PennyMac Mortgage Investment Trust - Quarter Report: 2023 March (Form 10-Q)

10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

Form 10-Q

(Mark One)


☒	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2023


☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission file number: 001-34416

PennyMac Mortgage Investment Trust

(Exact name of registrant as specified in its charter)


Maryland		27-0186273
(State or other jurisdiction of incorporation or organization)		(IRS Employer Identification No.)

3043 Townsgate Road, Westlake Village, California		91361
(Address of principal executive offices)		(Zip Code)

(818) 224-7442

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:


Title of Each Class	Trading Symbol (s)	Name of Each Exchange on Which Registered
Common Shares of Beneficial Interest, $0.01 Par Value	PMT	New York Stock Exchange
8.125% Series A Cumulative Redeemable Preferred Shares of Beneficial Interest, $0.01 Par Value	PMT/PA	New York Stock Exchange
8.00% Series B Cumulative Redeemable Preferred Shares of Beneficial Interest, $0.01 Par Value 6.75% Series C Cumulative Redeemable Preferred Shares of Beneficial Interest, $0.01 Par Value	PMT/PB PMT/PC	New York Stock Exchange New York Stock Exchange

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer”, “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.


Large accelerated filer	☒	Accelerated filer	☐
Non-accelerated filer	☐	Smaller reporting company	☐
		Emerging growth company	☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act): Yes ☐ No ☒

Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date.


Class		Outstanding at May 2, 2023
Common Shares of Beneficial Interest, $0.01 par value		87,556,352

PENNYMAC MORTGAGE INVESTMENT TRUST

FORM 10-Q

March 31, 2023

TABLE OF CONTENTS


		Page
Special Note Regarding Forward-Looking Statements		1
PART I. FINANCIAL INFORMATION		4
Item 1.	Financial Statements (Unaudited)	4
	Consolidated Balance Sheets	4
	Consolidated Statements of Operations	6
	Consolidated Statements of Changes in Shareholders’ Equity	7
	Consolidated Statements of Cash Flows	8
	Notes to Consolidated Financial Statements	10
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	52
	Our Company	52
	Results of Operations	55
	Net Investment Income	56
	Expenses	65
	Balance Sheet Analysis	68
	Asset Acquisitions	68
	Investment Portfolio Composition	69
	Cash Flows	72
	Liquidity and Capital Resources	72
	Off-Balance Sheet Arrangements and Aggregate Contractual Obligations	75
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	76
Item 4.	Controls and Procedures	77
PART II. OTHER INFORMATION		78
Item 1.	Legal Proceedings	78
Item 1A	Risk Factors	78
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	78
Item 3.	Defaults Upon Senior Securities	78
Item 4.	Mine Safety Disclosures	78
Item 5.	Other Information	78
Item 6.	Exhibits	79

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q (this “Report”) contains certain forward-looking statements that are subject to various risks and uncertainties. Forward-looking statements are generally identifiable by use of forward-looking terminology such as “may,” “will,” “should,” “potential,” “intend,” “expect,” “seek,” “anticipate,” “estimate,” “approximately,” “believe,” “could,” “project,” “predict,” “continue,” “plan” or other similar words or expressions.

Forward-looking statements are based on certain assumptions, discuss future expectations, describe future plans and strategies, contain financial and operating projections or state other forward-looking information. Examples of forward-looking statements include the following:

•

projections of our revenues, income, earnings per share, capital structure or other financial items;

•

descriptions of our plans or objectives for future operations, products or services;

•

forecasts of our future economic performance, interest rates, profit margins and our share of future markets; and

•

descriptions of assumptions underlying or relating to any of the foregoing expectations regarding the timing of generating any revenues.

Our ability to predict results or the actual effect of future events, actions, plans or strategies is inherently uncertain. Although we believe that the expectations reflected in such forward-looking statements are based on reasonable assumptions, our actual results and performance could differ materially from those set forth in the forward-looking statements. There are a number of factors, many of which are beyond our control that could cause actual results to differ significantly from management’s expectations. Some of these factors are discussed below.

You should not place undue reliance on any forward-looking statement and should consider the following uncertainties and risks, as well as the risks and uncertainties discussed elsewhere in this Report and the section entitled “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2022, filed with the Securities and Exchange Commission (“SEC”) on February 24, 2023.

Factors that could cause actual results to differ materially from historical results or those anticipated include, but are not limited to:

•

changes in interest rates and other macroeconomic conditions;

•

our ability to comply with various federal, state and local laws and regulations that govern our business;

•

the impact to our CRT arrangements and agreements of increased borrower requests for forbearance under the Coronavirus Aid, Relief and Economic Security Act;

•

changes in our investment objectives or investment or operational strategies, including any new lines of business or new products and services that may subject us to additional risks;

•

the degree and nature of our competition;

•

volatility in our industry, the debt or equity markets, the general economy or the real estate finance and real estate markets specifically, whether the result of market events or otherwise;

•

events or circumstances which undermine confidence in the financial and housing markets or otherwise have a broad impact on financial and housing markets, such as the sudden instability or collapse of large depository institutions or other significant corporations, terrorist attacks, natural or man-made disasters, or threatened or actual armed conflicts;

•

changes in general business, economic, market, employment and domestic and international political conditions, or in consumer confidence and spending habits from those expected;

•

declines in real estate or significant changes in U.S. housing prices or activity in the U.S. housing market;

•

the availability of, and level of competition for, attractive risk-adjusted investment opportunities in loans and mortgage-related assets that satisfy our investment objectives;

•

the inherent difficulty in winning bids to acquire loans, and our success in doing so;

•

the concentration of credit risks to which we are exposed;

•

our dependence on our Manager and servicer, potential conflicts of interest with such entities and their affiliates, and the performance of such entities;

•

changes in personnel and lack of availability of qualified personnel at our Manager, servicer or their affiliates;

•

the availability, terms and deployment of short-term and long-term capital;

•

the adequacy of our cash reserves and working capital;

•

our substantial amount of debt;

•

our ability to maintain the desired relationship between our financing and the interest rates and maturities of our assets;

•

the timing and amount of cash flows, if any, from our investments;

•

our exposure to risks of loss and disruptions in operations resulting from adverse weather conditions, man-made or natural disasters, climate change and pandemics such as the COVID-19 pandemic;

•

unanticipated increases or volatility in financing and other costs, including a rise in interest rates;

•

the performance, financial condition and liquidity of borrowers;

•

the ability of our servicer, which also provides us with fulfillment services, to approve and monitor correspondent sellers and underwrite loans to investor standards;

•

incomplete or inaccurate information or documentation provided by customers or counterparties, or adverse changes in the financial condition of our customers and counterparties;

•

our indemnification and repurchase obligations in connection with loans we purchase and later sell or securitize;

•

the quality and enforceability of the collateral documentation evidencing our ownership and rights in the assets in which we invest;

•

increased rates of delinquency, default and/or decreased recovery rates on our investments;

•

the performance of loans underlying mortgage-backed securities in which we retain credit risk;

•

our ability to foreclose on our investments in a timely manner or at all;

•

the degree to which our hedging strategies may or may not protect us from interest rate volatility;

•

the effect of the accuracy of or changes in the estimates we make about uncertainties, contingencies and asset and liability valuations when measuring and reporting upon our financial condition and results of operations;

•

our ability to maintain appropriate internal control over financial reporting;

•

technology failures, cybersecurity risks and incidents, and our ability to mitigate cybersecurity risks and cyber intrusions;

•

our ability to obtain and/or maintain licenses and other approvals in those jurisdictions where required to conduct our business;

•

our ability to detect misconduct and fraud;

•

our ability to comply with various federal, state and local laws and regulations that govern our business;

•

developments in the secondary markets for our loan products;

•

legislative and regulatory changes that impact the loan industry or housing market;

•

changes in regulations that impact the business, operations or governance of mortgage lenders and/or publicly-traded companies or such changes that increase the cost of doing business with such entities;

•

the Consumer Financial Protection Bureau and its issued and future rules and the enforcement thereof;

•

changes in government support of homeownership;

•

our ability to effectively identify, manage and hedge our credit, interest rate, prepayment, liquidity, and climate risks;

•

changes in government or government-sponsored home affordability programs;

•

limitations imposed on our business and our ability to satisfy complex rules for us to qualify as a real estate investment trust (“REIT”) for U.S. federal income tax purposes and qualify for an exclusion from the Investment Company Act of 1940 and the ability of certain of our subsidiaries to qualify as REITs or as taxable REIT subsidiaries for U.S. federal income tax purposes, as applicable, and our ability and the ability of our subsidiaries to operate effectively within the limitations imposed by these rules;

•

changes in governmental regulations, accounting treatment, tax rates and similar matters (including changes to laws governing the taxation of REITs, or the exclusions from registration as an investment company);

•

our ability to make distributions to our shareholders in the future;

•

our failure to deal appropriately with issues that may give rise to reputational risk; and

•

our organizational structure and certain requirements in our charter documents.

Other factors that could also cause results to differ from our expectations may not be described in this Report or any other document. Each of these factors could by itself, or together with one or more other factors, adversely affect our business, results of operations and/or financial condition.

Forward-looking statements speak only as of the date they are made, and we undertake no obligation to update any forward-looking statement to reflect the impact of circumstances or events that arise after the date the forward-looking statement was made.

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

PENNYMAC MORTGAGE INVESTMENT TRUST AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS (UNAUDITED)


	March 31,			December 31,
	2023			2022
	(in thousands, except share information)
ASSETS
Cash	$	118,672		$	111,866
Short-term investments at fair value		292,153			252,271
Mortgage-backed securities at fair value ($4,616,580 and $4,462,601 pledged to creditors, respectively)		4,629,004			4,462,601
Loans acquired for sale at fair value ($3,117,294 and $1,801,368 pledged to creditors, respectively)		3,143,518			1,821,933
Loans at fair value ($1,499,117 and $1,510,148 pledged to creditors, respectively)		1,502,471			1,513,399
Derivative assets ($2,883 and $1,262 pledged to creditors, respectively)		89,285			84,940
Deposits securing credit risk transfer arrangements pledged to creditors		1,297,917			1,325,294
Mortgage servicing rights at fair value ($3,926,160 and $3,962,820 pledged to creditors, respectively)		3,975,076			4,012,737
Servicing advances ($76,664 and $100,888 pledged to creditors, respectively)		138,716			197,972
Due from PennyMac Financial Services, Inc.		—			3,560
Other ($3,554 and $3,297 pledged to creditors, respectively)		170,417			134,991
Total assets	$	15,357,229		$	13,921,564
LIABILITIES
Assets sold under agreements to repurchase	$	8,114,108		$	6,616,528
Notes payable secured by credit risk transfer and mortgage servicing assets		2,790,958			2,804,028
Exchangeable senior notes		547,003			546,254
Asset-backed financing of variable interest entities at fair value		1,403,080			1,414,955
Interest-only security payable at fair value		23,205			21,925
Derivative and credit risk transfer strip liabilities at fair value		138,469			167,226
Unsettled securities trades		12,424			—
Accounts payable and accrued liabilities		152,793			160,212
Due to PennyMac Financial Services, Inc.		35,166			36,372
Income taxes payable		129,882			151,778
Liability for losses under representations and warranties		39,407			39,471
Total liabilities		13,386,495			11,958,749

Commitments and contingencies ─ Note 17

SHAREHOLDERS’ EQUITY
Preferred shares of beneficial interest, $0.01 par value per share, authorized 100,000,000 shares, issued and outstanding 22,400,000, liquidation preference $560,000,000		541,482			541,482
Common shares of beneficial interest—authorized, 500,000,000 common shares of $0.01 par value; issued and outstanding, 88,385,614 and 88,888,889 common shares, respectively		884			889
Additional paid-in capital		1,940,297			1,947,266
Accumulated deficit		(511,929	)		(526,822	)
Total shareholders’ equity		1,970,734			1,962,815
Total liabilities and shareholders’ equity	$	15,357,229		$	13,921,564

The accompanying notes are an integral part of these consolidated financial statements.

PENNYMAC MORTGAGE INVESTMENT TRUST AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS (UNAUDITED)

Assets and liabilities of consolidated variable interest entities (“VIEs”) included in total assets and liabilities (the assets of each VIE can only be used to settle liabilities of that VIE) are summarized below:


	March 31,		December 31,
	2023		2022
	(in thousands)
ASSETS
Loans at fair value	$	1,498,923	$	1,509,942
Derivative assets at fair value		2,883		1,262
Deposits securing credit risk transfer arrangements		1,297,917		1,325,294
Other—interest receivable		4,287		4,343
	$	2,804,010	$	2,840,841
LIABILITIES
Asset-backed financings at fair value	$	1,403,080	$	1,414,955
Derivative and credit risk transfer strip liabilities at fair value		129,808		160,553
Interest-only security payable at fair value		23,205		21,925
Accounts payable and accrued liabilities—interest payable		4,287		4,343
	$	1,560,380	$	1,601,776

The accompanying notes are an integral part of these consolidated financial statements.

PENNYMAC MORTGAGE INVESTMENT TRUST AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)


	Quarter ended March 31,
	2023			2022
	(in thousands, except per common share amounts)
Net investment income
Net gains (losses) on investments and financings	$	125,804		$	(229,095	)
Net loan servicing fees:
From nonaffiliates
Contractually specified		164,214			146,885
Other		3,943			9,114
		168,157			155,999
Change in fair value of mortgage servicing rights		(137,444	)		303,721
Mortgage servicing rights hedging results		(54,891	)		(163,802	)
		(24,178	)		295,918
From PennyMac Financial Services, Inc.		485			8,260
		(23,693	)		304,178
Net gains on loans acquired for sale:
From nonaffiliates		5,145			2,657
From PennyMac Financial Services, Inc.		1,328			1,296
		6,473			3,953
Loan origination fees		7,706			14,774
Net interest expense:
Interest income		153,019			51,063
Interest expense		179,137			63,514
Net interest expense		(26,118	)		(12,451	)
Results of real estate acquired in settlement of loans		56			230
Other		138			250
Net investment income		90,366			81,839
Expenses
Earned by PennyMac Financial Services, Inc.:
Loan servicing fees		20,449			21,088
Loan fulfillment fees		11,923			16,754
Management fees		7,257			8,117
Loan origination		2,178			2,842
Compensation		1,539			1,437
Professional services		1,523			4,025
Safekeeping		1,116			2,395
Loan collection and liquidation		579			3,177
Other		5,001			3,946
Total expenses		51,565			63,781
Income before (benefit from) provision for income taxes		38,801			18,058
(Benefit from) provision for income taxes		(21,896	)		37,187
Net income (loss)		60,697			(19,129	)
Dividends on preferred shares		10,455			10,455
Net income (loss) attributable to common shareholders	$	50,242		$	(29,584	)
Earnings (losses) per common share
Basic	$	0.56		$	(0.32	)
Diluted	$	0.50		$	(0.32	)
Weighted average common shares outstanding
Basic		88,831			94,146
Diluted		113,388			94,146
Dividends declared per common share	$	0.40		$	0.47

The accompanying notes are an integral part of these consolidated financial statements.

PENNYMAC MORTGAGE INVESTMENT TRUST AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY (UNAUDITED)


	Quarter ended March 31, 2023
	Preferred shares				Common shares
	Number				Number						Additional
	of				of			Par			paid-in			Accumulated
	shares		Amount		shares			value			capital			deficit			Total
	(in thousands, except per share amounts)
Balance at December 31, 2022		22,400	$	541,482		88,889		$	889		$	1,947,266		$	(526,822	)	$	1,962,815
Net income		—		—		—			—			—			60,697			60,697
Share-based compensation		—		—		135			1			589			—			590
Dividends:
Preferred shares		—		—		—			—			—			(10,455	)		(10,455	)
Common shares ($0.40 per share)		—		—		—			—			—			(35,349	)		(35,349	)
Repurchase of common shares		—		—		(638	)		(6	)		(7,558	)		—			(7,564	)
Balance at March 31, 2023		22,400	$	541,482		88,386		$	884		$	1,940,297		$	(511,929	)	$	1,970,734

	Quarter ended March 31, 2022
	Preferred shares				Common shares
	Number				Number						Additional
	of				of			Par			paid-in			Accumulated
	shares		Amount		shares			value			capital			deficit			Total
	(in thousands, except per share amounts)
Balance at December 31, 2021		22,400	$	541,482		94,897		$	949		$	2,081,757		$	(256,670	)	$	2,367,518
Cumulative effect of adoption of ASU 2020-06		—		—		—			—			(50,347	)		9,394			(40,953	)
Balance at January 1, 2022		22,400		541,482		94,897			949			2,031,410			(247,276	)		2,326,565
Net loss		—		—		—			—			—			(19,129	)		(19,129	)
Share-based compensation		—		—		84			1			506			—			507
Dividends:
Preferred shares		—		—		—			—			—			(10,454	)		(10,454	)
Common shares ($0.47 per share)		—		—		—			—			—			(43,722	)		(43,722	)
Repurchase of common shares		—		—		(1,974	)		(20	)		(31,809	)		—			(31,829	)
Balance at March 31, 2022		22,400	$	541,482		93,007		$	930		$	2,000,107		$	(320,581	)	$	2,221,938

The accompanying notes are an integral part of these consolidated financial statements.

PENNYMAC MORTGAGE INVESTMENT TRUST AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)


	Quarter ended March 31,
	2023			2022
	(in thousands)
Cash flows from operating activities
Net income	$	60,697		$	(19,129	)
Adjustments to reconcile net income (loss) to net cash (used in) provided by operating activities:
Net (gains) losses on investments and financings		(125,804	)		229,095
Change in fair value of mortgage servicing rights		137,444			(303,721	)
Mortgage servicing rights hedging results		54,891			163,802
Net gains on loans acquired for sale		(6,473	)		(3,953	)
Accrual of unearned discounts and amortization of purchase premiums on mortgage-backed securities, loans at fair value, and asset-backed financings		1,289			1,526
Amortization of debt issuance costs		3,762			4,140
Results of real estate acquired in settlement of loans		(56	)		(230	)
Share-based compensation expense		1,156			1,029
Purchase of loans acquired for sale at fair value from nonaffiliates		(20,417,078	)		(23,072,430	)
Purchase of loans acquired for sale at fair value from PennyMac Financial Services, Inc.		—			(259,038	)
Sale to nonaffiliates and repayment of loans acquired for sale		5,587,266			11,985,961
Sale of loans acquired for sale to PennyMac Financial Services, Inc.		13,451,031			13,160,768
Repurchase of loans subject to representation and warranties		(19,199	)		(24,234	)
Decrease in servicing advances		58,919			70,949
Decrease (increase) in due from PennyMac Financial Services, Inc.		3,560			(4,609	)
Repurchase of real estate previously sold as loans acquired for sale		(442	)		—
Increase in other assets		(36,963	)		(230,332	)
(Decrease) increase in accounts payable and accrued liabilities		(7,110	)		22,601
Decrease in due to PennyMac Financial Services, Inc.		(1,206	)		(12,369	)
(Decrease) increase in income taxes payable		(21,896	)		37,199
Net cash (used in) provided by operating activities		(1,276,212	)		1,747,025
Cash flows from investing activities
Net increase in short-term investments		(39,882	)		(68,469	)
Purchase of mortgage-backed securities at fair value		(2,772,168	)		(661,774	)
Sale and repayment of mortgage-backed securities at fair value		2,694,450			70,276
Repurchase of loans at fair value		(119	)		—
Repayment of loans at fair value		22,182			51,081
Net settlement of derivative financial instruments		(3,352	)		2,688
Distribution from credit risk transfer arrangements		42,709			207,014
Transfer of mortgage servicing rights relating to delinquent loans to Agency		835			—
Sale of real estate acquired in settlement of loans		760			2,893
(Increase) decrease in margin deposits		(68,158	)		199,719
Net cash used in investing activities		(122,743	)		(196,572	)

The accompanying notes are an integral part of these consolidated financial statements.

Statements continued on the next page

PENNYMAC MORTGAGE INVESTMENT TRUST AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)


	Quarter ended March 31,
	2023			2022
	(in thousands)
Cash flows from financing activities
Sale of assets under agreements to repurchase		33,465,001			30,883,776
Repurchase of assets sold under agreements to repurchase		(31,968,132	)		(32,463,483	)
Issuance of mortgage loan participation purchase and sale agreements		416,243			999,031
Repayment of mortgage loan participation purchase and sale agreements		(416,243	)		(983,296	)
Issuance of notes payable secured by credit risk transfer and mortgage servicing assets		10,000			125,001
Repayment of notes payable secured by credit risk transfer and mortgage servicing assets		(24,578	)		(225,927	)
Issuance of asset-backed financings at fair value		—			382,423
Repayment of asset-backed financings at fair value		(21,493	)		(49,764	)
Payment of debt issuance costs		(794	)		(1,715	)
Payment of dividends to preferred shareholders		(10,455	)		(10,454	)
Payment of dividends to common shareholders		(35,658	)		(44,797	)
Payment of vested share-based compensation tax withholdings		(567	)		(522	)
Repurchase of common shares		(7,563	)		(31,829	)
Net cash provided by (used in) financing activities		1,405,761			(1,421,556	)
Net increase in cash		6,806			128,897
Cash at beginning of quarter		111,866			58,983
Cash at end of quarter	$	118,672		$	187,880
Supplemental cash flow information
Payments (refunds), net:
Income taxes	$	—		$	(11	)
Interest	$	189,351		$	62,903
Non-cash investing activities:
Unsettled securities trades	$	12,424		$	—
Receipt of mortgage servicing rights as proceeds from sales of loans	$	100,618		$	194,596
Retention of subordinate mortgage-backed securities in loan securitizations	$	—		$	23,485
Recognition of loans at fair value resulting from initial consolidation of variable interest entities	$	—		$	405,908
Transfer of loans and advances to real estate acquired in settlement of loans	$	797		$	—
Non-cash financing activities:
Recognition of asset-backed financings resulting from initial consolidation of VIEs	$	—		$	382,423
Dividends declared, not paid	$	35,349		$	43,689

The accompanying notes are an integral part of these consolidated financial statements.

PENNYMAC MORTGAGE INVESTMENT TRUST AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Note 1—Organization

PennyMac Mortgage Investment Trust (“PMT” or the “Company”) is a specialty finance company, which, through its subsidiaries (all of which are wholly-owned), invests primarily in residential mortgage-related assets. The Company operates in four segments: credit sensitive strategies, interest rate sensitive strategies, correspondent production, and corporate:

•

The credit sensitive strategies segment represents the Company’s investments in credit risk transfer (“CRT”) arrangements referencing loans from its own correspondent production, including CRT agreements (“CRT Agreements”) and other CRT securities (together, “CRT arrangements”) and subordinate mortgage-backed securities (“MBS”).

•

The interest rate sensitive strategies segment represents the Company’s investments in mortgage servicing rights (“MSRs”), Agency and senior non-Agency MBS and the related interest rate hedging activities.

•

The correspondent production segment represents the Company’s operations aimed at serving as an intermediary between lenders and the capital markets by purchasing, pooling and reselling newly originated prime credit quality loans either directly or in the form of MBS, using the services of PNMAC Capital Management, LLC (“PCM” or the “Manager”) and PennyMac Loan Services, LLC (“PLS”), both indirect controlled subsidiaries of PennyMac Financial Services, Inc. (“PFSI”), a publicly-traded mortgage banking and investment management company.

The Company primarily sells the loans it acquires through its correspondent production activities to government-sponsored entities ("GSEs") 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 the Government National Mortgage Association ("GinnieMae"). Fannie Mae, Freddie Mac and Ginnie Mae are each referred to as an “Agency” and, collectively, as the “Agencies.”

•

The corporate segment includes management fees, corporate expense amounts and certain interest income and expense.

The Company conducts substantially all of its operations and makes substantially all of its investments through its subsidiary, PennyMac Operating Partnership, L.P. (the “Operating Partnership”), and the Operating Partnership’s subsidiaries. A wholly-owned subsidiary of the Company is the sole general partner, and the Company is the sole limited partner, of the Operating Partnership.

The Company believes that it qualifies, and has elected to be taxed, as a real estate investment trust (“REIT”) under the Internal Revenue Code of 1986, as amended. To maintain its tax status as a REIT, the Company is required to distribute at least 90% of its taxable income in the form of qualifying distributions to shareholders.

Note 2—Basis of Presentation

The Company’s consolidated financial statements have been prepared in compliance with accounting principles generally accepted in the United States (“GAAP”) as codified in the Financial Accounting Standards Board’s Accounting Standards Codification for interim financial information and with the Securities and Exchange Commission’s instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, these financial statements and notes do not include all of the information required by GAAP for complete financial statements. This interim consolidated information should be read together with the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2022.

These unaudited consolidated financial statements reflect all normal recurring adjustments necessary to present fairly the financial position, results of operations, and cash flows for the interim periods presented, but are not necessarily indicative of the results of operations that may be anticipated for the full year. Intercompany accounts and transactions have been eliminated.

Preparation of financial statements in compliance with GAAP requires the Company to make estimates and judgments that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements, and revenues and expenses during the reporting period. Actual results will likely differ from those estimates.

The Company held no restricted cash during the periods presented. Therefore, the consolidated statements of cash flows do not include references to restricted cash.

Note 3—Concentration of Risks

As discussed in Note 1 – Organization above, PMT’s operations and investing activities are centered in residential mortgage-related assets, including CRT arrangements, subordinate MBS, Agency and senior Non-Agency MBS and MSRs. CRT arrangements and subordinate MBS are more sensitive to borrower credit performance than other mortgage-related investments such as traditional

loans and Agency MBS. Fixed-rate Agency and senior non-Agency MBS are sensitive to changes in market interest rates. MSRs are sensitive to changes in prepayment rate activity and expectations.

