Q4 2021 PennyMac Mortgage Investment Trust Earnings Call (Pre-Recorded)
Organic asset creation remains a competitive advantage for PMT relative to other mortgage Reits.
Speaker 1: 89.
Speaker 2: Combined with the platform and management team provided by PFSI, we believe PMT is uniquely positioned to capitalize on opportunities as they arise and evolve.
Combined with the platform and management team provided by PFS Si we believe PMT is uniquely positioned to capitalize on opportunities as they arise and evolve.
An example of this is our recent success aggregating a securitizing investor loans, while investing in the subordinate tranches of the resulting bonds.
Speaker 2: An example of this is our recent success aggregating and securitizing investor loans while investing in the subordinate tranches of the resulting bond.
Speaker 2: In fact, over the last several months, we have invested in subordinate tranches of investor loan securitizations with a total UPB of over $1.5 billion.
In fact over the last several months, we have invested in subordinate tranches of investor loan securitization with a total <unk> of over $1 5 billion.
Speaker 2: Importantly, the two most recent transactions we completed in the quarter were securitized by PMT, and we expect to be a programmatic issue of investor and second home securitizations throughout 2022.
Importantly, the two most recent transactions we completed in the quarter were securitized by PMT and we expect to be a programmatic issue of investors second home securitization throughout 2022.
As we look ahead, we see additional opportunities for private label securitization and subsequent investments for PMT bolstered by recent GSE fee increases on certain loans as mandated by the FHFA.
Speaker 2: As we look ahead, we see additional opportunities for private label securitizations and subsequent investments for PMT bolstered by recent GSE fee increases on certain loans as mandated by the FHFA. The FHFA is a private label securitizations and subsequent investments for PMT bolstered by recent GSE fee increases on certain loans as mandated by recent GSE fee increases on
Loan level price adjustments for second homes in certain high balance loans have provided incentives for originators to sell these loans through the correspondent channel for securitization.
Speaker 2: Loan level price adjustments for second homes and certain high balance loans have provided incentives for originators to sell these loans through the correspondent channel for securitization, particularly to scaled aggregators like PMT rather than directly to Fannie Mae or Freddie Maine.
Particularly to scale, the aggregators like PMT, rather than directly to Fannie Mae or Freddie Mac.
Speaker 2: Turning to CRT, PMT is a leader in lender risk share transactions with nearly $120 billion in the U.P.B. of loans sold to Fannie Mae from 2015 to 2020.
Turning to CRT PMT as a leader in lender risk share transactions with nearly $120 billion in <unk> of loans sold to Fannie Mae from 2015 to 2020, while we are not currently delivering loans into CRT transactions were actively engaged in discussions the gse's regarding the <unk>.
Speaker 2: While we are not currently delivering loans into CRT transactions, we are actively engaged in discussions with the GSEs regarding the potential resumption of lender risk share investors.
Tetra resumption of lender risk share investments.
Speaker 2: We believe we are well positioned to lead broadly on this effort given our history, platform and expertise.
We believe we are well positioned to lead broadly on this effort given our history platform and expertise.
Speaker 2: Because of the greater capital relief CRT provides the GSEs under the amended Enterprise Regulatory Capital Framework and the additional private capital CRT provides to the housing ecosystem, we remain optimistic for the future of lender risk share.
Because of the greater capital relief CRT provides the gse's under the amended enterprise regulatory capital framework and the additional private capital CRT provides to the housing ecosystem, we remain optimistic for the future of lender risk share.
Speaker 2: Most importantly, the alignment of interest as acquirer and servicer of the loans should be compelling for the GS.
Most importantly, the alignment of interests as acquirer and servicer of the loans should be compelling for the gse's given we can work directly with our borrowers in times of hardship.
Speaker 2: Given we can work directly with our borrowers in times of hardship.
Speaker 2: On slide 8, we illustrate the run rate potential from PMT's investment strategy.
On slide eight we illustrate the run rate potential from Pmt's investment strategies, which represents the average annualized return in quarterly earnings potential that PMT expects over the next four quarters.
Speaker 2: which represents the average annualized return and quarterly earnings potential that PMT expects over the next four quarters.
In total we expect the quarterly run rate for PMT strategies to average 37 per share or seven 7% annualized return on equity.
Speaker 2: In total, we expect the quarterly run rate for PMT strategies to average 37 cents per share, or 7.7% annualized return on F.
Speaker 2: This runway potential reflects performance expectations in the highly competitive transitioning mortgage market.
