Q2 2020 PennyMac Mortgage Investment Trust Earnings Call (Pre-recorded)
Mortgage investment Trust.
The slides that accompany this discussion are available from Pennymac mortgage investment trusts website at www Dot Pennymac Dash Riet dotcom.
Before we begin let me remind you that our discussion contains forward looking statements that are subject to the risks identified on slide two that could cause our actual results to differ materially.
Thank you.
Now I'd like to introduce David Spector, PMT is president and Chief Executive Officer, who will discuss the company's second quarter results.
Thank you Isaac.
For the second quarter 2020, PMT reported net income attributable to common shareholders, a $458.4 million or $4.51 per common share.
Our record earnings this quarter reflect record correspondent production segment results and the partial recovery in the fair value of our crts investments from depressed levels at March 31, 2020, as a result of market dislocations related to covert 19.
These earnings were partially offset by fair value losses on MSR ours, driven by higher than anticipated prepayments during the quarter and expectations for higher prepayments in the future driven by lower rates.
Interest rate hedges also recorded at fair value losses, driven by elevated hedge costs and fair value losses on options used to hedge MSR as volatility decreased by June thirtyth.
PMT reports results through four segments credit sensitive strategies, which contributed $458.8 million in pre tax income interest rate sensitive strategies, which contributed $117.5 million in pre tax loss.
Correspondent production, which contributed $139.6 million in pre tax income and corporate with a pre tax loss of $12.8 million.
As previously announced PMT paid a dividend of 40 cents per share for the quarter.
Book value per common share was $19 in 39 cents at June Thirtyth up from $15 in 16 cents at March 30, Onest 2020.
PMT is capital deployment this quarter continued to be driven by its conventional loan production volumes, which totaled $18.9 billion, an unpaid principal balance up 17% from the prior quarter and up 76% from the second quarter 2019.
New MSR investments for the quarter totaled $203 million and we delivered to Fannie Mae CRT eligible loans of $1.8 billion in new PB, resulting in a firm commitment to purchase $48 million of new CRT Securities.
In May and June we repurchased approximately 566000 shares of PMT at a weighted average price of $13 in 36 cents at a cost of $7.6 million.
Now, let's turn to slide four and discuss economic developments affecting our business.
Challenges in the US economy reflect the impact of Coca 19 has a recent resurgence of the virus weighs on states plans to reopened.
The opening plans, including a return to physical work locations are now on pause in over 80% of the country and economic recovery is expected to be more gradual than previously forecast.
According to the Bureau of Labor statistics, the unemployment rate reached a recent high of 14.7% at April Thirtyth.
While leading economists forecast a gradual recovery to 6.9% by the end of 2021.
New request for mortgage forbearance have decreased substantially since March and April and borrowers are beginning to exit forbearance plans is that continue or resume making payments or obtain assistance through government supported loan modification programs.
And recently, despite relatively tight levels of supply economists have begun to forecast home price decreases in metropolitan areas with heavily affected economies.
Fiscal stimulus benefits from the federal government have begun to roll off with an extension or further stimulus remaining uncertain as Congress is yet to resolve differences on several issues, including the jobless benefit liability protections for business eight to state and local governments and direct payments to Americans.
Liquidity in the financial markets has largely rebounded since March and April hub, However markets continue to reflect uncertainty related to the long term impacts of cobot 19.
The improved liquidity during May and June resulted in a significant recovery in the fair value of credit related assets and in particular government sponsored enterprise credit risk transfer investments that gains in value.
Now, let's turn to slide five to discuss PMT is opportunity in the mortgage origination market.
Economic forecast for total originations in 2020 have increased to nearly three trillion dollars the highest level since 2003 and forecast for total originations in 2021 have recently increased to 2.3 trillion dollars similar to the strong market we saw in 2019.
These forecasts are supported by all time, low mortgage rates, which continue to drive robust refinance and purchase mortgage demand.
Forecast for purchase mortgage originations have also increased recently as a result of higher demand.
Putting in suburban areas. Additionally, sales of previously owned homes posted their largest ever monthly increase in June and sales of new homes have been above consensus expectations.
Gain on sale margins remain elevated more specifically in the direct lending channels driven by capacity constraints.
While corresponding gain on sale margins of decrease from record levels seen early in the quarter as other market participants have returned.
And as a result of its capital structure risk management disciplines, and significant technology and infrastructure investments made by PFS sign in recent years PMT was able to successfully capitalize on the market opportunity and continue to acquire fund and settle loans throughout the crisis.