Credit Risk

Note 6 – Variable Interest Entities details the Company’s investments in CRT arrangements whereby the Company sold pools of loans into Fannie Mae guaranteed loan securitizations which became reference pools underlying the CRT arrangements. Fannie Mae transferred interest-only (“IO”) ownership interests and recourse obligations based upon securitized reference pools of loans subject to the CRT arrangements into the trust entities, and the Company acquired the IO ownership interest and assumed the recourse obligations in the CRT arrangements.

The Company also invests in subordinate MBS which are among the first beneficial interests in the related securitizations to absorb credit losses on the underlying loans.

The Company’s retention of credit risk through its investment in CRT arrangements and subordinate MBS subjects it to risks associated with delinquency and foreclosure similar to the risks of loss associated with owning the underlying loans, which is greater than the risk of loss associated with selling such loans to Fannie Mae without the retention of such credit risk in the case of CRT arrangements and investing in senior mortgage pass through securities in the case of subordinate MBS.

CRT Agreements are structured such that loans that reach a specific number of days delinquent (including loans in forbearance which also includes those subject to the forbearance provided in the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”)) trigger losses chargeable to the CRT Agreements based on the size of the loan and a contractual schedule of loss severity. Therefore, the risks associated with delinquency and foreclosure may in some instances be greater than the risks associated with owning the related loans because the structure of the CRT Agreements provides that the Company may be required to absorb losses in the event of delinquency or foreclosure even when there is ultimately no loss realized with respect to such loans (e.g., as a result of a borrower’s re-performance). In contrast, the structure of the Company’s investment in CRT strips requires PMT to absorb losses only when the reference loans realize losses.

Fair Value Risk

The Company is exposed to fair value risk in addition to the risks specific to credit and, as a result of prevailing market conditions or the economy generally, may be required to recognize losses associated with adverse changes to the fair value of its investments in MSRs, CRT arrangements, and MBS:

•

The fair value of MSRs is sensitive to changes in prepayment speeds, estimates of cost to service the underlying loans or the returns demanded by market participants;

•

The fair values of CRT arrangements and subordinate MBS are sensitive to market perceptions of future credit performance of the underlying loans as well as the actual credit performance of such loans and to the returns required by market participants to hold such investments; and

•

The fair values of fixed-rate Agency and senior non-Agency pass through MBS are sensitive to changes in market interest rates.

Note 4—Transactions with Related Parties

The Company enters into transactions with subsidiaries of PFSI in support of its operating, investing and financing activities as summarized below.

Operating Activities

Correspondent Production Activities

The Company is provided fulfillment and other services by PLS under an amended and restated mortgage banking services agreement. The Company does not hold the Ginnie Mae approval required to issue securities guaranteed by Ginnie Mae MBS and act as a servicer. Accordingly, under the agreement, PLS currently purchases loans saleable in accordance with the Ginnie Mae MBS Guide “as is” and without recourse of any kind from the Company at cost less any administrative fees paid by the correspondent to the Company plus accrued interest and a sourcing fee, which generally ranges from one to two basis points based on the average number of calendar days loans are held by the Company before purchase by PLS. The Company may also sell conventional loans to PLS under the same arrangement subject to mutual agreement between the parties.

Fulfillment and sourcing fees are summarized below:

•

Fulfillment fees shall not exceed the following:

(i)

the number of loan commitments issued by the Company multiplied by a pull-through factor of either .99 or .80 depending on whether the loan commitments are subject to a “mandatory trade confirmation” or a “best efforts lock confirmation”, respectively, and then multiplied by $585 for each pull-through adjusted loan commitment up to and including 16,500 per quarter and $355 for each pull-through adjusted loan commitment in excess of 16,500 per quarter, plus

(ii)

$315 multiplied by the number of purchased loans up to and including 16,500 per quarter and $195 multiplied by the number of purchased loans in excess of 16,500 per quarter, plus

(iii)

$750 multiplied by the number of all purchased loans that are sold or securitized to parties other than Fannie Mae and Freddie Mac; provided however, that no fulfillment fee shall be due or payable to PLS with respect to any Ginnie Mae loans or, as of October 1, 2022, designated Fannie Mae or Freddie Mac loans acquired by PLS.

•

Sourcing fees range from one to two basis points of the unpaid principal balance (“UPB”), generally based on the average number of calendar days the loans are held by PMT before purchase by PLS.

The mortgage banking services agreement expires, unless terminated earlier in accordance with its terms, on June 30, 2025, subject to automatic renewal for additional 18-month periods, unless terminated in accordance with its terms.

The Company may purchase newly originated conforming balance non-government insured or guaranteed loans from PLS under a mortgage loan purchase and sale agreement.

Following is a summary of correspondent production activity between the Company and PLS:


	Quarter ended March 31,
	2023		2022
	(in thousands)
Loan fulfillment fees earned by PLS	$	11,923	$	16,754
UPB of loans fulfilled by PLS	$	6,628,810	$	9,769,262

Sourcing fees received from PLS included in Net gains on loans acquired for sale	$	1,328	$	1,296
UPB of loans sold to PLS:
Government guaranteed or insured	$	9,213,712	$	12,747,779
Conventional conforming		4,062,874		—
	$	13,276,586	$	12,747,779
Purchases of loans acquired for sale from PLS	$	—	$	259,038

Tax service fees paid to PLS	$	1,410	$	2,342


	March 31, 2023		December 31, 2022
	(in thousands)
Loans included in Loans acquired for sale at fair value pending sale to PLS	$	416,162	$	159,671

Loan Servicing

The Company, through its Operating Partnership, has a loan servicing agreement with PLS (the “Servicing Agreement”) pursuant to which PLS provides subservicing for the Company's portfolio of MSRs, loans held for sale, loans held in VIEs (prime servicing) and its portfolio of residential loans purchased with credit deterioration (special servicing). The Servicing Agreement provides for servicing fees earned by PLS that are established at a fixed per loan monthly amount based on the delinquency, bankruptcy and/or foreclosure status of the serviced loan or real estate acquired in settlement of loans (“REO”). The Servicing Agreement expires on June 30, 2025, subject to automatic renewal for additional 18-month periods, unless terminated earlier in accordance with its terms.

Prime Servicing

The base servicing fees for prime loans subserviced by PLS on the Company’s behalf are $7.50 per month for fixed-rate loans and $8.50 per month for adjustable-rate loans.

To the extent that these prime loans become delinquent, PLS is entitled to an additional servicing fee per loan ranging from $10 to $55 per month and based on the delinquency, bankruptcy and foreclosure status of the loan or $75 per month if the underlying mortgaged property becomes REO.

PLS is also entitled to customary ancillary income and certain market-based fees and charges, including boarding and deboarding fees, liquidation and disposition fees, assumption, modification and origination fees and certain fees for COVID-19 pandemic-related forbearance and modification activities it provides as required by the CARES Act.

Special Servicing

The base servicing fee rates for loans purchased with credit deterioration (distressed loans) range from $30 per month for current loans up to $95 per month for loans in foreclosure proceedings. The base servicing fee rate for REO is $75 per month. PLS also receives a supplemental servicing fee of $25 per month for each distressed loan.

PLS receives activity-based fees for modifications, foreclosures and liquidations that it facilitates with respect to distressed loans, as well as other market-based refinancing and loan disposition fees.

MSR Recapture Agreement

The Company has an MSR recapture agreement with PFSI. Pursuant to the terms of the MSR recapture agreement, if PFSI refinances mortgage loans for which the Company previously held the MSRs, PFSI is generally required to transfer and convey to the Company cash in an amount equal to:

•

40% of the fair market value of the MSRs relating to the recaptured loans subject to the first 15% of the “recapture rate”

•

35% of the fair market value of the MSRs relating to the recaptured loans subject to the “recapture rate” in excess of 15% and up to 30%; and

•

30% of the fair market value of the MSRs relating to the recaptured loans subject to the “recapture rate” in excess of 30%.

The “recapture rate” means, during each month, the ratio of (i) the aggregate unpaid principal balance of all recaptured loans, to (ii) the aggregate unpaid principal balance of all mortgage loans for which the Company held the MSRs and that were refinanced or otherwise paid off in such month. PFSI has further agreed to allocate sufficient resources to target a recapture rate of at least 15%.

The MSR recapture agreement expires, unless terminated earlier in accordance with its terms, on June 30, 2025, subject to automatic renewal for additional 18-month periods, unless terminated in accordance with its terms.

Following is a summary of loan servicing fees earned by PLS:


	Quarter ended March 31,
	2023		2022
	(in thousands)
Loan servicing fees:
Loans acquired for sale at fair value	$	285	$	264
Loans at fair value		120		210
MSRs		20,044		20,614
	$	20,449	$	21,088
Average investment in loans:
Acquired for sale at fair value	$	2,359,044	$	2,129,668
At fair value	$	1,510,606	$	1,559,939
Average MSR portfolio UPB	$	230,812,774	$	217,692,169

Management Fees

The Company has a management agreement with PCM pursuant to which PMT pays PCM management fees as follows:

•

A base management fee that is calculated quarterly and is equal to the sum of (i) 1.5% per year of average shareholders’ equity up to $2 billion, (ii) 1.375% per year of average shareholders’ equity in excess of $2 billion and up to $5 billion, and (iii) 1.25% per year of average shareholders’ equity in excess of $5 billion.

•

A performance incentive fee that is calculated quarterly at a defined annualized percentage of the amount by which “net income,” on a rolling four-quarter basis and before deducting the incentive fee, exceeds certain levels of return on “equity.”

The performance incentive fee is equal to the sum of: (a) 10% of the amount by which “net income” for the quarter exceeds (i) an 8% return on “equity” plus the “high watermark”, up to (ii) a 12% return on “equity” plus (b) 15% of the amount by which “net income” for the quarter exceeds (i) a 12% return on “equity” plus the “high watermark”, up to (ii) a 16% return on “equity” plus (c) 20% of the amount by which “net income” for the quarter exceeds a 16% return on “equity” plus the “high watermark”.

For the purpose of determining the amount of the performance incentive fee:

“Net income” is defined as net income or loss attributable to the Company’s common shares of beneficial interest (“Common Shares”) calculated in accordance with GAAP, and adjusted to exclude one-time events pursuant to changes in GAAP and certain other non-cash charges after discussion between PCM and the Company’s independent trustees and after approval by a majority of the Company’s independent trustees.

“Equity” is the weighted average of the issue price per Common Share of all of the Company’s public offerings, multiplied by the weighted average number of Common Shares outstanding (including restricted share units) in the rolling four-quarter period.

“High watermark” is the quarterly adjustment that reflects the amount by which the “net income” (stated as a percentage of return on "equity") in that quarter exceeds or falls short of the lesser of 8% and the average Fannie Mae 30-year MBS yield (the "target yield") for the four quarters then ended. The “high watermark” starts at zero and is adjusted quarterly. If the “net income” is lower than the target yield, the “high watermark” is increased by the difference. If the “net income” is higher than the target yield, the “high watermark” is reduced by the difference. Each time a performance incentive fee is earned, the “high watermark” returns to zero. As a result, the threshold amounts required for PCM to earn a performance incentive fee are adjusted cumulatively based on the performance of PMT’s “net income” over (or under) the target yield, until the “net income” in excess of the target yield exceeds the then-current cumulative “high watermark” amount.

The base management fee and the performance incentive fee are both payable quarterly in arrears. The performance incentive fee may be paid in cash or a combination of cash and the Company’s Common Shares (subject to a limit of no more than 50% paid in Common Shares), at the Company’s option.

In the event of termination of the management agreement between the Company and PCM, PCM may be entitled to a termination fee in certain circumstances. The termination fee is equal to three times the sum of (a) the average annual base management fee, and (b) the average annual performance incentive fee earned by PCM, in each case during the 24-month period before termination.

Following is a summary of management fee expenses:


		Quarter ended March 31,
		2023		2022
	(in thousands)
Base management		$	7,257	$	8,117
Performance incentive			—		—
		$	7,257	$	8,117
Average shareholders' equity amounts used to calculate base management fee expense		$	1,962,105	$	2,212,304

Expense Reimbursement

Under the management agreement, PCM is entitled to reimbursement of its organizational and operating expenses, including third-party expenses, incurred on the Company’s behalf, it being understood that PCM and its affiliates shall allocate a portion of their personnel’s time to provide certain legal, tax and investor relations services for the direct benefit of the Company. PCM is reimbursed $165,000 per fiscal quarter, such amount to be reviewed annually and to not preclude reimbursement for any other services performed by PCM or its affiliates.

The Company is required to pay PCM and its affiliates a portion of rent, telephone, utilities, office furniture, equipment, machinery and other office, internal and overhead expenses of PCM and its affiliates required for the Company’s and its subsidiaries’ operations. These expenses are allocated based on the ratio of the Company’s and its subsidiaries’ proportion of gross assets compared to all remaining gross assets managed or owned by PCM and/or its affiliates as calculated at each fiscal quarter end.

Following is a summary of the Company’s reimbursements to PCM and its affiliates for expenses:


	Quarter ended March 31,
	2023		2022
	(in thousands)
Reimbursement of:
Expenses incurred on the Company’s behalf, net	$	5,661	$	5,357
Common overhead incurred by PCM and its affiliates		1,821		1,864
Compensation		165		165
	$	7,647	$	7,386
Payments and settlements during the year (1)	$	32,384	$	39,764

(1)

Payments and settlements include payments and netting settlements made pursuant to master netting agreements between the Company and PFSI for the operating, investing and financing activities itemized in this Note.

Financing Activities

PFSI held 75,000 of the Company’s Common Shares at both March 31, 2023 and December 31, 2022.

Amounts Receivable from and Payable to PFSI

Amounts receivable from and payable to PFSI are summarized below:


	March 31, 2023		December 31, 2022
	(in thousands)
Due from PFSI-Miscellaneous receivables	$	—	$	3,560

Due to PFSI:
Correspondent production fees	$	8,325	$	6,835
Allocated expenses and expenses and costs paid by PFSI on PMT’s behalf		7,610		11,447
Management fees		7,257		7,307
Loan servicing fees		6,791		6,740
Fulfillment fees		5,183		4,043
	$	35,166	$	36,372

The Company has also transferred cash to PLS to fund loan servicing advances and REO property acquisition and preservation costs on its behalf. Such amounts are included in various balance sheet items as summarized below:


Balance sheet line including advance amount	March 31, 2023		December 31, 2022
	(in thousands)
Loan servicing advances	$	138,716	$	197,972
Real estate acquired in settlement of loans		3,291		3,479
	$	142,007	$	201,451

Note 5—Loan Sales

The following table summarizes cash flows between the Company and transferees in transfers of loans that are accounted for as sales where the Company maintains continuing involvement with the loans:


	Quarter ended March 31,
	2023		2022
	(in thousands)
Cash flows:
Proceeds from sales	$	5,587,266	$	11,985,961
Loan servicing fees received	$	164,214	$	146,885

The following table summarizes for the dates presented collection status information for loans that are accounted for as sales where the Company maintains continuing involvement:


	March 31, 2023		December 31, 2022
	(in thousands)
UPB of loans outstanding	$	231,507,353	$	229,858,573
Collection status (UPB) (1)
Delinquency:
30-89 days delinquent	$	1,556,305	$	1,903,007
90 or more days delinquent:
Not in foreclosure	$	839,807	$	880,841
In foreclosure	$	66,275	$	70,921
Bankruptcy	$	132,238	$	123,239
Delinquent loans in COVID-19 pandemic-related forbearance:
30-89 days	$	144,897	$	176,346
90 days or more	$	404,288	$	464,694
Custodial funds managed by the Company (2)	$	2,347,138	$	1,783,157

(1)

Includes delinquent loans in COVID-19 pandemic-related forbearance plans that were requested by borrowers seeking payment relief in accordance with the CARES Act.

(2)

Custodial funds include borrower and investor custodial cash accounts relating to loans serviced under mortgage servicing agreements and are not included on the Company’s consolidated balance sheets. The Company earns placement fees on certain of the custodial funds it manages on behalf of the loans’ borrowers and investors, and these fees are included in Interest income in the Company’s consolidated statements of operations.

Note 6—Variable Interest Entities

The Company is a variable interest holder in various VIEs that relate to its investing and financing activities.

Credit Risk Transfer Arrangements

The Company has previously entered into certain loan sales arrangements pursuant to which it accepted credit risk relating to the loans sold in exchange for a portion of the interest earned on such loans. These arrangements absorb scheduled or realized credit losses on such loans and include CRT Agreements, and other CRT securities.

The Company, through its subsidiary, PennyMac Corp. (“PMC”), entered into CRT arrangements with Fannie Mae, pursuant to which the Company sold pools of loans into Fannie Mae-guaranteed securitizations while retaining recourse obligations as part of the retention of IO ownership interests in such loans and include:

•

CRT Agreements, which are structured such that loans that reach a specific number of days delinquent (including loans in forbearance, which also includes those subject to the forbearance provided in the CARES Act) trigger losses chargeable to the CRT Agreements based on the size of the loan and a contractual schedule of loss severity; and

•

Other CRT securities, which require the Company to absorb losses only when the reference loans realize credit losses.

The Company placed Deposits securing CRT arrangements into the subsidiary trust entities to secure its recourse obligations. The Deposits securing CRT arrangements represent the Company’s maximum contractual exposure to claims under its recourse obligations and are the sole source of settlement of losses under the CRT arrangements.

The Company’s exposure to losses under its recourse obligations was initially established at rates ranging from 3.5% to 4.0% of the UPB of the loans sold under the CRT arrangements. As the UPB of the underlying loans subject to each CRT arrangement is reduced through repayments, the percentage exposure of each CRT arrangement will increase to maximums ranging from 4.5% to 5.0% of outstanding UPB, although the total dollar amount of exposure to losses does not increase.

The Company has concluded that the subsidiary trust entities holding its CRT arrangements are VIEs and the Company is the primary beneficiary of the VIEs as it is the holder of the primary beneficial interests which absorb the variability of the trusts’ results of operations. For CRT Agreements, the Company recognizes its IO ownership interests and recourse obligations on the consolidated balance sheets as CRT Derivatives in Derivative assets and Derivative and credit risk transfer strip liabilities. For other CRT securities, the Company recognizes its IO ownership interests and recourse obligations as CRT strips which are also included on the consolidated balance sheet in Derivative and credit risk transfer strip liabilities. Gains and losses on the derivatives and strips (including the IO ownership interest sold to nonaffiliates) included in the CRT arrangements are included in Net gains (losses) on investments and financings in the consolidated statements of operations.

Following is a summary of the CRT arrangements:


	Quarter ended March 31,
	2023			2022
	(in thousands)
Net investment income:
Net gains (losses) on investments and financings:
CRT Derivatives and strips:
CRT derivatives
Realized	$	3,030		$	21,201
Valuation changes		8,096			(27,049	)
		11,126			(5,848	)
CRT strips
Realized		12,304			17,763
Valuation changes		24,128			(41,758	)
		36,432			(23,995	)
Interest-only security payable at fair value		(1,280	)		(5,780	)
		46,278			(35,623	)
Interest income — Deposits securing CRT arrangements		14,212			222
	$	60,490		$	(35,401	)

Net payments made (recoveries received) to settle losses (recoveries) on CRT arrangements	$	1,257		$	(15,973	)


	March 31, 2023			December 31, 2022
	(in thousands)
Carrying value of CRT arrangements:
Derivative and credit risk transfer strip assets (liabilities), net
CRT derivatives	$	(13,860	)	$	(22,098	)
CRT strips		(113,065	)		(137,193	)
	$	(126,925	)	$	(159,291	)

Deposits securing CRT arrangements	$	1,297,917		$	1,325,294
Interest-only security payable at fair value	$	23,205		$	21,925

CRT arrangement assets pledged to secure borrowings:
Derivative assets	$	2,883		$	1,262
Deposits securing CRT arrangements (1)	$	1,297,917		$	1,325,294

UPB of loans underlying CRT arrangements	$	24,824,362		$	25,315,524
Collection status (UPB):
Delinquency (2)
Current	$	24,277,884		$	24,673,719
30-89 days delinquent	$	322,328		$	409,049
90-180 days delinquent	$	107,982		$	112,286
180 or more days delinquent	$	91,892		$	93,717
Foreclosure	$	24,276		$	26,753
Bankruptcy	$	57,676		$	54,395
Delinquent loans in COVID-19 pandemic-related forbearance plans:
30-89 days delinquent	$	23,358		$	35,388
90-180 days delinquent	$	29,352		$	39,033
180 or more days delinquent	$	29,052		$	35,588

(1)

Deposits securing credit risk transfer strip liabilities also secure $129.8 million and $160.6 million in CRT strip and CRT derivative liabilities at March 31, 2023 and December 31, 2022, respectively.

(2)

Includes delinquent loans in COVID-19 pandemic-related forbearance plans that were requested by borrowers seeking payment relief in accordance with the CARES Act.

Subordinate Mortgage-Backed Securities

The Company retains or purchases subordinate MBS in transactions sponsored by PMC or a nonaffiliate. Cash inflows from the loans underlying these securities are distributed to investors and service providers in accordance with the contractual priority of payments and, as such, most of these inflows must be directed first to service and repay the senior securities.

The rights of holders of the subordinate securities to receive distributions of principal and/or interest, as applicable, are subordinate to the rights of holders of the senior securities. After the senior securities are repaid, substantially all cash inflows will be directed to the subordinate securities, including those held by the Company, until they are fully repaid.

The Company’s retention or purchase of subordinate MBS exposes PMT to the credit risk in the underlying loans because the Company’s beneficial interests are among the first beneficial interests to absorb credit losses on those assets. The Company’s exposure to losses from its investments in subordinate MBS is limited to its recorded investment in such securities.

Whether the Company concludes that it is the primary beneficiary of the VIEs issuing the subordinate MBS and therefore consolidates these entities is based on its exposure to losses that could be significant to the VIEs and its power to direct activities that most significantly impact the VIEs’ economic performance:

•

Certain of the Company’s investments in subordinate MBS either do not expose the Company to losses or residual returns that could be significant to the issuing VIE or the Company has concluded that it does not have the power to direct the activities that most significantly impact the VIE’s economic performance. These investments are classified as subordinate credit-linked securities in its investment in MBS as shown in Note 8 – Mortgage-Backed Securities.

•

For other investments in subordinate MBS, comprised of transactions backed by loans purchased by the Company that were subsequently included in securitizations sponsored by the Company or a nonaffiliate and serviced by PLS, the Company concluded that it is the primary beneficiary of the VIEs as it has the power, through PLS, in its role as the servicer or sub-servicer of the loans, to direct the activities of the VIEs that most significantly impact the VIEs’ economic performance and, as a holder of subordinate securities, is exposed to losses or residual returns that could potentially be significant to the VIEs. Therefore, PMT consolidates the VIEs that issue those subordinate MBS.

The Company recognizes the interest income earned on the loans owned by the VIEs and the interest expense attributable to the asset-backed securities issued to nonaffiliates by its consolidated VIEs on its consolidated statements of operations.

Following is a summary of the Company’s investment in subordinate mortgage-backed securities held in consolidated VIEs:


	Quarter ended March 31,
	2023			2022
	(in thousands)
Fair value changes:
Loans at fair value	$	11,017		$	(96,564	)
Asset-backed financings at fair value	$	(10,160	)	$	89,174
Interest income	$	15,166		$	12,849
Interest expense	$	12,353		$	11,027


	March 31, 2023		December 31, 2022
	(in thousands)
Loans at fair value	$	1,498,923	$	1,509,942
Asset-backed financings at fair value	$	1,403,080	$	1,414,955
Subordinate MBS retained at fair value pledged to secure Assets sold under agreements to repurchase	$	84,866	$	84,044

Note 7— Fair Value

The Company’s consolidated financial statements include assets and liabilities that are measured at or based on their fair values. Measurement at or based on fair value may be on a recurring or nonrecurring basis depending on the accounting principles applicable to the specific asset or liability and whether the Company has elected to carry the item at its fair value as discussed in the following paragraphs.

The Company groups its assets and liabilities at fair value in three levels, based on the markets in which the assets and liabilities are traded and the observability of the inputs used to determine fair value. These levels are:

•

Level 1—Quoted prices in active markets for identical assets or liabilities.

•

Level 2—Prices determined or determinable using other significant observable inputs. Observable inputs are inputs that other market participants would use in pricing an asset or liability and are developed based on market data obtained from sources independent of the Company.

•

Level 3—Prices determined using significant unobservable inputs. In situations where significant observable inputs are unavailable, unobservable inputs may be used. Unobservable inputs reflect the Company’s own judgments about the factors that market participants use in pricing an asset or liability, and are based on the best information available in the circumstances.

As a result of the difficulty in observing certain significant valuation inputs affecting “Level 3” fair value assets and liabilities, the Company is required to make judgments regarding these items’ fair values. Different persons in possession of the same facts may reasonably arrive at different conclusions as to the inputs to be applied in valuing these assets and liabilities and their fair values. Such differences may result in significantly different fair value measurements. Likewise, due to the general illiquidity of some of these assets and liabilities, subsequent transactions may be at values significantly different from those reported.

The Company reclassifies its assets and liabilities between levels of the fair value hierarchy when the inputs required to establish fair value at a level of the fair value hierarchy are no longer readily available, requiring the use of lower-level inputs, or when the inputs required to establish fair value at a higher level of the hierarchy become available.

