PENNYMAC FINANCIAL SERVICES, INC. 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 ofPennyMac 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 theSecurities 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 ofU.S. residential mortgage loans (activities which we refer to as mortgage banking) and the management of investments related to theU.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 inPrivate National Mortgage Acceptance Company, LLC ("PNMAC"). We are the managing member ofPNMAC , and we operate and control all of the businesses and affairs ofPNMAC , and consolidate the financial results ofPNMAC and its subsidiaries. We conduct our business in three segments: production, servicing (together, production and servicing comprise our mortgage banking activities) and investment management:
? The production segment performs loan origination, acquisition and sale
activities.
The servicing segment performs loan servicing for both newly originated loans
? we are holding for sale and loans we service for others, including for PennyMac
the
The investment management segment represents our investment management
? activities, which include the activities associated with investment asset
acquisitions and dispositions such as sourcing, due diligence, negotiation and
settlement.
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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
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Results of Operations
Our results of operations are summarized below:
Quarter ended June 30, Six months ended June 30,
2022 2021 2022 2021
(dollars in thousands, except per share amounts)
Revenues:
Net gains on loans held for sale at fair
value $ 222,567 $ 582,648 $ 521,026 $ 1,336,989
Loan origination fees 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 238,447 14,871
524,756 54,591
Net interest expense (21,263) (21,634) (44,688) (47,266)
Management fees 7,910 11,913 16,027 20,362
Other 3,263 3,143 6,695 6,079
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
Servicing 3,051 31,290 1,805 50,473
Other 53,194 56,469 121,758 96,071
Total expenses 333,989 462,737 756,973 901,415Income 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
Annualized return on average
stockholders' equity 14.9% 23.3% 17.6% 33.2%
Dividend declared per share $ 0.20 $ 0.20 $ 0.40 $ 0.40
Income before provision for income taxes
by segment:
Mortgage banking:
Production $ 9,885 $ 244,442 $ 19,155 $ 607,337
Servicing 167,394 30,924 392,547 172,668
Total mortgage banking 177,279 275,366 411,702 780,005
Investment management 247 4,149 344 5,518
$ 177,526 $ 279,515 $ 412,046 $ 785,523
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 $ 7,665,657 $ 13,879,343
Unpaid principal balance of loan
servicing portfolio:
Owned:
Mortgage servicing rights and liabilities $ 297,311,164 $ 258,610,649
Loans held for sale 3,575,712 10,438,935
300,886,876 269,049,584
Subserviced for PMT 226,388,582 204,174,462
$ 527,275,458 $ 473,224,046
Net assets of PennyMac Mortgage
Investment Trust $ 2,070,640 $ 2,343,390
Book value per share $ 65.38 $ 54.49 To provide investors with information in addition to our results as
determined by accounting principles generally accepted in
("GAAP"), we disclose Adjusted EBITDA as a non-GAAP measure. Adjusted EBITDA (1) is a measure that is frequently used in our industry to measure performance
and we believe that this measure provides supplemental information that is
useful to investors. Adjusted EBITDA is not a financial measure calculated in
accordance with GAAP and should not be considered as a substitute for net
income, or any other performance measure calculated in accordance with GAAP.
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:
a) they do not reflect every cash expenditure, future requirements for capital
expenditures or contractual commitments;
b) they do not reflect the significant interest expense or the cash requirements
necessary to service interest or principal payment on our debt; and
c) they are not adjusted for all non-cash income or expense items that are
reflected in our consolidated statements of cash flows.
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:
Quarter ended June 30, Six months ended June 30,
2022 2021 2022 2021
(in thousands)
Net income $ 129,163 $ 204,229 $ 302,756 $ 581,097
Provision for income taxes 48,363 75,286 109,290 204,426
Income before provision for income taxes 177,526 279,515 412,046 785,523
Depreciation and amortization 7,364 7,335 14,375 14,967
(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 - - - 1,037
Hedging losses (gains) associated with MSRs 176,005 (91,118) 393,865 351,033
Stockbased compensation 14,948 8,894 24,223 19,771
Interest expense on corporate debt or
corporate revolving credit facilities and
capital lease 23,693 16,217 47,136 28,946
Adjusted EBITDA $ 165,710 $ 471,440 $ 333,753 $ 1,145,748
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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 endedJune 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 endedJune 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 endedJune 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 endedJune 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.