This run rate potential reflects performance expectations in the highly competitive transitioning mortgage market.
Speaker 2: In our credit-sensitive strategies, CRT returns reflect credit spreads that have tightened over time.
And our credit sensitive strategies CRT returns reflect credit spreads that have tightened over time.
Speaker 2: In addition, we expect to increase investments in non-agency subordinate MBS at attractive returns through private-label securitization.
In addition, we expect to increase investments in non agency subordinate MBS at attractive returns through private label securitization.
In the interest rate sensitive strategies, we expect more consistent returns as prepayments speeds stabilize.
Speaker 2: In the interest rate sensitive strategies, we expect more consistent returns as prepayment speeds stabilize.
In correspondent production the expected returns reflect our view that significant levels of competition to acquire conventional loans will result in lower volumes and margins than we've experienced in recent quarters.
Speaker 2: In correspondent production, the expected returns reflect our view that significant levels of competition to acquire conventional loans will result in lower volumes and margins than we have experienced in recent quarters.
This analysis excludes potential contributions from opportunities under exploration, such as new investments in CRT or the introduction of new products other than investor loans.
Speaker 2: This analysis excludes potential contributions from opportunities under exploration, such as new investments in CRT or the introduction of new products other than investor loans.
Speaker 2: It is also important to note our forecast for PMT's taxable income and liquidity continues to support the common dividend at its current level of $0.47 per share over this period.
It is also important to note our forecast for Pmt's taxable income and liquidity continues to support the common dividend at its current level of <unk> 47 per share over this period.
Now I'd like to turn the call over to Vandy far Taj PMT senior managing director and Chief Investment Officer, who will discuss the drivers of Pmt's fourth quarter investment performance.
Speaker 2: Now I'd like to turn the call over to Vandy Fartaj, PMT Senior Managing Director and Chief Investment Officer, who will discuss the drivers of PMT's fourth quarter investment performance.
Thank you, David let's begin with highlights and our correspondent production segment.
Speaker 3: Thank you, David. Let's begin with highlights in our correspondent productions.
Speaker 3: Total correspondent acquisition volume in the quarter was $32.8 billion, down 25% from the prior quarter and down 42% from the fourth quarter of 2020.
Total correspondent acquisition volume in the quarter was $32 8 billion down 25% from the prior quarter and down 42% from the fourth quarter of 2020.
Speaker 3: 52% of PMT's acquisition volumes were conventional loans, down from 65% in the prior quarter.
52% of Pmt's acquisition volumes were conventional loans down from 65% in the prior quarter we.
Speaker 3: We maintained our leadership position in the channel as a result of our consistency, competitive pricing, and the operational excellence we continue to provide to our nearly 770 correspondents.
We maintained our leadership position in the channel as a result of our consistency competitive pricing and the operational excellence, we continue to provide to our nearly 770 correspondent sellers.
Conventional lock volume in the quarter was $14 7 billion down.
Speaker 3: Conventional lock volume in the quarter was $14.7 billion, down 50% from the prior quarter and down 63% year over year as we maintained our pricing discipline despite significant competition for conventional loans in a smaller origination market, including the GSC cash win.
Down 50% from the prior quarter and down 63% year over year as we maintained our pricing discipline. Despite significant competition for conventional loans and a smaller origination market, including the GSC cash window.
Speaker 3: PMT's correspondent production segment, pre-tax income as a percentage of interest rate law commitments, was three basis points, down from nine basis points in the prior quarter. The weighted average fulfillment fee rate in the fourth quarter was 12 basis points, down from 15 basis points in the prior quarter, reflecting discretionary reductions made by PFSI to facilitate successful loan acquisitions by PMS.
Pmt's correspondent production segment pretax income as a percentage of interest rate lock commitments was three basis points down from nine basis points from the prior quarter.
The weighted average fulfillment fee rate in the fourth quarter was 12 basis points down from 15 basis points in the prior quarter, reflecting discretionary reductions made by PFS side to facilitate successful loan acquisitions by PMT.
Acquisition volumes in January were $7 $6 billion in UBB unlocks were seven 5 billion in UBB.
Speaker 3: Acquisition volumes in January were $7.6 billion in UBB and LUX were $7.5 billion in UBB.
Pmt's interest rate sensitive strategies consist of our investments in MSR sourced from our correspondent production and investments in agency MBS non agency senior MBS and interest rate derivatives with offsetting interest rate exposure.