Fair Value Accounting Elections

The Company identified all of PMT’s non-cash financial assets and MSRs to be accounted for at fair value. The Company has elected to account for these assets at fair value so such changes in fair value will be reflected in income as they occur and more timely reflect the results of the Company’s performance.

The Company identified PMT’s asset-backed financings of VIEs and interest only security payable to be accounted for at fair value to reflect the generally offsetting changes in fair value of these borrowings to changes in fair value of the assets at fair value collateralizing these financings. For other borrowings, the Company has determined that historical cost accounting is more appropriate because under this method debt issuance costs are amortized over the term of the debt facilities, thereby matching the debt issuance cost to the periods benefiting from the availability of these facilities.

Financial Statement Items Measured at Fair Value on a Recurring Basis

Following is a summary of financial statement items that are measured at fair value on a recurring basis:


	March 31, 2023
	Level 1		Level 2		Level 3		Total
	(in thousands)
Assets:
Short-term investments	$	292,153	$	—	$	—	$	292,153
Mortgage-backed securities at fair value		—		4,629,004		—		4,629,004
Loans acquired for sale at fair value		—		3,133,409		10,109		3,143,518
Loans at fair value		—		1,498,923		3,548		1,502,471
Derivative assets:
Call options on interest rate futures purchase contracts		13,508		—		—		13,508
Put options on interest rate futures purchase contracts		6,570		—		—		6,570
Forward purchase contracts		—		16,477		—		16,477
Forward sale contracts		—		7,711		—		7,711
MBS call options		—		1,832		—		1,832
MBS put options		—		3,573		—		3,573
CRT derivatives		—		—		2,883		2,883
Interest rate lock commitments		—		—		9,952		9,952
Total derivative assets before netting		20,078		29,593		12,835		62,506
Netting		—		—		—		26,779
Total derivative assets after netting		20,078		29,593		12,835		89,285
Mortgage servicing rights at fair value		—		—		3,975,076		3,975,076
	$	312,231	$	9,290,929	$	4,001,568	$	13,631,507
Liabilities:
Asset-backed financings at fair value	$	—	$	1,403,080	$	—	$	1,403,080
Interest-only security payable at fair value		—		—		23,205		23,205
Derivative and credit risk transfer strip liabilities:
Forward purchase contracts		—		5,302		—		5,302
Forward sales contracts		—		86,918		—		86,918
MBS call options		—		2,004		—		2,004
CRT derivatives		—		—		16,743		16,743
Interest rate lock commitments		—		—		1,403		1,403
Total derivative liabilities before netting		—		94,224		18,146		112,370
Netting		—		—		—		(86,966	)
Total derivative liabilities after netting		—		94,224		18,146		25,404
Credit risk transfer strips		—		—		113,065		113,065
Total derivative and credit risk transfer strip liabilities		—		94,224		131,211		138,469
	$	—	$	1,497,304	$	154,416	$	1,564,754


	December 31, 2022
	Level 1		Level 2		Level 3		Total
	(in thousands)
Assets:
Short-term investments	$	252,271	$	—	$	—	$	252,271
Mortgage-backed securities at fair value		—		4,462,601		—		4,462,601
Loans acquired for sale at fair value		—		1,811,225		10,708		1,821,933
Loans at fair value		—		1,509,942		3,457		1,513,399
Derivative assets:
Call options on interest rate futures purchase contracts		2,906		—		—		2,906
Put options on interest rate futures purchase contracts		8,130		—		—		8,130
Forward purchase contracts		—		418		—		418
Forward sale contracts		—		43,435		—		43,435
MBS put options		—		2,783		—		2,783
CRT derivatives		—		—		1,262		1,262
Interest rate lock commitments		—		—		3,877		3,877
Total derivative assets before netting		11,036		46,636		5,139		62,811
Netting		—		—		—		22,129
Total derivative assets after netting		11,036		46,636		5,139		84,940
Mortgage servicing rights at fair value		—		—		4,012,737		4,012,737
	$	263,307	$	7,830,404	$	4,032,041	$	12,147,881
Liabilities:
Asset-backed financings at fair value	$	—	$	1,414,955	$	—	$	1,414,955
Interest-only security payable at fair value		—		—		21,925		21,925
Derivative liabilities and credit risk transfer strips:
Forward purchase contracts		—		15,196		—		15,196
Forward sales contracts		—		17,279		—		17,279
CRT derivatives		—		—		23,360		23,360
Interest rate lock commitments		—		—		4,355		4,355
Total derivative liabilities before netting		—		32,475		27,715		60,190
Netting		—		—		—		(30,157	)
Total derivative liabilities after netting		—		32,475		27,715		30,033
Credit risk transfer strips		—		—		137,193		137,193
Total derivative and credit risk transfer strip liabilities		—		32,475		164,908		167,226
	$	—	$	1,447,430	$	186,833	$	1,604,106

The following is a summary of changes in items measured at fair value on a recurring basis using Level 3 inputs that are significant to the estimation of the fair values of the assets and liabilities at either the beginning or end of the periods presented:


	Quarter ended March 31, 2023
Assets (1)	Loans acquired for sale			Loans at fair value			CRT derivatives			Interest rate lock commitments			CRT strips			Mortgage servicing rights			Total
	(in thousands)
Balance, December 31, 2022	$	10,708		$	3,457		$	(22,098	)	$	(478	)	$	(137,193	)	$	4,012,737		$	3,867,133
Purchases and issuances		3,495			119			—			(7,687	)		—			—			(4,073	)
Repayments and sales		(3,767	)		(20	)		(2,888	)		—			(12,304	)		—			(18,979	)
Amounts received pursuant to sales of loans		—			—			—			—			—			100,618			100,618
Changes in fair value included in results of operations arising from:
Changes in instrument - specific credit risk		—			—			—			—			—			—			—
Other factors		(327	)		452			11,126			27,032			36,432			(137,444	)		(62,729	)
		(327	)		452			11,126			27,032			36,432			(137,444	)		(62,729	)
Transfers of:
Loans to REO		—			(460	)		—			—			—			—			(460	)
Interest rate lock commitments to loans acquired for sale (2)		—			—			—			(10,318	)		—			—			(10,318	)
Mortgage servicing rights relating to delinquent loans to Agency		—			—			—			—			—			(835	)		(835	)
Balance, March 31, 2023	$	10,109		$	3,548		$	(13,860	)	$	8,549		$	(113,065	)	$	3,975,076		$	3,870,357
Changes in fair value recognized during the year relating to assets still held at March 31, 2023	$	161		$	(8	)	$	8,096		$	8,549		$	24,128		$	(137,444	)	$	(96,518	)

(1)

For the purpose of this table, CRT derivative, interest rate lock commitment (“IRLC”), and CRT strip asset and liability positions are shown net.

(2)

The Company had transfers among the fair value levels arising from transfers of IRLCs to loans acquired for sale at fair value upon purchase of the respective loans.


Liabilities	Quarter ended March 31, 2023
	(in thousands)
Interest-only security payable:
Balance, December 31, 2022	$	21,925
Changes in fair value included in results of operations arising from:
Changes in instrument - specific credit risk		—
Other factors		1,280
		1,280
Balance, March 31, 2023	$	23,205
Changes in fair value recognized during the year relating to liability outstanding at March 31, 2023	$	1,280


	Quarter ended March 31, 2022
Assets (1)	Loans acquired for sale			Loans at fair value			CRT derivatives			Interest rate lock commitments			CRT strips			Mortgage servicing rights		Total
	(in thousands)
Balance, December 31, 2021	$	30,129		$	4,161		$	18,964		$	2,451		$	(26,837	)	$	2,892,855	$	2,921,723
Purchases and issuances		24,105			—			—			(28,144	)		—			—		(4,039	)
Repayments and sales		(29,498	)		(654	)		(21,165	)		—			(17,763	)		—		(69,080	)
Amounts received pursuant to sales of loans		—			—			—			—			—			194,596		194,596
Changes in fair value included in results of operations arising from:
Changes in instrument - specific credit risk		—			—			—			—			—			—		—
Other factors		(411	)		442			(5,848	)		(118,799	)		(23,995	)		303,721		155,110
		(411	)		442			(5,848	)		(118,799	)		(23,995	)		303,721		155,110
Transfers:
Interest rate lock commitments to loans acquired for sale (2)		—			—			—			121,027			—			—		121,027
Balance, March 31, 2022	$	24,325		$	3,949		$	(8,049	)	$	(23,465	)	$	(68,595	)	$	3,391,172	$	3,319,337
Changes in fair value recognized during the quarter relating to assets still held at March 31, 2022	$	(229	)	$	66		$	(27,049	)	$	(23,465	)	$	(41,758	)	$	303,721	$	211,286

(1)

For the purpose of this table, CRT derivative, IRLC, and CRT strip asset and liability positions are shown net.

(2)

The Company had transfers among the fair value levels arising from transfers of IRLCs to loans acquired for sale at fair value upon purchase of the respective loans.


Liabilities	Quarter ended March 31, 2022
	(in thousands)
Interest-only security payable:
Balance, December 31, 2021	$	10,593
Changes in fair value included in results of operations arising from:
Changes in instrument - specific credit risk		—
Other factors		5,780
		5,780
Balance, March 31, 2022	$	16,373
Changes in fair value recognized during the quarter relating to liability outstanding at March 31, 2022	$	5,780

Financial Statement Items Measured at Fair Value under the Fair Value Option

Following are the fair values and related principal amounts due upon maturity of loans accounted for under the fair value option (including loans acquired for sale, loans held in consolidated VIEs, and distressed loans):


	March 31, 2023							December 31, 2022
	Fair value		Principal amount due upon maturity		Difference			Fair value		Principal amount due upon maturity		Difference
	(in thousands)
Loans acquired for sale at fair value:
Current through 89 days delinquent	$	3,140,761	$	3,089,597	$	51,164		$	1,819,551	$	1,795,445	$	24,106
90 or more days delinquent:
Not in foreclosure		2,551		3,449		(898	)		1,666		1,927		(261	)
In foreclosure		206		300		(94	)		716		809		(93	)
		2,757		3,749		(992	)		2,382		2,736		(354	)
	$	3,143,518	$	3,093,346	$	50,172		$	1,821,933	$	1,798,181	$	23,752
Loans at fair value:
Held in consolidated VIEs:
Current through 89 days delinquent	$	1,498,108	$	1,766,772	$	(268,664	)	$	1,508,540	$	1,788,911	$	(280,371	)
90 or more days delinquent:
Not in foreclosure		815		1,077		(262	)		1,231		1,642		(411	)
In foreclosure		—		—		—			171		226		(55	)
		815		1,077		(262	)		1,402		1,868		(466	)
		1,498,923		1,767,849		(268,926	)		1,509,942		1,790,779		(280,837	)
Distressed:
Current through 89 days delinquent		480		714		(234	)		498		682		(184	)
90 or more days delinquent:
Not in foreclosure		1,404		2,561		(1,157	)		1,230		2,964		(1,734	)
In foreclosure		1,664		2,575		(911	)		1,729		2,728		(999	)
		3,068		5,136		(2,068	)		2,959		5,692		(2,733	)
		3,548		5,850		(2,302	)		3,457		6,374		(2,917	)
	$	1,502,471	$	1,773,699	$	(271,228	)	$	1,513,399	$	1,797,153	$	(283,754	)

Following are the changes in fair value included in current period results of operations by consolidated statement of operations line item for financial statement items accounted for under the fair value option:


	Quarter ended March 31, 2023
	Net gains (losses) on investments and financings			Net loan servicing fees			Net gains on loans acquired for sale		Net interest expense			Total
	(in thousands)
Assets:
Mortgage-backed securities at fair value	$	78,218		$	—		$	—	$	(1,956	)	$	76,262
Loans acquired for sale at fair value		—			—			15,315		—			15,315
Loans at fair value		11,468			—			—		126			11,594
Credit risk transfer strips		36,432			—			—		—			36,432
MSRs at fair value		—			(137,444	)		—		—			(137,444	)
	$	126,118		$	(137,444	)	$	15,315	$	(1,830	)	$	2,159
Liabilities:
Interest-only security payable at fair value	$	(1,280	)	$	—		$	—	$	—		$	(1,280	)
Asset-backed financings at fair value		(10,160	)		—			—		(542	)		(10,702	)
	$	(11,440	)	$	—		$	—	$	(542	)	$	(11,982	)


	Quarter ended March 31, 2022
	Net gains (losses) on investments and financings			Net loan servicing fees		Net gains on loans acquired for sale			Net interest expense			Total
	(in thousands)
Assets:
Mortgage-backed securities at fair value	$	(186,525	)	$	—	$	—		$	(1,411	)	$	(187,936	)
Loans acquired for sale at fair value		—			—		(227,266	)		—			(227,266	)
Loans at fair value		(96,121	)		—		—			(949	)		(97,070	)
Credit risk transfer strips		(23,995	)		—		—			—			(23,995	)
MSRs at fair value		—			303,721		—			—			303,721
	$	(306,641	)	$	303,721	$	(227,266	)	$	(2,360	)	$	(232,546	)
Liabilities:
Interest-only security payable at fair value	$	(5,780	)	$	—	$	—		$	—		$	(5,780	)
Asset-backed financings at fair value		89,174			—		—			(834	)		88,340
	$	83,394		$	—	$	—		$	(834	)	$	82,560

Financial Statement Item Measured at Fair Value on a Nonrecurring Basis

Following is a summary of the carrying value of assets that were remeasured during the period based on fair value on a nonrecurring basis:


Real estate acquired in settlement of loans	Level 1		Level 2		Level 3		Total
	(in thousands)
March 31, 2023	$	—	$	—	$	325	$	325
December 31, 2022	$	—	$	—	$	1,292	$	1,292

The following table summarizes the fair value changes recognized during the periods on assets held at period end that were remeasured at fair value on a nonrecurring basis:


	Quarter ended March 31,
	2023		2022
	(in thousands)
Real estate asset acquired in settlement of loans	$	73	$	(148	)

The Company remeasures its REO based on fair value when it evaluates the REO for impairment. The Company evaluates its REO for impairment with reference to the respective properties’ fair values less costs to sell. REO may be revalued after acquisition due to the Company receiving greater access to the property, the property being held for an extended period or receiving indications that the property’s fair value may not be supported by developing market conditions. Any subsequent change in fair value to a level that is less than or equal to the property’s cost is recognized in Results of real estate acquired in settlement of loans in the Company’s consolidated statements of operations.

Fair Value of Financial Instruments Carried at Amortized Cost

Most of the Company’s borrowings are carried at amortized cost. The Company’s Assets sold under agreements to repurchase, Mortgage loan participation purchase and sale agreements, Notes payable secured by credit risk transfer and mortgage servicing assets and Exchangeable senior notes are classified as “Level 3” fair value liabilities due to the Company’s reliance on unobservable inputs to estimate these instruments’ fair values.

The Company has concluded that the fair values of these borrowings other than Notes payable secured by credit risk transfer and mortgage servicing assets and Exchangeable senior notes approximate the agreements’ carrying values due to the borrowing agreements’ variable interest rates and short maturities.

Following are the carrying and fair values of the Notes payable secured by credit risk transfer and mortgage servicing assets and Exchangeable senior notes:


	March 31, 2023				December 31, 2022
Instrument	Carrying value		Fair value		Carrying value		Fair value
	(in thousands)
Notes payable secured by credit risk transfer and mortgage servicing assets	$	2,790,958	$	2,763,386	$	2,804,028	$	2,721,391
Exchangeable senior notes	$	547,003	$	496,073	$	546,254	$	471,781

The Company estimates the fair value of the Notes payable secured by credit risk transfer and mortgage servicing assets and Exchangeable senior notes using indications of fair value provided by nonaffiliate brokers.

Valuation Governance

Most of the Company’s assets, its Asset-backed financings at fair value, Interest-only security payable at fair value and Derivative and credit risk transfer strip liabilities at fair value are carried at fair value with changes in fair value recognized in current period results of operations. A substantial portion of these items are “Level 3” fair value assets and liabilities which require the use of unobservable inputs that are significant to the estimation of the fair values of the assets and liabilities. Unobservable inputs reflect the Company’s own judgments about the factors that market participants use in pricing an asset or liability and are based on the best information available under the circumstances.

Due to the difficulty in estimating the fair values of “Level 3” fair value assets and liabilities, the Company has assigned responsibility for estimating the fair value of these assets and liabilities to specialized staff and subjects the valuation process to significant senior management oversight:

•

PFSI’s Financial Analysis and Valuation group (the “FAV group”) is responsible for estimating the fair values of “Level 3” fair value assets and liabilities other than IRLCs and maintaining its valuation policies and procedures.

•

PFSI’s Capital Markets Risk Management staff is responsible for estimating the fair value of the Company’s IRLCs which is reviewed by PFSI’s Capital Markets Operations group.

With respect to the non-IRLC “Level 3” valuations, the FAV group reports to PFSI’s senior management valuation committee, which oversees the valuations. The FAV group monitors the models used for valuation of the Company’s “Level 3” fair value assets and liabilities other than IRLCs, including the models’ performance versus actual results, and reports those results to PFSI’s senior management valuation committee. PFSI’s senior management valuation committee includes the Company’s chief financial, risk, credit, and capital markets officers as well as other senior members of the Company’s finance, capital markets and risk management staffs.

The FAV group is responsible for reporting to PFSI’s senior management valuation committee on the changes in the valuation of the non-IRLC “Level 3” fair value assets and liabilities, including major factors affecting the valuation and any changes in model methods and inputs. To assess the reasonableness of its valuations, the FAV group presents an analysis of the effect on the valuation of changes to the significant inputs to the models and, for MSRs, comparisons of its estimates of fair value and of key inputs to those procured from nonaffiliated brokers and published surveys.

Valuation Techniques and Inputs

The following is a description of the techniques and inputs used in estimating the fair values of “Level 2” and “Level 3” fair value assets and liabilities:

Mortgage-Backed Securities

The Company categorizes its current holdings of securities accounted for as MBS as “Level 2” fair value assets. Fair value of these MBS is established based on quoted market prices for the Company’s MBS holdings or similar securities. Changes in the fair value of MBS are included in Net gains (losses) on investments and financings in the consolidated statements of operations.

Loans

Fair value of loans is estimated based on whether the loans are saleable into active markets:

•

Loans that are saleable into active markets, comprised of most of the Company’s loans acquired for sale at fair value and all of the loans at fair value held in VIEs, are categorized as “Level 2” fair value assets:

•

For loans acquired for sale, the fair values are established using the loans’ contracted selling price or quoted market price or market price equivalent.

•

For the loans at fair value held in VIEs, the quoted indications of fair value of all of the individual securities issued by the securitization trusts are used to derive fair values for the loans. The Company obtains indications of fair value from nonaffiliated brokers based on comparable securities and validates the brokers’ indications of fair value using pricing models and inputs the Company believes are similar to the models and inputs used by other market participants. The Company adjusts the fair values received from brokers to include the fair value of MSRs attributable to the loans held by the Company included in the VIEs.

•

Loans that are not saleable into active markets, comprised of previously sold loans that the Company repurchased pursuant to the representation and warranties it provided to the purchaser and distressed loans, are categorized as “Level 3” fair value assets:

•

Fair value for loans acquired for sale categorized as “Level 3” assets is estimated using a discounted cash flow approach or their contracted selling price when applicable. Inputs to the discounted cash flow model include current interest rates, payment status, property types, discount rates and forecasts of future interest rates, home prices, prepayment speeds, default speeds and loss severities.

•

Distressed loans’ fair values are estimated based on the expected resolution from the individual asset’s disposition strategy. When a cash flow projection is used to estimate the fair value, those cash flows are discounted at annual rates up to 20%.

Derivative and Credit Risk Transfer Strip Assets and Liabilities

CRT Derivatives

The Company categorizes CRT derivatives as “Level 3” fair value assets and liabilities. The fair value of CRT derivatives is based on indications of fair value provided to the Company by nonaffiliated brokers for the certificates representing the beneficial interests in the trusts holding the Deposits securing credit risk transfer arrangements pledged to creditors, the recourse obligations and the IO ownership interests. Together, the recourse obligation and the IO ownership interest comprise the CRT derivative. Fair value of the CRT derivatives is derived by deducting the balance of the Deposits securing credit risk transfer arrangements pledged to creditors from the fair value of the certificates.

The Company assesses the fair values it receives from nonaffiliated brokers using the discounted cash flow approach. The significant unobservable inputs used by the Company in its review and approval of the valuation of CRT derivatives are the discount rate, voluntary and involuntary prepayment speeds and the remaining loss expectations of the reference loans. Changes in fair value of CRT derivatives are included in Net gains (losses) on investments and financings in the consolidated statements of operations.

Following is a quantitative summary of key unobservable inputs used in the Company’s review and approval of broker-provided fair values for CRT derivatives:


	March 31, 2023		December 31, 2022
	(dollars in thousands)
Fair value
CRT derivatives:
Assets	$	2,883	$	1,262
Liabilities	$	16,743	$	23,360
UPB of loans in reference pools	$	5,865,196	$	5,972,060
Key inputs (1)
Discount rate
Range	8.3% – 10.0%		8.7% – 11.1%
Weighted average	9.9%		10.8%
Voluntary prepayment speed (2)
Range	7.3% – 8.4%		7.5% – 8.3%
Weighted average	7.6%		7.6%
Involuntary prepayment speed (3)
Range	0.5% – 1.2%		0.5% – 1.3%
Weighted average	0.6%		0.6%
Remaining loss expectation
Range	0.4% – 0.6%		0.4% – 0.7%
Weighted average	0.6%		0.6%

(1)

Weighted average inputs are based on fair value amounts of the CRT Agreements, except for remaining loss expectation which is based on the UPB of the loans in the reference pools.

(2)

Voluntary prepayment speed is measured using Life Voluntary Conditional Prepayment Rate (“CPR”).

(3)

Involuntary prepayment speed is measured using Life Involuntary CPR.

Interest Rate Lock Commitments

The Company categorizes IRLCs as “Level 3” fair value assets and liabilities. The Company estimates the fair value of IRLCs based on quoted Agency MBS prices, the probability that the loans will be purchased under the commitments (the “pull-through rate”) and the Company’s estimate of the fair value of the MSRs it expects to receive upon sale of the loans.

The significant unobservable inputs used in the fair value measurement of the Company’s IRLCs are the pull-through rates and the estimated MSRs attributed to the mortgage loans subject to the commitments. Significant changes in the pull-through rate or the MSR component of the IRLCs, in isolation, may result in a significant change in the IRLCs’ fair value. The financial effects of changes in these inputs are generally inversely correlated as increasing interest rates have a positive effect on the fair value of the MSR component of an IRLC’s fair value, but also increase the pull-through rate for the loan principal and interest payment cash flow component that has decreased in fair value. Changes in fair value of IRLCs are included in Net gains on loans acquired for sale in the consolidated statements of operations.

Following is a quantitative summary of key unobservable inputs used in the valuation of IRLCs:


	March 31, 2023		December 31, 2022
Fair value (in thousands) (1)	$	8,549	$	(478	)
Committed amount (in thousands)	$	1,806,398	$	1,484,384
Key inputs (2)
Pull-through rate
Range	42.0% – 100%		54.8% – 100%
Weighted average	86.7%		92.1%
MSR fair value expressed as
Servicing fee multiple
Range	1.5 – 7.4		1.9 – 7.1
Weighted average	4.4		4.7
Percentage of UPB
Range	0.5% – 3.1%		0.7% – 3.1%
Weighted average	1.9%		1.9%

(1)

For purposes of this table, IRLC asset and liability positions are shown net.

(2)

Weighted-average inputs are based on the committed amounts.

Hedging Derivatives

Fair value of derivative financial instruments actively traded on exchanges are categorized by the Company as “Level 1” fair value assets and liabilities. Fair values of derivative financial instruments based on observable interest rates, volatilities and prices in the MBS or other markets are categorized by the Company as “Level 2” fair value assets and liabilities. Changes in the fair value of hedging derivatives are included in Net gains (losses) on investments and financings, Net loan servicing fees – from nonaffiliates – Mortgage servicing rights hedging results, or Net gains on loans acquired for sale, as applicable, in the consolidated statements of operations.

Credit Risk Transfer Strips

The Company categorizes CRT strips as “Level 3” fair value assets or liabilities. The fair value of CRT strips is based on indications of fair value provided to the Company by nonaffiliated brokers for the securities representing the beneficial interests in the trusts holding the Deposits securing credit risk transfer arrangements pledged to creditors, the IO ownership interest and recourse obligation. Together, the IO ownership interest and the recourse obligation comprise the CRT strip.

Fair value of the CRT strips is derived by deducting the balance of the Deposits securing credit risk transfer arrangements pledged to creditors from the fair value of the securities derived from indications provided by the nonaffiliated brokers. Through December 31, 2021, the Company applied adjustments to the fair value derived from these indications to account for contractual restrictions limiting PMT’s ability to sell certain of the certificates. During the quarter ended March 31, 2022, the contractual restrictions on the Company’s ability to sell the certificates were removed. The Company recognized the effect of the removal of this restriction in Net gains (losses) on investments and financing during the quarter ended March 31, 2022.

The Company assesses the indications of fair value it receives from nonaffiliated brokers using the discounted cash flow approach. The significant unobservable inputs used by the Company in its review and approval of the valuation of the CRT strips are the discount rate, voluntary and involuntary prepayment speeds and the remaining loss expectations of the reference loans. Changes in fair value of CRT strips are included in Net gains (losses) on investments and financings in the consolidated statements of operations.

