PENNYMAC MORTGAGE INVESTMENT TRUST 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
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
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
During the quarter ended
We operate our business in four segments: Correspondent production, Interest rate sensitive strategies, Credit sensitive strategies and our Corporate operations as described below.
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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 March 31,
2022 2021
(in thousands)
Sales of loans acquired for sale:
To nonaffiliates $ 11,985,961 $ 33,318,157
To PennyMac Financial Services, Inc. 13,160,768 18,420,614
$ 25,146,729 $ 51,738,771
Net gains on loans acquired for sale $ 3,953 $ 53,012 Investment activities resulting from correspondent
production:
Receipt of MSRs as proceeds from sales of loans
investment properties, net of associated asset-backed financings 23,485 - Total investments resulting from correspondent activities$ 218,081 $ 407,696
Interest Rate Sensitive Investments
Our interest rate sensitive investments include:
• Mortgage servicing rights. During the quarter ended March 31, 2022 , we
received approximately $194.6 million of MSRs as proceeds from sales of
loans acquired for sale. We held approximately $3.4 billion of MSRs at
fair value at March 31, 2022 .
• REIT-eligible mortgage-backed or mortgage-related securities. We purchased
approximately $661.8 million of MBS during the quarter ended March 31,
2022 . We held MBS with fair values totaling approximately $3.1 billion at
March 31, 2022 .
Credit Sensitive Investments
CRT Arrangements
At present, we are no longer creating new CRT investments as the
Securities Backed by Loans Secured by Investment Properties
Beginning in the quarter ended
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
-
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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 amounts of non-cash investment (loss) income items included in net investment income are as follows:
Quarter ended March 31,
2022 2021
(dollars in thousands)
Net (losses) gains on investments and financings:
Mortgage-backed securities $ (186,525 ) $ (71,117 ) Loans:
Held in variable interest entities (96,564 ) (2,345 )
Distressed 384 84
ESS - 1,651
CRT arrangements (74,587 ) 97,931
Asset-backed financings at fair value 89,174 900
(268,118 ) 27,104
Net gains on loans acquired for sale (1) 104,343 180,787
Net loan servicing fees-MSR valuation adjustments 303,721 278,282
Net interest income-Capitalization of interest
pursuant to loan modifications - 198
$ 139,946 $ 486,371
Net investment income $ 81,839 $ 201,397
Non-cash items as a percentage of net investment income 171 % 241 %
(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.
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
the 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
property acquired in settlement of the loan has been sold;
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• ESS investments through a portion of the monthly interest payments
collected on the loans in the ESS reference pool or from the sale of
investment;
• 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 the 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
service.© Edgar Online, source
