Company to PNMAC’s exchanged unitholders of an amount equal to 85% of the amount of the net tax benefits, if any, that the Company is deemed to realize as a result of (i) increases in tax basis of PNMAC’s assets resulting from exchanges of ownership interests in PNMAC and (ii) certain other tax benefits related to entering into the tax receivable agreement, including tax benefits attributable to payments under the tax receivable agreement.
Although a reorganization in November 2018 eliminated the potential for unitholders to exchange any additional units subject to this tax receivable agreement, the Company continues to be subject to the agreement and will be required to make payments, to the extent any of the tax benefits specified above are deemed to be realized, under the tax receivable agreement to those certain prior owners of PNMAC who effected exchanges of ownership interests in PNMAC for the Company’s common stock before the closing of the reorganization.
The Company has recorded $27.0 million and $30.5 million Payable to exchanged Private National Mortgage Acceptance Company, LLC unitholders under tax receivable agreement as of June 30, 2022 and December 31, 2021, respectively. The Company made $3.5 million of payments under the tax receivable agreement during the quarter and six months ended June 30, 2022 and made $3.4 million of payments during the quarter and six months ended June 30, 2021.
.
17
Note 5—Loan Sales and Servicing Activities
The Company originates or purchases and sells loans in the secondary mortgage market without recourse for credit losses. However, the Company maintains continuing involvement with the loans in the form of servicing arrangements and the liability under representations and warranties it makes to purchasers and insurers of the loans.
The following table summarizes cash flows between the Company and transferees as a result of the sale of loans in transactions where the Company maintains continuing involvement with the loans as servicer:
Cash flows:
Sales proceeds
19,574,766
41,739,700
Servicing fees received (1)
228,834
201,866
433,762
397,648
The following table summarizes the UPB of the loans sold by the Company in transactions when it maintains continuing involvement with the loans as servicer:
UPB of loans outstanding
276,627,961
254,524,015
Delinquencies (1):
30-89 days
8,229,868
6,129,597
90 days or more:
Not in foreclosure
4,937,553
8,399,299
In foreclosure
761,684
715,016
Foreclosed
6,809
6,900
Bankruptcy
1,127,843
1,039,362
Delinquent loans in COVID-19 pandemic-related forbearance plans:
1,186,431
1,020,290
90 days or more
2,346,059
2,550,703
3,532,490
3,570,993
18
The following tables summarize the UPB of the Company’s loan servicing portfolio:
rights owned
Subservicing
loans serviced
Investor:
Non-affiliated entities:
Originated
Purchased
20,683,203
297,311,164
PennyMac Mortgage Investment Trust
226,388,582
Loans held for sale
3,575,712
300,886,876
527,275,458
Delinquent loans (1):
30 days
6,978,732
1,273,934
8,252,666
60 days
1,973,027
215,132
2,188,159
5,211,953
809,369
6,021,322
843,852
77,542
921,394
7,737
11,824
19,561
15,015,301
2,387,801
17,403,102
1,309,018
123,905
1,432,923
628,325
109,758
738,083
603,333
88,208
691,541
2,439,641
431,331
2,870,972
3,671,299
629,297
4,300,596
Custodial funds managed by the Company (2)
5,656,246
2,907,651
8,563,897
December 31, 2021
23,861,358
278,385,373
221,892,142
9,430,766
287,816,139
509,708,281
5,338,545
974,055
6,312,600
1,604,782
190,727
1,795,509
9,001,137
1,750,628
10,751,765
829,494
43,793
873,287
8,017
16,489
24,506
16,781,975
2,975,692
19,757,667
1,261,980
133,655
1,395,635
554,161
81,580
635,741
556,990
89,534
646,524
2,732,089
638,703
3,370,792
3,843,240
809,817
4,653,057
8,485,081
3,823,527
12,308,608
Following is a summary of the geographical distribution of loans included in the Company’s loan servicing portfolio for the top five and all other states as measured by UPB:
State
California
67,505,093
67,317,935
Florida
47,896,679
45,222,233
Texas
44,140,186
42,064,686
Virginia
32,497,446
31,442,370
Maryland
24,673,589
23,922,075
All other states
310,562,465
299,738,982
20
Note 6—Fair Value
Most of the Company’s assets and certain of its liabilities are measured at or based on their fair values. 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 significant inputs used to determine fair value. These levels are:
As a result of the difficulty in observing certain significant valuation inputs affecting “Level 3” fair value assets and liabilities, the Company is required to make judgments regarding these items’ fair values. Different persons in possession of the same facts may reasonably arrive at different conclusions as to the inputs to be applied in valuing these assets and liabilities and their fair values. Such differences may result in significantly different fair value measurements. Likewise, due to the general illiquidity of some of these assets and liabilities, subsequent transactions may be at values significantly different from those reported.
Fair Value Accounting Elections
The Company identified its MSRs, its mortgage servicing liabilities (“MSLs”) and all of its non-cash financial assets to be accounted for at fair value so changes in fair value will be reflected in income as they occur and more timely reflect the results of the Company’s performance. The Company has also identified its ESS financing to be accounted for at fair value as a means of hedging the related MSRs’ fair value risk.
21
Assets and Liabilities Measured at Fair Value on a Recurring Basis
Following is a summary of assets and liabilities that are measured at fair value on a recurring basis:
Level 1
Level 2
Level 3
Assets:
Short-term investment
Loans held for sale at fair value
3,083,257
503,553
Derivative assets:
Interest rate lock commitments
70,685
Forward purchase contracts
61,855
Forward sales contracts
24,499
MBS put options
7,868
Put options on interest rate futures purchase contracts
11,844
Call options on interest rate futures purchase contracts
13,709
Total derivative assets before netting
25,553
94,222
190,460
Netting
(86,559)
Total derivative assets
Mortgage servicing rights at fair value
Investment in PennyMac Mortgage Investment Trust
31,551
3,177,479
5,791,405
8,913,876
Liabilities:
Derivative liabilities:
13,005
89,488
Total derivative liabilities before netting
102,493
108,027
(65,325)
Total derivative liabilities
7,871
45,039
22
8,613,607
1,128,876
323,473
20,485
40,215
7,655
Swaption purchase contracts
1,625
3,141
2,078
5,219
69,980
398,672
(64,977)
13,392
8,683,587
5,330,427
13,962,429
18,007
35,415
53,422
54,702
(32,096)
4,096
25,422
As shown above, all or a portion of the Company’s loans held for sale, Interest Rate Lock Commitments (“IRLCs”), MSRs, ESS and MSLs are measured using Level 3 fair value inputs. Following are roll forwards of assets and liabilities measured at fair value using “Level 3” inputs at either the beginning or the end of the period presented:
Net interest
Mortgage
Loans held
rate lock
servicing
Assets
for sale
commitments (1)
rights
776,590
37,899
4,707,039
5,521,528
Purchases and issuances, net
598,948
145,980
744,928
Capitalization of interest and advances
15,608
Sales and repayments
(129,896)
398,253
Changes in fair value included in income arising from:
Changes in instrument-specific credit risk
(24,394)
Other factors
(8,922)
(167,106)
111,875
(64,153)
(33,316)
(88,547)
Transfers from Level 3 to Level 2
(723,995)
Transfers to real estate acquired in settlement of loans
(386)
Transfers to loans held for sale
48,378
65,151
5,785,871
Changes in fair value recognized during the quarter relating to assets still held at June 30, 2022
(18,079)
158,947
Quarter ended
Liabilities
Mortgage servicing liabilities:
2,564
Changes in fair value included in income
(227)
Changes in fair value recognized during the quarter relating to liabilities still outstanding at June 30, 2022
5,202,065
337,940
3,268,910
8,808,915
6,828,094
351,934
7,180,028
60,439
(3,866,340)
483,362
179,792
332,435
(339,624)
(7,189)
172,603
(4,585,789)
(678,699)
3,818,261
343,610
3,412,648
7,574,519
Changes in fair value recognized during the quarter relating to assets still held at June 30, 2021
74,184
78,170
24
46,026
57,421
(3,356)
100,091
Changes in fair value recognized during the quarter relating to liabilities still outstanding at June 30, 2021
322,193
5,329,147
2,733,726
307,289
3,041,015
47,719
(1,264,888)
(30,210)
(21,318)
(566,483)
324,534
(263,267)
(51,528)
(293,477)
(2,089,966)
2,152
Changes in fair value recognized during the period relating to assets still held at June 30, 2022
(28,700)
360,985
(479)
Changes in fair value recognized during the period relating to liabilities still outstanding at June 30, 2022
25
4,675,169
677,026
2,581,174
7,933,369
11,056,535
829,867
11,886,402
78,844
(4,795,241)
227,946
152,822
(122,421)
30,401
258,347
(7,424,910)
(82)
Transfers of interest rate lock commitments to loans held for sale
(1,316,105)
Changes in fair value recognized during the period relating to assets still held at June 30, 2021
135,823
357,012
Excess
spread
financing
liabilities
45,324
177,074
Issuance of excess servicing spread financing pursuant to a recapture agreement with PennyMac Mortgage Investment Trust
(9,616)
(8,579)
Repayments
Changes in fair value recognized during the period relating to liabilities still outstanding at June 30, 2021
The Company had transfers among the fair value levels arising from the return to salability in the active secondary market of certain loans held for sale and from transfers of IRLCs to loans held for sale at fair value upon purchase or funding.
26
Assets and Liabilities Measured at Fair Value under the Fair Value Option
Net changes in fair values included in income for assets and liabilities carried at fair value as a result of management’s election of the fair value option by income statement line item are summarized below:
Net gains on
Net
loans held
loan
for sale at
fair value
fees
(96,365)
761,841
15,510
422,217
Mortgage servicing liabilities
227
3,356
(204,343)
1,411,960
120,191
1,289,539
Excess servicing spread financing payable to PennyMac Mortgage Investment Trust
479
9,616
8,579
Following are the fair value and related principal amounts due upon maturity of loans held for sale:
Principal
amount
Fair
due upon
maturity
Difference
Current through 89 days delinquent
3,513,307
3,494,822
18,485
9,577,398
9,263,242
314,156
90 days or more delinquent:
63,177
65,812
(2,635)
153,162
153,875
(713)
10,326
15,078
11,923
13,649
(1,726)
11,098
311,717
Assets Measured at Fair Value on a Nonrecurring Basis
Following is a summary of assets that were measured at fair value on a nonrecurring basis:
Real estate acquired in settlement of loans
1,666
2,588
27
The following table summarizes the (losses) gains recognized on assets when they were remeasured at fair value on a nonrecurring basis:
(326)
(434)
(740)
(743)
Fair Value of Financial Instruments Carried at Amortized Cost
The Company’s Assets sold under agreements to repurchase, Mortgage loan participation purchase and sale agreements, Obligations under capital lease, Notes payable secured by mortgage servicing assets and Unsecured senior notes are carried at amortized cost.
These liabilities are classified as “Level 3” fair value items due to the Company’s reliance on unobservable inputs to estimate their fair values. The Company has concluded that the fair values of these liabilities other than Notes payable secured by mortgage servicing assets and the Unsecured senior notes approximate their carrying values due to their short terms and/or variable interest rates.
The Company estimates the fair value of the Notes payable secured by mortgage servicing assets and the Unsecured senior notes using indications of fair value provided by non-affiliate brokers. The fair value and carrying value of these notes are summarized below:
Carrying value
1,746,784
1,302,640
1,416,500
1,790,375
Valuation Governance
Most of the Company’s financial assets, and all of its MSRs, ESS, derivative liabilities and MSLs, are carried at fair value with changes in fair value recognized in current period income. Certain of the Company’s financial assets and derivatives and all of its MSRs, ESS, and MSLs are “Level 3” fair value assets and liabilities which require use of unobservable inputs that are significant to the estimation of the items’ fair values. Unobservable inputs reflect the Company’s own judgments about the factors that market participants use in pricing an asset or liability, and are based on the best information available under the circumstances.
Due to the difficulty in estimating the fair values of “Level 3” fair value assets and liabilities, the Company has assigned responsibility for estimating the fair value of these assets and liabilities to specialized staff and subjects the valuation process to significant senior management oversight:
With respect to the non-IRLC “Level 3” valuations, the FAV group reports to the Company’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 the Company’s senior management valuation committee. The Company’s senior management valuation committee includes the Company’s chief financial, investment and credit officers as well as other senior members of the Company’s finance, capital markets and risk management staffs.