Following is a quantitative summary of key unobservable inputs used in the Company’s review and approval of the adjusted broker-provided fair values used to derive the fair value of the CRT strip liabilities:


	March 31, 2023		December 31, 2022
	(dollars in thousands)
Fair value	$	113,065	$	137,193
UPB of loans in the reference pools	$	18,959,166	$	19,343,464
Key inputs (1)
Discount rate
Range	6.6% – 10.3%		4.3% – 11.3%
Weighted average	9.8%		10.5%
Voluntary prepayment speed (2)
Range	7.7% – 7.9%		7.7% – 7.9%
Weighted average	7.7%		7.7%
Involuntary prepayment speed (3)
Range	0.5% – 1.5%		0.6% – 2.0%
Weighted average	0.6%		0.8%
Remaining loss expectation
Range	0.7% – 2.0%		0.7% – 2.0%
Weighted average	0.9%		0.9%

(1)

Weighted average inputs are based on fair value amounts of the CRT arrangements, except for remaining loss expectation which is based on the UPB of the loans in the reference pools.

(2)

Voluntary prepayment speed is measured using Life Voluntary CPR.

(3)

Involuntary prepayment speed is measured using Life Involuntary CPR.

Mortgage Servicing Rights

The Company categorizes MSRs as “Level 3” fair value assets. The Company uses a discounted cash flow approach to estimate the fair value of MSRs. The fair value of MSRs is derived from the net positive cash flows associated with the servicing agreements. The Company receives a servicing fee based on the remaining UPB of the loans subject to the servicing agreements and generally has the right to receive other remuneration including various mortgagor-contracted fees such as late charges and collateral reconveyance charges, and is generally entitled to retain any placement fees earned on funds held pending remittance of mortgagor principal, interest, tax and insurance payments.

The key inputs used in the estimation of the fair value of MSRs include the applicable pricing spreads, the prepayment speeds of the underlying loans, and the annual per-loan cost to service the loans, all of which are unobservable. Significant changes to any of those inputs in isolation could result in a significant change in the MSR fair value measurement. Changes in these key inputs are not directly related. Changes in the fair value of MSRs are included in Net loan servicing fees – From nonaffiliates – Change in fair value of mortgage servicing rights in the consolidated statements of operations.

MSRs are generally subject to loss in fair value when mortgage interest rates decrease, when returns required by market participants (pricing spreads) increase, or when annual per-loan cost of servicing increases. Reductions in the fair value of MSRs affect income primarily through recognition of the change in fair value.

Following are the key inputs used in determining the fair value of MSRs at the time of initial recognition:


	Quarter ended March 31,
	2023		2022
	(MSR recognized and UPB of underlying loans amounts in thousands)
MSR recognized	$	100,618	$	194,596
UPB of underlying loans	$	5,549,325	$	11,929,172
Weighted average annual servicing fee rate (in basis points)	41		31
Key inputs (1)
Pricing spread (2)
Range	5.5% – 8.7%		5.8% – 7.8%
Weighted average	5.8%		6.6%
Prepayment speed (3)
Range	13.1% – 21.8%		6.0% – 9.0%
Weighted average	13.2%		8.4%
Equivalent average life (in years)
Range	2.8 – 6.6		4.0 – 8.4
Weighted average	6.5		8.0
Annual per-loan cost of servicing
Range	$69 – $69		$80 – $80
Weighted average	$69		$80

(1)

Weighted average inputs are based on UPB of the underlying loans.

(2)

The Company uses the pricing spread over the United States Treasury (“Treasury”) securities yield curve for the purpose of discounting cash flows relating to MSRs.

(3)

Prepayment speed is measured using Life Total CPR, which includes both voluntary and involuntary prepayments. Equivalent average life is provided as supplementary information.

Following is a quantitative summary of key inputs used in the valuation of MSRs as of the dates presented, and the effect on the fair value from adverse changes in those inputs:


	March 31, 2023		December 31, 2022
	(Fair value, UPB of underlying loans and effect on fair value amounts in thousands)
Fair value	$	3,975,076	$	4,012,737
UPB of underlying loans	$	231,615,214	$	229,971,035
Weighted average annual servicing fee rate (in basis points)	29		29
Weighted average note interest rate	3.5%		3.5%
Key inputs (1)
Pricing spread (2)
Range	4.9% – 8.9%		4.9% – 8.8%
Weighted average	5.8%		5.7%
Effect on fair value of (3):
5% adverse change	$(52,336)		$(52,004)
10% adverse change	$(103,357)		$(102,727)
20% adverse change	$(201,628)		$(200,497)
Prepayment speed (4)
Range	5.2% – 18.4%		5.1% – 17.4%
Weighted average	6.7%		6.3%
Equivalent average life (in years)
Range	3.3 – 9.1		3.5 – 9.3
Weighted average	8.7		8.9
Effect on fair value of (3):
5% adverse change	$(53,572)		$(51,044)
10% adverse change	$(105,425)		$(100,544)
20% adverse change	$(204,325)		$(195,201)
Annual per-loan cost of servicing
Range	$68 – $69		$69 – $69
Weighted average	$69		$69
Effect on fair value of (3):
5% adverse change	$(17,640)		$(17,629)
10% adverse change	$(35,279)		$(35,258)
20% adverse change	$(70,559)		$(70,515)

(1)

Weighted-average inputs are based on the UPB of the underlying loans.

(2)

The Company uses a pricing spread over the Treasury securities yield curve for the purpose of discounting cash flows relating to MSRs.

(3)

These sensitivity analyses are limited in that they were performed as of a particular date; only account for the estimated effect of the movements in the indicated inputs; do not incorporate changes in those inputs in relation to other inputs; are subject to the accuracy of the models and inputs used; and do not incorporate other factors that would affect the Company’s overall financial performance in such events, including operational adjustments to account for changing circumstances. For these reasons, these estimates should not be viewed as earnings forecasts.

(4)

Prepayment speed is measured using Life Total CPR, which includes both voluntary and involuntary prepayments. Equivalent average life is provided as supplementary information.

Real Estate Acquired in Settlement of Loans

REO is measured based on its fair value on a nonrecurring basis and is categorized as a “Level 3” fair value asset. Fair value of REO is established by using a current estimate of fair value from either a broker’s price opinion, a full appraisal, or the price given in a pending contract of sale.

REO fair values are reviewed by PLS staff appraisers when the Company obtains multiple indications of fair value and there is a significant difference between the indications of fair value. PLS staff appraisers will attempt to resolve the difference between the indications of fair value. In circumstances where the staff appraisers are not able to generate adequate data to support a fair value conclusion, the staff appraisers obtain an additional appraisal to determine fair value. Recognized changes in the fair value of REO are included in Results of real estate acquired in settlement of loans in the consolidated statements of operations.

Note 8— Mortgage-Backed Securities

Following is a summary of activity in the Company’s investment in MBS:


	Quarter ended March 31,
	2023			2022
	(in thousands)
Balance at beginning of quarter	$	4,462,601		$	2,666,768
Purchases		2,784,592			661,774
Sales		(2,629,540	)		—
Repayments		(64,910	)		(70,276	)
Changes in fair value included in income arising from:
Amortization of net purchase premiums (discounts)		(1,957	)		(1,411	)
Valuation adjustments		78,218			(186,525	)
		76,261			(187,936	)
Balance at end of quarter	$	4,629,004		$	3,070,330


	March 31, 2023		December 31, 2022
	(in thousands)
Fair value of mortgage-backed securities pledged to secure Assets sold under agreements to repurchase	$	4,616,580	$	4,462,601

Following is a summary of the Company’s investment in MBS:


	March 31, 2023
	Principal balance		Unamortized net purchase premiums (discounts)			Accumulated valuation changes			Fair value (1)
	(in thousands)
Agency fixed-rate pass-through securities	$	4,419,508	$	607		$	(10,064	)	$	4,410,051
Subordinate credit-linked securities		197,313		(180	)		(431	)		196,702
Senior non-Agency securities		27,814		(865	)		(4,698	)		22,251
	$	4,644,635	$	(438	)	$	(15,193	)	$	4,629,004


	December 31, 2022
	Principal balance		Unamortized net purchase premiums (discounts)			Accumulated valuation changes			Fair value (1)
	(in thousands)
Agency fixed-rate pass-through securities	$	4,693,045	$	30,423		$	(460,966	)	$	4,262,502
Subordinate credit-linked securities		184,620		52			(6,774	)		177,898
Senior non-Agency securities		28,103		(876	)		(5,026	)		22,201
	$	4,905,768	$	29,599		$	(472,766	)	$	4,462,601

(1)

All MBS have maturities of more than ten years.

Note 9—Loans Acquired for Sale at Fair Value

Following is a summary of the distribution of the Company’s loans acquired for sale at fair value:


Loan type	March 31, 2023		December 31, 2022
	(in thousands)
GSE eligible (1)	$	2,717,247	$	1,651,554
Held for sale to PLS — Government insured or guaranteed (2)		416,162		159,671
Home equity lines of credit		2,174		2,424
Repurchased pursuant to representations and warranties		7,935		8,284
	$	3,143,518	$	1,821,933

Loans pledged to secure Assets sold under agreements to repurchase	$	3,117,294	$	1,801,368

(1)

GSE eligibility refers to the eligibility of loans for sale to Fannie Mae or Freddie Mac. The Company sells or finances a portion of its GSE eligible loan production to other investors, including PLS.

(2)

The Company is not approved by Ginnie Mae as an issuer of Ginnie Mae-guaranteed securities which are backed by government-insured or guaranteed loans. The Company sells all government-insured or guaranteed loans (as well as certain GSE eligible loans) that it purchases from correspondent sellers to PLS, which is a Ginnie Mae-approved issuer, and earns a sourcing fee as described in Note 4 – Transactions with Related Parties – Operating activities – Correspondent Production Activities.

Note 10—Loans at Fair Value

Loans at fair value are comprised primarily of loans held in VIEs securing asset-backed financings as discussed in Note 6 –Variable Interest Entities – Subordinate Mortgage-Backed Securities.

Following is a summary of the distribution of the Company’s loans at fair value:


Loan type	March 31, 2023		December 31, 2022
	(in thousands)
Loans in VIEs:
Agency-conforming loans secured by investment properties	$	1,449,070	$	1,459,160
Fixed interest rate jumbo loans		49,853		50,782
		1,498,923		1,509,942
Distressed loans		3,548		3,457
	$	1,502,471	$	1,513,399
Loans at fair value pledged to secure:
Asset-backed financings at fair value (1)	$	1,498,923	$	1,509,942
Assets sold under agreements to repurchase		194		206
	$	1,499,117	$	1,510,148

(1)

As discussed in Note 6 ‒ Variable Interest Entities ‒ Subordinate Mortgage-Backed Securities, the Company holds a portion of the securities issued by the VIEs. At March 31, 2023 and December 31, 2022, $84.9 million and $84.0 million, respectively, of such retained certificates were pledged to secure Assets sold under agreements to repurchase.

Note 11—Derivative and Credit Risk Transfer Strip Assets and Liabilities

Derivative and credit risk transfer assets and liabilities are summarized below:


	March 31, 2023		December 31, 2022
	(in thousands)
Derivative assets	$	89,285	$	84,940
	$	89,285	$	84,940

Derivative liabilities	$	25,404	$	30,033
Credit risk transfer strip liabilities		113,065		137,193
	$	138,469	$	167,226

The Company records all derivative and CRT strip assets and liabilities at fair value and records changes in fair value in current period results of operations.

Derivative Activities

The Company holds and issues derivative financial instruments in connection with its operating, investing and financing activities. Derivative financial instruments are created as a result of certain of the Company’s operations and the Company also enters into derivative transactions as part of its interest rate risk management activities.

Derivative financial instruments created as a result of the Company’s operations include:

•

IRLCs that are created when the Company commits to purchase loans acquired for sale; and

•

CRT Agreements whereby the Company retained a recourse obligation relating to certain loans it sold into Fannie Mae guaranteed securitizations as part of the retention of IO ownership interests in such loans.

The Company engages in interest rate risk management activities in an effort to reduce the variability of earnings caused by the effects of changes in interest rates on the fair value of certain of its assets and liabilities. The Company bears price risk related to its mortgage production, servicing assets and MBS financing activities due to changes in market interest rates as discussed below:

•

The Company is exposed to losses if market mortgage interest rates increase, because market interest rate increases generally cause the fair value of MBS, IRLCs and loans acquired for sale to decrease.

•

The Company is exposed to losses if market mortgage interest rates decrease, because market interest rate decreases generally cause the fair value of MSRs to decrease.

To manage the price risk resulting from these interest rate risks, the Company uses derivative financial instruments with the intention of moderating the risk that changes in market interest rates will result in unfavorable changes in the fair value of the Company’s MBS, inventory of loans acquired for sale, IRLCs and MSRs.

The Company records all derivative and CRT strip assets and liabilities at fair value and records changes in fair value in current period results of operations. The Company does not designate and qualify any of its derivative financial instruments for hedge accounting.

Cash flows from derivative financial instruments relating to hedging of IRLCs and loans acquired for sale are included in Cash flows from operating activities in Sale to nonaffiliates and repayment of loans acquired for sale at fair value. Cash flows from derivative financial instruments relating to hedging of MSRs are included in Cash flows from investing activities.

Derivative Notional Amounts and Fair Value of Derivatives

The Company had the following derivative assets and liabilities recorded within Derivative assets and Derivative and credit risk transfer liabilities and related margin deposits recorded in Other assets on the consolidated balance sheets:


	March 31, 2023							December 31, 2022
			Fair value							Fair value
	Notional		Derivative		Derivative			Notional		Derivative		Derivative
Instrument	amount (1)		assets		liabilities			amount (1)		assets		liabilities
	(in thousands)
Hedging derivatives subject to master netting arrangements (2):
Call options on interest rate futures purchase contracts		1,325,000	$	13,508	$	—			1,950,000	$	2,906	$	—
Put options on interest rate futures purchase contracts		2,775,000		6,570		—			1,785,000		8,130		—
Forward purchase contracts		4,121,991		16,477		5,302			3,929,833		418		15,196
Forward sale contracts		11,511,964		7,711		86,918			11,661,925		43,435		17,279
MBS call options		—		1,832		2,004			—		—		—
MBS put options		750,000		3,573		—			1,050,000		2,783		—
Bond futures		1,212,800		—		—			867,900		—		—
Other derivatives not subject to master netting arrangements:
CRT derivatives		5,865,196		2,883		16,743			5,972,060		1,262		23,360
Interest rate lock commitments		1,806,398		9,952		1,403			1,484,384		3,877		4,355
Total derivative instruments before netting				62,506		112,370					62,811		60,190
Netting				26,779		(86,966	)				22,129		(30,157	)
			$	89,285	$	25,404				$	84,940	$	30,033
Margin deposits placed with derivative counterparties included in derivative balances above, net			$	113,744						$	52,286
Derivative assets pledged to secure:
Notes payable secured by credit risk transfer and mortgage servicing assets			$	2,883						$	1,262

(1) Notional amounts provide an indication of the volume of the Company’s derivative activity.

(2) All hedging derivatives are interest rate derivatives that are used as economic hedges.

Netting of Financial Instruments

The Company has elected to net derivative asset and liability positions, and cash collateral placed with or received from its counterparties when such positions are subject to a legally enforceable master netting arrangement and the Company intends to set off. The derivative financial instruments that are not subject to master netting arrangements are CRT derivatives and IRLCs. As of March 31, 2023 and December 31, 2022, the Company was not a party to any reverse repurchase agreements or securities lending transactions that are required to be disclosed in the following tables.

Derivative Assets, Financial Instruments and Collateral Held by Counterparty

The following table summarizes by significant counterparty the amount of derivative asset positions after considering master netting arrangements and financial instruments or cash pledged that do not meet the accounting guidance qualifying for setoff accounting.


	March 31, 2023								December 31, 2022
	Net amount		Gross amounts						Net amount		Gross amounts
	of assets		not offset in the						of assets		not offset in the
	presented		consolidated						presented		consolidated
	in the		balance sheet						in the		balance sheet
	consolidated				Cash				consolidated				Cash
	balance		Financial		collateral		Net		balance		Financial		collateral		Net
	sheet		instruments		received		amount		sheet		instruments		received		amount
	(in thousands)
CRT derivatives	$	2,883	$	—	$	—	$	2,883	$	1,262	$	—	$	—	$	1,262
Interest rate lock commitments		9,952		—		—		9,952		3,877		—		—		3,877
RJ O’Brien & Associates, LLC		20,078		—		—		20,078		11,036		—		—		11,036
Bank of America, N.A.		19,982		—		—		19,982		14,666		—		—		14,666
Morgan Stanley & Co. LLC		17,169		—		—		17,169		33,703		—		—		33,703
Goldman Sachs & Co. LLC		9,315		—		—		9,315		2,789		—		—		2,789
Citigroup Global Markets Inc.		6,276		—		—		6,276		—		—		—		—
Wells Fargo Securities, LLC		—		—		—		—		6,980		—		—		6,980
Credit Suisse Securities (USA) LLC		—		—		—		—		5,827		—		—		5,827
Barclays Capital Inc.		—		—		—		—		2,013		—		—		2,013
J.P. Morgan Securities LLC		—		—		—		—		110		—		—		110
Other		3,630		—		—		3,630		2,677		—		—		2,677
	$	89,285	$	—	$	—	$	89,285	$	84,940	$	—	$	—	$	84,940

Derivative Liabilities, Financial Liabilities and Collateral Pledged by Counterparty

The following table summarizes by significant counterparty the amount of derivative liabilities and assets sold under agreements to repurchase after considering master netting arrangements and financial instruments or cash pledged that do not meet the accounting guidance to qualify for setoff accounting. All assets sold under agreements to repurchase represent sufficient collateral or exceed the liability amount recorded on the consolidated balance sheet.


	March 31, 2023									December 31, 2022
	Net amount		Gross amounts							Net amount		Gross amounts
	of liabilities		not offset in the							of liabilities		not offset in the
	presented		consolidated							presented		consolidated
	in the		balance sheet							in the		balance sheet
	consolidated		Financial			Cash				consolidated		Financial			Cash
	balance		instruments			collateral		Net		balance		instruments			collateral		Net
	sheet		(1)			pledged		amount		sheet		(1)			pledged		amount
	(in thousands)
Interest rate lock commitments	$	1,403	$	—		$	—	$	1,403	$	4,355	$	—		$	—	$	4,355
CRT derivatives		16,743		—			—		16,743		23,360		—			—		23,360
J.P. Morgan Securities LLC		1,991,349		(1,991,349	)		—		—		1,605,813		(1,605,813	)		—		—
Barclays Capital Inc.		1,242,211		(1,241,372	)		—		839		1,115,265		(1,115,265	)		—		—
Bank of America, N.A.		1,085,013		(1,085,013	)		—		—		1,239,293		(1,239,293	)		—		—
Wells Fargo Securities, LLC		951,279		(949,955	)		—		1,324		262,512		(262,512	)		—		—
Atlas Securitized Products, L.P.		895,137		(895,137	)		—		—		—		—			—		—
Credit Suisse Securities (USA) LLC		—		—			—		—		675,639		(675,639	)		—		—
BNP Paribas		378,785		(378,785	)		—		—		153,220		(153,220	)		—		—
Daiwa Capital Markets		376,627		(376,317	)		—		310		439,089		(439,089	)		—		—
RBC Capital Markets, L.P.		335,303		(335,303	)		—		—		268,581		(268,581	)		—		—
Amherst Pierpont Securities LLC		262,183		(262,093	)		—		90		283,928		(283,294	)		—		634
Citigroup Global Markets Inc.		246,508		(246,508	)		—		—		197,229		(195,807	)		—		1,422
Goldman Sachs & Co. LLC		193,012		(193,012	)		—		—		156,952		(156,952	)		—		—
Mizuho Financial Group		81,569		(80,066	)		—		1,503		—		—			—		—
Morgan Stanley & Co. LLC		76,031		(76,031	)		—		—		218,730		(218,730	)		—		—
Nomura Holdings America, Inc		4,567		(4,567	)		—		—		4,444		(4,444	)		—		—
Other		3,192		—			—		3,192		262		—			—		262
	$	8,140,912	$	(8,115,508	)	$	—	$	25,404	$	6,648,672	$	(6,618,639	)	$	—	$	30,033

(1)

Amounts represent the UPB of Assets sold under agreements to repurchase.

Following are the net gains (losses) recognized by the Company on derivative financial instruments and the consolidated statements of operations line items where such gains and losses are included:


		Quarter ended March 31,
Derivative activity	Consolidated statements of operations line	2023			2022
		(in thousands)
Interest rate lock commitments	Net gains on loans acquired for sale (1)	$	9,027		$	(25,916	)
CRT derivatives	Net gains (losses) on investments and financings	$	11,126		$	(5,848	)
Hedged item:
Interest rate lock commitments and loans acquired for sale	Net gains on loans acquired for sale	$	(20,744	)	$	251,899
Mortgage servicing rights	Net loan servicing fees	$	(54,891	)	$	(163,802	)

(1)

Represents net change in fair value of IRLCs from the beginning to the end of the reporting period. Amounts recognized at the date of commitment and fair value changes recognized during the period until purchase of the underlying loan or cancellation of the commitment are shown in the rollforward of IRLCs for the period in Note 7 – Fair Value – Financial Statement Items Measured at Fair Value on a Recurring Basis.

Note 12—Mortgage Servicing Rights

Following is a summary of MSRs:


	Quarter ended March 31,
	2023			2022
	(in thousands)
Balance at beginning of quarter	$	4,012,737		$	2,892,855
MSRs resulting from loan sales		100,618			194,596
Transfer to Agency of mortgage servicing rights relating to delinquent loans		(835	)		—
Changes in fair value:
Due to changes in inputs used in valuation model (1)		(45,771	)		392,640
Other changes in fair value (2)		(91,673	)		(88,919	)
		(137,444	)		303,721
Balance at end of quarter	$	3,975,076		$	3,391,172


	March 31, 2023		December 31, 2022
	(in thousands)
Fair value of mortgage servicing rights pledged to secure Assets sold under agreements to repurchase and Notes payable secured by credit risk transfer and mortgage servicing assets	$	3,926,160	$	3,962,820

(1)

Primarily reflects changes in pricing spread, prepayment speed, servicing cost, and UPB of underlying loan inputs.

(2)

Represents changes due to realization of expected cash flows.

Servicing fees relating to MSRs are recorded in Net loan servicing fees – from nonaffiliates on the Company’s consolidated statements of operations and are summarized below:


	Quarter ended March 31,
	2023		2022
	(in thousands)
Contractually-specified servicing fees	$	164,214	$	146,885
Ancillary and other fees:
Late charges		759		612
Other		3,184		8,502
		3,943		9,114
	$	168,157	$	155,999
Average MSR servicing portfolio	$	230,812,774	$	217,692,169

MSR recapture fees	$	485	$	8,260
UPB of loans recaptured	$	95,191	$	1,580,805

Note 13— Other Assets

Other assets are summarized below:


	March 31, 2023		December 31, 2022
	(dollars in thousands)
Derivative margin deposits	$	59,191	$	51,463
Interest receivable		40,231		31,027
Servicing fees receivable		13,149		15,727
Correspondent lending receivables		8,063		8,967
Other receivables		22,781		7,657
Real estate acquired in settlement of loans		8,270		7,734
Other		18,732		12,416
	$	170,417	$	134,991
Real estate acquired in settlement of loans pledge to secure Assets sold under agreements to repurchase	$	3,554	$	3,297

Note 14— Short-Term Debt

The borrowing facilities described throughout these Notes 14 and 15 contain various covenants, including financial covenants governing the Company and its subsidiaries’ net worth, debt-to-equity ratio, and liquidity. Management believes that the Company was in compliance with these covenants as of March 31, 2023.

Assets Sold Under Agreements to Repurchase

Following is a summary of financial information relating to assets sold under agreements to repurchase:


	Quarter ended March 31,
	2023			2022
	(dollars in thousands)
Weighted average interest rate (1)		5.55	%		1.06	%
Average balance	$	7,242,478		$	4,999,896
Total interest expense	$	100,267		$	15,571
Maximum daily amount outstanding	$	9,107,074		$	7,405,436

(1)

Excludes the effect of amortization of debt issuance costs of $1.2 million and $2.5 million for the quarters ended

March 31, 2023 and 2022, respectively.


	March 31, 2023			December 31, 2022
	(dollars in thousands)
Carrying value:
Unpaid principal balance	$	8,115,508		$	6,618,639
Unamortized debt issuance costs		(1,400	)		(2,111	)
	$	8,114,108		$	6,616,528
Weighted average interest rate		5.80	%		5.03	%
Available borrowing capacity (1):
Committed	$	41,308		$	217,279
Uncommitted		3,253,455			4,762,056
	$	3,294,763		$	4,979,335
Margin deposits placed with (received from) counterparties included in Other assets (Accounts payable and accrued liabilities), net	$	17,399		$	(13,630	)
Assets securing agreements to repurchase:
Mortgage-backed securities	$	4,616,580		$	4,462,601
Loans acquired for sale at fair value	$	3,117,294		$	1,801,368
Loans at fair value:
Securities retained in asset-backed financings	$	84,866		$	84,044
Distressed	$	194		$	206
Deposits securing credit risk transfer arrangements	$	446,574		$	455,552
Mortgage servicing rights (2)	$	2,045,372		$	2,092,794
Servicing advances	$	76,664		$	100,888
Real estate acquired in settlement of loans	$	3,554		$	3,297

(1)

The amount the Company is able to borrow under asset repurchase agreements is tied to the fair value of unencumbered assets eligible to secure those agreements and the Company’s ability to fund the agreements’ margin requirements relating to the assets financed.

