PENNYMAC MORTGAGE INVESTMENT TRUST Management’s Discussion and Analysis of Financial Condition and Results of Operations (Form 10-Q) | Market Screener

The following discussion and analysis of financial condition and results of
operations should be read with the consolidated financial statements and the
related notes of PennyMac Mortgage Investment Trust ("PMT") included within this
Quarterly Report on Form 10-Q (this "Report").

Statements contained in this Report may constitute forward-looking statements
within the meaning of the Private Securities Litigation Reform Act of 1995.
These statements involve known and unknown risks, uncertainties and other
factors, which may cause actual results to be materially different from those
expressed or implied in such statements. You can identify these forward-looking
statements by words such as "may," "will," "should," "expect," "anticipate,"
"believe," "estimate," "intend," "plan" and other similar expressions. You
should consider our forward-looking statements in light of the risks discussed
under the heading "Risk Factors," as well as our consolidated financial
statements, related notes, and the other financial information appearing
elsewhere in this Report and our other filings with the United States Securities
and Exchange Commission ("SEC"). The forward-looking statements contained in
this Report are made as of the date hereof and we assume no obligation to update
or supplement any forward-looking statements.

The following discussion and analysis provides information that we believe is
relevant to an assessment and understanding of our consolidated results of
operations and financial condition. Unless the context indicates otherwise,
references in this Report to the words "we," "us," "our" and the "Company" refer
to PMT and its affiliates.

Our Company

We are a specialty finance company that invests primarily in mortgage-related
assets. Our objective is to provide attractive risk-adjusted returns to our
investors over the long-term, primarily through dividends and secondarily
through capital appreciation. Our investment focus is on the mortgage-related
assets that we create through our correspondent production activities, including
mortgage servicing rights ("MSRs"), subordinate mortgage-backed securities
("MBS"), and credit risk transfer ("CRT") arrangements, which include CRT
Agreements and CRT strips that absorb credit losses on certain of the loans we
sold. We also invest in Agency MBS and senior non-Agency MBS. We have also
historically invested in distressed mortgage assets (distressed loans and real
estate acquired in settlement of loans ("REO")), which we have substantially
liquidated.

We are externally managed by PNMAC Capital Management, LLC ("PCM"), an
investment adviser that specializes in and focuses on U.S. mortgage assets. Our
loans and MSRs are serviced by PennyMac Loan Services, LLC ("PLS"). PCM and PLS
are both indirect controlled subsidiaries of PennyMac Financial Services, Inc.
("PFSI"), a publicly-traded mortgage banking and investment management company.

During the nine months ended September 30, 2022, we purchased newly originated
prime credit quality residential loans with fair values totaling $67.4 billion
as compared to $147.4 billion for the nine months ended September 30, 2021, in
our correspondent production business. To the extent that we purchase loans that
are insured by the U.S. Department of Housing and Urban Development through the
Federal Housing Administration, or insured or guaranteed by the U.S. Department
of Veterans Affairs or U.S. Department of Agriculture, we and PLS have agreed
that PLS will fulfill and purchase such loans, as PLS is a Government National
Mortgage Association ("Ginnie Mae") approved issuer and we are not. This
arrangement has enabled us to compete with other correspondent aggregators that
purchase both government and conventional loans. Our purchase volume included
$36.5 billion and $51.5 billion of such loans during the nine month periods
ended September 30, 2022 and 2021, respectively. We receive a sourcing fee from
PLS based on the unpaid principal balance ("UPB") of each loan that we sell to
PLS under such arrangement, and earn interest income on the loan for the period
we hold it before the sale to PLS. During the nine months ended September 30,
2022 and 2021, we received sourcing fees totaling $3.6 million and $4.9 million,
respectively.

The Company operates in four segments, Communications Production, Interest Rate Sensitive Strategies, Credit Sensitive Strategies, and Our Corporate Operations, as described below.

• The Credit Sensitive Strategic segment represents investments in CRT.

Arrangements Containing CRT Agreements and CRT Securities (collectively, “CRT

arrangements”), subordinated mortgage-backed securities (“MBS”), distressed

loans and real estate.