The FAV group is responsible for reporting to the Company’s senior management valuation committee on the changes in the valuation of the non-IRLC “Level 3” fair value assets and liabilities, including major factors affecting the valuation and any changes in model methods and inputs. To assess the reasonableness of its valuations, the FAV group presents an analysis of the effect on the valuation of changes to the significant inputs to the models.
Valuation Techniques and Inputs
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:
Loans Held for Sale
Most of the Company’s loans held for sale at fair value are saleable into active markets and are therefore categorized as “Level 2” fair value assets. The fair values of “Level 2” fair value loans are determined using their contracted selling price or quoted market price or market price equivalent.
Certain of the Company’s loans held for sale are not saleable into active markets and are therefore categorized as “Level 3” fair value assets. Loans held for sale categorized as “Level 3” fair value assets include:
Loans become eligible for resale into a new Ginnie Mae security when the loans become current either through completion of a modification of the loan’s terms or after six months of timely payments following either the completion of certain types of payment deferral programs or borrower reperformance and when the issuance date of the new security is at least 210 days after the date the loan was last delinquent.
The Company uses a discounted cash flow model to estimate the fair value of its “Level 3” fair value loans held for sale. The significant unobservable inputs used in the fair value measurement of the Company’s “Level 3” fair value loans held for sale are discount rates, home price projections, voluntary prepayment/resale and total prepayment speeds. Significant changes in any of those inputs in isolation could result in a significant change to the loans’ fair value measurement. Increases in home price projections are generally accompanied by an increase in voluntary prepayment speeds.
29
Following is a quantitative summary of key “Level 3” fair value inputs used in the valuation of loans held for sale:
Fair value (in thousands)
Key inputs (1):
Discount rate:
Range
3.3% – 10.2%
2.2% – 9.2%
Weighted average
3.6%
2.3%
Twelve-month projected housing price index change:
2.2% – 2.6%
6.1% – 6.5%
2.4%
6.2%
Voluntary prepayment/resale speed (2):
4.7% – 28.6%
0.4% – 30.3%
24.6%
22.0%
Total prepayment speed (3):
4.8% – 37.4%
0.4% – 39.3%
31.2%
28.2%
Changes in fair value of loans held for sale attributable to changes in the loan’s instrument-specific credit risk are measured with reference to the change in the respective loan’s delinquency status and performance history at period end from the later of the beginning of the period or acquisition date. Changes in fair value of loans held for sale are included in Net gains on loans held for sale at fair value in the Company’s consolidated statements of income.
Derivative Financial Instruments
Interest Rate Lock Commitments
The Company categorizes IRLCs as “Level 3” fair value assets or 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 loans and the probability that the loan will be funded or purchased (the “pull-through rate”).
The significant unobservable inputs used in the fair value measurement of the Company’s IRLCs are the estimated fair value of MSRs attributable to the mortgage loans it has committed to purchase and the pull-through rate. Significant changes in the pull-through rate or the MSR component of the IRLCs, in isolation, could result in significant changes in the IRLCs’ fair value measurement. 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 increase the pull-through rate for the loan principal and interest payment cash flow component, which has decreased in fair value. Changes in fair value of IRLCs are included in Net gains on loans held for sale at fair value in the consolidated statements of income.
30
Following is a quantitative summary of key unobservable inputs used in the valuation of IRLCs:
Fair value (in thousands) (1)
Key inputs (2):
Pull-through rate:
7.9% – 100%
8.0% – 100%
84.3%
78.4%
Mortgage servicing rights fair value expressed as:
Servicing fee multiple:
(3.2) – 7.0
(8.5) – 6.7
4.1
3.8
Percentage of loan commitment amount
(0.6)% – 3.8%
(1.6)% – 3.6%
1.8%
1.5%
Hedging Derivatives
Fair values of derivative financial instruments actively traded on exchanges are categorized by the Company as “Level 1” fair value assets and liabilities; fair values of derivative financial instruments based on observable interest rates, volatilities and prices in the MBS or other markets are categorized by the Company as “Level 2” fair value assets and liabilities.
Changes in the fair value of hedging derivatives are included in Net gains on loans held for sale at fair value, or Net loan servicing fees – Mortgage servicing rights hedging results, as applicable, 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 prepayment rate (prepayment speed), pricing spread (discount rate), and annual per-loan cost to service the underlying loans, all of which are unobservable. Significant changes to any of those inputs in isolation could result in a significant change in the MSR fair value measurement. Changes in these key inputs are not directly related. Changes in the fair value of MSRs are included in Net loan servicing fees—Change in fair value of mortgage servicing rights and mortgage servicing liabilities in the consolidated statements of income.
31
Following are the key inputs used in determining the fair value of MSRs received by the Company when it retains the obligation to service the mortgage loans it sells:
(Amount recognized and unpaid principal balance of underlying loans in thousands)
MSR and pool characteristics:
Amount recognized
Unpaid principal balance of underlying loans
19,377,222
36,830,098
49,953,192
71,773,352
Weighted average servicing fee rate (in basis points)
42
33
43
Annual total prepayment speed (2):
5.7% – 19.3%
6.7% – 17.7%
5.7% – 23.4%
6.2% – 16.7%
8.4%
8.5%
8.3%
8.1%
Equivalent average life (in years):
4.3 – 9.2
4.0 – 8.8
3.7 – 9.2
4.1 – 9.0
8.5
8.1
8.4
8.3
Pricing spread (3):
5.7% – 11.7%
6.0% – 16.9%
5.7% – 16.1%
8.2%
8.9%
7.7%
9.2%
Per-loan annual cost of servicing:
$80 – $146
$80 – $117
$80 – $176
$81 – $117
$103
$104
32
Following is a quantitative summary of key inputs used in the valuation of the Company’s MSRs and the effect on the fair value from adverse changes in those inputs:
(Fair value, unpaid principal balance of underlying
loans and effect on fair value amounts in thousands)
$ 5,217,167
$ 3,878,078
Pool characteristics:
$ 297,269,682
$ 278,324,780
Weighted average note interest rate
3.2%
35
34
5.5% – 19.0%
7.9% – 26.7%
10.7%
2.0 – 9.2
3.1 – 7.7
8.0
6.8
Effect on fair value of (3):
5% adverse change
($79,424)
($80,109)
10% adverse change
($156,226)
($157,252)
20% adverse change
($302,462)
($303,259)
Pricing spread (4):
4.9% – 14.8%
5.3% – 15.5%
6.9%
($76,013)
($59,577)
($149,848)
($117,352)
($291,326)
($227,791)
$79 – $156
$79 – $197
$106
$108
($37,615)
($32,979)
($75,231)
($65,958)
($150,461)
($131,916)
Excess Servicing Spread Financing at Fair Value
ESS is categorized as a “Level 3” fair value liability. Because ESS is a claim to a portion of the cash flows from MSRs, the fair value measurement of the ESS is similar to that of MSRs. The Company uses the same discounted cash flow approach to measuring the ESS as it uses to measure MSRs except that certain inputs relating to the cost to service the mortgage loans underlying the MSRs and certain ancillary income are not included as these cash flows do not accrue to the holder of the ESS.
The key inputs used in the estimation of ESS fair value include pricing spread and prepayment speed. Significant changes to either of those inputs in isolation could result in a significant change in the fair value of ESS. Changes in these key inputs are not directly related.
ESS is generally subject to fair value increases when mortgage interest rates increase. Increasing mortgage interest rates normally discourage mortgage refinancing activity. Decreased refinancing activity increases the life of the mortgage loans underlying the ESS, thereby increasing the fair value of this financing. Changes in the fair value of ESS are included in Net loan servicing fees—Change in fair value of excess servicing spread financing payable to PennyMac Mortgage Investment Trust. During the six months ended June 30, 2021, the Company repaid its outstanding ESS financing payable to PMT.
Mortgage Servicing Liabilities
MSLs are categorized as “Level 3” fair value liabilities. The Company uses a discounted cash flow approach to estimate the fair value of MSLs. The key inputs used in the estimation of the fair value of MSLs include the applicable pricing spread, annual total prepayment speed, and the per-loan annual cost of servicing the underlying loans. Changes in the fair value of MSLs are included in Net servicing fees—Change in fair value of mortgage servicing rights and mortgage servicing liabilities in the consolidated statements of income.
Following are the key inputs used in determining the fair value of MSLs:
Unpaid principal balance of underlying loans (in thousands)
41,481
60,593
Servicing fee rate (in basis points)
Annual total prepayment speed (2)
18.0%
19.8%
Pricing spread (3)
7.5%
Equivalent average life (in years)
4.7
Per-loan annual cost of servicing
1,253
1,406
Note 7—Loans Held for Sale at Fair Value
Loans held for sale at fair value include the following:
Loan type
Government-insured or guaranteed
2,409,046
6,030,518
Conventional conforming
644,470
2,583,089
Jumbo
29,741
Purchased from Ginnie Mae securities serviced by the Company
450,598
1,082,444
Repurchased pursuant to representations and warranties
52,955
46,432
Fair value of loans pledged to secure:
2,738,333
8,629,861
532,175
505,716
3,270,508
9,135,577
Note 8—Derivative Financial Instruments
The Company holds and issues derivative financial instruments in connection with its operating activities. Derivative financial instruments are created as a result of the Company’s loan production activities and when the Company enters into derivative transactions as part of its interest rate risk management activities. Derivative financial instruments created as a result of the Company’s loan production activities are IRLCs that are created when the Company commits to purchase or originate a loan for sale.
The Company engages in interest rate risk management activities in an effort to moderate the effect of changes in market interest rates on the fair value of certain of the its assets. To manage this fair value risk resulting from interest rate risk, the Company uses derivative financial instruments acquired with the intention of reducing the risk that changes in market interest rates will result in unfavorable changes in the fair value of the Company’s IRLCs, inventory of loans held for sale and its MSRs.
The Company does not designate and qualify any of its derivatives for hedge accounting. The Company records all derivative financial instruments at fair value and records changes in fair value in current period income.
Derivative Notional Amounts, Fair Value of Derivatives and Netting of Financial Instruments
The Company has elected to present net derivative asset and liability positions, and cash collateral obtained from or posted to its counterparties when subject to a master netting arrangement that is legally enforceable on all counterparties in the event of default. The derivatives that are not subject to a master netting arrangement are IRLCs.
The Company had the following derivative financial instruments recorded on its consolidated balance sheets:
Notional
Derivative
Derivative instrument
amount (1)
assets
Not subject to master netting arrangements:
7,665,657
14,111,795
Subject to master netting arrangements (2):
9,437,616
22,007,383
14,556,614
34,429,676
2,600,000
9,550,000
3,175,000
2,450,000
2,405,000
1,250,000
5,375,000
Treasury futures purchase contracts
2,861,700
1,544,800
Treasury futures sale contracts
3,886,900
1,925,000
Interest rate swap futures purchase contracts
3,010,600
Interest rate swap futures sale contracts
2,187,200
Total derivatives before netting
Deposits received from derivative counterparties, net
21,234
32,881
36
Derivative Assets, Financial Instruments, and Cash 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 to qualify for setoff accounting.
Gross amount not
offset in the
consolidated
Net amount
balance sheet
of assets in the
Financial
collateral
instruments
received
RJ O'Brien
25,552
Nomura Securities International, Inc.
6,938
Bank of America, N.A.
3,005
Others
726
1,998
Derivative Liabilities, Financial Instruments and Collateral Held by Counterparty
The following table summarizes by significant counterparty the amount of derivative liabilities and assets sold under agreements to repurchase after considering master netting arrangements and financial instruments or cash pledged that do not meet the accounting guidance to qualify for setoff accounting. All assets sold under agreements to repurchase are secured by sufficient collateral or have fair value that exceeds the liability amount recorded on the consolidated balance sheets.
Gross amounts
not offset in the
of liabilities
in the
instruments (1)
pledged
Credit Suisse First Boston Mortgage Capital LLC
1,003,404
(1,002,552)
852
1,974,278
(1,969,670)
4,608
485,306
(477,673)
7,633
1,758,690
(1,758,690)
Citibank, N.A.
228,578
(225,646)
2,932
403,003
(402,806)
197
Goldman Sachs
198,695
(186,361)
12,334
853,147
(850,918)
2,229
Royal Bank of Canada
182,820
(182,820)
496,064
(496,064)
JPMorgan Chase Bank, N.A.