Now, let's turn to slide six to discuss PMT is investment activity by strategy during the quarter.
On slide six we detailed investment activity for each of Pmts investment strategies during the second quarter.
PMT is investment opportunities are driven by conventional correspondent production business.
CRT assets increased due to fair value gains of $453 million and decrease from substantial runoff due to prepayment activity, including a significant reduction in the unfunded commitment related to CRT six.
New investments in CRT were $48 million as we wind down the program with Fannie Mae.
Pmts distressed loan and real estate owned portfolio declined further to $52 million in fair value at the end of second quarter from $60 million at March 30 Onest.
This portfolios primarily comprised of Oreo.
New MSR any assess investments primarily source in the securitization of $18.9 billion in new PBF conventional loan production.
Were $204 million and net of runoff increased $139 million.
As a result of the decline in interest rates during the quarter. The fair value of MSR DSS investments declined by $112 million, partially offsetting the net new investments.
Agency MBS are held by PMT as part of the comprehensive strategy designed to mitigate the interest rate sensitivity of the MSR in DSS assets.
The reduction of agency MBS in the quarter reflects a rebalancing of the hedge in favor of MBS forwards and does not reflect a significant change in invested equity.
Overall, the net change in PMT has invested equity was a decrease of approximately $60 million in the second quarter.
Now, let's turn to slide seven and discuss the run rate return potential from PMT is investment strategies.
PMT has run rate return potential represents the average annualized return in quarterly earnings potential PMT expects to earn on average each quarter from its strategies over the next four quarters.
Our expectation for PMT is investment strategies is an average diluted EPS per quarter of 65 cents, which should result in an annualized return on common equity of approximately 13%.
PMT is equity allocation related to credit sensitive strategies is expected to average 37% with a run rate annualized potential return on equity of 16.1%.
Our credit sensitive strategies, primarily consist of our investments in CRT with a return potential that has decreased from previous estimates due to the increase in fair value in the second quarter, which decreased our go forward expected rates of return.
The CRT markets continue to reflect uncertainty related to covert 19 and its associated losses.
Equity allocated to interest rate sensitive strategies is expected to average 33% with an annualized return on equity of 11.1%.
We consider the results in this segment in aggregate has MBS and hedge positions are primarily used to moderate the impact of interest rate volatility on MSR NSS returns.
Our expectations reflect higher return potential MSR ours, driven by a reduction in the expected impact on servicing from cobot 19.
Equity allocated to the correspondent production segment is expected to average 14% within annualized return on equity of approximately 38%.
This is lower than prior projections as conventional margins have returned to normalized levels faster than originally anticipated.
That concludes my presentation and I now like to turn the discussion over to Vandy far touch PMT is chief investment Officer, who will review our mortgage investment activities.
Thank you David.
Let's begin on slide nine for a look at our correspondent production highlights correspondent acquisitions by PMT in the second quarter totaled $29.9 billion and you PB up slightly from the prior quarter and up 40% year over year.
63% of our acquisitions were conventional loans and 37% more government loans conventional correspondent acquisitions totaled $18.9 billion and you PB up 17% from the prior quarter and up 76% from a second quarter of 2019.
Government loan acquisitions in the quarter for which PMT earnings of sourcing free from Pennymac financial totaled $11 billion and you'd be down 19% from the prior quarter and up 4% from the second quarter of 2019.
Conventional lock volume was a record $24.8 billion and you PB up 30% from the prior quarter at up 96% from the second quarter of 2019.
Im excited to announce that out as of July 30, Onest approximately 80% of Pmts correspondent sellers are now on P. three new correspondent lending portal introduced by Pennymac financial our manager and service provider during the second quarter.
This portal Leverages Pemex proprietary technology, and Ellie Mae's next generation encompass digital lending platform for a best in class experience.
Importantly, Pete three seamlessly integrates with Panamax proprietary loan bidding system that instantly prices loans for unique characteristics and required returns.
We believe that this new system will improve the overall customer experience, while also increasing the speed at which we can deploy updates or system enhancements and a rapidly changing mortgage market environment.
Higher margin best efforts commitments increased to 38% of lock volume in the second quarter from 23% in the prior quarter enabled by our strong capital position and our managers expertise to efficiently hedge production pipelines across different market environments.
Looking at July volumes remain elevated total correspondent loan acquisitions for the month were $12.7 billion and you PB, while interest rate lock commitments were a record $16 billion and you PB.