• Interest rate sensitive strategic segments represent our investments

In MSR, PFSI, Agency, and

Senior non-sovereign MBS and related interest rate hedging activities.

• The correspondent production segment is

acts as an intermediary between lenders and the capital markets.

Purchasing, pooling and reselling of newly originated high quality credit

Loans directly or in the form of MBS using PCM’s services.



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

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• Our Corporate Division includes Administrative Expenses, Corporate Expenses amounts

and constant interest income.


Our Investment Activities

Correspondent Production

Our correspondent production activities include the acquisition and sale of newly originated high quality, high credit quality residential mortgages. Correspondent Productions is the source of investment in MSRs, private label non-agency securitizations and CRT arrangements through 2020. Our correspondent production and resulting investment activities are summarized below.

                                           Quarter ended September 30,          Nine months ended September 30,
                                              2022               2021               2022                 2021
                                                                      (in

thousand)

Sales of loans acquired for sale:
To nonaffiliates                         $     9,709,969     $ 29,865,473     $     31,922,573       $  93,365,579
To PennyMac Financial Services, Inc.          12,561,276       15,996,702   

36,544,166 51,471,399

                                         $    22,271,245     $ 45,862,175     $     68,466,739       $ 144,836,978
Net gains on loans acquired for sale     $         4,313     $     16,196     $         15,937       $      96,934
Investment activities resulting from
correspondent

Manufacturing:

Receipt of MSRs as proceeds from sales
of loans                                 $       178,001     $    424,912     $        543,255       $   1,245,546
Retention of interest in
securitization of loans
  secured by investment properties,
net of
  associated asset-backed financing                    -            9,755               23,485               9,755
Total investments resulting from
correspondent
  production activities                  $       178,001     $    434,667   

$566,740 $1,255,301

interest rate sensitive investments

Our interest rate sensitive investments include:

• Mortgage servicing rights.quarterly and nine months

September 30, 2022received approximately $178 million When $543.3

million MSR each as proceeds from the sale of loans acquired for

       sale. We held approximately $3.9 billion of MSRs at fair value at
       September 30, 2022.

REIT Eligible Agent and senior mortgage collateral or mortgage related

Securities.bought about $1.9 billion institutional fixed rate

Pass-Through Securities & Non-Agency Senior MBS, Net Sales

9 months finished September 30, 2022. Held agency flat-rate system

Total fair value of pass-through securities and non-agency senior MBS

about $3.7 billion and September 30, 2022.


Credit Sensitive Investments

CRT Arrangements

During the quarter and nine months ended September 30, 2022, we recognized
investment income of approximately $11.3 million and losses of $64.0 million,
respectively, relating to our holdings of CRT securities. We held net
CRT-related investments (comprised of deposits securing CRT arrangements, CRT
derivatives, CRT strips and Interest-only security payable) totaling
approximately $1.2 billion at September 30, 2022.

Subordinated Mortgage Backed Securities


Subordinate MBS provide us with a higher yield than senior securities. However,
we retain credit risk in the subordinate MBS since they are the first securities
to absorb credit losses relating to the underlying loans. We purchased
approximately $184.7 million of subordinate credit-linked securities during the
nine months ended September 30, 2022. We held the subordinate credit-linked
securities with fair values totaling approximately $176.1 million at
September 30, 2022.

As the result of the Company's consolidation of the variable interest entities
that issued the subordinate MBS described in Note 6 - Variable Interest Entities
- Subordinate Mortgage-Backed Securities to the consolidated financial
statements included in this Report, we include loans underlying these and
similar transactions with UPBs totaling approximately $1.9 billion and fair
values totaling $1.5 billion on our consolidated balance sheet as of
September 30, 2022.

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taxation


We believe that we qualify to be taxed as a REIT and as such will not be subject
to federal income tax on that portion of our income that is distributed to
shareholders as long as we meet applicable REIT asset, income and share
ownership tests. If we fail to qualify as a REIT, and do not qualify for certain
statutory relief provisions, our profits will be subject to income taxes and we
may be precluded from qualifying as a REIT for the four tax years following the
year we lose our REIT qualification.