111,571
(107,675)
3,896
300,912
(300,912)
Morgan Stanley Bank, N.A.
88,467
(86,760)
1,707
299,580
(292,105)
7,475
Wells Fargo Bank, N.A.
83,803
(79,082)
4,721
203,779
(200,338)
3,441
Barclays Capital
60,082
(59,891)
191
677,419
(676,685)
734
BNP Paribas
37,554
(37,554)
349,172
(349,172)
2,902
2,642
2,488,716
(2,446,014)
7,319,966
(7,297,360)
37
Following are the gains (losses) recognized by the Company on derivative financial instruments and the income statement lines where such gains and losses are included:
Derivative activity
Income statement line
Net gains on loans held for sale at fair value (1)
27,251
5,670
(257,043)
(333,416)
Hedged item:
Interest rate lock commitments and loans held for sale
296,290
(167,734)
997,069
294,804
Net loan servicing fees–Mortgage servicing rights hedging results
Note 9—Mortgage Servicing Rights and Mortgage Servicing Liabilities
Mortgage Servicing Rights at Fair Value
The activity in MSRs is as follows:
MSRs resulting from loan sales
Change in fair value due to:
Changes in valuation inputs used in valuation model (1)
233,697
(239,514)
557,625
73,376
Other changes in fair value (2)
(121,822)
(100,110)
(233,091)
(195,797)
Total change in fair value
UPB of underlying loans at end of period
297,269,682
252,475,400
Fair value of mortgage servicing rights pledged to secure Assets sold under agreements to repurchase and Notes payable secured by mortgage servicing assets
5,163,544
3,856,791
38
Mortgage Servicing Liabilities at Fair Value
The activity in MSLs is summarized below:
Changes in fair value due to:
(129)
11,083
(267)
17,847
(98)
(14,439)
(212)
(27,463)
6,135,249
Contractual servicing fees relating to MSRs and MSLs are recorded in Net loan servicing fees—Loan servicing fees—From non-affiliates on the consolidated statements of income; other fees relating to MSRs and MSLs are recorded in Net loan servicing fees—Loan servicing fees—Other on the Company’s consolidated statements of income. Such amounts are summarized below:
Contractual servicing fees
Other fees:
Late charges
9,527
6,665
19,644
14,596
3,541
7,768
8,535
15,622
272,406
222,708
532,326
449,246
39
Note 10—Leases
The Company has operating lease agreements relating to its facilities. The Company’s operating lease agreements have remaining terms ranging from less than one year to eight years; some of the operating lease agreements include options to extend the term for up to five years. None of the Company’s operating lease agreements require the Company to make variable lease payments.
The Company’s lease agreements are summarized below:
(dollars in thousands)
Lease expense:
Operating leases
5,008
4,508
9,962
8,874
Short-term leases
241
420
460
470
Net lease expense included in Occupancy and equipment
5,249
4,928
10,422
9,344
Other information:
Payments for operating leases
5,388
5,149
10,257
10,185
Operating lease right-of-use assets recognized
4,570
Period end weighted averages:
Remaining lease term (in years)
5.3
5.9
Discount rate
3.9%
4.1%
Lease payments of the Company’s operating lease liabilities are summarized below:
Twelve months ended June 30,
22,626
2023
22,993
2024
22,109
2025
20,059
2026
13,400
Thereafter
14,471
Total lease payments
115,658
Less imputed interest
(12,902)
Operating lease liability
40
Note 11—Other Assets
Other assets are summarized below:
Capitalized software, net
138,382
109,480
Margin deposits
64,783
100,482
Prepaid expenses
46,486
64,924
Furniture, fixtures, equipment and building improvements, net
31,756
31,677
Deposits securing Assets sold under agreements to repurchase and Notes payable secured by mortgage servicing assets
25,547
36,632
Other servicing receivables
22,554
113,820
Servicing fees receivable, net
18,693
23,672
Interest receivable
10,828
9,688
8,002
7,474
101,050
118,767
Other assets pledged to secure:
Assets sold under agreements to repurchase and Notes payable secured by mortgage servicing assets
Obligations under capital lease:
4,546
Furniture, fixture, equipment and building improvements, net
4,116
45,294
Note 12—Short-Term Debt
The borrowing facilities described throughout these Notes 12 and 13 contain various covenants, including financial covenants governing the Company’s net worth, debt-to-equity ratio and liquidity. Management believes that the Company was in compliance with these covenants as of June 30, 2022.
Assets Sold Under Agreements to Repurchase
The Company has multiple borrowing facilities in the form of asset sales under agreements to repurchase. These borrowing facilities are secured by loans held for sale at fair value or participation certificates backed by mortgage servicing assets. Eligible assets are sold at advance rates based on the fair value (as determined by the lender) of the assets sold. Interest is charged at a rate based on the Secured Overnight Financing Rate (“SOFR”) or LIBOR, as applicable. Loans and participation certificates financed under these agreements may be re-pledged by the lenders.
Fannie Mae MSR Facility
On April 28, 2021, the Company, through its wholly-owned subsidiaries, PLS, PNMAC, and PFSI ISSUER TRUST - FMSR, entered into a structured finance transaction, allowing PLS to finance Fannie Mae MSRs and ESS (the “Fannie Mae MSR Facility”). In connection with the Fannie Mae MSR Facility, PLS pledges and/or sells to PFSI ISSUER TRUST - FMSR participation certificates representing beneficial interests in MSRs and ESS pursuant to the terms of a master repurchase agreement, dated as of April 28, 2021, by and between PLS, PFSI Issuer Trust - FMSR and PNMAC (the “FMSR PC Repurchase Agreement”). In return, PFSI ISSUER TRUST- FMSR has issued to PLS the Series 2021-MSRVF1 Note, dated April 28, 2021, known as the “PFSI ISSUER TRUST - FMSR Collateralized Notes, Series 2021-MSRVF1” (the “FMSR VFN”), and may, from time to time, issue to institutional investors term notes, in each case secured on a pari passu basis by the participation certificates relating to the MSRs (the “FMSR Term Notes”). The maximum principal balance of the FMSR VFN is $1 billion.
41
Under the FMSR PC Repurchase Agreement, PLS grants to PFSI ISSUER TRUST – FMSR a security interest in all of its right, title and interest in, to and under participation certificates representing beneficial interests in MSRs and ESS, including all of its rights and interests in any MSRs and ESS it thereafter owns or acquires. The principal amount paid by PFSI ISSUER TRUST - FMSR for the participation certificates under the FMSR PC Repurchase Agreement is based upon a percentage of the market value of the underlying MSRs (inclusive of the ESS). Upon PLS’s repurchase of the participation certificates, PLS is required to repay PFSI ISSUER TRUST - FMSR 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 FMSR VFN and any outstanding term notes) to the date of such repurchase.
PLS also entered into a master repurchase agreement on April 28, 2021 (the “FMSR VFN Repurchase Agreement”) with Credit Cuisse First Boston Mortgage Capital LLC (“CSFB”), as administrative agent, and Credit Suisse AG, Cayman Islands Branch (“CSCIB”), as purchaser, pursuant to which PLS sold the FMSR VFN to CSCIB with an agreement to repurchase such FMSR VFN at a later date. The FMSR VFN Repurchase Agreement has a term extending through May 31, 2024. The FMSR VFN Repurchase Agreement provides for a maximum purchase price of $250 million, all of which is committed.
The principal amount paid by CSCIB for the FMSR VFN is based upon a percentage of the market value of such FMSR VFN. Upon PLS’s repurchase of the FMSR VFN, PLS is required to repay CSCIB the principal amount relating thereto plus accrued interest (at a rate reflective of the current market based on a spread above SOFR to the date of such repurchase.
Freddie Mac MSR Facility
On December 7, 2021, the Company entered a Master Repurchase Agreement secured by Freddie Mac MSRs with a maximum purchase price of $175 million which may be further reduced by amounts outstanding with Credit Suisse under other financing facilities. The facility expires on May 31, 2024. The Company is not currently borrowing under this facility.
Ginnie Mae MSR Facility
The Company, through its wholly-owned subsidiaries PLS, PNMAC, and the Issuer Trust, have a structured finance transaction, in which 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 (the “GNMA MSR Facility”). In return, the Issuer Trust has issued to PLS, pursuant to the terms of an indenture, the Series 2016-MSRVF1 Variable Funding Note, known as the “PNMAC GMSR ISSUER TRUST MSR Collateralized Notes, Series 2016-MSRVF1” (the “VFN”), and has issued and may, from time to time pursuant to the terms of any supplemental indenture, issue to institutional investors additional 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 $2 billion.
On July 30, 2021, the Company, through its wholly-owned subsidiaries PLS, PNMAC and the Issuer Trust, entered into agreements to syndicate existing variable funding note repurchase agreements as part of the Ginnie Mae MSR structured finance facility. The Company entered into an Amended and Restated Series 2016-MSRVF1 Master Repurchase Agreement by and among PLS, as seller, CSFB, as administrative agent to the buyers, CSCIB, as a buyer, Citibank, N.A., as a buyer, and PNMAC, as a guarantor (the “Syndicated GMSR Servicing Spread Agreement”), related to the servicing spread. The Syndicated GMSR Servicing Spread Agreement added Citibank as a syndicate buyer of MSRs and related ESS, and increased the borrowing capacity from $400 to $500 million, all of which is committed on a 50-50 pro rata basis between CSCIB and Citibank.
Ginnie Mae Servicing Advances
On April 1, 2020, the Company, through its wholly-owned subsidiaries PLS, PNMAC and the PNMAC GMSR ISSUER TRUST, issued a series of variable funding notes, the Series 2020-SPIADVF1 Notes (“GMSR Servicing Advance Notes”), to be sold under agreement to repurchase pursuant to a Master Repurchase Agreement, dated as of April 1, 2020, with Credit Suisse First Boston Mortgage Capital LLC, acting as administrative agent on behalf of Credit Suisse AG, Cayman Islands Branch, as buyer (the “GMSR Servicing Advances Repurchase Agreement”). The GMSR Servicing Advances Repurchase Agreement provides the Company with financing secured by servicing advance receivables to pay, in accordance with the Ginnie Mae requirements, in the event borrowers are delinquent: (i) regularly scheduled monthly principal and interest to mortgage-backed securities holders; (ii) taxes, homeowner’s insurance, and other escrowed items; and (iii) other expenses related to servicing delinquent loans as specified by (A) state and federal laws and (B) government agencies, including the FHA, the VA, and the USDA.
On July 30, 2021, the Company, through its wholly-owned subsidiaries PLS, PNMAC and the Issuer Trust, entered into agreements to syndicate existing variable funding note repurchase agreements, as part of the Ginnie Mae servicing advance facility. The Company entered into an Amended and Restated Series 2020-SPIADVF1 Master Repurchase Agreement by and among PLS, as seller, CSFB, as administrative agent to the buyers, CSCIB, as a buyer, Citibank, as a buyer, and PNMAC, as a guarantor (the “Syndicated GMSR SAR Agreement”). The Syndicated GMSR SAR Agreement added Citibank as a syndicate buyer of servicing advances receivables and provides a $600 million borrowing capacity, all of which is committed on a 50-50 pro rata basis between CSCIB and Citibank.
Assets sold under agreements to repurchase are summarized below:
Average balance of assets sold under agreements to repurchase
2,215,595
7,571,340
2,964,727
7,999,580
Weighted average interest rate (1)
2.80
%
2.07
2.42
2.13
Total interest expense
18,949
44,623
42,719
96,802
Maximum daily amount outstanding
3,316,376
10,856,677
7,289,147
Carrying value:
Unpaid principal balance funded under:
Committed facilities
2,290,666
5,079,581
Uncommitted facilities
155,348
2,217,779
2,446,014
7,297,360
Unamortized debt issuance costs
(4,198)
(4,625)
Weighted average interest rate
3.32
1.83
Available borrowing capacity (2):
Committed
1,614,334
285,419
Uncommitted
6,464,652
8,417,221
8,078,986
8,702,640
Fair value of assets securing repurchase agreements:
Servicing advances (3)
279,664
232,107
Mortgage servicing rights (3)
3,552,812
Deposits (3)
Margin deposits (4)
8,375
10,875
44
Following is a summary of maturities of outstanding advances under repurchase agreements by maturity date:
Remaining maturity at June 30, 2022
Unpaid principal balance
Within 30 days
430,925
Over 30 to 90 days
1,491,071
Over 90 to 180 days
41,509
Over 180 days to one year
382,509
Over one year to two years
100,000
Total assets sold under agreements to repurchase
Weighted average maturity (in months)
4.0
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) relating to the Company’s assets sold under agreements to repurchase is summarized by counterparty below as of June 30, 2022:
Counterparties
Amount at risk
maturity of advances
Facility maturity
Credit Suisse First Boston Mortgage Capital LLC & Citibank, N.A. (1)
3,085,625
May 31, 2024
88,969
August 2, 2022
June 14, 2023
82,621
October 12, 2022
June 5, 2024
JP Morgan Chase Bank, N.A.