Now, let's turn to slide tenant discuss pmts investments in GFC credit risk transfer.
In alignment with the wind down of investments and CRT PMT delivered $1.8 billion and you PB of CRT eligible loans to Fannie Mae in the second quarter.
On a pro forma basis at June Thirtyth PMT is outstanding CRT investments totaled $3.1 billion essentially unchanged from the prior quarter as fair value gains were offset by higher prepayments and a reduction in the expected face amount of firm commitment to purchase CRT Securities. The 60, plus day delinquency rate was seven.
0.3% up sharply from 0.3% in the prior quarter as a result of hardships related to cobot 19.
The expected increase in losses has yet to materialize in realized losses in the second quarter totaled $2.7 million, bringing cumulative lifetime losses to $13 million.
Do you PB of the loans underlying PMT CRT agreements was 80 and a half billion dollars.
Now, let's turn to slide 11 to examine how gains on PMPM CRT investments differ from CASM Stacker Securities.
PMT CRT investments recorded $453 million in fair value gains in the second quarter, representing a significant recovery of the fair value loss in the first quarter, but gains were lower relative to the more liquid tranches of comparable CASM Stacker securities.
Although PMT is GRC CRT investments are similar to CASM stacker, the investments of structural differences that yield different results. The structure of PMT is fifth CRT transaction as shown on the left while comparable cash transactions shown on the right.
PMT owns the entirety of the loss position up to 4%, including the true first loss position or subordinate traunch labeled be too.
This is the first tranche to absorb losses and has the most price sensitive and an adverse economic environment.
Further the credit announcement on PMT subordinate tranche may differ from the credit enhancement on the subordinate tranche of a similar Fannie Mae cast transaction as shown in the example.
Additionally, as noted in the diagram, the first loss tranches retained by Fannie Mae and Freddie Mac in respective CASM stacker transactions, which makes comparison to the fair market value of PMT securities difficult.
Now, let's turn to slide 12 to discuss how prepayments allow PMT to recoup CRT fair value losses.
PMT avoids any actual losses and expects to recognize fair value gains on CRT investments when the underlying loans payoff.
Since principles received at par or for CRT, six that commitment amount as reduced.
The reporting conventions used and CRT valuations create a two month lag in the reporting of prepayments on CRT investments.
Therefore, the high level of prepayments in May and June will be reflected in the valuation at September Thirtyth 2020.
Now, let's turn to slide 13 to discuss trends in MSR NSS investments.
Despite elevated prepayment activity during the quarter Pmts MSR assets increased a $1.2 billion driven by investment growth from strong conventional production volumes.
New MSR investments totaled $203 million, the PB of Pmts MSR portfolio totaled $145.3 billion at June Thirtyth up from $141.8 billion at March 30 Onest.
PMT CSS investments, resulting from bulk mini bulk and flow MSR acquisitions by Pennymac financial from 2013 to 2015 decreased to $151.2 million at June Thirtyth, driven by repayments of the underlying loans.
The PV associated with EPS us investments totaled $18.2 billion at June Thirtyth down from $19.2 billion at March 30 Onest.
Now, let's turn to slide 14 to discuss the performance from the interest rate sensitive strategies segment in the second quarter.
PMT seeks to manage interest rate exposure on a global basis, recognizing interest rate sensitivities across its investment strategies.
PMT has a history of successfully hedging to offset the majority of the interest rate risk inherent in mortgage servicing rights.
In the second quarter MSR fair value decreased due to expectations for increased prepayment activity in the future related to lower interest rates as well as higher than modeled actual prepayments.
Interest rate hedges reported a net loss, while we maintained our hedge discipline throughout the market turmoil elevated volatility early in the second quarter drove the cost of options to near record highs.
Subsequently volatility decreased by June Thirtyth, resulting in fair value losses on options.
Year to date through June Thirtyth, MSR, yes, fair value losses totaled $690.1 million more than offset by gains and fair value of agency MBS and interest rate hedges totaling $825.3 million.
This reflects pmcs disciplined focus on capital preservation and risk management to protect the value of the MSR SS assets across bearing interest rate environments.
Now I'd like to turn the discussion over to Andy chain PMT is chief Financial Officer to review the second quarter's financial results.
Thank you have Andy let's turn to slide 16, and discuss the second quarter results and return contributions by strategy.
PMT is activities in the second quarter reflected a net income attributable to common shareholders.