A portion of our activities, including our correspondent production business, is
conducted in our taxable REIT subsidiary ("TRS"), which is subject to corporate
federal and state income taxes. Accordingly, we make a provision for income
taxes with respect to the operations of our TRS. We expect that the effective
rate for the provision for income taxes may be volatile in future periods. Our
goal is to manage the business to take full advantage of the tax benefits
afforded to us as a REIT.

We evaluate our deferred tax assets quarterly to determine if valuation
allowances are required based on the consideration of all available positive and
negative evidence using a "more-likely-than-not" standard with respect to
whether deferred tax assets will be realized. Our evaluation considers, among
other factors, taxable loss carryback availability, expectations of sufficient
future taxable income, trends in earnings, existence of taxable income in recent
years, the future reversal of temporary differences, and available tax planning
strategies that could be implemented, if required. The ultimate realization of
our deferred tax assets depends primarily on our ability to generate future
taxable income during the periods in which the related deferred tax assets
become deductible.

Non-cash investment income


A substantial portion of our net investment income is comprised of non-cash
items, including fair value adjustments, recognition of the fair value of assets
created and liabilities incurred in loan sale transactions and the
capitalization and amortization of certain assets and liabilities. Because we
have elected, or are required by accounting principles generally accepted in the
United States ("GAAP"), to record certain of our financial assets (comprised of
MBS, loans acquired for sale at fair value, loans at fair value and ESS), our
derivatives and CRT strips, our MSRs, and our asset-backed financings and
interest-only security payable at fair value, a substantial portion of the
income or loss we record with respect to such assets and liabilities results
from non-cash changes in fair value.

The amounts of non-cash investment (loss) income items included in net investment income are as follows:

                                           Quarter ended September 30,            Nine months ended September 30,
                                              2022                2021             2022                   2021
                                                                    (dollars in thousands)
Net (losses) gains on investments and
financings:
Mortgage-backed securities               $     (251,477 )      $  (18,591 )   $      (620,500 )     $         (60,456 )
Loans:
Held in variable interest entities              (99,267 )            (241 )          (318,300 )                (3,250 )
Distressed                                           44               (63 )               495                      96
ESS                                                   -                 -                   -                   1,651
CRT arrangements                                (13,854 )          26,167            (156,031 )               162,128
Asset-backed financings at fair value            92,993             1,663             298,834                   4,146
                                               (271,561 )           8,935            (795,502 )               104,315
Net gains on loans acquired for sale
(1)                                             160,514           370,096             445,492               1,091,476
Net loan servicing fees-MSR valuation
adjustments (2)                                  94,690          (134,869 )           462,347                (166,628 )
                                         $      (16,357 )      $  244,162     $       112,337       $       1,029,163
Net investment income                    $      151,065        $   47,854     $       254,404       $         370,817
Non-cash items as a percentage of net
investment
  income                                            (11 %)            510 %                44 %                   278 %


(1) Amounts represent liability for MSRs, representations and warranties received

Loan sale transactions and changes in fair value of loans, occurring at IRLC

Hedges of derivatives held at period end.

(2) Includes changes in fair value related to MSR derivative hedging instruments.

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We accept or pay cash related to:

• Monthly principal investment in mortgage-backed securities.

and payment of interest from the issuer of such securities or from the sale thereof.

investment;



     •  Loan investments when the investments are paid down, paid off or sold,
        when payments of principal and interest occur on such loans or when the
        properties acquired in settlement of loans are sold;

• ESS investment with a portion of monthly interest payments

        collected on the loans in the ESS reference pool or from sales of the
        investments;

• CRT arrangements with a portion of both interest payments collected

Loans in the reference pool of the CRT arrangement and release to us

        the deposits securing the arrangements as principal on such loans is
        repaid;

• Hedging instruments when receiving or making margin as a fair trade

The value of each commodity is determined when the commodity reaches maturity or

If you effectively cancel the transaction through an offsetting transaction.

• Our Liability for Representations and Warranties When Repurchasing Loans

or settle loss claims from investors.When

• MSR in the form of Loan Service Fee and Deposit Placement Fee

We manage loans on behalf of borrowers and investors

service.

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