75,401
August 17, 2022
June 6, 2024
58,007
September 23, 2022
Barclays Bank PLC
19,202
September 29, 2022
November 3, 2022
18,324
November 17, 2023
16,177
October 20, 2022
December 23, 2022
13,596
October 29, 2022
June 17, 2024
12,895
October 9, 2022
April 26, 2024
7,534
October 4, 2022
July 31, 2023
4,359
October 14, 2022
January 3, 2024
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 agreements mature if the fair value (as determined by the applicable lender) of the assets securing those agreements decreases.
Mortgage Loan Participation Purchase and Sale Agreements
One of the borrowing facilities secured by loans held for sale is in the form of mortgage loan participation purchase and sale agreements. Participation certificates, each of which represents an undivided beneficial ownership interest in mortgage loans that have been pooled with Fannie Mae, Freddie Mac or Ginnie Mae, are sold to a lender pending the securitization of the mortgage loans and sale of the resulting securities. A commitment to sell the securities resulting from the pending securitization between the Company and a non-affiliate 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 that is based on a percentage of the purchase price. The holdback amount is not required to be paid to the Company until the settlement of the security and its delivery to the lender.
45
The mortgage loan participation purchase and sale agreements are summarized below:
Average balance
214,654
254,343
218,977
265,390
2.25
1.36
1.98
1.35
1,377
1,039
2,497
2,134
514,054
528,844
515,043
502,775
(659)
2.85
1.48
Fair value of loans pledged to secure mortgage loan participation purchase and sale agreements
Note 13—Long-Term Debt
Obligations Under Capital Lease
The Company had a capital lease transaction secured by certain fixed assets and capitalized software. The capital lease matured on June 13, 2022 and bore interest at a spread over one-month LIBOR.
Obligations under capital lease are summarized below:
523
9,072
1,695
10,169
2.49%
2.10%
2.18%
2.12%
48
107
1,396
10,468
11,864
2.11%
Assets pledged to secure obligations under capital lease:
Capitalized software
Furniture, fixtures and equipment
46
Notes Payable Secured by Mortgage Servicing Assets
Term Notes
In connection with the GNMA MSR Facility, the Issuer Trust issued secured term notes (the “Term Notes”) to qualified institutional buyers under Rule 144A of the Securities Act of 1933, as amended (the “Securities Act”). The Term Notes are secured by participation certificates relating to Ginnie Mae mortgage servicing assets financed pursuant to the GNMA MSR Facility, and rank pari passu with the VFNs and the GMSR Servicing Advance Notes.
Following is a summary of the issued and outstanding Term Notes:
Annual interest rate
Issuance date
Principal balance
Index
Spread
Stated maturity date (1)
February 28, 2018
One-month LIBOR
2.85%
2/25/2023
August 10, 2018
2.65%
8/25/2023
June 3, 2022
SOFR
4.25%
5/25/2027
1,800,000
Notes payable secured by mortgage servicing assets are summarized below:
1,426,373
1,300,000
1,363,536
3.69%
2.91%
3.34%
2.90%
13,656
10,104
23,565
19,992
47
(6,740)
(2,378)
4.76%
2.84%
Assets pledged to secure notes payable (1):
Servicing advances
4,681,236
Deposits
Unsecured Senior Notes
The Company issued unsecured senior notes (the “Unsecured Notes”) to qualified institutional buyers under Rule 144A of the Securities Act. The Unsecured Notes are senior unsecured obligations of the Company and will rank senior in right of payment to any future subordinated indebtedness of the Company, equally in right of payment with all existing and future senior indebtedness of the Company and effectively subordinated to any future secured indebtedness of the Company to the extent of the fair value of collateral securing such indebtedness.
The Unsecured Notes are fully and unconditionally guaranteed, jointly and severally, on a senior unsecured basis by PFSI’s existing and future wholly-owned domestic subsidiaries (other than certain excluded subsidiaries defined in the indenture under which the Unsecured Notes were issued). The guarantees are senior unsecured obligations of the guarantors and will rank senior in right of payment to any future subordinated indebtedness of the guarantors, equally in right of payment with all existing and future senior indebtedness of the guarantors and effectively subordinated to any future secured indebtedness of the guarantors to the extent of the fair value of collateral securing such indebtedness. The Unsecured Notes and the guarantees are structurally subordinated to the indebtedness and liabilities of the Company’s subsidiaries that do not guarantee the Unsecured Notes.
Following is a summary of the Company’s outstanding Unsecured Notes issued:
Coupon interest rate
Maturity date
Optional redemption date (1)
(annual)
September 29, 2020
5.38%
October 15, 2025
October 15, 2022
October 19, 2020
150,000
February 11, 2021
February 15, 2029
February 15, 2024
September 16, 2021
5.75%
September 15, 2031
September 15, 2026
1,152,762
5.07%
4.81%
23,688
16,169
47,116
28,839
Unamortized debt issuance costs and premiums, net
(21,945)
(23,781)
Maturities of Long-Term Debt
Maturities of long-term debt obligations (based on final maturity dates) are as follows:
2027
1,150,000
3,600,000
Note 14—Liability for Losses Under Representations and Warranties
Following is a summary of the Company’s liability for losses under representations and warranties:
42,794
38,428
32,688
Provision for losses:
Resulting from sales of loans
2,182
10,304
6,236
20,357
Reduction in liability due to change in estimate
(2,227)
(3,640)
(5,396)
(7,325)
Losses incurred, net
(3,413)
(757)
(5,025)
(1,385)
44,335
Unpaid principal balance of loans subject to representations and warranties at end of period
278,793,884
234,327,924
Note 15—Income Taxes
The Company’s effective income tax rates were 27.2% and 26.9% for the quarters ended June 30, 2022 and 2021, respectively, and 26.5% and 26.0% for the six months ended June 30, 2022 and 2021, respectively.
49
Note 16—Commitments and Contingencies
Commitments to Purchase and Fund Mortgage Loans
The Company’s commitments to purchase and fund loans totaled $7.7 billion as of June 30, 2022.
Litigation
From time to time, the Company may be a party to legal proceedings, lawsuits and other claims arising in the ordinary course of its business. The amount, if any, of ultimate liability with respect to such matters cannot be determined, but despite the inherent uncertainties of litigation, management believes that the ultimate disposition of any such proceedings and exposure will not have, individually or taken together, a material adverse effect on the financial condition, income, or cash flows of the Company.
On November 5, 2019, Black Knight Servicing Technologies, LLC, a wholly-owned indirect subsidiary of Black Knight, Inc. (“BKI”), filed a Complaint and Demand for Jury Trial in the Fourth Judicial Circuit Court in and for Duval County, Florida (the “Florida State Court”), captioned Black Knight Servicing Technologies, LLC v. PennyMac Loan Services, LLC, Case No. 2019-CA-007908 (the “BKI Complaint”). Allegations contained within the BKI Complaint include breach of contract and misappropriation of MSP® System trade secrets in order to develop an imitation mortgage-processing system intended to replace the MSP® System.
The BKI Complaint seeks damages for breach of contract and misappropriation of trade secrets, injunctive relief under the Florida Uniform Trade Secrets Act and declaratory judgment of ownership of all intellectual property and software developed by or on behalf of PLS as a result of its wrongful use of and access to the MSP® System and related trade secret and confidential information. On March 30, 2020, the Florida State Court granted a motion to compel arbitration filed by PLS. While no assurance can be provided as to the ultimate outcome of this claim or the account of any losses to the Company, the Company believes the BKI Complaint is without merit and plans to vigorously defend the matter, which remains pending.
Regulatory Matters
The Company and/or its subsidiaries are subject to various state and federal regulations related to its loan production and servicing operations by the various states it operates in as well as federal agencies such as the Consumer Financial Protection Bureau (“CFPB”), HUD, and the FHA and is subject to the requirements of the Agencies to which it sells loans and for which it performs loan servicing activities. As a result, the Company may become involved in information-gathering requests, reviews, investigations and proceedings (both formal and informal) by such various federal, state and local regulatory bodies.
On January 7, 2021, PLS received a letter from the CFPB notifying PLS that, in accordance with the CFPB’s discretionary Notice and Opportunity to Respond and Advise (“NORA”) process, the CFPB’s Office of Enforcement was considering recommending that the CFPB take legal action against PLS for alleged violations of the Real Estate Settlement Procedures Act and Truth in Lending Act. The CFPB's examination covered the period from March 2015 through September 2016. Should the CFPB commence an action, it may seek restitution, civil monetary penalties, injunctive relief, or other corrective action, the extent of which remains uncertain at this time. Notably, certain of the alleged violations were originally self-identified by PLS and remediated before the CFPB's examination, and all alleged violations were fully remediated as of August 2017. PLS confirmed these remediation actions as well as full restitution to any affected borrowers in its response to the NORA letter submitted on February 8, 2021. While the NORA process remains open and pending at this time, and there can be no assurance as to the nature or extent of any actions taken by the CFPB with regard to these alleged violations, the Company does not believe that the ultimate resolution of this matter will have a material adverse effect on its financial statements or operations.
Cessation of the LIBOR Index
The Company historically used a LIBOR index to establish the applicable interest rates in lending and financing transactions. One-week and two-month United States Dollar LIBOR rates have been discontinued in 2022 and non-U.S. dollar LIBOR settings cease to be representative. The Company has serviced LIBOR-based adjustable rate mortgages and other financial arrangements that may incorporate fallback provisions or replacement provisions related to the LIBOR transition. The discontinuation of LIBOR could materially affect our interest expense and earnings, our cost of capital, and the fair value of certain of our assets and the instruments we use to hedge their value. Furthermore, the transition away from widely used benchmark rates like LIBOR could result in customers or other market participants challenging the determination of their interest or dividend payments, disputing the interpretations or implementation of contract or instrument “fallback” provisions and other transition related changes.
Note 17—Stockholders’ Equity
In August 2021, the Company’s board of directors approved an increase to the Company’s common stock repurchase program from $1 billion to $2 billion.
Following is a summary of activity under the stock repurchase program:
Cumulative
total (1)
Shares of common stock repurchased
2,427
2,574
4,747
7,227
29,821
Cost of shares of common stock repurchased
113,645
154,920
255,057
443,439
1,565,678
Note 18—Net Gains on Loans Held for Sale
Net gains on loans held for sale at fair value are summarized below:
From non-affiliates:
Cash (losses) gains:
Loans
(451,171)
387,305
(1,395,392)
470,017
Hedging activities
82,617
(325,651)
972,704
410,574
(368,554)
61,654
(422,688)
880,591
Non-cash gains:
Mortgage servicing rights and mortgage servicing liabilities resulting from loan sales
425,941
889,512
Provisions for losses relating to representations and warranties:
Pursuant to loan sales
(2,182)
(10,304)
(6,236)
(20,357)
Reductions in liability due to change in estimate
2,227
3,640
5,396
7,325
Changes in fair values of loans and derivatives held at period end:
(43,349)
(50,322)
177,081
54,900
Hedging derivatives
213,673
157,917
24,365
(115,770)
From PennyMac Mortgage Investment Trust (1)
Note 19—Net Interest Expense
Net interest expense is summarized below:
Cash and short-term investments
405
747
977
1,734
36,777
76,453
85,890
151,277
Placement fees relating to custodial funds
12,682
3,597
16,879
9,480
From PennyMac Mortgage Investment Trust—Assets purchased from PennyMac Mortgage Investment Trust under agreements to resell
To non-affiliates:
Interest shortfall on repayments of mortgage loans serviced for Agency securitizations
12,286
29,144
29,765
58,580
Interest on mortgage loan impound deposits
1,166
1,304
2,752
2,410
To PennyMac Mortgage Investment Trust—Excess servicing spread financing at fair value
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Note 20—Stock-based Compensation
On May 24, 2022, PFSI’s stockholders approved and adopted the 2022 Equity Incentive Plan and no additional equity awards will be issued from the Company’s 2013 Equity Incentive Plan.