(2)

Beneficial interests in Fannie Mae MSRs are pledged for both Assets sold under agreements to repurchase and Notes payable secured by credit risk transfer and mortgage servicing assets.

Following is a summary of maturities of outstanding advances under repurchase agreements by maturity date:


Remaining maturity at March 31, 2023 (1)	Unpaid principal balance
	(in thousands)
Within 30 days	$	4,405,227
Over 30 to 90 days		2,837,245
Over 90 days to 180 days		424,998
Over 180 days to 1 year		—
Over 1 year to 2 years		448,038
	$	8,115,508
Weighted average maturity (in months)		2.0

(1)

The Company is subject to margin calls during the period the repurchase agreements are outstanding and therefore may be required to repay a portion of the borrowings before the respective repurchase agreements mature if the fair value (as determined by the applicable lender) of the assets securing those repurchase agreements decreases.

The amount at risk (the fair value of the assets pledged plus the related margin deposit, less the amount advanced by the counterparty and interest payable) and maturity information relating to the Company’s assets sold under agreements to repurchase is summarized by pledged asset and counterparty below as of March 31, 2023:

Loans, REO and MSRs


			Weighted-average maturity
Counterparty	Amount at risk		Advances	Facility
	(in thousands)
Bank of America, N.A.	$	33,622	May 6, 2023	June 5, 2024
Citibank, N.A.	$	18,609	May 31, 2023	April 26, 2024
Barclays Capital Inc.	$	48,065	June 2, 2023	November 13, 2024
Goldman Sachs & Co. LLC	$	3,745	June 5, 2023	December 23, 2023
JPMorgan Chase & Co.	$	11,598	May 30, 2023	June 17, 2024
Atlas Securitized Products, L.P.	$	61,683	June 9, 2023	May 31, 2024
Wells Fargo Securities, LLC	$	14,178	June 13, 2023	November 17, 2023
BNP Paribas Corporate & Institutional Banking	$	14,908	June 18, 2023	November 30, 2024
RBC Capital Markets, L.P.	$	12,112	June 6, 2023	February 10, 2024
Morgan Stanley & Co. LLC	$	4,082	June 19, 2023	January 27, 2025

Securities


Counterparty	Amount at risk		Weighted average maturity
	(in thousands)
Bank of America, N.A.	$	19,928	April 23, 2023
Citibank, N.A.	$	32,022	May 24, 2023
Barclays Capital Inc.	$	56,559	April 14, 2023
JPMorgan Chase & Co.	$	52,383	April 19, 2023
Wells Fargo Securities, LLC	$	28,870	April 6, 2023
Daiwa Capital Markets America Inc.	$	10,772	April 24, 2023
Amherst Pierpont Securities LLC	$	7,831	April 21, 2023
Mizuho Financial Group	$	4,173	April 21, 2023
Nomura Holdings America, Inc	$	1,707	April 3, 2023

CRT arrangements


Counterparty	Amount at risk		Weighted average maturity
	(in thousands)
Bank of America, N.A.	$	57,379	April 3, 2023
Citibank, N.A.	$	54,539	July 3, 2023
Goldman Sachs & Co. LLC	$	96,233	May 23, 2023

Mortgage Loan Participation Purchase and Sale Agreement

One of the borrowing facilities secured by loans acquired for sale is in the form of a mortgage loan participation purchase and sale agreement. Participation certificates, each of which represents an undivided beneficial ownership interest in a pool of loans that have been pooled with Fannie Mae or Freddie Mac, are sold to the lender pending the securitization of such loans and the sale of the resulting security. The commitment between the Company and a nonaffiliate to sell such security is also assigned to the lender at the time a participation certificate is sold.

The purchase price paid by the lender for each participation certificate is based on the trade price of the security, plus an amount of interest expected to accrue on the security to its anticipated delivery date, minus a present value adjustment, any related hedging costs and a holdback amount. The holdback amount is based on a percentage of the purchase price and is not required to be paid to the Company until the settlement of the security and its delivery to the lender.

The mortgage loan participation purchase and sale agreement is summarized below:


	Quarter ended March 31,
	2023			2022
	(dollars in thousands)
Average balance (1)	$	17,107		$	35,809
Weighted average interest rate (2)		6.20	%		1.64	%
Total interest expense	$	293		$	176
Maximum daily amount outstanding	$	90,531		$	88,633

(1)

No outstanding balance as of March 31, 2023 and December 31, 2022.

(2)

Excludes the effect of amortization of debt issuance costs of $31,000 for the quarters ended March 31, 2023 and 2022.

Note 15— Long-Term Debt

Notes Payable Secured By Credit Risk Transfer and Mortgage Servicing Assets

CRT Arrangement Financing

The Company, through various wholly-owned subsidiaries, issued secured term notes (the “CRT Term Notes”) to qualified institutional buyers under Rule 144A of the Securities Act of 1933, as amended (the “Securities Act”). All of the CRT Term Notes rank pari passu with each other.

Following is a summary of the CRT Term Notes outstanding:


				Unpaid		Annual interest rate				Maturity date
Term notes	Issuance date	Issuance amount		principal balance		Index	Spread			Stated	Optional extension (1)
		(in thousands)
2021 1R	March 4, 2021	$	659,156	$	292,216	LIBOR (2)		2.90	%	February 28, 2024	February 27, 2026
2020 1R	February 14, 2020	$	350,000		56,576	LIBOR		2.35	%	February 27, 2025	(3)
2019 3R	October 16, 2019	$	375,000		53,134	LIBOR		2.70	%	October 29, 2024	(3)
2019 2R	June 11, 2019	$	638,000		176,190	LIBOR		2.75	%	May 29, 2023	May 29, 2025
				$	578,116

(1)

The indentures relating to these issuances provide the Company with the option to extend the maturity dates of certain of the CRT Term Notes under the conditions specified in the respective agreements.

(2)

London Inter-Bank Offered Rate ("LIBOR").

(3)

Stated maturity date reflects the exercise by the Company of its option to extend the maturity of this issuance.

Fannie Mae MSR Financing

The Company, through a subsidiary, PMT ISSUER TRUST-FMSR, finances MSRs and ESS pledged or sold by PMC through a combination of repurchase agreements and term financing.

The repurchase agreement financing for Fannie Mae MSRs is effected through the issuance of a Series 2017-VF1 Note dated December 20, 2017 (the "FMSR VFN") by PMT ISSUER TRUST-FMSR to PMC which is then sold to qualified institutional buyers under an agreement to repurchase. The amount outstanding under the FMSR VFN is included in Assets sold under agreements to repurchase in the Company’s consolidated balance sheets. The FMSR VFN has a committed borrowing capacity of $700 million and matures on May 31, 2024.

The Company’s term financing for Fannie Mae MSRs through PMT ISSUER TRUST – FMSR is effected through the issuance of term notes (the “FT-1 Notes”) to qualified institutional buyers under Rule 144A of the Securities Act.

The FT1 Notes and the FMSR VFN are secured by certain participation certificates relating to Fannie Mae MSRs and rank pari passu with each other.

Following is a summary of the term financing of the Company’s Fannie Mae MSRs:


				Unpaid		Annual interest rate		Maturity date
FT-1 Note	Issuance date	Issuance amount		principal balance		Index	Spread	Stated	Optional extension (1)
		(in thousands)
2022	June 28, 2022	$	305,000	$	305,000	SOFR (2)	4.19%	June 25, 2027	(3)
2021	March 30, 2021	$	350,000		350,000	LIBOR	3.00%	March 25, 2026	March 27, 2028
2018	April 25, 2018	$	450,000		450,000	LIBOR	2.35%	April 25, 2023	April 25, 2025
				$	1,105,000

(1)

The indentures relating to these issuances provide the Company with the option of extending the maturity dates of certain of the FT-1 Notes under the conditions specified in the respective agreements.

(2)

Secured Overnight Financing Rate ("SOFR")

(3)

Either June 26, 2028 or June 25, 2029.

Freddie Mac MSR Financing

The Company, through PMC and PMH, finances certain MSRs (including any related excess servicing spread) relating to loans pooled into Freddie Mac securities through various credit agreements. The total loan amount available under the agreements is $1.6 billion, bearing interest at an annual rate equal to SOFR plus a spread as defined in each agreement, with a weighted average maturity of June 2024. The total loan amount available under the agreements may be reduced by other debt outstanding with the counterparties. Advances under the credit agreements are secured by MSRs relating to loans serviced for Freddie Mac guaranteed securities.

On March 16, 2023, the Company and its subsidiaries consented to assignments of all of the credit facilities provided to the Company by Credit Suisse First Boston Mortgage Capital LLC, as administrative agent and Credit Suisse AG, Cayman Islands Branch, as a buyer or purchaser, and Alpine Securitization LTD, as a buyer or purchaser. All of the credit facilities were assigned to Atlas Securitized Products, L.P., Atlas Securitized Products Investments 3, L.P., Atlas Securitized Products Funding 2, L.P., and Nexera Holding LLC.

Following is a summary of financial information relating to notes payable secured by credit risk transfer and mortgage servicing assets:


		Quarter ended March 31,
		2023			2022
	(dollars in thousands)
Average balance		$	2,802,691		$	2,438,773
Weighted average interest rate (1)			7.69	%		3.14	%
Total interest expense		$	54,947		$	20,366
Maximum daily amount outstanding		$	2,812,694		$	2,601,767

(1)

Excludes the effect of amortization of debt issuance costs of $1.8 million and $1.5 million for the quarters ended

March 31, 2023 and 2022, respectively.


	March 31, 2023			December 31, 2022
	(dollars in thousands)
Carrying value:
Unpaid principal balance:
CRT Term Notes	$	578,116		$	592,694
FT-1 Notes		1,105,000			1,105,000
Freddie Mac credit agreements		1,115,000			1,115,000
		2,798,116			2,812,694
Unamortized debt issuance costs		(7,158	)		(8,666	)
	$	2,790,958		$	2,804,028
Weighted average interest rate		7.84	%		7.30	%
Assets securing notes payable:
Mortgage servicing rights (1)	$	3,926,160		$	3,962,820
CRT Agreements:
Deposits securing CRT arrangements	$	851,343		$	869,742
Derivative assets	$	2,883		$	1,262

(1)

Beneficial interests in Freddie Mac MSRs are pledged as collateral for the Notes payable secured by credit risk transfer and mortgage servicing assets. Beneficial interests in Fannie Mae MSRs are pledged for both Assets sold under agreements to repurchase and Notes payable secured by credit risk transfer and mortgage servicing assets.

Exchangeable Senior Notes

On March 5 and March 9, 2021, PMC issued $345 million aggregate principal amount of exchangeable senior notes (the “2026 Exchangeable Notes”) due 2026 in a private offering. The 2026 Exchangeable Notes will mature on March 15, 2026 unless repurchased or exchanged in accordance with their terms before such date. The 2026 Exchangeable Notes bear interest at a rate of 5.50% per year, payable semiannually.

On November 7 and November 19, 2019, PMC issued $210 million aggregate principal amount of exchangeable senior notes due 2024 (the “2024 Exchangeable Notes” and, together with the 2026 Exchangeable Notes, the “Exchangeable Notes”) in a private offering. The 2024 Exchangeable Notes will mature on November 1, 2024 unless repurchased or exchanged in accordance with their terms before such date. The 2024 Exchangeable Notes bear interest at 5.50% per year, payable semiannually.

The 2026 Exchangeable Notes and the 2024 Exchangeable Notes are fully and unconditionally guaranteed by the Company and are exchangeable for Common Shares, cash, or a combination thereof, at PMC’s election, at any time until the close of business on the second scheduled trading day immediately preceding the maturity date, subject to the satisfaction of certain conditions if the exchange occurs before December 15, 2025 and August 1, 2024, respectively. The exchange rates are equal to 46.1063 and 40.101 Common Shares per $1,000 principal amount of the 2026 Exchangeable Notes and 2024 Exchangeable Notes, respectively, and are subject to adjustment upon the occurrence of certain events, but will not be adjusted for any accrued and unpaid interest.

Following is financial information relating to the Exchangeable Notes:


	Quarter ended March 31,
	2023			2022
	(in thousands)
Average balance	$	546,511		$	529,542
Weighted average interest rate (1)		5.66	%		5.84	%
Interest expense	$	8,380		$	8,320

	March 31, 2023			December 31, 2022
	(in thousands)
Carrying value:
UPB	$	555,000		$	555,000
Unamortized debt issuance costs		(7,997	)		(8,746	)
	$	547,003		$	546,254

(1)

Excludes the effect of amortization of debt issuance costs of $748,000 and $689,000 for the quarters ended March 31, 2023 and 2022, respectively.

Asset-Backed Financing of Variable Interest Entities at Fair Value

Following is a summary of financial information relating to the asset-backed financings of VIEs at fair value described in Note 6 ‒ Variable Interest Entities ‒ Subordinate Mortgage-Backed Securities:


	Quarter ended March 31,
	2023			2022
	(dollars in thousands)
Average balance	$	1,411,990		$	1,460,610
Total interest expense	$	12,353		$	11,027
Weighted average interest rate (1)		3.70	%		3.29	%

(1)

Excludes the effect of (accrual) amortization of premiums and debt issuance cost of $(542,000) and $834,000 for the quarters ended March 31, 2023 and 2022, respectively.


	March 31, 2023			December 31, 2022
	(dollars in thousands)
Fair value	$	1,403,080		$	1,414,955
Unpaid principal balance	$	1,659,916		$	1,681,410
Weighted average interest rate		3.22	%		3.22	%

The asset-backed financings are non-recourse liabilities and are secured solely by the assets of consolidated VIEs and not by any other assets of the Company. The assets of the VIEs are the only source of funds for repayment of the certificates.

Maturities of Long-Term Debt

Contractual maturities of long-term debt obligations (based on final maturity dates) are as follows:


			Twelve months ended March 31,
	Total		2024		2025		2026		2027		2028		Thereafter
	(in thousands)
Notes payable secured by credit risk transfer and mortgage servicing assets (1)	$	2,798,116	$	918,406	$	1,224,710	$	350,000	$	—	$	305,000	$	—
Exchangeable senior notes		555,000		—		210,000		345,000		—		—		—
Asset-backed financings at fair value (2)		1,659,916		—		—		—		—		—		1,659,916
Interest-only security payable at fair value (2)		23,205		—		—		—		—		—		23,205
Total	$	5,036,237	$	918,406	$	1,434,710	$	695,000	$	—	$	305,000	$	1,683,121

(1)

Based on stated maturity. As discussed above, certain of the Notes payable secured by credit risk and mortgage servicing assets allow the Company to exercise optional extensions.

(2)

Contractual maturity does not reflect expected repayment as borrowers of the underlying loans generally have the right to repay their loans at any time.

Note 16—Liability for Losses Under Representations and Warranties

Following is a summary of the Company’s liability for losses under representations and warranties:


	Quarter ended March 31,
	2023			2022
	(in thousands)
Balance, beginning of quarter	$	39,471		$	40,249
Provision for losses:
Pursuant to loan sales		940			1,317
Reduction in liability due to change in estimate		(616	)		(1,165	)
Losses incurred		(388	)		(176	)
Balance, end of quarter	$	39,407		$	40,225
UPB of loans subject to representations and warranties at end of quarter	$	230,035,290		$	217,466,262

Note 17—Commitments and Contingencies

Commitments

The following table summarizes the Company’s outstanding contractual commitments:


	March 31, 2023
	(in thousands)
Commitments to purchase loans acquired for sale	$	1,806,398

Litigation

From time to time, the Company may be involved in various legal and regulatory proceedings, claims and legal actions arising in the ordinary course of business. The amount, if any, of ultimate liability with respect to such matters cannot be determined, but despite the inherent uncertainties of litigation, management believes that the ultimate disposition of any such proceedings and exposure will not have, individually or taken together, a material adverse effect on the financial condition, results of operations, or cash flows of the Company.

Cessation of the LIBOR Index

The Company historically used a LIBOR index to establish the applicable interest rates in lending and financing transactions. One-week and two-month United States Dollar LIBOR rates were discontinued as of December 31, 2021 and non-U.S. Dollar LIBOR settings have ceased to be representative. The principal United States Dollar LIBOR tenors (overnight and one, three, six and 12 months) will cease to be published by any administrator or will no longer be representative as of June 30, 2023. The Company services LIBOR-based adjustable rate mortgages and other financial arrangements that may incorporate fallback provisions or replacement provisions related to the LIBOR transition.

The discontinuation of LIBOR could affect the Company’s interest expense and earnings, cost of capital, and the fair value of certain of its assets and the instruments used to hedge their fair value. Furthermore, the transition away from widely used benchmark

rates like LIBOR could result in customers or other market participants challenging the determination of their interest or dividend payments, disputing the interpretations or implementation of contract or instrument “fallback” provisions and other transition related changes.

Note 18—Shareholders’ Equity

Preferred Shares of Beneficial Interest

Preferred shares of beneficial interest are summarized below:


										Dividends per share
Preferred										Quarter ended March 31,
Share series	Description (1)	Number of shares		Liquidation preference		Issuance discount		Carrying value		2023		2022
Fixed-to-floating rate cumulative redeemable		(in thousands, except dividends per share)
A	8.125% Issued March 2017		4,600	$	115,000	$	3,828	$	111,172	$	0.51	$	0.51
B	8.00% Issued July 2017		7,800		195,000		6,465		188,535	$	0.50	$	0.50
Fixed-rate cumulative redeemable
C	6.75% Issued August 2021		10,000		250,000		8,225		241,775	$	0.42	$	0.42
			22,400	$	560,000	$	18,518	$	541,482

(1)

Par value is $0.01 per share.

The Company’s Series A Fixed-to-Floating Rate Cumulative Redeemable Preferred Shares of Beneficial Interest (the “Series A Preferred Shares”) pay cumulative dividends at a fixed rate of 8.125% per year based on the $25.00 per share liquidation preference to, but not including, March 15, 2024. From, and including, March 15, 2024 and thereafter, the Company will pay cumulative dividends on the Series A Preferred Shares at a floating rate equal to three-month LIBOR as calculated on each applicable dividend determination date plus a spread of 5.831% per year based on the $25.00 per share liquidation preference.

The Company’s Series B Fixed-to-Floating Rate Cumulative Redeemable Preferred Shares of Beneficial Interest (the “Series B Preferred Shares”) pay cumulative dividends at a fixed rate of 8.00% per year based on the $25.00 per share liquidation preference to, but not including, June 15, 2024. From, and including, June 15, 2024 and thereafter, the Company will pay cumulative dividends on the Series B Preferred Shares at a floating rate equal to three-month LIBOR as calculated on each applicable dividend determination date plus a spread of 5.99% per year based on the $25.00 per share liquidation preference.

The Company’s Series C Fixed Rate Cumulative Redeemable Preferred Shares of Beneficial Interest (the “Series C Preferred Shares” together with the Series A Preferred Shares and Series B Preferred Shares, the “Preferred Shares”) pay cumulative dividends at a fixed rate of 6.75% per year based on the $25.00 per share liquidation preference.

The Series A Preferred Shares, the Series B Preferred Shares and Series C Preferred Shares will not be redeemable before March 15, 2024, June 15, 2024 and August 24, 2026, respectively, except in connection with the Company’s qualification as a REIT for U.S. federal income tax purposes or upon the occurrence of a change of control. On or after the date the Preferred Shares become redeemable, or 120 days after the first date on which such change of control occurred, the Company may, at its option, redeem any or all of the Preferred Shares at $25.00 per share plus any accumulated and unpaid dividends to, but not including, the redemption date.

The Preferred Shares have no stated maturity, are not subject to any sinking fund or mandatory redemption and will remain outstanding indefinitely unless redeemed or repurchased by the Company or converted into Common Shares in connection with a change of control by the holders of the Preferred Shares.

Common Shares of Beneficial Interest

“At-The-Market” (“ATM”) Equity Offering Program

The Company periodically enters into ATM equity offering programs allowing it to offer and sell securities on an as-and-when-needed basis through designated broker-dealers. On June 15, 2021, the Company entered into a new ATM equity offering program allowing it to offer up to $200 million of its Common Shares, all of which were available for issuance as of March 31, 2023.

Common Share Repurchase Program

The Company has a Common Share repurchase program. On October 24, 2022, the Company’s board of trustees approved an increase to PMT's Common Share repurchase authorization from $400 million to $500 million before transaction fees.

The following table summarizes the Company’s Common Share repurchase activity:


	Quarter ended March 31,				Cumulative
	2023		2022		total (1)
	(in thousands)
Common Shares repurchased		638		1,974		27,329
Cost of Common Shares repurchased (2)	$	7,564	$	31,829	$	406,303

(1)

Amounts represent the Common Share repurchase program total from its inception in August 2015 through March 31, 2023.

(2)

Cumulative total cost of Common Shares repurchased includes $547,000 of transaction fees.

Note 19— Net Gains (Losses) on Investments and Financings

Net gains (losses) on investments and financings are summarized below:


		Quarter ended March 31,
		2023			2022
	(in thousands)
From nonaffiliates:
Mortgage-backed securities		$	78,218		$	(186,525	)
Loans at fair value:
Held in VIEs			11,017			(96,564	)
Distressed			451			443
CRT arrangements			46,278			(35,623	)
Asset-backed financings at fair value			(10,160	)		89,174
		$	125,804		$	(229,095	)

Note 20— Net Gains on Loans Acquired for Sale

Net gains on loans acquired for sale are summarized below:


	Quarter ended March 31,
	2023			2022
	(in thousands)
From nonaffiliates:
Cash losses:
Sales of loans	$	(72,945	)	$	(439,788	)
Hedging activities		(52,116	)		338,102
		(125,061	)		(101,686	)
Non-cash gains:
Receipt of MSRs in mortgage loan sale transactions		100,618			194,596
Provision for losses relating to representations and warranties provided in loan sales:
Pursuant to loans sales		(940	)		(1,317	)
Reduction of liability due to change in estimate		616			1,165
		(324	)		(152	)
Changes in fair value of loans and derivatives
Interest rate lock commitments		9,027			(25,916	)
Loans		(10,487	)		22,018
Hedging derivatives		31,372			(86,203	)
		29,912			(90,101	)
		130,206			104,343
Total from nonaffiliates		5,145			2,657
From PFSI ‒ cash gains		1,328			1,296
	$	6,473		$	3,953

Note 21—Net Interest Expense

Net interest expense is summarized below:


	Quarter ended March 31,
	2023			2022
	(in thousands)
Interest income:
Cash and short-term investments	$	6,311		$	403
Mortgage-backed securities		51,139			14,400
Loans acquired for sale at fair value		36,988			19,248
Loans at fair value:
Held in consolidated variable interest entities		15,166			12,849
Distressed		(7	)		174
Deposits securing CRT arrangements		14,212			222
Placement fees relating to custodial funds		28,920			3,709
Other		290			58
		153,019			51,063
Interest expense:
Assets sold under agreements to repurchase		100,267			15,571
Mortgage loan participation purchase and sale agreements		293			176
Notes payable secured by credit risk transfer and mortgage servicing assets		54,947			20,366
Exchangeable senior notes		8,380			8,320
Asset-backed financings at fair value		12,353			11,027
Interest shortfall on repayments of loans serviced for Agency securitizations		1,029			7,042
Interest on loan impound deposits		1,343			1,012
Other		525			—
		179,137			63,514
Net interest expense	$	(26,118	)	$	(12,451	)

Note 22—Share-Based Compensation

The Company has adopted an equity incentive plan (“2019 Plan”) which provides for the issuance of equity based awards based on PMT’s Common Shares that may be made by the Company to its officers and trustees, and the members, officers, trustees, directors and employees of PCM, PFSI, or their affiliates and to PCM, PFSI and other entities that provide services to PMT and the employees of such other entities.

The 2019 Plan is administered by the Company’s compensation committee, pursuant to authority delegated by PMT’s board of trustees, which has the authority to make awards to the eligible participants referenced above, and to determine what form the awards will take, and the terms and conditions of the awards.

The 2019 Plan allows for the grant of restricted and performance-based share and unit awards.

The shares underlying award grants will again be available for award under the 2019 Plan if:

•

any shares subject to an award granted under the equity incentive plan are forfeited, canceled, exchanged or surrendered;

•

an award terminates or expires without a distribution of shares to the participant; or

•

shares are surrendered or withheld by PMT as payment of either the exercise price of an award and/or withholding taxes for an award.

Restricted share units have been awarded to trustees and officers of the Company and to other employees of PFSI and its subsidiaries at no cost to the grantees. Such awards generally vest over a one- to three-year period.

The following table summarizes the Company’s share-based compensation activity:


	Quarter ended March 31,
	2023		2022
	(in thousands)
Grants:
Restricted share units		165		128
Performance share units		123		99
		288		227
Grant date fair value:
Restricted share units	$	2,134	$	2,006
Performance share units		1,581		1,551
	$	3,715		3,557
Vestings:
Restricted share units		129		78
Performance share units (1)		48		41
		177		119
Forfeitures:
Restricted share units		—		—
Performance share units		—		9
		—		9
Compensation expense relating to share-based grants	$	1,156	$	1,029

(1)

The actual number of performance-based restricted share units (“RSUs”) that vested during the quarter ended March 31, 2023 was 48,372 Common Shares, which is approximately 39% of the originally granted performance-based RSUs.