Speaker 3: PMT's interest rate sensitive strategies consist of our investments in MSR sourced from our correspondent production and investments in agency MBS non agency senior MBS and interest rate derivatives with offsetting interest rate exposure.
The fair value of Pmt's MSR investments at the end of the fourth quarter was $2 9 billion up slightly from $2 8 billion at the end of the prior quarter the.
Speaker 3: The fair value of PMT's MSR investments at the end of the fourth quarter was $2.9 billion, up slightly from $2.8 billion at the end of the prior quarter.
Speaker 3: The increase reflects newly originated MSRs resulting from conventional production volumes that more than offset fair value declines and prepayments.
The increase reflects newly originated MSR, resulting from conventional production volumes that more than offset fair value declines in prepayments. Similarly.
Speaker 3: Similarly, the UPB of loans underlying PMT's MSR investments totaled $216 billion, up from $212 billion.
Similarly, the <unk> of loans underlying pmt's MSR investments totaled $216 billion up from $212 billion.
Now I would like to discuss Pmt's credit sensitive strategies, which primarily consist of investments in CRT.
Speaker 3: Now I would like to discuss PMT's credit sensitive strategies, which primarily consist of investments Foreholder
Speaker 3: The total UPV of loans underlying our CRT investments as of December 31st was $30.8 billion, down 13% quarter over quarter.
The total <unk> of loans underlying our CRT investments as of December 31 was $30 8 billion down 13% quarter over quarter.
Fair value of our CRT investments at the end of the quarter was $1 7 billion.
Speaker 3: Fair value of our CRT investments at the end of the quarter was $1.7 billion, down from $1.9 billion at September 30th due to declines in asset value that resulted from prepayment.
Down from $1 9 billion.
Timber 30 due to declines in asset value that resulted from prepayments.
The 60, plus day delinquency rate underlying our CRT investments continue to improve and declined to three point or 6% from $3, 79% at September 30.
Speaker 3: The 60 plus day delinquency rate underlying our CRT investments continue to improve and decline to 3.06% from 3.79% at September 3.
And the outlook for our current investments in CRT remains favorable with a current weighted average loan to value ratio of approximately 64% at year and benefiting from the home price appreciation experienced in recent years.
Speaker 3: And the outlook for our current investments in CRT remains favorable with a current weighted average loan to value ratio of approximately 64% at year end, benefiting from the home price appreciation experience in recent years.
<unk> position as the manager and servicer of loans underlying Pmt's CRT investments gives PMT a strategic advantage since we can work directly with borrowers who have loans underlying pmt's investments that have experience hardships PFS saw uses a variety of loss mitigation strategies to assist delinquent borrowers and because.
Speaker 3: PFSI's position as the manager and servicer of loans underlying PMT CRT investments gives PMT a strategic advantage Since we can work directly with borrowers who have loans underlying PMT's investments that have experienced hardship
Speaker 3: PFSI uses a variety of loss mitigation strategies to assist the LYNQuENT borrowers, and because the scheduled loss transactions notably PMTT1 through three, and I'll street securities 2017 PM1 trigger a loss if a borrower becomes 180 days or more delinquent, we've deployed additional loss mitigation resources and continue to assist those borrowers.
The scheduled loss transactions, notably PMT, one through three and all Street Securities 2017 PM, one trigger a loss if a borrower becomes a 180 days or more delinquent we've deployed additional loss mitigation resources and continue to assist those borrowers at risk.
Speaker 3: With respect to PMTT one through three, which comprises 6% of the fair value of PMT's overall CRT investment, if all presently delinquent loans proceeded unmitigated to 180 days or more delinquent, additional losses would be approximately $11 million.
With respect to <unk>, one through three which comprises 6% of the fair value of Pmt's overall CRT investment if all presently delinquent loans proceeded on mitigated to a 180 days or more delinquent.
Additional losses would be approximately $11 million through the end of the quarter losses to date totaled $13 million.
Speaker 3: through the end of the quarter, losses to date totaled $13 million.
Moving on to our streets Securities 2017 PM, one which COVID-19% of the total fair value of Pmt's CRT investments such losses will become reverse credit events, if the payment status as reported as current after a forbearance period due to COVID-19.
Speaker 3: Moving on to L Street's Securities 2017 PM1, which COVID-19% of the total fair value of PMT's CRT investment, such losses will become reverse credit events if the payment status is reported as current after a four-bearance period due to COVID-19.