Following is a summary of the stock-based compensation activity:
Grants:
Units:
Performance-based restricted share units ("RSUs")
342
310
Stock options
574
249
Time-based RSUs
331
171
Grant date fair value:
Performance-based RSUs
19,522
18,237
12,138
5,116
18,903
10,066
50,563
33,419
Vestings and exercises:
Performance-based RSUs vested
643
640
Stock options exercised
97
63
185
Time-based RSUs vested
246
307
Compensation expense
14,948
Note 21—Earnings Per Share
Basic earnings per share is determined by dividing net income by the weighted average number of shares of common stock outstanding during the period. Diluted earnings per share is determined by dividing net income by the weighted average number of shares of common stock outstanding, assuming all dilutive securities were issued.
The Company’s potentially dilutive securities are stock-based compensation awards. The Company applies the treasury stock method to determine the diluted weighted average number of shares of common stock outstanding based on the outstanding stock-based compensation awards.
The following table summarizes the basic and diluted earnings per share calculations:
(in thousands, except per share amounts)
Weighted average basic shares of common stock outstanding
Effect of dilutive securities - shares issuable under stock-based compensation plan
2,475
3,509
2,897
3,755
Weighted average shares of common stock applicable to diluted earnings per share
Basic earnings per share
Diluted earnings per share
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Calculations of diluted earnings per share require certain potentially dilutive shares to be excluded when their inclusion in the diluted earnings per share calculation would be anti-dilutive. The following table summarizes the weighted-average number of anti-dilutive outstanding RSUs and stock options excluded from the calculation of diluted earnings per share:
(in thousands except for weighted-average exercise price)
Performance-based RSUs (1)
508
308
412
215
233
Stock options (2)
1,424
1,256
173
Total anti-dilutive units and options
2,076
1,901
388
Weighted average exercise price of anti-dilutive stock options (2)
58.49
58.85
58.68
Note 22—Regulatory Capital and Liquidity Requirements
The Company, through PLS, is required to maintain specified levels of capital and liquidity to remain a seller/servicer in good standing with the Agencies. Such capital and liquid asset requirements generally are tied to the size of the Company’s loan servicing portfolio, loan origination volume and delinquency rates.
The Company is subject to financial eligibility requirements established by the Federal Housing Finance Agency for sellers/servicers eligible to sell or service mortgage loans with Fannie Mae and Freddie Mac. The eligibility requirements include:
The Company is also subject to financial eligibility requirements for Ginnie Mae single-family issuers. The eligibility requirements include net worth of $2.5 million plus 35 basis points of PLS' outstanding Ginnie Mae single-family obligations and a liquidity requirement equal to the greater of $1.0 million or 10 basis points of PLS' outstanding Ginnie Mae single-family securities.
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The Agencies’ capital and liquidity requirements, the calculations of which are specified by each Agency, are summarized below:
Requirement/Agency
Actual (1)
Requirement (1)
Capital
Fannie Mae & Freddie Mac
6,338,183
754,717
5,872,064
722,040
Ginnie Mae
5,763,953
959,193
5,424,747
976,303
HUD
2,500
Liquidity
1,359,587
101,256
316,659
93,973
232,759
220,577
Adjusted net worth / Total assets ratio
Tangible net worth / Total assets ratio
Noncompliance with an Agency’s requirements can result in such Agency taking various remedial actions up to and including terminating the Company’s ability to sell loans to and service loans on behalf of the respective Agency.
Note 23—Segments
The Company operates in three segments: production, servicing and investment management.
Two of the segments are in the mortgage banking business: production and servicing. The production segment performs loan origination, acquisition and sale activities. The servicing segment performs servicing of loans, execution and management of early buyout loan transactions and servicing of loans sourced and managed by the investment management segment for PMT, including executing the loan resolution strategy identified by the investment management segment relating to distressed mortgage loans.
The investment management segment represents the activities of the Company’s investment manager, which include sourcing, performing diligence, bidding and closing investment asset acquisitions and managing the acquired assets and correspondent production activities for PMT.
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Financial performance and results by segment are as follows:
Mortgage Banking
Investment
Production
Management
Revenue: (1)
152,895
69,672
Loan origination fees
Net interest income (expense):
Interest income
28,379
21,485
Interest expense
19,207
51,920
9,172
(30,435)
583
900
1,483
1,780
3,263
Total net revenue
223,241
278,584
501,825
9,690
213,587
110,959
324,546
9,443
9,654
167,625
177,279
247
Segment assets at quarter end
3,735,706
10,509,950
14,245,656
26,599
419,293
163,355
31,830
48,967
36,913
65,515
102,428
(5,083)
(16,548)
(21,631)
(3)
925
1,555
1,588
3,143
566,151
162,603
728,754
13,498
321,709
131,679
453,388
9,349
244,442
30,924
275,366
4,149
7,670,877
16,185,956
23,856,833
23,305
23,880,138
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Revenues: (1)
374,505
146,521
59,320
44,426
46,266
102,168
13,054
(57,742)
1,368
1,516
2,884
3,811
6,695
534,130
615,051
1,149,181
19,838
515,206
222,273
737,479
19,494
18,924
392,778
411,702
344
Segment assets at period end
935,256
401,733
61,361
101,517
74,985
135,153
210,138
(13,624)
(33,636)
(47,260)
(6)
1,227
2,122
3,349
2,730
6,079
1,239,042
424,810
1,663,852
23,086
631,705
252,142
883,847
17,568
607,337
172,668
780,005
5,518
(
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Note 24—Subsequent Events
Management has evaluated all events and transactions through the date the Company issued these consolidated financial statements. During this period:
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Cautionary Statement Regarding Forward-Looking Statements
The following discussion and analysis of financial condition and results of operations should be read with the consolidated financial statements including the related notes of PennyMac Financial Services, Inc. (“PFSI”) 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 section entitled “Risk Factors” in Part II Item 1A and in our Annual Report on Form 10-K, 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 Securities 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.
Overview
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 PFSI.
Our Company
We are a specialty financial services firm primarily focused on the production and servicing of U.S. residential mortgage loans (activities which we refer to as mortgage banking) and the management of investments related to the U.S. mortgage market. We believe that our operating capabilities, specialized expertise, access to long-term investment capital, and the experience of our management team across all aspects of the mortgage business will allow us to profitably engage in these activities and capitalize on other related opportunities as they arise in the future.
Our primary assets are equity interests in Private National Mortgage Acceptance Company, LLC (“PNMAC”). We are the managing member of PNMAC, and we operate and control all of the businesses and affairs of PNMAC, and consolidate the financial results of PNMAC and its subsidiaries. We conduct our business in three segments: production, servicing (together, production and servicing comprise our mortgage banking activities) and investment management:
Our principal mortgage banking subsidiary, PennyMac Loan Services, LLC (“PLS”), is a non-bank producer and servicer of mortgage loans in the United States. PLS is a seller/servicer for the Federal National Mortgage Association (“Fannie Mae”) and the Federal Home Loan Mortgage Corporation (“Freddie Mac”), each of which is a government-sponsored entity. PLS is also an approved issuer of securities guaranteed by the Government National Mortgage Association (“Ginnie Mae”), a lender of the Federal Housing Administration (“FHA”), and a lender/servicer of the U.S. Department of Veterans Affairs (“VA”) and the U.S. Department of Agriculture (“USDA”). We refer to each of Fannie Mae, Freddie Mac, Ginnie Mae, FHA, VA and USDA as an “Agency” and collectively as the “Agencies.” PLS is able to service loans in all 50 states, the District of Columbia, Guam and the U.S. Virgin Islands, and originate loans in 49 states and the District of Columbia, either because PLS is properly licensed in a particular jurisdiction or exempt or otherwise not required to be licensed in that jurisdiction.
Our investment management subsidiary is PNMAC Capital Management, LLC (“PCM”), a Delaware limited liability company registered with the SEC as an investment adviser under the Investment Advisers Act of 1940, as amended. PCM has an investment management contract with PMT.
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Results of Operations
Our results of operations are summarized below:
(dollars in thousands, except per share amounts)
Revenues:
Expenses:
53,194
56,469
121,758
96,071
Annualized return on average stockholders' equity
14.9%
23.3%
17.6%
33.2%
Dividend declared per share
0.20
0.40
Income before provision for income taxes by segment:
Mortgage banking:
9,885
19,155
167,394
392,547
Total mortgage banking
Investment management
Adjusted Earnings Before Interest, Taxes, Depreciation and Amortization ("EBITDA") (1)
165,710
471,440
333,753
1,145,748
During the period:
Interest rate lock commitments issued
17,872,576
34,271,160
42,998,079
70,389,873
At end of period:
Interest rate lock commitments outstanding
13,879,343
Unpaid principal balance of loan servicing portfolio:
Owned:
Mortgage servicing rights and liabilities
258,610,649
10,438,935
269,049,584
Subserviced for PMT
204,174,462
473,224,046
Net assets of PennyMac Mortgage Investment Trust
2,070,640
2,343,390
Book value per share
65.38
54.49
We define “Adjusted EBITDA” as net income plus provision for income taxes, depreciation and amortization, excluding decrease (increase) in fair value of mortgage servicing rights (“MSRs”) net of mortgage servicing liabilities (“MSLs”), due to changes in the valuation inputs we use in our valuation models, increase (decrease) in
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fair value of excess servicing spread (“ESS”) payable to PMT, hedging losses (gains) associated with MSRs, stock-based compensation and interest expense on corporate debt or corporate revolving credit facilities and capital lease.
We believe that the presentation of Adjusted EBITDA provides useful information to investors regarding our results of operations because each measure assists both investors and management in analyzing and benchmarking the performance and value of our business. However, other companies may define Adjusted EBITDA differently, and as a result, our measures of Adjusted EBITDA may not be directly comparable to those of other companies.
Adjusted EBITDA measures have limitations as analytical tools, and should not be considered in isolation or as a substitute for analysis of our results as reported under GAAP. Some of these limitations are:
Because of these limitations, Adjusted EBITDA measures are not intended as alternatives to net income as an indicator of our operating performance and should not be considered as measures of discretionary cash available to us to invest in the growth of our business or as measures of cash that will be available to us to meet our obligations.
The following table presents a reconciliation of Adjusted EBITDA to our net income, the most directly comparable financial measure calculated and presented in accordance with GAAP, for each of the periods indicated:
7,364
7,335
(Increase) decrease in fair value of MSRs net of MSLs due to changes in valuation inputs used in valuation models
(233,826)
250,597
(557,892)
(55,529)
Increase in fair value of ESS payable to PennyMac Mortgage Investment Trust
Hedging losses (gains) associated with MSRs
176,005
(91,118)
Stock‑based compensation
Interest expense on corporate debt or corporate revolving credit facilities and capital lease
23,693
16,217
47,136
28,946
Adjusted EBITDA
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Business Trends
Due to significant inflationary pressures, the U.S. Federal Reserve raised the federal funds rate in the first half of 2022 and is expected to continue to raise interest rates through the year as well as reduce the federal government’s overall portfolio of Treasury and mortgage-backed securities. Increasing interest rates are expected to reduce the size of the mortgage origination market from an estimated $4.4 trillion in 2021 to a current forecast range from $2.4 trillion to $2.8 trillion for 2022 according to leading economists. Lower projected mortgage transaction volumes and increasing interest rates are expected to cause a decrease in all mortgage production activities and increase competition in the mortgage production business, while also leading to a reduction in prepayment speeds in our mortgage servicing portfolio from the elevated levels experienced in 2021. Rising interest rates will increase the costs of certain floating rate borrowings, as well as provide greater interest income from our placement fees on deposits and loans held for sale. We have and expect to continue to reduce business expenses to align with the lower projected mortgage production activities for the remainder of the year.
Income Before Provisions for Income Taxes
For the quarter ended June 30, 2022, income before provision for income taxes decreased $102.0 million compared to the same period in 2021. The decrease was primarily due to a $360.1 million decrease in Net gains on loans held for sale at fair value, a $57.3 million decrease in Loan origination fees and a $33.4 million decrease in fulfillment fees from PMT due to lower production volumes and overall gain on sale margins during the quarter ended June 30, 2022 compared to the same period in 2021, partially offset by a $223.6 million increase in Net loan servicing fees reflecting improved valuation results in our MSRs and a $128.7 million decrease in total expenses, primarily due to reductions in compensation, loan origination and servicing expenses.
