PennyMac Mortgage Investment Trust

Results of Operations

Business Trends

Due to ongoing inflationary pressures, over the last several quarters, the U.S. Federal Reserve has maintained the federal funds rate at its highest level since 2007 and has continued to reduce the federal government’s overall holdings of Treasury and mortgage-backed securities. Elevated interest rates are expected to constrain growth in the size of the mortgage origination market from $1.5 trillion in 2023 to an estimated $1.7 trillion in 2024 according to mortgage lending industry economists.

The limited size of the mortgage origination market and sustained interest rates at higher levels continue to impact our mortgage production activities. Higher interest rates have also increased the costs of floating rate borrowings, increased interest income from placement fees we receive relating to custodial funds that we manage on deposits and loans held for sale and reduced prepayment speeds in our mortgage servicing portfolio as compared to the same time period in the prior year. We have also continued our sales of conventional loans to PLS during the six months ended June 30, 2024, and we intend to continue to sell a portion of our conventional loans to PLS throughout the remainder of 2024 at a reduce rate to optimize our use and allocation of capital.

Elevated 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 our CRT arrangements or subordinate credit-linked notes and increase losses from our representations and warranties. However, many of the loans underlying our assets have favorable credit characteristics including low loan-to-value ratios, which are likely to help moderate the negative effects of credit performance in an economic downturn.

The following is a summary of our key performance measures:

(1)

Includes net gains on sales of loans and loan origination fees.

Our consolidated net income increased by $810,000 during the quarter ended June 30, 2024, as compared to the quarter ended June 30, 2023 reflecting decreased losses on MBS and a reduced provision for income taxes offset by reduced CRT-related investment gains:

The decrease in the quarterly pretax results is summarized below:

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Our credit sensitive strategies segment recognized a $43.8 million decrease in net gains on our CRT arrangements as market credit spreads tightened less compared to the same period in 2023.

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Our interest rate sensitive strategies segment recognized a $35.2 million decrease in valuation losses on MBS and hedging derivatives caused by a smaller increase in interest rates over the quarter and a $9.1 million decrease in net interest expense in our interest rate sensitive strategies segment, offset by a $12.3 million decrease in net servicing fees resulting from increased net MSR valuation losses compared to the quarter ended June 30, 2023.

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Our correspondent production segment recognized a $7.7 million increase in our gains on sale of loans during the quarter ended June 30, 2024, reflecting a reduction of our liability for representations and warranties 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, and improved gain on sale margins and increased gain on sale margins for mortgage loans partially offset by reduced volume of sales to nonaffiliates.

Our consolidated net income decreased $12.3 million during the six months ended June 30, 2024, as compared to the six months ended June 30, 2023 reflecting losses on MBS and reduced CRT-related investment gains, partially offset by increased net servicing fees, net gains on sales of loans and benefit from income taxes:

The decrease in the six months pretax results is summarized below

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Our credit sensitive strategies segment recognized a $38.5 million decrease in net gains on our CRT arrangements as market credit spreads tightened less compared to the same period in 2023.

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Our interest rate sensitive strategies segment recognized $59.2 million in losses on MBS and hedging derivatives caused by an increase in market interest rates and a $57.1 million increase in net servicing fees reflecting reduced net valuation losses on MSRs, as well as a $11.5 million decrease in net interest expense compared to the six months ended June 30, 2023.

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Our correspondent production segment recognized a $15.8 million increase in our gains on sales of loans during the six months ended June 30, 2024, reflecting a reduction of our liability for representations and warranties 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, and improved gain on sale margins.