	March 31, 2023
	Restricted share units		Performance share units
Shares expected to vest:
Number of units (in thousands)		261		217
Grant date average fair value per unit	$	14.43	$	14.53

Note 23—Income Taxes

The Company’s effective tax rate was (56.4)% with consolidated pretax income of $38.8 million for the quarter ended March 31, 2023. The Company’s taxable REIT subsidiary (“TRS”) recognized a tax benefit of $21.8 million on a pretax loss of $90.1 million for the quarter ended March 31, 2023. For the same period in 2022, the TRS recognized a tax expense of $37.9 million

on pretax income of $272.8 million. The Company’s reported consolidated pretax income was $18.1 million for the quarter ended March 31, 2022. The primary difference between the Company’s effective tax rate and the statutory tax rate is generally attributable to nontaxable REIT income resulting from the dividends paid deduction.

The Company assesses the available positive and negative evidence to estimate whether sufficient future taxable income will be generated to permit use of the existing deferred tax assets. On the basis of this evaluation, as of March 31, 2023, the valuation allowance remains zero. The conclusion was primarily based on the fact that the TRS has reported cumulative GAAP income over the last three-year period ending March 31, 2023. The amount of deferred tax assets considered realizable could be adjusted in future periods based on future income.

In general, cash dividends declared by the Company will be considered ordinary income to the shareholders for income tax purposes. Some portion of the dividends may be characterized as capital gain distributions or a return of capital. For tax years beginning after December 31, 2017, the 2017 Tax Cuts and Jobs Act (subject to certain limitations) provides a 20% deduction from taxable income for ordinary REIT dividends.

Note 24—Earnings Per Common Share

The Company grants restricted share units which entitle the recipients to receive dividend equivalents during the vesting period on a basis equivalent to the dividends paid to holders of Common Shares. Unvested share-based compensation awards containing non-forfeitable rights to receive dividends or dividend equivalents (collectively, “dividends”) are classified as “participating securities” and are included in the basic earnings per share calculation using the two-class method.

Under the two-class method, all earnings (distributed and undistributed) are allocated to Common Shares and participating securities based on their respective rights to receive dividends. Basic earnings per share is determined by dividing net income available to common shareholders (net income reduced by preferred dividends and income attributable to the participating securities) by the weighted average Common Shares outstanding during the period.

The following table summarizes the basic and diluted earnings per share calculations:


	Quarter ended March 31,
	2023			2022
	(in thousands except per share amounts)
Net income (loss)	$	60,697		$	(19,129	)
Dividends on preferred shares		(10,455	)		(10,455	)
Effect of participating securities—share-based compensation awards		(140	)		(104	)
Net income (loss) attributable to common shareholders		50,102			(29,688	)
Interest on Exchangeable Notes, net of income taxes		6,352			—
Income attributable to participating securities		8			—
Diluted net income (loss) attributable to common shareholders	$	56,462		$	(29,688	)
Weighted average basic shares outstanding		88,831			94,146
Dilutive securities:
Shares issuable pursuant to exchange of the Exchangeable Notes		24,328			—
Shares issuable under share-based compensation plan		229			—
Diluted weighted average shares outstanding		113,388			94,146
Basic earnings (loss) per share	$	0.56		$	(0.32	)
Diluted earnings (loss) per share	$	0.50		$	(0.32	)

Calculation of diluted earnings per share requires certain potentially dilutive shares to be excluded when the inclusion of such shares would be anti-dilutive. The following table summarizes the potentially dilutive shares excluded from the diluted earnings per share calculation as inclusion of such shares would have been antidilutive:


	Quarter ended March 31,
	2023		2022
	(in thousands)
Shares issuable under share-based compensation plan		—		133
Shares issuable pursuant to exchange of the Exchangeable Senior Notes		—		24,328

Note 25—Segments

The Company operates in four segments as described in Note 1 ‒ Organization.

The Company’s reportable segments are identified based on PMT’s investment strategies. The Company’s chief operating decision maker is its chief executive officer. The following disclosures about the Company’s business segments are presented consistent with the way the Company’s chief operating decision maker organizes and evaluates financial information for making operating decisions and assessing performance.

Financial highlights by operating segment are summarized below:


	Credit		Interest rate
	sensitive		sensitive			Correspondent
Quarter ended March 31, 2023	strategies		strategies			production		Corporate			Total
	(in thousands)
Net investment income:
Net gains (losses) on investments and financings	$	54,388	$	71,416		$	—	$	—		$	125,804
Net gains on loans acquired for sale		—		—			6,473		—			6,473
Net loan servicing fees		—		(23,693	)		—		—			(23,693	)
Net interest expense:
Interest income		21,394		92,083			36,927		2,615			153,019
Interest expense		17,803		125,168			35,132		1,034			179,137
		3,591		(33,085	)		1,795		1,581			(26,118	)
Other		56		—			7,844		—			7,900
		58,035		14,638			16,112		1,581			90,366
Expenses:
Loan fulfillment and servicing fees payable to PFSI		77		20,372			11,923		—			32,372
Management fees		—		—			—		7,257			7,257
Other		636		1,289			2,408		7,603			11,936
		713		21,661			14,331		14,860			51,565
Pretax income (loss)	$	57,322	$	(7,023	)	$	1,781	$	(13,279	)	$	38,801
Total assets at end of quarter	$	1,620,576	$	10,110,650		$	3,196,705	$	429,298		$	15,357,229


	Credit			Interest rate
	sensitive			sensitive			Correspondent
Quarter ended March 31, 2022	strategies			strategies			production		Corporate			Total
	(in thousands)
Net investment income:
Net gains (losses) on investments and financings	$	(44,905	)	$	(184,190	)	$	—	$	—		$	(229,095	)
Net gains on loans acquired for sale		(4	)		—			3,957		—			3,953
Net loan servicing fees		—			304,178			—		—			304,178
Net interest expense:
Interest income		2,058			29,110			19,181		714			51,063
Interest expense		10,128			41,685			11,560		141			63,514
		(8,070	)		(12,575	)		7,621		573			(12,451	)
Other		288			—			14,966		—			15,254
		(52,691	)		107,413			26,544		573			81,839
Expenses:
Loan fulfillment and servicing fees payable to PFSI		59			21,029			16,754		—			37,842
Management fees		—			—			—		8,117			8,117
Other		3,211			2,175			5,212		7,224			17,822
		3,270			23,204			21,966		15,341			63,781
Pretax income (loss)	$	(55,961	)	$	84,209		$	4,578	$	(14,768	)	$	18,058
Total assets at end of quarter	$	1,747,763		$	8,387,313		$	1,812,210	$	440,229		$	12,387,515

Note 26—Regulatory Capital and Liquidity Requirements

The Company, through PMC, is subject to financial eligibility requirements established by the Federal Housing Finance Agency for sellers/servicers eligible to sell or service mortgage loans with Fannie Mae and Freddie Mac. The eligibility requirements include:

•

A tangible net worth of $2.5 million plus 25 basis points of the UPB of the Company’s total 1-4 unit servicing portfolio, excluding mortgage loans subserviced for others;

•

A tangible net worth/total assets ratio greater than or equal to 6%; and

•

A liquidity requirement equal to 3.5 basis points of the aggregate UPB serviced for the Agencies plus 200 basis points of total nonperforming Agency servicing UPB less 70% of such nonperforming Agency servicing UPB in excess of 600 basis points where the underlying loans are in COVID-19 forbearance but were current at the time they entered forbearance.

The Agencies’ capital and liquidity amounts and requirements, are summarized below:


	Net worth (1)				Tangible net worth / total assets ratio (1)						Liquidity (1)
Fannie Mae and Freddie Mac	Actual		Required		Actual			Required			Actual		Required
	(dollars in thousands)
March 31, 2023	$	1,100,753	$	593,721		13	%		6	%	$	385,500	$	79,946
December 31, 2022	$	1,138,331	$	586,436		16	%		6	%	$	343,286	$	79,372

(1)

Calculated in accordance with the Agencies’ requirements.

In August 2022, the Agencies issued revised capital and liquidity requirements. The requirements will be effective at various dates beginning September 30, 2023, for seller/servicers of mortgage loans to Fannie Mae and Freddie Mac. The Company believes it was in compliance with the Agencies’ revised requirements as of March 31, 2023.

Noncompliance with the Agencies’ capital and liquidity requirements can result in the Agencies taking various remedial actions up to and including removing the Company’s ability to sell loans to and service loans on behalf of the Agencies.

Note 27—Subsequent Events

Management has evaluated all events and transactions through the date the Company issued these consolidated financial statements. During this period, all agreements to repurchase assets that matured before the date of this Report were extended or renewed.

•

On April 5, 2023, the Company issued an aggregate principal amount of $235 million in secured term notes to qualified institutional buyers under Rule 144A of the Securities Act. The term notes bear interest at an annual rate equal to SOFR plus a spread as defined in the borrowing agreement.

•

The Company exercised its options to extend the maturity dates of the 2018 FT-1 Note from April 25, 2023 to April 25, 2025 and of the 2019-2R CRT Term Note from May 29, 2023 to May 29, 2025 as specified in these borrowings' indentures.

•

All agreements to repurchase assets that matured before the date of this Report were extended or renewed.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

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. A significant portion of our investment portfolio is comprised of mortgage-related assets that we have created 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 (“CRT Agreements”) and CRT strips that absorb credit losses on certain of the loans we sold. We also invest in Agency MBS, subordinate credit-linked 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 quarter ended March 31, 2023, we purchased newly originated prime credit quality residential loans with fair values totaling $20.4 billion as compared to $23.3 billion for the quarter ended March 31, 2022, 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. During the quarter ended March 31, 2023, we sold $4.1 billion, in UPB of conventional loans to PLS in order to optimize our use and allocation of capital.

Our purchase volume included $13.5 billion and $13.2 billion of loans we sold to PLS during the quarters ended March 31, 2023 and 2022, 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 quarter ended March 31, 2023, we received sourcing fees totaling $1.3 million, relating to $13.3 billion, in 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:

•

The credit sensitive strategies segment represents the Company’s investments in CRT arrangements referencing loans from its own correspondent production, including CRT agreements and other CRT securities (together, “CRT arrangements”) and subordinate mortgage-backed securities (“MBS”).

•

The interest rate sensitive strategies segment represents the Company’s investments in MSRs, Agency and senior non-Agency MBS and the related interest rate hedging activities.

•

The Company primarily sells the loans it acquires through its correspondent production activities to government-sponsored entities ("GSEs") 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 or the GSEs. Fannie Mae, Freddie Mac and Ginnie Mae are each referred to as an “Agency” and, collectively, as the “Agencies.”

•

The corporate segment includes management fees, corporate expense amounts and certain interest income and expense.

Our Investment Activities

Correspondent Production

Our correspondent production activities involve the acquisition and sale of newly originated prime credit quality residential loans. Correspondent production has served as the source of our investments in MSRs, private label non-Agency securitizations and CRT arrangements. Our correspondent production and resulting investment activity are summarized below:


		Quarter ended March 31,
		2023		2022
	(in thousands)
Sales of loans acquired for sale:
To nonaffiliates		$	5,587,266	$	11,985,961
To PennyMac Financial Services, Inc.			13,451,031		13,160,768
		$	19,038,297	$	25,146,729
Net gains on loans acquired for sale		$	6,473	$	3,953
Investment activities resulting from correspondent production:
Receipt of MSRs as proceeds from sales of loans		$	100,618	$	194,596
Retention of interests in securitizations of loans secured by investment properties, net of associated asset-backed financings			—		23,485

Interest Rate Sensitive Investments

Our interest rate sensitive investments include:

•

Mortgage servicing rights. During the quarter ended March 31, 2023, we received approximately $100.6 million of MSRs as proceeds from sales of loans acquired for sale. We held approximately $4.0 billion of MSRs at fair value at

March 31, 2023.

•

REIT-eligible Agency and senior mortgage-backed or mortgage-related securities. We purchased approximately

$142.7 million Agency fixed-rate pass-through securities and non-Agency senior MBS, net of sales during the quarter ended March 31, 2023. We held Agency fixed-rate pass-through securities and non-Agency senior MBS with fair values totaling approximately $4.4 billion at March 31, 2023.

Credit Sensitive Investments

CRT Arrangements

We held net CRT-related investments (comprised of deposits securing CRT arrangements, CRT derivatives, CRT strips and an interest-only security payable) totaling approximately $1.1 billion at March 31, 2023.

Subordinate Credit-Linked Mortgage-Backed Securities

Subordinate credit-linked MBS provide us with a higher yield than senior securities. However, we retain credit risk in the subordinate credit-linked MBS since they are the first securities to absorb credit losses relating to the underlying loans. We purchased approximately$12.4 million of subordinate credit-linked MBS during the quarter ended March 31, 2023. We held subordinate credit-linked MBS with fair values totaling approximately $196.7 million at March 31, 2023.

As the result of the Company’s consolidation of the variable interest entities that issued the subordinate MBS as 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 unpaid principal balances (“UPB”) totaling approximately $1.8 billion on our consolidated balance sheet as of March 31, 2023.

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 and recognition of the fair value of assets created and liabilities incurred in loan sale transactions. 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, and loans at fair value), 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 net non-cash investment (loss) income items included in net investment income are as follows:


	Quarter ended March 31,
	2023			2022
	(dollars in thousands)
Net gains (losses) on investments and financings:
Mortgage-backed securities	$	78,218		$	(186,525	)
Loans:
Held in variable interest entities		11,017			(96,564	)
Distressed		452			384
CRT arrangements		32,224			(68,807	)
Interest-only security payable at fair value		(1,280	)		(5,780	)
Asset-backed financings at fair value		(10,160	)		89,174
		110,471			(268,118	)
Net gains on loans acquired for sale (1)		130,206			104,343
Net loan servicing fees‒MSR valuation adjustments (2)		(183,705	)		347,554
	$	56,972		$	183,779
Net investment income	$	90,366		$	81,839
Non-cash items as a percentage of net investment income		63	%		225	%

(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 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 loans are sold;

•

CRT arrangements through a portion of the interest payments collected on loans in the CRT arrangements’ reference pools, interest payments from the investment of the deposits securing the arrangement in short-term investments 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 instruments change, 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.

Results of Operations

Overview

Due to significant inflationary pressures, the U.S. Federal Reserve continued to raise the federal funds rate during the quarter ended March 31, 2023 and continues to reduce the federal government’s overall holdings of Treasury and mortgage-backed securities. Increasing interest rates and a slowing economy are expected to continue to reduce the size of the mortgage origination market from an estimated $2.2 trillion in 2022 to a projected range from $1.6 trillion to $1.8 trillion for 2023 according to leading economists.

Lower projected mortgage transaction volumes and increasing interest rates have caused a decrease in mortgage production activities and increased competition in the mortgage production business, while also leading to a reduction in prepayment speeds in our mortgage servicing portfolio from the same time in the prior year. Rising interest rates have increased the costs of floating rate borrowings and have generated greater interest income from our placement fees on deposits and loans held for sale. We have also increased our sales of conventional loans to PLS.

At a macroeconomic level, increasing interest rates may also lead to a reduction in economic activity and slowing home price growth or depreciation, which could lead to increasing mortgage delinquencies or defaults and increased losses. If these effects are realized, they could negatively affect the performance of our credit-sensitive assets such as CRT or subordinate credit-linked notes. However, many of the loans underlying our assets have favorable credit characteristics and low loan-to-value ratios which are likely to help offset the negative effects of credit performance in an economic downturn.

Due to certain capital rules, Fannie Mae and Freddie Mac have higher capital requirements to guarantee loans delivered by loan aggregators and may charge higher fees for third party originated loans that we aggregate and deliver to the Agencies as compared to individual loans delivered by mortgage lenders directly to the Agencies’ cash windows without the assistance of a loan aggregator. To the extent the Agencies increase the number of cash window purchases and sales for their own accounts, our business and results of operations could be materially and adversely affected. The competitive landscape for our correspondent business has also been affected by the exit of several large entities, which may present an opportunity for growth of our share in that business.

We intend to continue to sell conventional loans to PLS in the second quarter of 2023 to optimize our use and allocation of capital.

The following is a summary of our key performance measures:


	Quarter ended March 31,
	2023			2022
	(dollar amounts in thousands, except per common share amounts)
Net investment income	$	90,366		$	81,839
Expenses		51,565			63,781
Pretax income		38,801			18,058
(Benefit from) provision for income taxes		(21,896	)		37,187
Net income (loss)		60,697			(19,129	)
Dividends on preferred shares		10,455			10,455
Net income (loss) attributable to common shareholders	$	50,242		$	(29,584	)
Pretax income (loss) by segment:
Credit sensitive strategies	$	57,322		$	(55,961	)
Interest rate sensitive strategies		(7,023	)		84,209
Correspondent production		1,781			4,578
Corporate		(13,279	)		(14,768	)
	$	38,801		$	18,058
Annualized return on average common shareholder's equity		13.9	%		(6.8	)%
Earnings (losses) per common share
Basic	$	0.56		$	(0.32	)
Diluted	$	0.50		$	(0.32	)
Dividends per common share	$	0.40		$	0.47
	March 31, 2023			December 31, 2022
Total assets	$	15,357,229		$	13,921,564
Book value per common share	$	15.96		$	15.78
Closing price per common share	$	12.33		$	12.39

Our results of operations increased by $79.8 million during the quarter ended March 31, 2023, as compared to the quarter ended March 31, 2022, reflecting the effect of increased gains on MBS, increased valuation of CRT-related investments and a tax benefit, offset by the fair value performance of our MSR investments. The increase in pretax results is summarized below:

•

Our credit sensitive strategies segment recognized an $81.9 million increase in net gains on our CRT arrangements as credit spreads tightened due to an improving macroeconomic outlook compared to the quarter ended March 31, 2022, in which market economic outlooks did not improve in a similar way.

•

Our interest rate sensitive strategies segment was affected by the decrease in interest rates during the quarter ended March 31, 2023, as compared to increasing interest rates in the quarter ended March 31, 2022, resulting in a $264.7 million increase in gains on MBS, offset by a $327.9 million decrease in net servicing fees caused by valuation losses in our investment in MSRs and hedging results.

•

Our correspondent production segment recognized a $2.5 million increase in our gain on sale during the quarter ended March 31, 2023, reflecting improved gain on sale margins compared to the quarter ended March 31, 2022.

•

We recorded an income tax benefit of $21.9 million, primarily due to valuation losses on our investment in MSRs.

Net Investment Income

Our net investment income is summarized below:


	Quarter ended March 31,
	2023			2022
	(in thousands)
Net gains (losses) on investments and financings	$	125,804		$	(229,095	)
Net loan servicing fees		(23,693	)		304,178
Net gains on loans acquired for sale		6,473			3,953
Net loan origination fees		7,706			14,774
Net interest expense		(26,118	)		(12,451	)
Other		194			480
	$	90,366		$	81,839

Net Gains (Losses) on Investments and Financings

Net gains (losses) on investments and financings are summarized below:


	Quarter ended March 31,
	2023			2022
	(in thousands)
From nonaffiliates:
Mortgage-backed securities	$	78,218		$	(186,525	)
Loans at fair value:
Held in consolidated variable interest entities		11,017			(96,564	)
Distressed		451			443
CRT arrangements		46,278			(35,623	)
Asset-backed financings at fair value		(10,160	)		89,174
	$	125,804		$	(229,095	)

The increase in net gains on investments for the quarter ended March 31, 2023, as compared to the same period in 2022, was caused primarily by increased gains from our investments in MBS and CRT arrangements as interest rates decreased and credit spreads tightened while the reverse occurred in the same period in 2022.

Mortgage-Backed Securities

During the quarter ended March 31, 2023, we recognized net valuation gains of $78.2 million, as compared to valuation losses of $186.5 million for the same period in 2022. The gains recognized reflect a larger portfolio of assets and interest rate decreases along with credit spread tightening during the quarter ended March 31, 2023, as compared to the effect of increasing interest rates on fair value during the quarter ended March 31, 2022.

Loans at fair value – Held in VIEs and Asset-Backed Financings at Fair Value

Loans at fair value held in VIEs and Asset-backed financings at fair value recorded a net gain of $857,000 during the quarter ended March 31, 2023, as compared to a net loss of $7.4 million during the quarter ended March 31, 2022. The net gain during the quarter ended March 31, 2023, reflects the effect of decreasing interest rates during the period.

CRT Arrangements

The activity in and balances relating to our CRT arrangements are summarized below:


	Quarter ended March 31,
	2023			2022
	(in thousands)
Net investment income:
Net gains (losses) on investments and financings:
CRT Derivatives and strips:
CRT derivatives
Realized	$	3,030		$	21,201
Valuation changes		8,096			(27,049	)
		11,126			(5,848	)
CRT strips
Realized		12,304			17,763
Valuation changes		24,128			(41,758	)
		36,432			(23,995	)
Interest-only security payable at fair value		(1,280	)		(5,780	)
		46,278			(35,623	)
Interest income — Deposits securing CRT arrangements		14,212			222
	$	60,490		$	(35,401	)

Net payments made (recoveries received) to settle losses (recoveries) on CRT arrangements	$	1,257		$	(15,973	)


	March 31, 2023			December 31, 2022
	(in thousands)
Carrying value of CRT arrangements:
Derivative and credit risk transfer strip assets (liabilities), net
CRT derivatives	$	(13,860	)	$	(22,098	)
CRT strips		(113,065	)		(137,193	)
	$	(126,925	)	$	(159,291	)

Deposits securing CRT arrangements	$	1,297,917		$	1,325,294
Interest-only security payable at fair value	$	23,205		$	21,925

CRT arrangement assets pledged to secure borrowings:
Derivative assets	$	2,883		$	1,262
Deposits securing CRT arrangements (1)	$	1,297,917		$	1,325,294

UPB of loans underlying CRT arrangements	$	24,824,362		$	25,315,524
Collection status (UPB):
Delinquency (2)
Current	$	24,277,884		$	24,673,719
30-89 days delinquent	$	322,328		$	409,049
90-180 days delinquent	$	107,982		$	112,286
180 or more days delinquent	$	91,892		$	93,717
Foreclosure	$	24,276		$	26,753
Bankruptcy	$	57,676		$	54,395
Delinquent loans in COVID-19 pandemic-related forbearance plans:
30-89 days delinquent	$	23,358		$	35,388
90-180 days delinquent	$	29,352		$	39,033
180 or more days delinquent	$	29,052		$	35,588

(1)

(2)

Includes delinquent loans in COVID-19 pandemic-related forbearance plans that were requested by borrowers seeking payment relief in accordance with the CARES Act.

The performance of our investments in CRT arrangements during the quarter ended March 31, 2023 reflects credit spread tightening (a decrease in the interest rate premium demanded by investors for instruments over those that are considered “risk free”) for CRT securities in the credit markets. This contrasts with CRT investments' fair value losses during the quarter ended March 31, 2022, when credit spreads widened.

Net Loan Servicing Fees

Our net loan servicing fees have two primary components: fees earned for servicing loans and the effects of MSR valuation changes, net of hedging results, as summarized below:


	Quarter ended March 31,
	2023			2022
	(in thousands)
Loan servicing fees	$	168,157		$	155,999
Effect of MSRs and hedging results		(191,850	)		148,179
Net loan servicing fees	$	(23,693	)	$	304,178

Following is a summary of our loan servicing fees:


	Quarter ended March 31,
	2023		2022
	(in thousands)
Contractually-specified servicing fees	$	164,214	$	146,885
Ancillary and other fees:
Late charges		759		612
Other		3,184		8,502
		3,943		9,114
	$	168,157	$	155,999
Average MSR servicing portfolio	$	230,812,774	$	217,692,169

MSR recapture fees	$	485	$	8,260

Loan servicing fees 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 UPB of the loans serviced and we collect these fees from borrower payments. Other loan servicing fees are comprised primarily of borrower-contracted fees such as late charges, reconveyance fees and fees charged to correspondent lenders for loans repaid by the borrower shortly after purchase.

The change in contractually-specified fees during the quarter ended March 31, 2023, as compared to the same period in 2022, is due primarily to increased servicing fees resulting from the growth in our loan servicing portfolio.

The changes in other loan servicing fees during the quarter ended March 31, 2023, as compared to the same period in 2022, is due to a decrease in the volume of fees charged to correspondent lenders for loans paid off shortly after purchase, reflecting the effect of increasing interest rates on refinancing activity.

We have elected to carry our servicing assets 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 inputs used to estimate the fair value of such items. We endeavor to moderate the effects of changes in fair value primarily by entering into derivatives transactions.

Changes in fair value of MSRs and hedging results are summarized below:


	Quarter ended March 31,
	2023			2022
	(in thousands)
Change in fair value of MSRs
Realization of cash flows	$	(91,673	)	$	(88,919	)
Changes in valuation inputs used in valuation model		(45,771	)		392,640
		(137,444	)		303,721
Hedging results		(54,891	)		(163,802	)
Total change in fair value of mortgage servicing rights and hedging results		(192,335	)		139,919
Recapture income from PFSI		485			8,260
	$	(191,850	)	$	148,179
Average balance of mortgage servicing rights	$	3,983,193		$	3,158,711

Changes in realization of cash flows are influenced by changes in the level of servicing assets and liabilities and changes in estimates of remaining cash flows to be realized. During the quarter ended March 31, 2023, realization of cash flows increased primarily due to the significant growth of our investment in MSRs as compared to the quarter ended March 31, 2022.

Changes in fair value due to changes in valuation inputs used in our valuation model during the quarter ended March 31, 2023 reflect the decrease in interest rates during such period, resulting in a downward fair value adjustment due to higher projected prepayments during the quarter ended March 31, 2023, as compared to the sharp increase in interest rates during the quarter ended March 31, 2022, causing the fair value of MSRs to significantly increase as future prepayment expectations decreased materially.