For the six months ended June 30, 2022, income before provision for income taxes decreased $373.5 million compared to the same period in 2021. The decrease was primarily due to a $816.0 million decrease in Net gains on loans held for sale at fair value, a $93.5 million decrease in Loan origination fees and a $77.5 million decrease in fulfillment fees from PMT due to lower production volumes and gain on sale margins during the six months ended June 30, 2022 compared to the same period in 2021, partially offset by a $470.2 million increase in Net loan servicing fees reflecting improved valuation results in our MSRs and a $144.4 million decrease in total expenses.
Net Gains on Loans Held for Sale at Fair Value
In our production segment, revenues reflect the effects of increasing interest rates on both demand for mortgage loans and gain on sale margins during the quarter and six months ended June 30, 2022 compared to the strong demand due to the historically low interest rate environment that prevailed during the same periods in 2021.
During the quarter and six months ended June 30, 2022, we recognized Net gains on loans held for sale at fair value totaling $222.6 million and $521.0 million, respectively, a decrease of $360.1 million and $816.0 million, respectively, compared to the same periods in 2021. The decreases were primarily due to lower production volumes, lower overall gain on sale margins and decreases in early buyout (“EBO”) loan redelivery gains as a result of lower volumes and modifications as well as gain on sale margins during the quarter and six months ended June 30, 2022 compared to the same periods in 2021.
Our net gains on loans held for sale are summarized below:
Cash gains:
Total cash gains
Change in fair value of loans and derivative financial instruments outstanding at end of period:
197,575
113,265
(55,597)
(394,286)
Total non-cash gains
595,873
532,542
958,118
482,194
Total gains on sale from non-affiliates
From PennyMac Mortgage Investment Trust (primarily cash)
Interest rate lock commitments issued:
By loan type:
Government-insured or guaranteed mortgage loans
13,666,180
23,397,624
30,799,395
48,544,503
Conventional conforming mortgage loans
4,173,683
10,873,536
12,147,958
21,845,370
Jumbo mortgage loans
32,713
50,726
By production channel:
Consumer direct
4,326,453
14,107,575
13,437,966
27,491,791
Broker direct
2,219,730
4,506,355
5,746,359
10,177,154
Correspondent
11,326,393
15,657,230
23,813,754
32,720,928
10,884,506
Commitments to fund and purchase loans
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Non-cash elements of gain on sale of loans held for sale
Our gains on loans held for sale include both cash and non-cash elements. We recognize a significant portion of our gains on loans held for sale when we make commitments to purchase or fund mortgage loans. We recognize this gain in the form of interest rate lock commitments (“IRLC”). We adjust our initial gain amount as the loan purchase or origination process progresses until the loan is either funded or cancelled. We also receive non-cash proceeds on sale that include our estimate of the fair value of MSRs and we incur liabilities for mortgage servicing liabilities (which represent the fair value of the costs we expect to incur in excess of the fees we receive for EBO loans we have resold to third party investors) and for the fair value of our estimate of the losses we expect to incur relating to the representations and warranties we provide in our loan sale transactions.
The MSRs, MSLs, and liability for representations and warranties we recognize represent our estimate of the fair value of future benefits and costs we will realize for years in the future. These estimates represented approximately 179% and 195% of our gains on sales of loans held for sale at fair value for the quarter and six months ended June 30, 2022, respectively, as compared to 72% and 66% for the quarter and six months ended June 30, 2021, respectively. These estimates change as circumstances change and changes in these estimates are recognized in income in subsequent periods. Subsequent changes in the fair value of our MSRs significantly affect our results of operations.
Interest Rate Lock Commitments, Mortgage Servicing Rights and Mortgage Servicing Liabilities
The methods and key inputs we use to measure and update our measurements of IRLCs, MSRs and MSLs are detailed in Note 6 – Fair value – Valuation Techniques and Inputs to the consolidated financial statements included in this Quarterly Report.
Representations and Warranties
Our agreements with the purchasers and insurers include representations and warranties related to the 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 loan, property eligibility, borrower credit, income and asset requirements, and compliance with applicable federal, state and local law.
In the event of a breach of our representations and warranties, we may be required to either repurchase the loans with the identified defects or indemnify the purchaser or insurer. In such cases, we bear any subsequent credit losses on the loans. Our credit losses may be reduced by any recourse we have to correspondent originators that sold such loans to us and breached similar or other representations and warranties. In such event, we have the right to seek a recovery of related repurchase losses from that correspondent seller.
Our representations and warranties are generally not subject to stated limits of exposure. However, we believe that the current unpaid principal balance (“UPB”) of loans sold by us and subject to representation and warranty liability to date represents the maximum exposure to repurchases related to representations and warranties.
The level of the liability for losses under representations and warranties is difficult to estimate and requires considerable judgment. The level of loan repurchase losses is dependent on economic factors, purchaser or insurer loss mitigation strategies, and other external conditions that may change over the lives of the underlying loans. Our estimate of the liability for representations and warranties is developed by our credit administration staff and approved by our senior management credit committee which includes our senior executives and senior management in our loan production, loan servicing and credit risk management areas.
The method used to estimate our losses on representations and warranties is a function of our estimate of future defaults, loan repurchase rates, the severity of loss in the event of default, if applicable, and the probability of reimbursement by the correspondent loan seller. We establish a liability at the time loans are sold and review our liability estimate on a periodic basis.
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We recorded provisions for losses under representations and warranties relating to current loan sales as a component of Net gains on loans held for sale at fair value totaling $2.2 million and $6.2 million for the quarter and six months ended June 30, 2022, respectively, compared to $10.3 million and $20.4 million for the quarter and six months ended June 30, 2021, respectively. The decreases in the provision relating to current loan sales are primarily attributable to a reduction in loan sales.
We also recorded reductions in the liability of $2.2 million and $5.4 million during the quarter and six months ended June 30, 2022, respectively, compared to $3.6 million and $7.3 million during the quarter and six months ended June 30, 2021, respectively. The reductions in the liability resulted from previously sold loans meeting performance criteria established by the Agencies which significantly limit the likelihood of certain repurchase or indemnification claims.
Following is a summary of loan repurchase activity and the UPB of loans subject to representations and warranties:
Indemnification activity:
Loans indemnified at beginning of period
19,941
14,239
15,079
13,788
New indemnifications
5,725
5,100
11,366
7,255
Less indemnified loans sold, repaid or refinanced
605
2,805
1,384
4,509
Loans indemnified at end of period
25,061
16,534
Repurchase activity:
Total loans repurchased
28,020
25,928
45,549
43,914
Less:
Loans repurchased by correspondent lenders
8,391
13,763
15,849
22,452
Loans repaid by borrowers or resold with defects resolved
8,164
1,927
13,660
4,576
Net loans repurchased with losses chargeable to liability for representations and warranties
11,465
10,238
16,040
16,886
Losses charged to liability for representations and warranties
3,413
757
5,025
1,385
Unpaid principal balance of loans subject to representations and warranties
Liability for representations and warranties
During the quarter and six months ended June 30, 2022, we repurchased loans totaling $28.0 million and $45.5 million, respectively. We charged losses of $3.4 million and $5.0 million to the liability during the quarter and six months ended June 30, 2022, respectively. Our losses arising from representations and warranties have historically been minimized by our ability to either recover most of the losses from our correspondent sellers or from our ability to profitably refinance and resell repurchased loans. The recent increases in market interest rates may affect certain of our correspondent sellers’ ability to honor their obligations to repurchase delinquent loans. Furthermore, these market factors and expected economic slowdown may increase the level of borrower defaults, increasing the level of repurchases we are required to make and making profitable resolutions of repurchased loans more difficult. We expect these developments will increase the losses we incur in relation to our representations and warranties compared to our historical experience. However, we believe our recorded liability is presently adequate to absorb such losses.
Loan Origination Fees
Loan origination fees decreased $57.3 million and $93.5 million during the quarter and six months ended June 30, 2022, respectively, compared to the same periods in 2021. The decreases were primarily due to a decrease in the volume of loans we produced.
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Fulfillment Fees from PennyMac Mortgage Investment Trust
Fulfillment fees from PMT represent fees we collect for services we perform on behalf of PMT in connection with the acquisition, packaging and sale of loans. The fulfillment fees are calculated based on the number of loans we fulfill for PMT.
Fulfillment fees decreased $33.4 million and $77.5 million during the quarter and six months ended June 30, 2022, respectively, compared to the same periods in 2021. The decreases were primarily due to a decrease in loan production volume.
Net Loan Servicing Fees
Our net loan servicing fee income has two primary components: fees earned for servicing the loans and the effects of MSR and MSL valuation changes, net of hedging results as summarized below:
Loan servicing fees
Effects of MSRs and MSLs
Following is a summary of our loan servicing fees:
11,356
7,938
23,312
16,902
11,321
23,793
24,726
44,428
Average loan servicing portfolio
MSRs and MSLs
294,119,536
253,626,369
289,506,967
249,351,346
224,340,103
196,351,853
223,145,653
188,856,542
Loan servicing fees from non-affiliates generally relate to our MSRs which are primarily related to servicing we provide for loans included in Agency securitizations. These fees are contractually established at an annualized percentage of the unpaid principal balance of the loan serviced and we collect these fees from borrower payments. Loan servicing fees from PMT are primarily related to PMT’s MSRs and are established at monthly per-loan amounts based on whether the loan is a fixed-rate or adjustable-rate loan and the loan’s delinquency or foreclosure status as detailed in Note 4 – Transactions with Related Parties to the consolidated financial statements included in this Report. Other loan servicing fees are comprised primarily of borrower-contracted fees such as late charges and reconveyance fees.
The increases in loan servicing fees from non-affiliates and from PMT for the quarter and six months ended June 30, 2022 were primarily due to growth of our loan servicing portfolio as compared to the same periods in 2021. The decreases in other loan servicing fees for the quarter and six months ended June 30, 2022, were primarily due to decreases in fees charged to correspondent lenders related to borrower early loan payoffs resulting from the reduction in prepayment activity we experienced in the current rising interest rate environment as compared to the same periods in 2021.
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Mortgage Servicing Rights and Mortgage Servicing Liabilities
We have elected to carry our servicing assets and liabilities at fair value. Changes in fair value have two components: changes due to realization of the contractual servicing fees and changes due to changes in market inputs used to estimate the fair value of MSRs and MSLs. We endeavor to moderate the effects of changes in fair value by entering into derivatives transactions and, until March 2021, by financing certain of our purchases of MSRs with the sale of a portion of the MSR assets’ cash flows to PMT in the form of ESS.
Change in fair value of MSRs, MSLs and ESS and the related hedging results are summarized below:
MSR and MSL valuation changes:
Realization of cash flows
(121,724)
(85,671)
(232,879)
(168,334)
Other changes in fair value of mortgage servicing rights and mortgage servicing liabilities
233,826
(250,597)
557,892
55,529
Change in fair value of excess servicing spread
Hedging results
Total change in fair value of mortgage servicing rights, mortgage servicing liabilities and excess servicing spread financing net of hedging results
Average balances:
5,021,736
3,346,877
4,660,794
3,120,761
2,442
62,098
2,560
55,229
Excess servicing spread financing
43,484
Changes in realization of cash flows are influenced by changes in the level of servicing assets and liabilities and changes in estimates of the remaining cash flows to be realized. During the quarter and six months ended June 30, 2022, realization of cash flows increased primarily due to the growth in our investment in MSRs partially offset by a reduction in the rate at which the MSRs are expected to be realized as a result of slower prepayment expectations in 2022 as compared to 2021.
Other changes in fair value of MSRs increased during both the six months ended June 30, 2022 and the same period in 2021 due to significant increases in interest rates and resulting decreases in expected future prepayment speeds in each period. The change for the six months ended June 30, 2022 was larger than the same period in 2021 due to the larger increase in interest rates experienced during the six months ended June 30, 2022.
Hedging results reflect valuation losses attributable to the effects of interest rate increases on the fair value of the hedging instruments during the six months ended June 30, 2022 and 2021.
