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 billionas compared to $147.4 billionfor 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 Developmentthrough the Federal Housing Administration, or insured or guaranteed by the U.S. Department of Veterans Affairsor 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 billionand $51.5 billionof such loans during the nine month periods ended September 30, 2022and 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, 2022and 2021, we received sourcing fees totaling $3.6 millionand $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 Maeare each referred to as an "Agency" and, collectively, as the "Agencies." 60 --------------------------------------------------------------------------------
• 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
Sales of loans acquired for sale: To nonaffiliates
$ 9,709,969 $ 29,865,473 $ 31,922,573 $ 93,365,579To PennyMac Financial Services, Inc. 12,561,276 15,996,702
$ 22,271,245 $ 45,862,175 $ 68,466,739 $ 144,836,978Net gains on loans acquired for sale $ 4,313 $ 16,196$ 15,937 $ 96,934Investment activities resulting from correspondent
Receipt of MSRs as proceeds from sales of loans
$ 178,001 $ 424,912 $ 543,255 $ 1,245,546Retention 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
interest rate sensitive investments
Our interest rate sensitive investments include:
• Mortgage servicing rights.quarterly and nine months
million MSR each as proceeds from the sale of loans acquired for
sale. We held approximately
$3.9 billionof MSRs at fair value at September 30, 2022.
Pass-Through Securities & Non-Agency Senior MBS, Net Sales
9 months finished
Total fair value of pass-through securities and non-agency senior MBS
Credit Sensitive Investments CRT Arrangements During the quarter and nine months ended
September 30, 2022, we recognized investment income of approximately $11.3 millionand 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 billionat September 30, 2022.
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 millionof 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 millionat 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 Securitiesto the consolidated financial statements included in this Report, we include loans underlying these and similar transactions with UPBs totaling approximately $1.9 billionand fair values totaling $1.5 billionon our consolidated balance sheet as of September 30, 2022. 61 --------------------------------------------------------------------------------
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 $ 1,029,163Net 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.
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.
• 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
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