PennyMac Mortgage Investment Trust

Our net investment income is summarized below:

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:

Following is a summary of our loan servicing fees:

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 and reconveyance fees, and incentive fees received form the Agencies for loss mitigation activities as well as fees charged to correspondent lenders for loans repaid by the borrower shortly after purchase.

The change in contractually-specified fees during the quarter and six months ended June 30, 2024, as compared to the same periods in 2023, is due primarily to a slight reduction in our MSR servicing portfolio, reflecting the shift of a portion of our loan sales from third party sales with servicing rights retained to sales to PLS which include the transfer of servicing rights to PLS.

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 fair value. We endeavor to moderate the effects of changes in fair value attributable to changes in fair value inputs (market conditions) primarily by entering into derivatives transactions.

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

Changes in fair value due to changes in valuation inputs used in our valuation model during the quarter and six months ended June 30, 2024, reflect the effects of expectations for slower future prepayments of the underlying loans and higher earnings on custodial balances as a result of interest rates increasing.

The decrease in loan recapture income from PFSI reflects the decrease in refinancing activity in our MSR portfolio during the quarter and six months ended June 30, 2024, as compared to the same periods in 2023. 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.

Hedging results reflect valuation losses in hedges against interest rates during the quarter and six months ended June 30, 2024, which is attributable to interest rates increasing as well as the effects of interest rate volatility and elevated hedge costs on the fair value of the hedging instruments.

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.

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:

(1)

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 income.

Following is a summary of characteristics of our MSR servicing portfolio as of June 30, 2024:

(1)

Loan-to-value.

(2)

Represents MSRs on conventional loans sold to private investors.

Net Gains on Loans Acquired for Sale

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

The changes in gain on loans acquired for sale during the quarter and six months ended June 30, 2024, as compared to the same periods in 2023, reflect the effect of a reduction in our liability for representations and warranties and increased gain on sale margins for mortgage loans partially offset by reduced volume of sales to nonaffiliates.

Non-cash elements of gain on sale of loans:

Interest Rate Lock Commitments

Our Net gains on loans acquired for sale include 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 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 Net gains on loans acquired for sale. The fair values of our IRLCs becomes 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 income.

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.

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.

We recorded a provision for losses relating to representations and warranties relating to current loan sales of $204,000 and $458,000, respectively, for the quarter and six months ended June 30, 2024 and $738,000 and $1.7 million for the quarter and six months ended June 30, 2023, respectively. The decrease in the provision relating to current loan sales reflects the decrease of our loan sales volume to nonaffiliates and reduced default and loss-given default assumptions.

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

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 outstanding season, 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 sellers. 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 and adjust the liability for estimated losses in excess of the recorded liability.

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 income 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 $6.5 million and $13.4 million reduction in liability for representations and warranties during the quarter and six months ended June 30, 2024, respectively, 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 $2.9 million and $3.6 million reductions in the liability for representations and warranties during the quarter and six months ended June 30, 2023, respectively, 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.

Net (Losses) Gains on Investments and Financings

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

The decrease in net gains on investments for the quarter and six months ended June 30, 2024, as compared to the same periods in 2023, was primarily due to losses from our investments in MBS as interest rates increased and reduced gains in our CRT arrangements as spreads did not tighten to the same degree.

During the quarter and six months ended June 30, 2024, we recognized net valuation losses of $34.9 million and $73.1 million, respectively, as compared to net valuation losses of $61.6 million and net valuation gains of $16.6 million for the same periods in 2023.

The reduced losses recognized during the quarter ended June 30, 2024 reflect mixed interest rate performance at the end of the quarter as compared to an increase in interest rates during the quarter ended June 30, 2023. The losses recognized during the six month ended June 30, 2024, reflect more significant increases in interest rates and mortgage and credit spreads during the period as compared to the same period in 2023.

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 combined net valuation loss of $1.4 million and valuation gain of $4.8 million during the quarter and six months ended June 30, 2024, as compared to a net valuation loss of $459,000 and valuation gain of $398,000 during the quarter and six months ended June 30, 2023. The net loss during the quarter ended June 30, 2024, reflect the effect of interest rate performance during the quarter ended June 30, 2024. The net gain during the six months ended June 30, 2024 reflect the gains on the asset-backed financing exceeding the losses on the underlying assets as the result of credit spreads tightening (a decrease in the interest rate premium demanded by investors for instruments over those that are considered “risk free”), on our net investments secured by jumbo loans and investment properties.

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

(1)

Deposits securing credit risk transfer strip liabilities also secure $17.0 million and $46.7 million in CRT strip and CRT derivative liabilities at June 30, 2024 and December 31, 2023, respectively.

The performance of our investments in CRT arrangements during the quarter and six months ended June 30, 2024 and 2023 reflect credit spread tightening for CRT securities in the credit markets.

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 and six months ended June 30, 2024, as compared to the same periods in 2023, reflects a decrease in our purchases of loans for sale to nonaffiliates.

Net Interest Expense

Net interest expense is summarized below:

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

The decrease in net interest expense during the quarter and six months ended June 30, 2024, as compared to the same periods in 2023, is due to the increase in earnings from placement fees relating to custodial funds managed for borrowers and investors.