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Following is a summary of our loan servicing portfolio:
Loans serviced
Prime servicing:
Acquired
226,365,581
221,864,120
Total prime servicing
527,252,457
509,680,259
Special servicing subserviced for PMT
23,001
28,022
Total loans serviced
Delinquencies:
Owned servicing (1):
8,951,759
6,943,327
6,063,542
9,838,648
Delinquent loans in COVID-19 pandemic-related forbearance:
1,231,658
1,111,151
Subserviced for PMT (1):
1,489,066
1,164,782
898,735
1,810,910
197,966
171,114
Net Interest Expense
Net interest expense decreased $371,000 and $2.6 million during the quarter and six months ended June 30, 2022 compared to the same periods in 2021. The decreases were primarily due to:
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Management Fees from PennyMac Mortgage Investment Trust
Net assets of PMT at end of period
Management fees decreased $4.0 million and $4.3 million during the quarter and six months ended June 30, 2022, respectively, compared to the same periods in 2021. The decreases were primarily due to the non-recurrence of $3.3 million of performance inventive fees earned during the quarter and six months ended June 30, 2021, as result of PMT’s profitability during the measurement period ended June 30, 2021, on which its performance incentive fee was based. Base management fees declined due to a decrease in PMT’s shareholders’ equity which is the basis for the base management fees.
Compensation expenses are summarized below:
Salaries and wages
116,059
154,391
258,068
298,022
Severance
7,456
12,591
84
Incentive compensation
39,245
71,888
93,543
144,543
Taxes and benefits
20,484
29,879
55,314
61,476
Stock and unit-based compensation
Head count:
Average
5,706
7,151
6,316
7,008
Period end
5,088
7,231
Compensation expense decreased $66.9 million and $80.2 million during the quarter and six months ended June 30, 2022, respectively, compared to the same periods in 2021. The decreases were primarily due to reductions in loan production in 2022 that resulted in a workforce reduction and decreased incentive compensation accruals due to reduced achievement of profitability targets.
Loan origination expense decreased $30.7 million and $42.8 million during the quarter and six months ended June 30, 2022, respectively, compared to the same periods in 2021. The decreases were primarily due to decreased lending activities during the quarter and six months ended June 30, 2022 compared to the same periods during 2021.
Servicing expenses decreased $28.2 million and $48.7 million during the quarter and six months ended June 30, 2022, respectively, compared to the same periods in 2021. These decreases were primarily due to a larger reversal of the provision for estimated servicing advance losses recorded in prior periods than during the quarter and six months ended June 30, 2022. The reduction reflects the ongoing improvements in the performance of our servicing portfolio as we continue to resolve delinquent loans relating to the COVID-19 pandemic.
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Professional expenses decreased $4.0 million during the quarter ended June 30, 2022 compared to the same period in 2021 primarily due to a decrease in consulting expenses related to technology infrastructure. Professional expenses increased $2.8 million during the six months ended June 30, 2022 compared to the same period in 2021 primarily due to increase in legal and consulting fees related to our investments in technology infrastructure.
Marketing and advertising expense increased $2.8 million and $18.5 million during the quarter and six months ended June 30, 2022, respectively, compared to the same periods in 2021. The increases were primarily attributable to our new brand marketing campaign and increased marketing expenses for consumer direct lending.
Provision for Income Taxes
Our effective income tax rates were 27.2% and 26.5% during the quarter and six months ended June 30, 2022, respectively, compared to 26.9% and 26.0% during the same periods in 2021.
Balance Sheet Analysis
Following is a summary of key balance sheet items as of the dates presented:
1,420,357
346,942
Servicing advances, net
Investments in and advances to affiliates
44,271
41,391
550,159
705,656
LIABILITIES AND STOCKHOLDERS' EQUITY
Short-term debt
2,943,932
7,772,580
Long-term debt
3,571,315
3,077,330
6,515,247
10,849,910
631,134
796,908
Stockholders' equity
Leverage ratios:
Total debt / Stockholders' equity
1.9
3.2
Total debt / Tangible stockholders' equity
2.0
3.3
Total assets decreased $4.5 billion from $18.8 billion at December 31, 2021 to $14.3 billion at June 30, 2022. The decrease was primarily due to decreases of $6.2 billion in loans held for sale at fair value, partially offset by an increase of $1.3 billion in MSRs. The decrease in loans held for sale at fair value was primarily due to lower origination volume during the six months ended June 30, 2022.
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Total liabilities decreased $4.5 billion from $15.3 billion at December 31, 2021 to $10.8 billion at June 30, 2022. The decrease was primarily due to a decrease of $4.8 billion in short-term debt, partially offset by an increase of $494 million in long-term debt, reflecting decreased borrowing requirements relating to our inventory of loans held for sale, partially offset by financing of our growing investment in MSRs.
Cash Flows
Our cash flows are summarized below:
Change
Operating
4,799,918
Investing
(282,138)
Financing
(3,233,863)
1,283,917
Our cash flows resulted in a net increase in cash and restricted cash of $1.1 billion during the six months ended June 30, 2022 as discussed below.
Operating activities
Net cash provided by operating activities totaled $6.1 billion during the six months ended June 30, 2022 compared with net cash provided in operating activities of $1.3 billion during the same period in 2021. Our cash flows from operating activities are primarily influenced by changes in the levels of our inventory of mortgage loans held for sale as shown below:
Cash flows from:
6,015,822
1,530,900
Other operating sources
115,694
(199,302)
Investing activities
Net cash used in investing activities during the six months ended June 30, 2022 totaled $427.4 million, primarily due to $574.1 million in net settlement of derivative financial instruments used to hedge our investment in MSRs, partially offset by a $188.2 million decrease in margin deposits. Net cash used in investing activities during the six months ended June 30, 2021 totaled $145.2 million, primarily due to $345.6 million in net settlement of derivative financial instruments used to hedge our investment in MSRs, partially offset by a $134.7 million decrease in margin deposits.
Financing activities
Net cash used in financing activities totaled $4.6 billion during the six months ended June 30, 2022, primarily due to a decrease of $4.8 billion in short-term borrowings and $255.1 million of common stock repurchases, partially offset by issuance of a $500 million term note. The reduction in borrowings reflects reduced inventory of loans held for sale. Net cash used in financing activities totaled $1.4 billion during the six months ended June 30, 2021, primarily due to a decrease of $761.0 million in borrowings, $443.4 million of repurchase of our common stock and $134.6 million of repayment of ESS financing.
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Liquidity and Capital Resources
Our liquidity reflects our ability to meet our current obligations (including our operating expenses and, when applicable, the retirement of, and margin calls relating to, our debt, and margin calls relating to hedges on our commitments to purchase or originate mortgage loans and on our MSR investments), fund new originations and purchases, and make investments as we identify them. We expect our primary sources of liquidity to be through cash flows from business activities, proceeds from bank borrowings and proceeds from and issuance of equity or debt offerings. In addition, we utilized existing borrowings to increase our cash balances to over $1.4 billion in the second quarter of 2022.
The effect of the COVID-19 pandemic on our operations, liquidity and capital resources remain uncertain and difficult to predict, for further discussion of the potential impacts of the COVID-19 pandemic please also see the section entitled “Risk Factors” in Part II. Item 1A and in our Annual Report on Form 10-K for the year ended December 31, 2021, filed with the SEC on February 23, 2022.
Our current borrowing strategy is to finance our assets where we believe such borrowing is prudent, appropriate and available. Our borrowing activities are in the form of sales of assets under agreements to repurchase, sales of mortgage loan participation purchase and sale certificates, notes payable secured by mortgage servicing rights, a capital lease and unsecured senior notes. A significant amount of our borrowings have short-term maturities and provide for advances with terms ranging from 30 days to 364 days. Because a significant portion of our current debt facilities consist of short-term debt, 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.
Our repurchase agreements represent the sales of assets together with agreements for us to buy back the respective assets at a later date. The table below presents the average, maximum daily and ending balances:
Maximum daily balance
Balance at period end
8,262,251
The differences between the average and maximum daily balances on our repurchase agreements reflect both the effect of decreasing loan inventory levels during the six months ended June 30, 2022 and the fluctuations throughout the periods of our inventory as we fund and pool mortgage loans for sale in guaranteed mortgage securitizations.
Our repurchase 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 decrease in the market value (as determined by the applicable lender) of the assets subject to the related financing agreement. 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 secured financing agreements at PLS require us to comply with various financial covenants. The most significant financial covenants currently include the following:
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With respect to servicing performed for PMT, PLS is also subject to certain covenants under PMT’s debt agreements. Covenants in PMT’s debt agreements are equally, or sometimes less, restrictive than the covenants described above.
Our Unsecured Notes’ indentures contain covenants that limit the Company and our restricted subsidiaries’ ability to engage in specified types of transactions, including, but not limited to the following:
Although these financial covenants limit the amount of indebtedness that we may incur and affect 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.
We are also subject to liquidity and net worth requirements established by the Federal Housing Finance Agency (“FHFA”) for Agency seller/servicers and Ginnie Mae for single-family issuers. FHFA and Ginnie Mae have established minimum liquidity and net worth requirements for their approved non-depository single-family sellers/servicers in the case of Fannie Mae, Freddie Mac, and Ginnie Mae for its approved single-family issuers, as summarized below:
We believe that we are currently in compliance with the applicable Agency requirements.
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On August 4, 2021, our Board of Directors increased our common stock repurchase program from $1 billion to $2 billion. Share repurchases may be effected through open market purchases or privately negotiated transactions in accordance with applicable rules and regulations. The stock repurchase program does not have an expiration date and the authorization does not obligate us to acquire any particular amount of common stock. From inception through June 30, 2022, we have repurchased approximately $1.6 billion of common shares under our stock repurchase program.
We continue to explore a variety of means of financing our business, including debt financing through bank warehouse lines of credit, bank loans, repurchase agreements, securitization transactions and corporate debt. However, there can be no assurance as to how much additional financing capacity such efforts will produce, what form the financing will take or whether such efforts will be successful.
Off-Balance Sheet Arrangements and Guarantees
As of June 30, 2022, we have not entered into any off-balance sheet arrangements.
Debt Obligations
As described further above in “Liquidity and Capital Resources,” we currently finance certain of our assets through short-term borrowings with major financial institutions in the form of sales of assets under agreements to repurchase and mortgage loan participation purchase and sale agreements. We access the capital market for long-term debt through the issuance of secured term notes and unsecured senior notes and we have an outstanding long term capital lease. The issuer under our secured term note facilities is PLS or a wholly-owned issuer trust guaranteed by PNMAC. In addition, we have issued unsecured senior notes guaranteed by certain of our restricted wholly-owned domestic subsidiaries.
Under the terms of these financing agreements, PLS is required to comply with certain financial covenants, as described further above in “Liquidity and Capital Resources,” and various non-financial covenants customary for transactions of this nature. As of June 30, 2022, we believe we were in compliance in all material respects with these covenants.
Many of our debt financing agreements contain a condition precedent to obtaining additional funding that requires PLS to maintain positive net income for at least one of the previous two consecutive quarters, or other similar measures. PLS is compliant with all such conditions.
The financing agreements also contain margin call provisions that, upon notice from the applicable lender, require us to transfer cash or, in some instances, additional assets in an amount sufficient to eliminate any margin deficit. 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.
In addition, the financing agreements contain events of default (subject to certain materiality thresholds and grace periods), including payment defaults, breaches of covenants and/or certain representations and warranties, cross-defaults, guarantor defaults, servicer termination events and defaults, material adverse changes, bankruptcy or insolvency proceedings and other events of default customary for these types of transactions. The remedies for such events of default are also customary for these types of transactions and include the acceleration of the principal amount outstanding under the agreements and the liquidation by our lenders of the mortgage loans or other collateral then subject to the agreements.
The Company issued unsecured senior notes (the “Unsecured Notes”) to qualified institutional buyers in 2020 and 2021 under Rule 144A of the Securities Act of 1933, as amended. The Unsecured Notes are fully and unconditionally guaranteed, jointly and severally, on a senior unsecured basis by the Company’s existing and future wholly-owned domestic subsidiaries (other than certain excluded subsidiaries defined in the indentures under which the Unsecured Notes were issued). The Company is required to maintain certain financial covenants under terms of the Unsecured Notes, as described further above in “Liquidity and Capital Resources.” We believe the Company was in compliance with all financial covenants in the Unsecured Notes as of June 30, 2022.
