PennyMac Mortgage Investment Trust

Results of Operations

Business Trends

The U.S. Federal Reserve has begun to reduce the federal funds rate from its highest level since 2007 as inflationary pressures have abated, and longer term interest rates have declined slightly from their most elevated levels in recent years. Elevated interest rates have constrained growth in the size of the mortgage origination market from $1.5 trillion in 2023 to an estimated $1.7 trillion in 2024, but forecasted declining interest rates are projected to increased the refinancing activity and are projected to drive the origination market higher to $2.3 trillion in 2025, according to mortgage origination economists.

Declining interest rates and increasing opportunity for refinancing in recent periods have driven increased mortgage production activity in the most recent quarter, and also led to increasing prepayment speeds on our mortgage servicing portfolio from the historically slow prepayment speeds experienced earlier in the year. Higher interest rate levels have increased the costs of floating rate borrowings and interest income from placement fees we receive relating to custodial funds that we manage on deposits and loans held for sale as compared to the same period in the prior year, although we would expect these to begin declining as well as if the Federal Reserve reduces the federal funds rate as expected. We have also continued our sales of conventional loans to PLS during the nine months ended September 30, 2024, and we intend to continue to sell a portion of our conventional loans to PLS throughout the remainder of 2024 to optimize our use and allocation of capital.

The recent period of inflationary pressure and 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.

We are aggregating Agency eligible non-owner occupied loans and evaluating investment opportunities in the private label securitization market.

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 decreased by $20.0 million and $32.3 million during the quarter and nine months ended September 30, 2024, as compared to the quarter and nine months ended September 30, 2023 reflecting the fair value performance of our MSRs and reduced CRT-related investment gains, offset by increased gains on MBS and benefits from income taxes.

The decreases in the quarterly and nine months pretax results are summarized below:

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Our credit sensitive strategies segment recognized a $9.3 million and $47.8 million decrease in net gains on our CRT arrangements during the quarter and nine months ended September 30, 2024, respectively, as market credit spreads tightened less compared to the same periods in 2023.

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Our interest rate sensitive strategies segment recognized a $366.4 million and $309.3 million decrease in net servicing fees during the quarter and nine months ended September 30, 2024, respectively, resulting from increased net MSR valuation losses compared to the quarter and nine months ended September 30, 2023, caused by a decrease in market interest rates during the periods in 2024. These decreases were partially offset by a $277.7 million and $218.4 million increase in valuation gains on MBS and hedging derivatives during the quarter and nine months ended September 30, 2024, respectively, as well as a $20.1 million and $31.6 million decrease in net interest expense.

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Our correspondent production segment recognized a $6.5 million and $22.3 million increase in our net gains on sales of loans during the quarter and nine months ended September 30, 2024, respectively, reflecting increased gain on sale margins for mortgage loans and 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.