Hedging results reflect valuation losses in hedges against interest rates during the quarter ended March 31, 2023, during which interest rates decreased, as compared to the same period in 2022 when hedge losses were attributable to the sharp increase interest rates and elevated hedge costs. The loss from hedging activities decreased during the quarter ended March 31, 2023, as compared to the same period in 2022, since interest rates increased in 2023 while decreasing in 2022. The primary driver of the loss in the hedge in the period ended March 31, 2023 was the cost of the hedge, which was elevated in the period due to high interest rate volatility and an inverted yield curve.

The decrease in loan recapture income from PFSI reflects the decrease in refinancing activity in our MSR portfolio during the quarter ended March 31, 2023, as compared to the same period in 2022. We have an agreement with PFSI that requires that when PFSI refinances a loan for which we held the MSRs, we receive a recapture fee. The MSR recapture agreement is summarized in Note 4 ‒ Transactions with Related Parties – Operating Activities to the consolidated financial statements included in this Report.

Following is a summary of our loan servicing portfolio:


	March 31, 2023		December 31, 2022
	(in thousands)
UPB of loans outstanding	$	231,507,353	$	229,858,573
Collection status (UPB) (1)
Delinquency:
30-89 days delinquent	$	1,556,305	$	1,903,007
90 or more days delinquent:
Not in foreclosure	$	839,807	$	880,841
In foreclosure	$	66,275	$	70,921
Bankruptcy	$	132,238	$	123,239
Delinquent loans in COVID-19 pandemic-related forbearance:
30-89 days	$	144,897	$	176,346
90 days or more	$	404,288	$	464,694
Custodial funds managed by the Company (2)	$	2,347,138	$	1,783,157

(1)

Includes delinquent loans in COVID-19 pandemic-related forbearance plans that were requested by borrowers seeking payment relief in accordance with the Coronavirus Aid, Relief and Economic Security Act ("CARES Act").

(2)

Custodial funds include borrower and investor custodial cash accounts relating to loans serviced under mortgage servicing agreements and are not included on the Company’s consolidated balance sheets. The Company earns placement fees on certain of the custodial funds it manages on behalf of the loans’ borrowers and investors, which are included in Interest income in the Company’s consolidated statements of operations.

Net Gains on Loans Acquired for Sale

Our net gains on loans acquired for sale are summarized below:


	Quarter ended March 31,
	2023			2022
	(in thousands)
From non-affiliates:
Cash losses:
Sales of loans	$	(72,945	)	$	(439,788	)
Hedging activities		(52,116	)		338,102
		(125,061	)		(101,686	)
Non-cash gains:
Receipt of MSRs in loan sale transactions		100,618			194,596
Provision for losses relating to representations and warranties provided in loan sales:
Pursuant to loan sales		(940	)		(1,317	)
Reduction in liability due to change in estimate		616			1,165
		(324	)		(152	)
Changes in fair value of financial instruments during the periods:
Interest rate lock commitments		9,027			(25,916	)
Loans		(10,487	)		22,018
Hedging derivatives		31,372			(86,203	)
		29,912			(90,101	)
		130,206			104,343
Total from nonaffiliates		5,145			2,657
From PFSI—cash		1,328			1,296
	$	6,473		$	3,953

Interest rate lock commitments issued on loans acquired for sale:
To nonaffiliates	$	7,587,587		$	10,194,318
To PFSI		3,780,852			—
	$	11,368,439		$	10,194,318
Acquisition of loans for sale (UPB):
To nonaffiliates	$	6,628,809		$	9,769,262
To PFSI		13,524,332			12,730,330
	$	20,153,141		$	22,499,592

The changes in gain on loans acquired for sale during the quarter ended March 31, 2023, as compared to the same period in 2022, reflect the effect of stabilizing gain on sale margins for mortgage loans.

Non-cash elements of gain on sale of loans:

Interest Rate Lock Commitments

Our net gains on sales of loans includes our estimates of gains or losses we expect to realize upon the sale of mortgage loans we have committed to purchase but have not yet purchased or sold. Therefore, we recognize a substantial portion of our net gains on sales before we purchase the loans. These gains are reflected on our balance sheet as IRLC derivative assets and liabilities. We adjust the fair value of our IRLCs as the loan acquisition process progresses until we complete the acquisition or the commitment is canceled. Such adjustments are included in our gains on sales of loans acquired for sale. The fair value of our IRLCs become part of the carrying value of our loans when we complete the purchase of the loans. The methods and key inputs we use to measure the fair value of IRLCs are summarized in Note 7 – Fair value – Valuation Techniques and Inputs to the consolidated financial statements included in this Report.

The MSRs 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 change as circumstances change, and changes in these estimates are recognized in our results of operations in subsequent periods. Subsequent changes in the fair value of our MSRs significantly affect our results of operations.

Mortgage Servicing Rights

The methods we use to measure and update the measurements of our MSRs as well as the effect of changes in valuation inputs on MSR fair value are detailed in Note 7 – Fair value – Valuation Techniques and Inputs to the consolidated financial statements included in this Report.

Liability for Losses Under Representations and Warranties

We recognize a liability for losses we expect to incur relating to the representations and warranties we provide to purchasers in our loan sales transactions. 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.

We recorded a provision for losses relating to representations and warranties relating to current loan sales of $940,000 and $1.3 million for the quarters ended March 31, 2023 and 2022, respectively. The decrease in the provision relating to current loan sales reflects the decrease of our loan sales volume and reduced default and loss-given default assumptions.

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 investor or insurer against credit losses attributable to the loans with indemnified defects. In such cases, we bear any subsequent credit loss on the loans. Our credit loss may be reduced by any recourse we have to correspondent sellers that, in turn, had 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 those repurchase losses from that correspondent seller.

Following is a summary of the indemnification and repurchase activity and loans subject to representations and warranties:


	Quarter ended March 31,
	2023		2022
	(in thousands)
Indemnification activity (UPB):
Loans indemnified at beginning of quarter	$	8,108	$	2,782
New indemnifications		3,234		—
Less: Indemnified loans repaid or refinanced		748		—
Loans indemnified at end of quarter	$	10,594	$	2,782
Indemnified loans indemnified by correspondent lenders at end of quarter	$	2,149	$	1,112
UPB of loans with deposits received from correspondent sellers collateralizing prospective indemnification losses at end of quarter	$	4,043	$	213
Repurchase activity (UPB):
Loans repurchased	$	19,199	$	24,234
Less:
Loans repurchased by correspondent sellers		15,267		16,844
Loans resold or repaid by borrowers		3,901		11,172
Net loans repurchased (resolved) with losses chargeable to liability to representations and warranties	$	31	$	(3,782	)
Losses charged to liability for representations and warranties	$	388	$	176
At end of quarter:
Loans subject to representations and warranties	$	230,035,290	$	217,466,262
Liability for representations and warranties	$	39,407	$	40,225

The losses on representations and warranties we have recorded to date have been moderated by our ability to recover most of the losses inherent in the repurchased loans from the correspondent sellers. As the outstanding balance of loans we purchase and sell subject to representations and warranties increases, as the loans sold mature, as our investors’ and guarantors’ loss mitigation strategies change and as our correspondent sellers’ ability and willingness to repurchase loans change, we expect that the level of repurchase activity and associated losses may increase.

The method we use to estimate the liability for representations and warranties is a function of our estimates of future defaults, loan repurchase rates, severity of loss in the event of default and the probability of reimbursement by the correspondent loan seller. We establish a liability at our estimate of its fair value at the time loans are sold and review our liability estimate on a periodic basis.

The amount of the liability for representations and warranties is difficult to estimate and requires considerable judgment. The level of loan repurchase losses is dependent on economic factors, investor loss mitigation strategies, our ability to recover any losses inherent in the repurchased loan from the correspondent seller and other external conditions that change over the lives of the underlying loans. We may be required to incur losses related to such representations and warranties for several periods after the loans are sold or liquidated.

We record adjustments to our liability for losses on representations and warranties as economic fundamentals change, as investor and Agency evaluations of their loss mitigation strategies (including claims under representations and warranties) change and as economic conditions affect our correspondent sellers’ ability or willingness to fulfill their recourse obligations to us. Such adjustments may be material to our financial position and results of operations in future periods.

Adjustments to our liability for representations and warranties are included as a component of our Net gains on loans acquired for sale at fair value. We recorded a $616,000 reduction in liability for representations and warranties during the quarter ended March 31, 2023 due to the effects of certain loans reaching specified performance histories identified by the Agencies as sufficient to limit repurchase claims relating to such loans. We recorded a $1.2 million reduction in liability for representations and warranties during the quarter ended March 31, 2022 due to the effects of certain loans reaching specified performance histories identified by the Agencies as sufficient to limit repurchase claims relating to such loans.

Loan Origination Fees

Loan origination fees represent fees we charge correspondent sellers relating to our purchase of loans from those sellers. The decrease in fees during the quarter ended March 31, 2023, as compared to the same period in 2022, reflects a decrease in our purchases of loans with delivery fees.

Net Interest Expense

Net interest expense is summarized below:


	Quarter ended March 31, 2023								Quarter ended March 31, 2022
	Interest					Interest			Interest					Interest
	income/			Average		yield/			income/			Average		yield/
	expense			balance		cost %			expense			balance		cost %
	(dollars in thousands)
Assets:
Cash and short-term investments	$	6,311		$	538,073		4.76	%	$	403		$	241,963		0.67	%
Mortgage-backed securities		51,139			4,464,996		4.64	%		14,400			2,815,409		2.05	%
Loans acquired for sale at fair value		36,988			2,359,044		6.36	%		19,248			2,129,668		3.62	%
Loans at fair value:
Held by variable interest entities		15,166			1,507,128		4.08	%		12,849			1,555,874		3.30	%
Distressed		(7	)		3,478		-0.82	%		174			4,065		17.12	%
		15,159			1,510,606		4.07	%		13,023			1,559,939		3.34	%
Deposits securing CRT arrangements		14,212			1,285,678		4.48	%		222			1,665,568		0.05	%
		123,809			10,158,397		4.94	%		47,296			8,412,547		2.25	%
Placement fees relating to custodial funds		28,920								3,709
Other		290								58
	$	153,019		$	10,158,397				$	51,063		$	8,412,547
Liabilities:
Assets sold under agreements to repurchase	$	100,267		$	7,242,478		5.61	%	$	15,571		$	4,999,896		1.25	%
Mortgage loan participation purchase and sale agreements		293			17,107		6.95	%		176			35,809		1.97	%
Notes payable secured by credit risk transfer and mortgage servicing assets		54,947			2,802,691		7.95	%		20,366			2,438,773		3.34	%
Exchangeable senior notes		8,380			546,511		6.22	%		8,320			529,542		6.28	%
Asset-backed financings at fair value		12,353			1,411,990		3.55	%		11,027			1,460,610		3.02	%
		176,240			12,020,777		5.95	%		55,460			9,464,630		2.34	%
Interest shortfall on repayments of loans serviced for Agency securitizations		1,029								7,042
Interest on loan impound deposits		1,343								1,012
Other		525								—
	$	179,137		$	12,020,777				$	63,514		$	9,464,630
Net interest expense	$	(26,118	)						$	(12,451	)

The effects of changes in the yields and costs and composition of our investments on our net interest expense are summarized below:


		Quarter ended March 31, 2023 vs. Quarter ended March 31, 2022
		Increase (decrease) due to changes in
		Rate			Volume			Total
	(in thousands)
Assets:
Cash and short-term investments		$	4,913		$	995		$	5,908
Mortgage-backed securities			24,945			11,794			36,739
Loans acquired for sale at fair value			15,472			2,268			17,740
Loans at fair value:
Held by variable interest entities			2,740			(423	)		2,317
Distressed			(159	)		(22	)		(181	)
			2,581			(445	)		2,136
Deposits securing CRT arrangements			14,054			(64	)		13,990
			61,965			14,548			76,513
Placement fees relating to custodial funds									25,211
Other									232
		$	61,965		$	14,548		$	101,956
Liabilities:
Assets sold under agreements to repurchase		$	74,940		$	9,756		$	84,696
Mortgage loan participation purchase and sale agreement			251			(134	)		117
Notes payable secured by credit risk transfer and mortgage servicing assets			31,134			3,447			34,581
Exchangeable senior notes			(206	)		266			60
Asset-backed financings at fair value			1,712			(386	)		1,326
			107,831			12,949			120,780
Interest shortfall on repayments of loans serviced for Agency securitizations									(6,013	)
Interest on loan impound deposits									331
Other									525
		$	107,831		$	12,949		$	115,623
Increase in net interest expense		$	(45,866	)	$	1,599		$	(13,667	)

The increase in net interest expense during the quarter ended March 31, 2023, as compared to the same period in 2022, is due to an increase in the average balance of our financing that was not fully matched by the increase in our interest-earning assets, partially offset by an increase in placement fees relating to custodial funds we manage in our MSR portfolio.

Expenses

Our expenses are summarized below:


	Quarter ended March 31,
	2023		2022
	(in thousands)
Earned by PennyMac Financial Services, Inc.:
Loan servicing fees	$	20,449	$	21,088
Loan fulfillment fees		11,923		16,754
Management fees		7,257		8,117
Loan origination		2,178		2,842
Compensation		1,539		1,437
Professional services		1,523		4,025
Safekeeping		1,116		2,395
Loan collection and liquidation		579		3,177
Other		5,001		3,946
	$	51,565	$	63,781

Expenses decreased $12.2 million, or 19%, during the quarter ended March 31, 2023, as compared to the same period in 2022, as discussed below.

Loan Servicing Fees

Loan servicing fees payable to PLS are summarized below:


	Quarter ended March 31,
	2023		2022
	(in thousands)
Loan servicing fees:
Loans acquired for sale at fair value	$	285	$	264
Loans at fair value		120		210
MSRs		20,044		20,614
	$	20,449	$	21,088
Average investment in loans:
Acquired for sale at fair value	$	2,359,044	$	2,129,668
At fair value	$	1,510,606	$	1,559,939
Average MSR portfolio UPB	$	230,812,774	$	217,692,169

Loan servicing fees decreased by $639,000 during the quarter ended March 31, 2023, as compared to the same period in 2022. We incur loan servicing fees primarily in support of our MSR portfolio. The decrease in loan servicing fees is due to reductions in COVID-19 pandemic-related forbearance and modification activities, partially offset by growth in our MSR portfolio.

Loan Fulfillment Fees

Loan fulfillment fees represent fees we pay to PLS for the services it performs on our behalf in connection with our acquisition, packaging and sale of loans. Fulfillment fees decreased $4.8 million during the quarter ended March 31, 2023, compared to the same period in 2022. The decrease was due to a decrease in loan commitment volume. Our loan fulfillment fee structure is described in Note 4 – Transactions with Related Parties to the consolidated financial statements included in this Report.

Management Fees

Management fees payable to PCM are summarized below:


	Quarter ended March 31,
	2023		2022
	(in thousands)
Base	$	7,257	$	8,117
Performance incentive		—		—
	$	7,257	$	8,117
Average shareholders' equity amounts used to calculate base management fee expense	$	1,962,105	$	2,212,304

Management fees decreased by $860,000 during the quarter ended March 31, 2023, as compared to the same period in 2022. This decrease reflects the decrease in our average shareholders’ equity during the quarter ended March 31, 2023, as compared to the quarter ended March 31, 2022.

Loan origination

Loan origination expenses decreased $664,000, or 23%, during the quarter ended March 31, 2023, as compared to the same period in 2022, primarily reflecting a decrease in our loan originations produced through our correspondent production activities.

Other Expenses

Other expenses are summarized below:


	Quarter ended March 31,
	2023		2022
	(in thousands)
Common overhead allocation from PFSI	$	1,821	$	1,864
Technology		548		468
Bank service charges		496		565
Insurance		435		395
Other		1,701		654
	$	5,001	$	3,946

Income Taxes

We have elected to treat PMC as a taxable REIT subsidiary (“TRS”). Income from a TRS is only included as a component of REIT taxable income to the extent that the TRS makes dividend distributions of income to us. A TRS is subject to corporate federal and state income tax. Accordingly, a provision for income taxes for PMC is included in the accompanying consolidated statements of operations.

The Company’s effective tax rate was (56.4)% with consolidated pretax income of $38.8 million for the quarter ended March 31, 2023. The Company’s TRS recognized a tax benefit of $21.8 million on a pretax loss of $90.1 million for the quarter ended March 31, 2023. For the same period in 2022, the TRS recognized tax expense of $37.9 million on pretax income of $272.8 million, while the Company’s reported consolidated pretax income for the quarter ended March 31, 2022 was $18.1 million. The primary difference between the Company’s effective tax rate and the statutory tax rate is generally attributable to nontaxable REIT income resulting from the dividends paid deduction.

The Company assesses the available positive and negative evidence to estimate whether sufficient future taxable income will be generated to permit use of the existing deferred tax assets. On the basis of this evaluation, as of March 31, 2023, the valuation allowance remains zero as a result of cumulative GAAP income at the TRS for the three-year period ended March 31, 2022. The amount of deferred tax assets considered realizable could be adjusted in future periods based on future income.

The Inflation Reduction Act was signed into law on August 16, 2022 (the "Act"). Effective for tax years beginning after December 31, 2022, the Act imposes a 15% Alternative Minimum Tax ("AMT") on the adjusted financial statement income ("AFSI") of Applicable Corporations. The term "Applicable Corporations" does not include REITs but does include taxable REIT subsidiaries whose 3-year average AFSI exceeds $1 billion. Based on the current legislation and the definition of AFSI we do not expect that our TRS will be subject to this AMT in the foreseeable future.

Balance Sheet Analysis

Following is a summary of key balance sheet items as of the dates presented:


	March 31,		December 31,
	2023		2022
	(in thousands)
Assets
Cash	$	118,672	$	111,866
Investments:
Short-term		292,153		252,271
Mortgage-backed securities at fair value		4,629,004		4,462,601
Loans acquired for sale at fair value		3,143,518		1,821,933
Loans at fair value		1,502,471		1,513,399
Derivative assets		89,285		84,940
Deposits securing credit risk transfer arrangements		1,297,917		1,325,294
MSRs		3,975,076		4,012,737
		14,929,424		13,473,175
Other		309,133		336,523
Total assets	$	15,357,229	$	13,921,564
Liabilities
Debt:
Short-term	$	8,114,108	$	6,616,528
Long-term		4,764,246		4,787,162
		12,878,354		11,403,690
Other		508,141		555,059
Total liabilities		13,386,495		11,958,749
Shareholders’ equity		1,970,734		1,962,815
Total liabilities and shareholders’ equity	$	15,357,229	$	13,921,564

Total assets increased by approximately $1.4 billion, or 10%, during the period from December 31, 2022 through March 31, 2023, primarily due to an increase of $1.3 billion in Loans acquired for sale at fair value and $166.4 million in Mortgage-backed securities at fair value partially offset by decreases in MSRs of $37.7 million and Deposits securing credit risk transfer arrangements of $27.4 million.

Asset Acquisitions

Our asset acquisitions are summarized below.

Correspondent Production

Following is a summary of our correspondent production acquisitions at fair value:


	Quarter ended March 31,
	2023		2022
	(in thousands)
Correspondent loan purchases:
Government-sponsored entity ("GSE") eligible (1)	$	10,755,072	$	10,197,961
Held for sale to PLS ‒ Government insured or guaranteed		9,661,960		13,133,460
Advances to home equity lines of credit		46		47
	$	20,417,078	$	23,331,468

(1)

During the quarter ended March 31, 2023, we purchased for sale $20.4 billion in fair value of correspondent production loans as compared to $23.3 billion during the quarter ended March 31, 2022. The decrease in loan production reflects the effect of decreased loan demand as a result of the increasing interest rate environment during the quarter ended March 31, 2023, as compared to the same period in 2022.

Other Investment Activities

Following is a summary of our acquisitions of mortgage-related investments held in our credit rate sensitive strategies and interest rate sensitive strategies segments:


	Quarter ended March 31,
	2023		2022
	(in thousands)
Credit sensitive assets:
Loans secured by investment properties, net of associated asset-backed financing	$	—	$	23,485

Interest rate sensitive assets:
Mortgage-backed securities (net of sales)		155,052		661,774
Mortgage servicing rights received in loan sales		100,618		194,596
		255,670		856,370
	$	255,670	$	879,855

Our acquisitions during the quarters ended March 31, 2023 and 2022 were financed through the use of a combination of proceeds from borrowings and liquidations of existing investments. We continue to identify additional means of increasing our investment portfolio through cash flow from our business activities, existing investments, borrowings, and transactions that minimize current cash outlays. However, we expect that, over time, our ability to continue our investment portfolio growth will depend on our ability to raise additional equity capital.

Investment Portfolio Composition

Mortgage-Backed Securities

Following is a summary of our MBS holdings:


	March 31, 2023									December 31, 2022
					Average									Average
	Fair				Life					Fair				Life
	value		Principal		(in years)		Coupon			value		Principal		(in years)		Coupon
	(dollars in thousands)
Agency pass-through securities	$	4,410,051	$	4,419,508		6.9		5.1	%	$	4,262,502	$	4,693,045		10.1		3.5	%
Subordinate credit-linked securities		196,702		197,313		4.1		11.8	%		177,898		184,620		4.6		11.2	%
Senior non-Agency securities		22,251		27,814		14.3		2.5	%		22,201		28,103		14.3		2.5	%
	$	4,629,004	$	4,644,635						$	4,462,601	$	4,905,768

Credit Risk Transfer Arrangements

Following is a summary of the composition of the loans underlying our investment in funded CRT arrangements:


	March 31, 2023			December 31, 2022
	(in thousands)
Carrying value of CRT arrangements:
Derivative and credit risk transfer strip assets (liabilities), net
CRT strips	$	(113,065	)	$	(137,193	)
CRT derivatives		(13,860	)		(22,098	)
		(126,925	)		(159,291	)
Deposits securing CRT arrangements		1,297,917			1,325,294
Interest-only security payable at fair value		(23,205	)		(21,925	)
	$	1,147,787		$	1,144,078
UPB of loans subject to credit guarantee obligations	$	24,824,362		$	25,315,524

Following is a summary of the composition of the loans underlying our investment in CRT arrangements as of March 31, 2023:


		Year of origination
		2020		2019		2018		2017		2016		2015		Total
	(in millions)
UPB:
Outstanding		$	5,001	$	11,528	$	3,024	$	2,549	$	2,071	$	651	$	24,824
Liquidations:
Balances		$	—	$	3.4	$	54.7	$	159.2	$	115.7	$	57.5	$	390.5
Losses		$	—	$	0.2	$	5.4	$	19.6	$	12.1	$	6.8	$	44.1
Modifications:
Balances		$	66.0	$	537.0	$	294.3	$	—	$	—	$	—	$	897.3
Losses		$	0.8	$	8.7	$	7.0	$	—	$	—	$	—	$	16.5


		Year of origination
Original debt-to income ratio		2020			2019			2018			2017			2016			2015			Total
	(in millions)
<25%		$	1,032		$	1,730		$	278		$	322		$	310		$	70		$	3,742
25 - 30%			803			1,458			248			294			280			71			3,154
30 - 35%			884			1,764			352			393			357			98			3,848
35 - 40%			864			2,061			489			461			394			118			4,387
40 - 45%			862			2,490			716			650			543			177			5,438
>45%			556			2,025			941			429			187			117			4,255
		$	5,001		$	11,528		$	3,024		$	2,549		$	2,071		$	651		$	24,824
Weighted average			33.4	%		35.8	%		38.9	%		36.5	%		35.0	%		31.3	%		35.6	%


		Year of origination
Origination FICO credit score		2020		2019		2018		2017		2016		2015		Total
	(in millions)
600 - 649		$	34	$	164	$	72	$	30	$	19	$	11	$	330
650 - 699			251		1,089		634		390		253		130		2,747
700 - 749			1,183		3,381		1,072		866		654		199		7,355
750 or greater			3,525		6,862		1,238		1,259		1,145		311		14,340
Not available			8		32		8		4		—		—		52
		$	5,001	$	11,528	$	3,024	$	2,549	$	2,071	$	651	$	24,824
Weighted average			764		754		736		745		751		742		753


		Year of origination
Origination loan-to value ratio		2020			2019			2018			2017			2016			2015			Total
	(in millions)
<80%		$	2,352		$	4,080		$	971		$	825		$	839		$	262		$	9,329
80-85%			839			2,209			718			727			559			172			5,224
85-90%			327			650			138			131			114			38			1,398
90-95%			453			1,220			347			311			231			70			2,632
95-100%			1,030			3,369			850			555			328			109			6,241
		$	5,001		$	11,528		$	3,024		$	2,549		$	2,071		$	651		$	24,824
Weighted average			80.7	%		83.3	%		83.5	%		82.5	%		80.7	%		81.0	%		82.4	%


		Year of origination
Current loan-to value ratio (1)		2020			2019			2018			2017			2016			2015			Total
	(in millions)
<80%		$	4,956		$	11,402		$	2,992		$	2,545		$	2,071		$	651		$	24,617
80-85%			35			89			20			3			—			—			147
85-90%			8			25			7			1			—			—			41
90-95%			2			7			3			—			—			—			12
95-100%			—			2			1			—			—			—			3
>100%			—			3			1			—			—			—			4
		$	5,001		$	11,528		$	3,024		$	2,549		$	2,071		$	651		$	24,824
Weighted average			56.6	%		56.3	%		53.5	%		48.3	%		44.1	%		41.4	%		53.8	%

(1) Based on current UPB compared to estimated fair value of the property securing the loan.