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 endedJune 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 endedJune 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 endedJune 30, 2022 compared to the same periods in 2021. 63
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Our net gains on loans held for sale are summarized below:
Quarter ended June 30, Six months ended June 30,
2022 2021 2022 2021
(in thousands)
From non-affiliates:
Cash gains:
Loans $ (451,171) $ 387,305 $ (1,395,392) $ 470,017
Hedging activities 82,617 (325,651) 972,704 410,574
Total cash gains (368,554) 61,654 (422,688) 880,591
Non-cash gains:
Change in fair value of loans and
derivative financial instruments
outstanding at end of period:
Interest rate lock commitments 27,251 5,670 (257,043) (333,416)
Loans (43,349) (50,322) 177,081 54,900
Hedging derivatives 213,673 157,917 24,365 (115,770)
197,575 113,265 (55,597) (394,286)
Mortgage servicing rights and
mortgage servicing liabilities
resulting from loan sales 398,253 425,941 1,014,555 889,512
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
Total non-cash gains 595,873 532,542 958,118 482,194
Total gains on sale from
non-affiliates 227,319 594,196 535,430 1,362,785
From PennyMac Mortgage Investment
Trust (primarily cash) (4,752) (11,548) (14,404) (25,796)
$ 222,567 $ 582,648 $ 521,026 $ 1,336,989 During the period: 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 -$ 17,872,576 $ 34,271,160 $ 42,998,079 $ 70,389,873 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$ 17,872,576 $ 34,271,160 $ 42,998,079 $ 70,389,873 At end of period:
Loans held for sale at fair value$ 3,586,810 $ 10,884,506 Commitments to fund and purchase loans$ 7,665,657 $ 13,879,343 64 Table of Contents
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 endedJune 30, 2022 , respectively, compared to$10.3 million and$20.4 million for the quarter and six months endedJune 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 endedJune 30, 2022 , respectively, compared to$3.6 million and$7.3 million during the quarter and six months endedJune 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:
Quarter ended June 30, Six months ended June 30,
2022 2021 2022 2021
(in thousands)
During the period:
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 $ 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
At end of period: Unpaid principal balance of loans subject to representations and warranties$ 278,793,884 $ 234,327,924 Liability for representations and warranties $
39,336
During the quarter and six months endedJune 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 endedJune 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 endedJune 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. 66 Table of Contents
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 endedJune 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:
Quarter ended June 30, Six months ended June 30,
2022 2021 2022 2021
(in thousands)
Loan servicing fees $ 302,350 $ 260,021 $ 593,608 $ 519,466
Effects of MSRs and MSLs (63,903) (245,150) (68,852) (464,875)
Net loan servicing fees $ 238,447 $ 14,871 $ 524,756 $ 54,591
Loan servicing fees
Following is a summary of our loan servicing fees:
Quarter ended June 30, Six months ended June 30,
2022 2021 2022 2021
(in thousands)
Loan servicing fees:
From non-affiliates $ 259,338 $ 208,275 $ 504,147 $ 419,028 From PennyMac Mortgage Investment Trust 20,335 20,015
41,423 39,108
Other
Late charges 11,356 7,938 23,312 16,902
Other 11,321 23,793 24,726 44,428
22,677 31,731 48,038 61,330
$ 302,350 $ 260,021 $ 593,608 $ 519,466
Average loan servicing portfolio
MSRs and MSLs $ 294,119,536 $ 253,626,369 $ 289,506,967 $ 249,351,346
Subserviced for PMT $ 224,340,103 $ 196,351,853 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 endedJune 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 endedJune 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. 67
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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, untilMarch 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:
Quarter ended June 30, Six months ended June 30,
2022 2021 2022 2021
(inthousands)
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
112,102 (336,268) 325,013 (112,805)
Change in fair value of excess servicing
spread - - - (1,037)
Hedging results (176,005) 91,118 (393,865) (351,033)
Total change in fair value of mortgage
servicing rights, mortgage servicing
liabilities and excess servicing spread
financing net of hedging results $ (63,903) $ (245,150) $ (68,852) $ (464,875)
Average balances:
Mortgage servicing rights $ 5,021,736 $ 3,346,877 $ 4,660,794 $ 3,120,761
Mortgage servicing liabilities $ 2,442 $ 62,098 $ 2,560 $ 55,229
Excess servicing spread financing $ - $ - $ - $ 43,484
At end of period:
Mortgage servicing rights $ 5,217,167 $ 3,412,648
Mortgage servicing liabilities 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 endedJune 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 endedJune 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 endedJune 30, 2022 was larger than the same period in 2021 due to the larger increase in interest rates experienced during the six months endedJune 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
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Following is a summary of our loan servicing portfolio:
June 30, December 31,
2022 2021
(in thousands)
Loans serviced
Prime servicing:
Owned:
Mortgage servicing rights and liabilities
Originated $ 276,627,961 $ 254,524,015
Acquired 20,683,203 23,861,358
297,311,164 278,385,373
Loans held for sale 3,575,712 9,430,766
300,886,876 287,816,139
Subserviced for PMT 226,365,581 221,864,120
Total prime servicing 527,252,457 509,680,259Special servicing subserviced for PMT 23,001
28,022
Total loans serviced $ 527,275,458 $ 509,708,281
Delinquencies:
Owned servicing (1):
30-89 days $ 8,951,759 $ 6,943,327
90 days or more 6,063,542 9,838,648
$ 15,015,301 $ 16,781,975
Delinquent loans in COVID-19 pandemic-related forbearance:
30-89 days $ 1,231,658 $ 1,111,151
90 days or more 2,439,641 2,732,089
$ 3,671,299 $ 3,843,240
Subserviced for PMT (1):
30-89 days $ 1,489,066 $ 1,164,782
90 days or more 898,735 1,810,910
$ 2,387,801 $ 2,975,692
Delinquent loans in COVID-19 pandemic-related forbearance:
30-89 days $ 197,966 $ 171,114
90 days or more 431,331 638,703
$ 629,297 $ 809,817 Includes delinquent loans in COVID-19 pandemic-related forbearance plans that (1) were requested by borrowers seeking payment relief in accordance with the
CARES Act.
Net Interest Expense
Net interest expense decreased
an increase in placement fees we receive relating to custodial funds that we
? manage due to increased earning rates, partially offset by lower average
balances of custodial funds held;
a decrease in interest shortfall on repayments of loans serviced for Agency
? securitizations, reflecting decreased loan payoffs as a result of decreased
borrower refinancing activity due to the higher interest rate environment;
partially offset by
? an increase in interest on unsecured senior notes.
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Management Fees from PennyMac Mortgage Investment Trust
Quarter ended June 30, Six months ended June 30,
2022 2021 2022 2021
(in thousands)
Base management $ 7,910 $ 8,648 $ 16,027 $ 17,097
Performance incentive - 3,265 - 3,265
$ 7,910 $ 11,913 $ 16,027 $ 20,362 Net assets of PMT at end of period
Management fees decreased$4.0 million and$4.3 million during the quarter and six months endedJune 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 endedJune 30, 2021 , as result of PMT's profitability during the measurement period endedJune 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. Expenses Compensation
Compensation expenses are summarized below:
Quarter ended June 30, Six months ended June 30,
2022 2021 2022 2021
(in thousands)
Salaries and wages $ 116,059 $ 154,391 $ 258,068 $ 298,022
Severance 7,456 15 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 14,948 8,894 24,223 19,771
$ 198,192 $ 265,067 $ 443,739 $ 523,896
Head count:
Average 5,706 7,151 6,316 7,008
Period end 5,088 7,231
Compensation expense decreased
Loan origination
Loan origination expense decreased$30.7 million and$42.8 million during the quarter and six months endedJune 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 endedJune 30, 2022 compared to the same periods during 2021. Servicing Servicing expenses decreased$28.2 million and$48.7 million during the quarter and six months endedJune 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 endedJune 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. 70 Table of Contents Professional services
Professional expenses decreased$4.0 million during the quarter endedJune 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 endedJune 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
Marketing and advertising expense increased$2.8 million and$18.5 million during the quarter and six months endedJune 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 endedJune 30, 2022 , respectively, compared to 26.9% and 26.0% during the same periods in 2021.
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