Our debt obligations have the following size and maturities:
Outstanding
Lender
indebtedness (1)
facility size (2)
facility (2)
Maturity date (2)
(dollar amounts in thousands)
952,552
2,950,000
1,200,000
Credit Suisse First Boston Mortgage Capital LLC and Citibank, N.A. (3)
477,673
1,425,000
380,000
Goldman Sachs Bank USA
186,361
1,000,000
225,000
175,646
950,000
600,000
86,760
200,000
79,082
73,810
50,000
59,891
300,000
33,865
550,000
June 7, 2023
Notes payable
GMSR 2018-GT1 Notes
February 25, 2023
GMSR 2018-GT2 Notes
August 25, 2023
GMSR 2022-GT1 Notes
May 25, 2027
Unsecured Senior Notes - 5.375%
Unsecured Senior Notes - 4.25%
Unsecured Senior Notes - 5.75%
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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 June 30, 2022:
maturity of
advances under
Counterparty
repurchase agreement
Credit Suisse First Boston Mortgage Capital LLC and Citibank, N.A. (1)
Credit Suisse First Boston Mortgage Capital LLC (2)
Citibank, N.A. (2)
All debt financing arrangements that matured between June 30, 2022 and the date of this Report have been renewed or extended and are described in Note 12—Short-Term Debt to the accompanying consolidated financial statements.
Critical Accounting Estimates
Preparation of financial statements in compliance with GAAP requires us to make estimates that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements, and revenues and expenses during the reporting period. Certain of these estimates significantly influence the portrayal of our financial condition and results, and they require us to make difficult, subjective or complex judgments. Our critical accounting policies primarily relate to our fair value estimates.
Our Annual Report on Form 10-K for the year ended December 31, 2021 contains a discussion of our critical accounting policies, which utilize relevant critical accounting estimates.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Market risk is the exposure to loss resulting from changes in interest rates, foreign currency exchange rates, commodity prices, equity prices, real estate values and other market-based risks. The primary market risks that we are exposed to are fair value risk, interest rate risk and prepayment risk.
Fair Value Risk
Our IRLCs, mortgage loans held for sale, MSRs and MSLs are reported at their fair values. The fair value of these assets fluctuates primarily due to changes in interest rates. The fair value risk we face is primarily attributable to interest rate risk and prepayment risk.
Interest Rate Risk
Interest rate risk is highly sensitive to many factors, including governmental monetary and tax policies, domestic and international economic and political considerations, and other factors beyond our control. Changes in interest rates affect both the fair value of, and interest income we earn from, our mortgage-related investments and our derivative financial instruments. This effect is most pronounced with fixed-rate mortgage assets.
In general, rising interest rates negatively affect the fair value of our IRLCs and inventory of mortgage loans held for sale and positively affect the fair value of our MSRs. Changes in interest rates significantly influence the prepayment speeds of the loans underlying our investments in MSRs, which can have a significant effect on their fair values. Changes in interest rate are most prominently reflected in the prepayment speeds of the loans underlying our investments in MSRs and the discount rate used in their valuation.
Our operating results will depend, in part, on differences between the income from our investments and our financing costs. Presently much of our debt financing is based on a floating rate of interest calculated on a fixed spread over the relevant index, as determined by the particular financing arrangement.
Prepayment Risk
To the extent that the actual prepayment rate on the mortgage loans underlying our MSRs differs from what we projected when we initially recognized these assets and liabilities when we measure fair value as of the end of each reporting period, the carrying value of these assets and liabilities will be affected. In general, a decrease in the principal balances of the mortgage loans underlying our MSRs or an increase in prepayment expectations will decrease our estimates of the fair value of the MSRs, thereby reducing net servicing income, partially offset by the beneficial effect on net servicing income of a corresponding reduction in the fair value of our MSLs.
Risk Management Activities
We engage in risk management activities primarily in an effort to mitigate the effect of changes in interest rates on the fair value of our assets. To manage this price risk, we use derivative financial instruments acquired with the intention of moderating the risk that changes in market interest rates will result in unfavorable changes in the fair value of our assets, primarily prepayment exposure on our MSR investments as well as IRLCs and our inventory of loans held for sale. Our objective is to minimize our hedging expense and maximize our loss coverage based on a given hedge expense target. We do not use derivative financial instruments other than IRLCs for purposes other than in support of our risk management activities.
Our strategies are reviewed daily within a disciplined risk management framework. We use a variety of interest rate and spread shifts and scenarios and define target limits for market value and liquidity loss in those scenarios. With respect to our IRLCs and inventory of loans held for sale, we use MBS forward sale contracts to lock in the price at which we will sell the mortgage loans or resulting MBS, and further use MBS put options to mitigate the risk of our IRLCs not closing at the rate we expect. With respect to our MSRs, we seek to mitigate mortgage-based loss exposure utilizing MBS forward purchase and sale contracts, address exposures to smaller interest rate shifts with Treasury and interest rate swap futures, and use options and swaptions to achieve target coverage levels for larger interest rate shocks.
Fair Value Sensitivities
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 inputs 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.
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The following tables summarize the estimated change in fair value of MSRs as of June 30, 2022, given several shifts in pricing spreads, prepayment speed and annual per loan cost of servicing:
Change in fair value attributable to shift in:
-20%
-10%
-5%
+5%
+10%
+20%
Prepayment speed
346,740
167,258
82,179
(79,424)
(156,226)
(302,462)
Pricing spread
327,698
158,923
78,280
(76,013)
(149,848)
(291,326)
Annual per-loan cost of servicing
150,461
75,231
37,615
(37,615)
(75,231)
(150,461)
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, as amended (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 Rule 13a-15 under the Exchange Act. Based on our evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures were effective, as of the end of the period covered by this Report, to provide reasonable assurance that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the applicable rules and forms, and that it is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.
Changes in Internal Control over Financial Reporting
There have been no changes in our internal control over financial reporting during the quarter ended June 30, 2022 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Item 1. Legal Proceedings
From time to time, the Company may be involved in various legal and regulatory proceedings, lawsuits and other claims arising in the ordinary course of its business. The amount, if any, of ultimate liability with respect to such matters cannot be determined, but despite the inherent uncertainties of litigation, management believes that the ultimate disposition of any such proceedings and exposure will not have, individually or taken together, a material adverse effect on the financial condition, results of operations, or cash flows of the Company. See Note 16 — Commitments and Contingencies, to the financial statements contained in this report for a discussion of legal proceedings that are incorporated by reference into this Item 1.
Item 1A. Risk Factors
There have been 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, 2021, filed with the SEC on February 23, 2022.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
There were no sales of unregistered equity securities during the quarter ended June 30, 2022.
Stock Repurchase Program
The following table summarizes information about our stock repurchase during the quarter ended June 30, 2022:
Total numberof sharespurchased
Average pricepaid per share
Total number of shares purchasedas part of publicly announced plans or program (1)
Approximate dollarvalue of shares thatmay yet bepurchased under the plans or program (1)
April 1, 2022 – April 30, 2022
904,989
48.63
503,957,362
May 1, 2022 – May 31, 2022
559,604
48.04
477,072,376
June 1, 2022 – June 30, 2022
962,400
44.42
434,321,914
2,426,993
46.83
Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
Not applicable.
Item 5. Other Information
None
Item 6. Exhibits
Incorporated by Referencefrom the Below-Listed Form(Each Filed under SEC FileNumber 001-35916 or001-38727)
Exhibit No.
Exhibit Description
Form
Filing Date
2.1
Contribution Agreement and Plan of Merger, dated as of August 2, 2018, by and among PennyMac Financial Services, Inc., New PennyMac Financial Services, Inc., New PennyMac Merger Sub, LLC, Private National Mortgage Acceptance Company, LLC, and the Contributors.
8-K12B
November 1, 2018
3.1
Amended and Restated Certificate of Incorporation of New PennyMac Financial Services, Inc.
3.1.1
Certificate of Amendment to Amended and Restated Certificate of Incorporation of New PennyMac Financial Services, Inc.
Amended and Restated Bylaws of New PennyMac Financial Services, Inc.
3.2.1
Amendment to Amended and Restated Bylaws of PennyMac Financial Services, Inc. (formerly known as New PennyMac Financial Services, Inc.).
10-Q
November 4, 2019
10.1†
2022 Equity Incentive Plan
*
10.2
Amendment No. 1 to Third Amended and Restated Base Indenture, dated as of June 8, 2022, by and among PNMAC GMSR ISSUER TRUST, Citibank, N.A., PennyMac Loan Services, LLC, Credit Suisse First Boston Mortgage Capital LLC, and Pentalpha Surveillance LLC.
8-K
June 14, 2022
10.3
Series 2022-GT1 Indenture Supplement to Third Amended and Restated Base Indenture, dated as of June 8, 2022, by and among PNMAC GMSR ISSUER TRUST, Citibank, N.A., PennyMac Loan Services, LLC, and Credit Suisse First Boston Mortgage Capital LLC.
10.4
Flow Servicing Agreement, dated as of June 1, 2022, by and between PennyMac Loan Services, LLC and PennyMac Corp.
10.5
Amendment No. 2 to Third Amended and Restated Base Indenture, dated as of June 9, 2022, by and among PNMAC GMSR ISSUER TRUST, Citibank, N.A., PennyMac Loan Services, LLC, Credit Suisse First Boston Mortgage Capital LLC and Pentalpha Surveillance LLC.
10.6
Joint Amendment No. 7 to Series 2016-MSRVF1 Indenture Supplement and Amendment No. 5 to Series 2020-SPIADVF1 Indenture Supplement, dated as of June 8, 2022, by and among PNMAC GMSR ISSUER TRUST, Citibank, N.A., PennyMac Loan Services, LLC, Credit Suisse First Boston Mortgage Capital LLC, and Credit Suisse AG, Cayman Islands Branch.
10.7
Omnibus Amendment No. 1 to Amended and Restated Master Repurchase Agreements, dated as of June 8, 2022, by and among PennyMac Loan Services, LLC, Credit Suisse AG, Cayman Islands Branch, Citibank, N. A., and Credit Suisse First Boston Mortgage Capital, LLC, MSR Collateralized Notes, SERIES 2016-MSRVF1 and SERIES 2020-SPIADVF1.
10.8
Amendment No. 2 to SERIES 2020-SPIADVF1 Amended and Restated Master Repurchase Agreement, dated as of June 9, 2022, by and among PennyMac Loan Services, LLC, Credit Suisse AG, Cayman Islands Branch, Citibank, N. A., and Credit Suisse First Boston Mortgage Capital, LLC.
10.9
Amendment No. 1 to Amended and Restated Master Repurchase Agreement, dated as of June 9, 2022, by and among PNMAC GMSR ISSUER TRUST, PennyMac Loan Services, LLC and Private National Mortgage Acceptance Company, LLC, Credit Suisse AG, Cayman Islands Branch, Citibank, N. A., and Credit Suisse First Boston Mortgage Capital, LLC.
31.1
Certification of David A. Spector pursuant to Rule 13a-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2
Certification of Daniel S. Perotti pursuant to Rule 13a-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1
Certification of David A. Spector pursuant to Rule 13a-14(b) and 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
**
32.2
Certification of Daniel S. Perotti pursuant to Rule 13a-14(b) and 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
Interactive data files pursuant to Rule 405 of Regulation S-T: (i) the Consolidated Balance Sheets as of June 30, 2022 and December 31, 2021 (ii) the Consolidated Statements of Operation for the quarter ended June 30, 2022 and June 30, 2021, (iii) the Consolidated Statements of Changes in Stockholders’ Equity for the quarter ended June 30, 2022 and June 30, 2021, (iv) the Consolidated Statements of Cash Flows for the quarter ended June 30, 2022 and June 30, 2021 and (v) the Notes to the Consolidated Financial Statements.
101.INS
XBRL Instance Document – the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document
101.SCH
Inline XBRL Taxonomy Extension Schema Document
101.CAL
Inline XBRL Taxonomy Extension Calculation Linkbase Document
82
101.DEF
Inline XBRL Taxonomy Extension Definition Linkbase Document
101.LAB
Inline XBRL Taxonomy Extension Label Linkbase Document
101.PRE
Inline XBRL Taxonomy Extension Presentation Linkbase Document
104
Cover Page Interactive Data File (embedded within the Inline XBRL document and contained in Exhibit 101).
*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.
83
SIGNATURES
Pursuant to the requirements 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.
Dated: August 5, 2022
By:
/s/ DAVID A. SPECTOR
David A. Spector
Chairman and Chief Executive Officer
(Principal Executive Officer)
/s/ DANIEL S. PEROTTI
Daniel S. Perotti
Senior Managing Director and
Chief Financial Officer
(Principal Financial Officer)