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 six months ended June 30, 2022, we purchased newly originated prime credit quality residential loans with fair values totaling $44.6 billionas compared to $101.6 billionfor the six months ended June 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. 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 six months ended June 30, 2022, we received sourcing fees totaling $2.4 million, relating to $23.4 billionin UPB of loans that we sold to PLS.
We operate our business in four segments: Correspondent production, Interest rate sensitive strategies, Credit sensitive strategies and our Corporate operations as described below.
Our Investment Activities Correspondent Production
Our correspondent production activities involve the acquisition and sale of newly originated prime credit quality residential loans. Correspondent production serves as the source of our investments in MSRs, private label non-Agency securitizations, and, through 2020, CRT arrangements. Our correspondent production and resulting investment activity are summarized below:
Quarter ended June 30, Six months ended June 30, 2022 2021 2022 2021 (in
Sales of loans acquired for sale: To nonaffiliates
$ 10,226,643 $ 30,181,949 $ 22,212,604 $ 63,500,106To PennyMac Financial Services, Inc. 10,822,122 17,054,083
$ 21,048,765 $ 47,236,032 $ 46,195,494 $ 98,974,803Net gains on loans acquired for sale $ 7,671 $ 27,726 $ 11,624 $ 80,738Investment activities resulting from correspondent
Receipt of MSRs as proceeds from sales of loans
$ 170,658 $ 412,938 $ 365,254 $ 820,634Retention of interest in securitization of loans secured by investment properties, net of associated asset-backed financing - - 23,485 - Total investments resulting from correspondent production activities $ 170,658 $ 412,938
Interest Rate Sensitive Investments
Our interest rate sensitive investments include:
• Mortgage servicing rights. During the quarter and six months ended
2022, we received approximately
respectively, of MSRs as proceeds from sales of loans acquired for sale. We
securities. We purchased approximately
pass-through securities and non-Agency senior MBS during the six months
non-Agency senior MBS with fair values totaling approximately
$3.7 billionat June 30, 2022. Credit Sensitive Investments CRT Arrangements During the quarter and six months ended June 30, 2022, we recognized investment losses of approximately $40.0 millionand $75.4 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 $1.3 billionat June 30, 2022.
Beginning in the quarter ended
June 30, 2021, the Company purchased or retained approximately $94.6 millionof subordinate MBS backed by loans secured by investment properties sourced from the Company's conventional correspondent production activities. The 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 $125.7 millionof subordinate credit-linked securities during the six months ended June 30, 2022. We held the subordinate credit-linked securities with fair values totaling approximately $116.6 millionat June 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 billionon our consolidated balance sheet as of June 30, 2022. 62 --------------------------------------------------------------------------------
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 June 30, Six months ended June 30, 2022 2021 2022 2021 (dollars in thousands) Net (losses) gains on investments and financings: Mortgage-backed securities
$ (182,498 ) $ 29,252 $ (369,023 ) $ (41,865 )Loans: Held in variable interest entities (122,469 ) (664 ) (219,033 ) (3,009 ) Distressed 67 74 451 158 ESS - - - 1,651 CRT arrangements (67,590 ) 38,030 (142,177 ) 135,961 Asset-backed financings at fair value 116,667 1,582 205,841 2,483 (255,823 ) 68,274 (523,941 ) 95,379 Net gains on loans acquired for sale (1) 180,635 540,593 284,978 721,380 Net loan servicing fees-MSR valuation adjustments (2) 20,103 (332,787 )
367,657 (31,759 )
$ (55,085 ) $ 276,080 $ 128,694 $ 785,000Net investment income $ 21,500 $ 121,566 $ 103,339 $ 322,963Non-cash items as a percentage of net investment Income (256 %) 227 % 125 % 243 %
(1) Amount represents MSRs received, liability for representations and warranties
incurred in loan sales transactions and changes in fair value of loans, IRLCs
and hedging derivatives held at period end.
(2) Includes fair value changes related to MSR derivative hedging instruments.
We receive or pay cash relating to:
• Our investment in mortgage-backed securities through monthly principal and
interest payments from the issuer of such securities or from the sale of
• 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 property acquired in settlement of the loan has been sold;
• ESS investments through a portion of the monthly interest payments
collected on the loans in the ESS reference pool or from the sale of investments;
• CRT arrangements through a portion of both the interest payments collected
on loans in the CRT arrangements’ reference pools and the release to us of
the deposits securing the arrangements as principal on such loans is repaid;
• Hedging instruments when we receive or make margin deposits as is fair
value of respective instrument changes, when the instruments mature or
when we effectively cancel the transactions through offsetting trades?
• Our liability for representations and warranties when we repurchase loans
or settle loss claims from investors? and
• MSRs in the form of loan servicing fees and placement fees on the deposits
we manage on behalf of the borrowers and investors in the loans we
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