		Year of origination
Geographic distribution		2020		2019		2018		2017		2016		2015		Total
	(in millions)
CA		$	510	$	1,116	$	370	$	265	$	391	$	119	$	2,771
FL			554		1,120		389		268		223		58		2,612
TX			605		1,004		243		219		263		101		2,435
VA			262		514		110		121		144		63		1,214
MD			195		482		136		144		137		36		1,130
Other			2,875		7,292		1,776		1,532		913		274		14,662
		$	5,001	$	11,528	$	3,024	$	2,549	$	2,071	$	651	$	24,824


		Year of origination
Regional geographic distribution (1)		2020		2019		2018		2017		2016		2015		Total
	(in millions)
Northeast		$	464	$	1,412	$	354	$	369	$	263	$	96	$	2,958
Southeast			1,701		3,978		1,085		880		653		202		8,499
Midwest			465		1,213		258		244		188		47		2,415
Southwest			1,314		2,560		577		499		392		137		5,479
West			1,057		2,365		750		557		575		169		5,473
		$	5,001	$	11,528	$	3,024	$	2,549	$	2,071	$	651	$	24,824

(1)

Northeast consists of CT, DE, ME, MA, NH, NJ, NY, PA, PR, RI, VT, VI; Southeast consists of AL, DC, FL, GA, KY, MD, MS, NC, SC, TN, VA, WV; Midwest consists of IL, IN, IA, MI, MN, NE, ND, OH, SD, WI; Southwest consists of AZ, AR, CO, KS, LA, MO, NM, OK, TX, UT; and West consists of AK, CA, GU, HI, ID, MT, NV, OR, WA and WY.


		Year of origination
Collection status		2020		2019		2018		2017		2016		2015		Total
	(in millions)
Delinquency
Current - 89 Days		$	4,982	$	11,414	$	2,966	$	2,529	$	2,061	$	649	$	24,601
90 - 179 Days			9		56		24		12		5		1		107
180+ Days			8		47		24		8		4		1		92
Foreclosure			2		11		10		—		1		—		24
		$	5,001	$	11,528	$	3,024	$	2,549	$	2,071	$	651	$	24,824
Bankruptcy		$	2	$	22	$	16	$	7	$	9	$	2	$	58

Cash Flows

Our cash flows for the quarters ended March 31, 2023 and 2022 are summarized below:


	Quarter ended March 31,
	2023			2022
	(in thousands)
Operating activities	$	(1,276,212	)	$	1,747,025
Investing activities		(122,743	)		(196,572	)
Financing activities		1,405,761			(1,421,556	)
Net cash flows	$	6,806		$	128,897

Our cash flows resulted in a net increase in cash of $6.8 million during the quarter ended March 31, 2023, as discussed below.

Operating activities

Cash used in operating activities totaled $1.3 billion during the quarter ended March 31, 2023, as compared to cash provided by our operating activities of $1.7 billion during the quarter ended March 31, 2022. Cash flows from operating activities are most influenced by cash flows from loans acquired for sale as shown below:


	Quarter ended March 31,
	2023			2022
	(in thousands)
Operating cash flows from:
Loans acquired for sale	$	(1,397,980	)	$	1,791,027
Other		121,768			(44,002	)
	$	(1,276,212	)	$	1,747,025

Cash flows from loans acquired for sale primarily reflect changes in the level of production inventory from the beginning to end of the periods presented. Our inventory of loans held for sale increased during the quarter ended March 31, 2023, as compared to a decrease during the same period in 2022.

Investing activities

Net cash used in our investing activities was $122.7 million for the quarter ended March 31, 2023, as compared to net cash used in our investing activities of $196.6 million for the quarter ended March 31, 2022, primarily due to purchases of our investments in MBS in excess of sales and repayments of such assets and an increase in margin deposits partially offset by repayments from our investments in CRT arrangements.

Financing activities

Net cash provided by our financing activities was $1.4 billion for the quarter ended March 31, 2023, as compared to net cash used in our financing activities of $1.4 billion for the quarter ended March 31, 2022. This change reflects increased financing requirements relating to loans acquired for sale.

As discussed below in Liquidity and Capital Resources, our Manager continually evaluates and pursues additional sources of financing to provide us with future investing capacity. We do not raise equity or enter into borrowings for the purpose of financing the payment of dividends. We believe that our cash earnings, are adequate to fund our operating expenses and dividend payment requirements. However, we manage our liquidity in the aggregate and are reinvesting our cash flows in new investments as well as using such cash to fund our dividend requirements.

Liquidity and Capital Resources

Our liquidity reflects our ability to meet our current obligations (including the purchase of loans from correspondent sellers, our operating expenses and, when applicable, retirement of, and margin calls relating to, our debt and derivatives positions), make investments as our Manager identifies them, pursue our share repurchase program and make distributions to our shareholders. We generally need to distribute at least 90% of our taxable income each year (subject to certain adjustments) to our shareholders to qualify as a REIT under the Internal Revenue Code. This distribution requirement limits our ability to retain earnings and thereby replenish or increase capital to support our activities.

We expect our primary sources of liquidity to be cash flows from our investment portfolio, including cash earnings on our investments, cash flows from business activities, liquidation of existing investments and proceeds from borrowings and/or additional equity offerings. When we finance a particular asset, the amount borrowed is less than the asset’s fair value and we must provide the cash in the amount of such difference. Our ability to continue making investments is dependent on our ability to invest the cash representing such difference.

Debt Financing

Our current debt financing strategy is to finance our assets where we believe such borrowing is prudent, appropriate and available. We make collateralized borrowings in the form of sales of assets under agreements to repurchase, loan participation purchase and sale agreements and notes payable, including secured term financing for our MSRs and our CRT arrangements which has allowed us to more closely match the term of our borrowings to the expected lives of the assets securing those borrowings.

Our debt financing is summarized below:


	Assets financed
Financing	MBS		Loans acquired for sale		Loans at fair value		CRT assets		MSRs (1)		REO		Total
	(in thousands)
Borrowings
Short term
Assets sold under agreements to repurchase	$	4,413,869	$	2,950,797	$	63,460	$	237,943	$	448,039	$	—	$	8,114,108
Mortgage loan participation purchase and sale agreements		—		—		—		—		—		—		—
Long term
Notes payable secured by CRT arrangements and MSRs		—		—		—		576,808		2,214,150		—		2,790,958
Asset-backed financings at fair value		—		—		1,403,080		—		—		—		1,403,080
Interest-only security payable		—		—		—		23,205		—		—		23,205
Total secured borrowings		4,413,869		2,950,797		1,466,540		837,956		2,662,189		—		12,331,351
Exchangeable senior notes														547,003
Total borrowings	$	4,413,869	$	2,950,797	$	1,466,540	$	837,956	$	2,662,189	$	—		12,878,354
Shareholders' equity														1,970,734
Total financing													$	14,849,088

Assets pledged to secure borrowings	$	4,616,580	$	3,117,294	$	1,499,117	$	1,300,800	$	4,002,824	$	3,554	$	14,540,169
Debt-to-equity ratio:
Excluding non-recourse debt													5.8:1
Total													6.5:1

(1)

Amounts pledged to secure borrowings include pledged servicing advances.

Sales of Assets Under Agreements to Repurchase

Our repurchase agreements represent the sales of assets together with agreements for us to buy back the assets at a later date. Following is a summary of the activities in our repurchase agreements financing:


	Quarter ended March 31,
Assets sold under agreements to repurchase		2023		2022
	(in thousands)
Average balance outstanding	$	7,242,478	$	4,999,896
Maximum daily balance outstanding	$	9,107,074	$	7,405,436
Ending balance	$	8,114,108	$	5,092,700

The difference between the maximum and average daily amounts outstanding is primarily due to timing of loan purchases and sales in our correspondent production business. The total facility size of our assets sold under agreements to repurchase was approximately $11.4 billion at March 31, 2023.

Because a significant portion of our current debt facilities consists of short-term borrowings, we expect to either renew these facilities in advance of maturity in order to ensure our ongoing liquidity and access to capital or otherwise allow ourselves sufficient time to replace any necessary financing.

As discussed above, all of our repurchase agreements, and mortgage loan participation purchase and sale agreements have short-term maturities:

•

The transactions relating to loans and REO under agreements to repurchase generally provide for terms of approximately one to two years;

•

The transactions relating to loans under mortgage loan participation purchase and sale agreements provide for terms of approximately one year; and

•

The transactions relating to assets under notes payable provide for terms ranging from two to five years.

Debt Covenants

Our debt financing agreements require us and certain of our subsidiaries to comply with various financial covenants. As of the filing of this Report, these financial covenants include the following:

•

a minimum of $75 million in unrestricted cash and cash equivalents among the Company and/or our subsidiaries; a minimum of $75 million in unrestricted cash and cash equivalents among our Operating Partnership and its consolidated subsidiaries; a minimum of $25 million in unrestricted cash and cash equivalents between PMC and PennyMac Holdings, LLC (“PMH”); a minimum of $25 million in unrestricted cash and cash equivalents at PMC; and a minimum of $10 million in unrestricted cash and cash equivalents at PMH;

•

a minimum tangible net worth for the Company of $1.25 billion; a minimum tangible net worth for our Operating Partnership of $1.25 billion; a minimum tangible net worth for PMH of $250 million; and a minimum tangible net worth for PMC of $300 million;

•

a maximum ratio of total liabilities to tangible net worth of less than 10:1 for PMC and PMH and 7:1 for the Company and our Operating Partnership; and

•

at least two warehouse or repurchase facilities that finance amounts and assets similar to those being financed under our existing debt financing agreements.

Although these financial covenants limit the amount of indebtedness we may incur and impact our liquidity through minimum cash reserve requirements, we believe that these covenants currently provide us with sufficient flexibility to successfully operate our business and obtain the financing necessary to achieve that purpose.

PLS is also subject to various financial covenants, both as a borrower under its own financing arrangements and as our servicer under certain of our debt financing agreements. The most significant of these financial covenants currently include the following:

•

a minimum in unrestricted cash and cash equivalents of $100 million;

•

a minimum tangible net worth of $1.25 billion;

•

a maximum ratio of total liabilities to tangible net worth of 10:1; and

•

at least one other warehouse or repurchase facility that finances amounts and assets that are similar to those being financed under certain of our existing secured financing agreements.

Many of our debt financing agreements contain a condition precedent to obtaining additional funding that requires us to maintain positive net income for at least one (1) of the previous two consecutive quarters, or other similar measures. For the most recent fiscal quarter, the Company is compliant with all such conditions. However, we may be required to obtain waivers from certain lenders in the future if this condition precedent is not met.

Our debt financing agreements also contain margin call provisions that, upon notice from the applicable lender at its option, require us to transfer cash or, in some instances, additional assets in an amount sufficient to eliminate any margin deficit. A margin deficit will generally result from any decline in the market value (as determined by the applicable lender) of the assets subject to the related financing agreement, although in some instances we may agree with the lender upon certain thresholds (in dollar amounts or percentages based on the market value of the assets) that must be exceeded before a margin deficit will arise. Upon notice from the applicable lender, we will generally be required to satisfy the margin call on the day of such notice or within one business day thereafter, depending on the timing of the notice.

Regulatory Capital and Liquidity Requirements

In addition to the financial covenants imposed upon us and PLS under our debt financing agreements, we and/or PLS, as applicable, are also subject to liquidity and net worth requirements established by the Federal Housing Finance Agency (“FHFA”) for Agency sellers/servicers and Ginnie Mae for single-family issuers. FHFA and Ginnie Mae have established minimum liquidity and net worth requirements for approved non-depository single-family sellers/servicers in the case of FHFA, and for approved single-family issuers in the case of Ginnie Mae, as summarized below:

•

A minimum net worth of a base of $2.5 million plus 25 basis points of UPB for total 1-4 unit residential loans serviced;

•

A tangible net worth/total assets ratio greater than or equal to 6%;

•

A liquidity requirement equal to 0.035% (3.5 basis points) of total Agency servicing UPB plus an incremental 200 basis points of the amount by which total nonperforming Agency servicing UPB (reduced by 70% of the UPB of nonperforming Agency loans that are in COVID-19 pandemic related payment forbearance and were current when they entered such forbearance) exceeds 6% of the applicable Agency servicing UPB; allowable assets to satisfy liquidity requirement include cash and cash equivalents (unrestricted), certain investment-grade securities that are available for sale or held for trading including Agency mortgage-backed securities, obligations of Fannie Mae or Freddie Mac, and U.S. Treasury obligations, and unused and available portions of committed servicing advance lines;

•

In the case of PLS, liquidity equal to the greater of $1.0 million or 0.10% (10 basis points) of its outstanding Ginnie Mae single-family securities, which must be met with cash and cash equivalents; and

•

In the case of PLS, net worth equal to $2.5 million plus 0.35% (35 basis points) of its outstanding Ginnie Mae single-family obligations.

We believe that we and PLS are currently in compliance with the applicable Agency requirements. In August 2022, the Agencies issued revised capital and liquidity requirements. The requirements will be effective at various dates beginning September 30, 2023, for issuers of securities guaranteed by seller/servicers of mortgage loans to Fannie Mae and Freddie Mac and issuers of Ginnie Mae securities. We believe that we and PLS were in compliance with the applicable Agencies’ revised requirements as of March 31, 2023.

Our Manager continues to explore a variety of additional means of financing our business, including debt financing through bank warehouse lines of credit, repurchase agreements, term financing, securitization transactions and additional equity offerings. However, there can be no assurance as to how much additional financing capacity such efforts will produce, what form the financing will take or that such efforts will be successful.

Off-Balance Sheet Arrangements and Aggregate Contractual Obligations

Off-Balance Sheet Arrangements

As of March 31, 2023, we have not entered into any off-balance sheet arrangements.

All debt financing arrangements that matured between March 31, 2023 and the date of this Report have been renewed, extended or replaced.

The amount at risk (the fair value of the assets pledged plus the related margin deposit, less the amount advanced by the counterparty and accrued interest) relating to our assets sold under agreements to repurchase is summarized by counterparty below as of March 31, 2023:


Counterparty	Amount at risk
	(in thousands)
Bank of America, N.A.	$	110,929
Citibank, N.A.		105,170
Barclays Capital Inc.		104,624
Goldman Sachs & Co. LLC		99,978
JPMorgan Chase & Co.		63,981
Atlas Securitized Products, L.P.		61,683
Wells Fargo Securities, LLC		43,048
BNP Paribas Corporate & Institutional Banking		14,908
RBC Capital Markets, L.P.		12,112
Daiwa Capital Markets America Inc.		10,772
Amherst Pierpont Securities LLC		7,831
Mizuho Financial Group		4,173
Morgan Stanley & Co. LLC		4,082
Nomura Holdings America, Inc		1,707
	$	644,998

Critical Accounting Estimates

Preparation of financial statements in compliance with GAAP requires us to make estimates that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements, and revenues and expenses during the reporting period. Certain of these estimates significantly influence the portrayal of our financial condition and results, and they require us to make difficult, subjective or complex judgments. Our critical accounting policies primarily relate to our fair value estimates.

Our Annual Report on Form 10-K for the year ended December 31, 2022 contains a discussion of our critical accounting policies, which utilize relevant critical accounting estimates.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Market risk is the exposure to loss resulting from changes in interest rates, foreign currency exchange rates, commodity prices, equity prices, real estate values and other market-based risks. The primary market risks that we are exposed to are real estate risk, credit risk, interest rate risk, prepayment risk, inflation risk and market value risk.

Our primary trading asset is our inventory of loans acquired for sale. We believe that such assets’ fair values respond primarily to changes in the market interest rates for comparable recently-originated loans. Our other market-risk assets are a substantial portion of our investments and are primarily comprised of MSRs, CRT arrangements and MBS. We believe that the fair values of MSRs and MBS also respond primarily to changes in the market interest rates for comparable loans or yields on MBS. Changes in interest rates are reflected in the prepayment speeds underlying these investments and in the pricing spread (an element of the discount rate) used in their valuation. We believe that the primary market risks to the fair values of our investment in CRT arrangements are changes in market credit spreads and the fair value of the real estate securing the loans underlying such arrangements.

The following sensitivity analyses are limited in that they were performed at a particular point in time; only contemplate the movements in the indicated variables; do not incorporate changes to other variables; are subject to the accuracy of various models and assumptions used; and do not incorporate other factors that would affect our overall financial performance in such scenarios, including operational adjustments made by management to account for changing circumstances. For these reasons, the following estimates should not be viewed as earnings forecasts.

Mortgage-backed securities at fair value

The following table summarizes the estimated change in fair value of our mortgage-backed securities as of March 31, 2023, given several hypothetical (instantaneous) changes in interest rates and parallel shifts in the yield curve:


Interest rate shift in basis points	-200		-75		-50		50			75			200
	(in thousands)
Change in fair value	$	246,425	$	103,163	$	70,413	$	(79,499	)	$	(122,922	)	$	(376,732	)

Mortgage Servicing Rights

The following tables summarize the estimated change in fair value of MSRs as of March 31, 2023, given several shifts in pricing spread, prepayment speeds and annual per-loan cost of servicing:


Change in fair value attributable to shift in:	-20%		-10%		-5%		+5%			+10%			+20%
	(in thousands)
Pricing spread	$	223,452	$	108,805	$	53,697	$	(52,336	)	$	(103,357	)	$	(201,628	)
Prepayment speed	$	233,516	$	112,689	$	55,385	$	(53,572	)	$	(105,425	)	$	(204,325	)
Annual per-loan cost of servicing	$	70,559	$	35,279	$	17,640	$	(17,640	)	$	(35,279	)	$	(70,559	)

CRT Arrangements

Following is a summary of the effect on fair value of various changes to the pricing spread input used to estimate the fair value of our CRT arrangements given several shifts in pricing spread:


Pricing spread shift in basis points	-100		-50		-25		25			50			100
	(in thousands)
Change in fair value	$	43,419	$	21,340	$	10,580	$	(10,403	)	$	(20,633	)	$	(40,589	)

Following is a summary of the effect on fair value of various instantaneous changes in home values from those used to estimate the fair value of our CRT arrangements given several shifts:


Property value shift in %	-15%			-10%			-5%			5%		10%		15%
	(in thousands)
Change in fair value	$	(64,139	)	$	(37,009	)	$	(16,236	)	$	13,242	$	23,784	$	32,300

Item 4. Controls and Procedures

Disclosure Controls and Procedures

We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our reports filed under the Securities Exchange Act of 1934 (the “Exchange Act”) is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosures. However, no matter how well a control system is designed and operated, it can provide only reasonable, not absolute, assurance that it will detect or uncover failures within the Company to disclose material information otherwise required to be set forth in our periodic reports.

Our management has conducted an evaluation, with the participation of our Chief Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures as of the end of the period covered by this Report as required by paragraph (b) of Rules 13a-15 and 15d-15 under the Exchange Act. Based on our evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures were effective, as of the end of the period covered by this Report, to provide reasonable assurance that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the applicable rules and forms, and that it is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.

Changes in Internal Control over Financial Reporting

There have been no changes in our internal control over financial reporting during the quarter ended March 31, 2023 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

From time to time, we may be involved in various legal actions, claims and proceedings arising in the ordinary course of business. As of March 31, 2023, we were not involved in any material legal actions, claims or proceedings.

Item 1A. Risk Factors

There are no material changes from the risk factors set forth under Item 1A. “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2022, filed with the SEC on February 24, 2023.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

There were no sales of unregistered equity securities during the quarter ended March 31, 2023.

The following table provides information about our repurchases of Common Shares of beneficial interest (“Common Shares”) during the quarter ended March 31, 2023:


Period	Total number of shares purchased		Average price paid per share		Total number of shares purchased as part of publicly announced plans or programs (1)		Amount available for future share repurchases under the plans or programs (1)
	(in thousands, except average price paid per share)
January 1, 2023 – January 31, 2023		22	$	12.63		22	$	101,517
February 1, 2023 –February 28, 2023		—	$	—		—	$	101,517
March 1, 2023 – March 31, 2023		616	$	11.80		616	$	94,244

(1)

On October 24, 2022, the Company’s board of trustees approved an increase to the Company’s common share repurchase authorization from $400 million to $500 million (the “share repurchase program”). The share repurchase program does not require the Company to purchase a specific number of Common Shares, and the timing and amount of any Common Shares repurchased are based on market conditions and other factors, including price, regulatory requirements and capital availability. Common share repurchases may be effected through privately negotiated transactions or open market purchases, including pursuant to a trading plan implemented pursuant to Rule 10b5-1 of the Exchange Act. The share repurchase program does not have an expiration date but may be suspended, modified or discontinued at any time without prior notice.

Item 3. Defaults Upon Senior Securities

None

Item 4. Mine Safety Disclosures

Not applicable

Item 5. Other Information

None

Item 6. Exhibits


		Incorporated by Reference from the Below-Listed Form (Each Filed under SEC File Number 001-34416)
Exhibit No.	Exhibit Description	Form	Filing Date

3.1	Declaration of Trust of PennyMac Mortgage Investment Trust, as amended and restated.	10-Q	November 6, 2009

3.2	Second Amended and Restated Bylaws of PennyMac Mortgage Investment Trust	8-K	March 16, 2018

3.3	Articles Supplementary classifying and designating the 8.125% Series A Fixed-to-Floating Rate Cumulative Redeemable Preferred Shares of Beneficial Interest.	8-A	March 7, 2017

3.4	Articles Supplementary classifying and designating the 8.00% Series B Fixed-to-Floating Rate Cumulative Redeemable Preferred Shares of Beneficial Interest.	8-A	June 30, 2017

3.5	Articles Supplementary classifying and designating the 6.75% Series C Cumulative Redeemable Preferred Shares of Beneficial Interest.	8-A	August 20, 2021

10.1	Omnibus Assignment, Assumption and Amendment, dated March 16, 2023, among Credit Suisse First Boston Mortgage Capital LLC, Credit Suisse AG, Cayman Islands Branch, Alpine Securitization LTD, Atlas Securitized Products, L.P., Atlas Securitized Products Investments 3, L.P., Atlas Securitized Products Funding 2, L.P., and Nexera Holding LLC, PennyMac Corp., PennyMac Holdings, LLC, PennyMac Operating Partnership, L.P., PMC REO Financing Trust, PMC REO Trust 2015-1, and PennyMac Mortgage Investment Trust.	8-K	March 17, 2023

10.2	Joint Assignment, Assumption and Amendment No. 7 to the Series 2017-VF1 Repurchase Agreement, Amendment No. 1 to the Series 2017-VF1 Pricing Side Letter, Amendment No. 3 to the Series 2017-VF1 Side Letter Agreement and Amendment No. 1 to the VFN Repo Guaranty, dated March 16, 2023, among Credit Suisse First Boston Mortgage Capital LLC, Credit Suisse AG, Cayman Islands Branch, Citibank, N.A., Atlas Securitized Products, L.P., Atlas Securitized Products Investments 3, L.P., Atlas Securitized Products Funding 2, L.P., Nexera Holding LLC, PennyMac Corp., and PennyMac Mortgage Investment Trust.	8-K	March 17, 2023

10.3	Joint Assignment, Assumption and Amendment No. 2 to Advance PC Repurchase Agreement, No. 2 to Amended and Restated Pricing Side Letter and Amendment No. 1 to the Advance PC Repo Guaranty, dated March 16, 2023, among Credit Suisse First Boston Mortgage Capital LLC, Credit Suisse AG, Cayman Islands Branch, Atlas Securitized Products, L.P., Nexera Holding LLC, PennyMac Corp., and PennyMac Mortgage Investment Trust.	8-K	March 17, 2023

10.4†	Separation Agreement and General Release date as of March 21, 2023.	8-K/A	March 24, 2023

31.1	Certification of David A. Spector pursuant to Rule 13a-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.	*

31.2	Certification of Daniel S. Perotti pursuant to Rule 13a-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.	*

32.1**	Certification of David A. Spector pursuant to Rule 13a-14(b) and 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.	**

32.2**	Certification of Daniel S. Perotti pursuant to Rule 13a-14(b) and 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.	**

101	Interactive data files pursuant to Rule 405 of Regulation S-T: (i) the Consolidated Balance Sheets as of March 31, 2023 and December 31, 2022 (ii) the Consolidated Statements of Operation for the quarter ended March 31, 2023 and March 31, 2022, (iii) the Consolidated Statements of Changes in Stockholders’	*


		Equity for the quarter ended March 31, 2023 and March 31, 2022, (iv) the Consolidated Statements of Cash Flows for the quarter ended March 31, 2023 and March 31, 2022 and (v) the Notes to the Consolidated Financial Statements.
101.INS		Inline XBRL Instance Document – the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.
101.SCH		Inline XBRL Taxonomy Extension Schema Document
101.CAL		Inline XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF		Inline XBRL Taxonomy Extension Definition Linkbase Document
101.LAB		Inline XBRL Taxonomy Extension Label Linkbase Document
101.PRE		Inline XBRL Taxonomy Extension Presentation Linkbase Document
104		Cover Page Interactive Data File (embedded within the Inline XBRL document)

* Filed herewith.

† Indicates management contract or compensatory plan or arrangement.

** The certifications attached hereto as Exhibits 32.1 and 32.2 are furnished to the SEC pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and shall not be deemed filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, nor shall it be deemed incorporated by reference in any filing under the Securities Act of 1933, as amended, except as shall be expressly set forth by specific reference in such filing.

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.


	Pennymac Mortgage Investment Trust (Registrant)

Dated: May 4, 2023	By:	/s/ David A. Spector
		David A. Spector
		Chairman and Chief Executive Officer (Principal Executive Officer)

Dated: May 4, 2023	By:	/s/ Daniel S. Perotti
		Daniel S. Perotti
		Senior Managing Director and Chief Financial Officer (Principal Financial Officer)