PMT recorded $17 million and net loss was reversed in the fourth quarter is $19 million of losses reversed more than offset the $2 million in additional realized losses.
Speaker 3: PMT recorded $17 million in net losses reversed in the fourth quarter as $19 million of losses reversed, more than offset the $2 million in additional realized losses.
We estimate that an additional $18 million of these losses were eligible for reversal as of December 31.
Speaker 3: We estimate that an additional 18 million dollars of these losses were eligible for reversal as of December 31st subject to review by Fannie Mae and we expect this amount to continue to increase as additional borrowers exit forbearance and re-perform.
Subject to review by Fannie Mae and we expect this amount to continue to increase as additional borrowers exit forbearance and re perform.
Speaker 3: We estimate that only $17 million of the $48 million in losses to date had no potential for reversal. This market expectation of significant future loss reversals resulted in the fair value of L Street Securities 2017 PM1, exceeding its base amount by $12 million at the end of the quarter.
We estimate that only $17 million of the $48 million in losses to date had no potential for a reversal. This market expectation of significant future loss reversals resulted in the fair value of L Street Securities 2017 PM, one exceeding its face amount by $12 million at the end of the quarter.
As David mentioned earlier, we continue to invest in securitization collateralized by Investor loans during the quarter, we added $42 million in fair value of new investor loan securitization of investments and ended the year with $87 million of such investments.
Speaker 3: As David mentioned earlier, we continue to invest in securitizations collateralized by investor.
Speaker 3: During the quarter, we added 42 million dollars in fair value of new investor loan securitization investments and ended the year with 87 million dollars of such investment.
Speaker 3: In total, this year we have successfully deployed the runoff from elevated prepayments on CRT investments. And on slide seven, you can see $1.1 billion of net new investments in long-term mortgage assets offset by $1.1 billion in runoff from prepayments on CRT.
In total this year, we have successfully deployed the runoff from elevated prepayments on CRT investments and on slide seven you can see $1 $1 billion of net new investments in long term mortgage assets offset by $1 $1 billion of runoff from prepayments on CRT assets. Additionally, we are.
Speaker 3: Additionally, we opportunistically deployed $56.9 million to repurchase 3.1 million of PMT's common shares in 2021.
Opportunistically deployed $56 $9 million to repurchase $3 1 million of Pmt's common shares in 2021.
Under our current program capital remains available for repurchases at attractive price levels now.
Speaker 3: Under our current program, capital remains available for repurchases at attractive price levels.
Speaker 3: Now I would like to turn the call over to Dan Perotti, our Senior Managing Director and Chief Financial Officer who will review our quarterly financial results.
Now I would like to turn the call over to Dan <unk>, Our senior managing director and Chief Financial Officer, who will review our quarterly financial results.
Thank you Andy PMT reports results through four segments credit sensitive strategies, which contributed $33 $2 million in pre tax income.
Speaker 3: Thank you, Vandy. PMT reports results through four segments credit sensitive strategies, which contributed $33.2 million in pre tax income, interest rate sensitive strategies, which contributed $43.2 million in pre tax loss, correspondent production, which contributed $4.6 million in pre tax income, and the corporate segment, which had a pre tax loss of $14 million.
Interest rate sensitive strategies, which contributed $43 $2 million in pre tax loss of correspondent production, which contributed $4 6 million and pre tax income in the corporate segment, which had a pretax loss of $14 million.
Speaker 3: The contribution from PMT's CRT investments totaled $31.3 million.
The contribution from Pmt's CRT investments totaled $31 3 million. This amount included $1 6 million and market driven value gains, reflecting the impact of slight credit spread tightening and elevated prepayment speeds as a reminder, faster prepayment speeds benefit pmt's CRT investments as payoffs of the associated loans reduced potential.
Speaker 3: This amount included $1.6 million in market-driven value gains, reflecting the impact of slight credit spread tightening and elevated prepayments.
Speaker 3: As a reminder, faster prepayment speeds benefit PMT CRT investments as payoffs of the associated loans reduce potential for realized losses.
For realized losses.
Speaker 3: Net gain on CRT investments also included $26.9 million in realized gains in carry, $14.5 million in net losses reversed, primarily related to L Street Securities 2017-PM1, which Vandy discussed earlier, $100,000 in interest income on cash deposits.
Net gain on CRT investments also included $26 $9 million in realized gains and carry $14 5 million and net losses reversed primarily related to L Street Securities 2017 to SPM, one, which vandy discussed earlier.
$1000 in interest income on cash deposits.
Speaker 3: $11.7 million of financing expenses, and $200,000 of expenses to assist certain borrowers in mitigating loan delinquencies they incurred as a result of dislocations arising from the COVID-19 pandemic.
$11 $7 million of financing expenses and $200000 of expenses to assess certain borrowers in mitigating loan delinquencies. They incurred as a result of dislocations arising from the COVID-19 pandemic.
Pmt's interest rate sensitive strategies contributed a loss of $43 $2 million in the quarter MSR fair value decreased a total of $84 million during the quarter and included $49 million in fair value declines due to changes in interest rates, primarily due to a significant flattening of the yield curve and $35 million of valuation decreases due to.
Speaker 3: PMT's interest rate sensitive strategies contributed a loss of $43.2 million in the quarter. MSR fair value decreased a total of $84 million during the quarter and included $49 million in fair value declines due to changes in interest.
Speaker 4: primarily due to a significant flattening of the yield curve and $35 million of valuation decreases due to increases to short-term prepayment projects.
Increases to short term prepayment projections.
The fair value on agency MBS and interest rate hedges also declined by $7 million largely due to elevated hedge costs during the quarter.
Speaker 4: The fair value on the agency MBS and interest rate hedges also declined by $7 million largely due to elevated hedge costs during the quarter.
Speaker 4: PMT's correspondent production segment contributed $4.6 million to pre-tax income for the quarter.
Pmt's correspondent production segment contributed $4 $6 million to pre tax income for the quarter.
Speaker 4: PMT's corporate segment includes interest income from cash and short-term investments, management fees and corporate expenses. The segment's contribution for the quarter was a pretext loss of $14 million.
Pmt's corporate segment includes interest income from cash and short term investments management fees and corporate expenses. The segment's contribution for the quarter was a pre tax loss of $14 million.
Finally, we recognized a tax benefit of $2 $6 million in the fourth quarter driven by fair value declines in Msr's held in Pmt's taxable subsidiary.
Speaker 4: And with that, I'll turn the discussion back over to David for some closing remarks.
And with that I'll turn the discussion back over to David for some closing remarks.
Thank you Dan as the market transitions to a higher rate environment. We believe the return volatility of our investments will stabilize and the competitive climate will improve as correspondent aggregators adjust capacity to the new market.
Speaker 2: Thank you, Dan. As the market transitions to a higher rate environment, we believe the return volatility of our investments will stabilize, and the competitive climate will improve as correspondent aggregators adjust capacity to the new market.
Until that takes place we expect headwinds for the return potential of Pmt's strategies. However, there is significant investment opportunities. We are pursuing in the form of private label securitization and the potential to resume new CRT investments and we are encouraged by our continued active discussions with the GSA.
Speaker 2: Until that takes place, we expect headwinds for the return potential of PMT strategy.
Speaker 2: However, there are significant investment opportunities we are pursuing in the form of private label securitization and the potential to resume new CRT investments. And we are encouraged by our continued active discussions with the GSEs and FHFA on that front.
<unk> at FHFA on that front.
As a public company in our 13th year of operations with a very seasoned management team.
Speaker 2: As a public company in our 13th year of operations with a very seasoned management team, we have been disciplined through numerous mortgage cycles and have a strong track record of performance throughout our history.
We have been disciplined through numerous mortgage cycles and have a strong track record of performance throughout our history.
While we acknowledge the headwinds in this currently transitioning mortgage market, we are optimistic about pmt's ability to execute on opportunities and deliver attractive risk adjusted returns to shareholders over the long term.
Speaker 2: While we acknowledge the headwinds in this currently transitioning mortgage market, we are optimistic about PMT's ability to execute on opportunities and deliver attractive risk adjuster returns to shareholders over the long-term.
Speaker 2: We encourage investors with any questions to reach out to our Investor Relations team by email or phone. Thank you.
We encourage investors with any questions to reach out to our investor relations team by email or phone.
Thank you.
Speaker 5: This concludes PennyMac Mortgage Investment Trust's fourth quarter earnings discussion.
This concludes pennymac mortgage investment Trust's fourth quarter earnings discussion.
Speaker 5: For any questions, please visit our website at www.penymac-repe.com or call our Investor Relations Department at 818-224-7028. Thank you.
For any questions. Please visit our website at www Dot Pennymac dash REIT dot com or call our Investor Relations Department at 8182 to 47028. Thank you.