Q2 2025 PennyMac Mortgage Investment Trust Earnings Call
Operator: ...as well as non-GAAP measures that have been reconciled to their GAAP equivalent in the earnings material.
And reconciled to their GAAP equivalent in the earnings materials.
David Spector: Now I'd like to introduce David Spector, PennyMac Mortgage Investment Trust Chairman and Chief Executive Officer, and Dan Perotti, PennyMac Mortgage Investment Trust Chief Financial Officer. Please go ahead. Thank you, operator. For the second quarter, PMT produced a net loss to common shareholders of $3 million. or loss per share share of four cents. at solid levels of income, excluding market-driven value changes, were offset by fair value declines and a $14 million non-recurring tax adjustment that Dan will discuss later on. DMT declared a second quarter common dividend of 40 cents per And book value per share June 30 was $15, down modestly from March 31.
Speaker Change: Now I'd like to introduce David Spector, Pennymac mortgage investment Trust's, Chairman and Chief Executive Officer, and Dan Karate Pennymac mortgage investment Trust's Chief Financial Officer. Please go ahead.
Speaker Change: Thank you operator for the second quarter PMT produced a net loss to common shareholders of $3 million.
Speaker Change: Our loss per share share of <unk> has solid levels of income excluding market driven value changes were offset by fair value declines and a $14 million nonrecurring tax adjustments that Dan will discuss later on.
Speaker Change: PMT declared a second quarter common dividend of <unk> 40 per share and book value per share at June 30 was $15 down modestly from March 31.
David Spector: Interest rates were extremely volatile this quarter, with the 10-year Treasury yield traversing a range of more than 70 basis For more information visit www.FORECAST.COM including intraday moves in one week in April alone. This created a challenging environment for our investment strategy. However, our diversified investment portfolio, efficient cost structure, and strong risk management practices enable us to effectively manage through these challenging market conditions.
Speaker Change: Interest rates were extremely volatile this quarter with the 10 year treasury yield traversing a range of more than 70 basis points.
Speaker Change: Clearly intraday moves in one week in April alone.
Speaker Change: This created a challenging environment for our investment strategies, However, our diversified investment portfolio efficient cost structure and strong risk management practices enable us to effectively manage through these challenging market conditions.
David Spector: Turning to slide five, I want to touch on our synergistic partnership with PFSI and how that provides P&T with unique improvement competitive advantage. First, P&T leverages PFSI's best-in-class operating platform, including its deep and experienced management team, scaled servicing operations, and its large and agile multi-channel origination business, which provides P&T with a consistent and high-quality pipeline of loans for investors. Second, our structure allows P&T to efficiently deploy capital into long-term mortgage assets. without the operational burdens associated with origination service. And third, PFSA's deep access to the origination market, coupled with P&T's ability to execute private label securitization.
Speaker Change: Turning to slide five I wanted to touch on our synergistic partnership with PFS Si and how that provides PMT with unique and proven competitive advantages.
Speaker Change: First PMT Leverages <unk> best in class operating platform, including a deep and experienced management team scaled servicing operations and its large and agile multichannel origination business, which provides PMT with a consistent and high quality pipeline of loans for investment.
Speaker Change: Second our structure allows PMT to efficiently deploy capital into long term mortgage assets without the operational burdens associated with the origination and servicing.
Speaker Change: And third PFS is deep access to the origination market, coupled with pmt's ability to execute private label securitization provides.
David Spector: provides PMT with the opportunity to invest in unique, organically created investments at attractive risk-adjusted returns. As can be seen on slide six, the increasing volume of non-owner occupied and jumbo loans generated by the PennyMac platform underscores the potential for future investment. And this growing pipeline of loans provides us with flexibility and optionality, allowing us to strategically invest in assets that align with our long term return objectives. In the second quarter, we successfully completed three securitizations of agency-eligible investor loans totaling $1.1 billion in UPV, retaining $71 million of new investment. And we also completed our first jumbo loan securitization since 2013, with a total UPB of $339 million and retained investments of $82 million.
Speaker Change: Provides PMT with the opportunity to invest in unique organically created investments at attractive risk adjusted returns.
Speaker Change: As can be seen on slide six the increasing volume of non owner occupied and jumbo loans generated by the Pennymac platform underscores the potential for future investment.
Speaker Change: And this growing pipeline of loans provides us with flexibility and optionality.
Speaker Change: Allowing us to strategically invest in assets that align with our long term return objectives.
Speaker Change: In the second quarter, we successfully completed three securitization of agency eligible investor loans totaling $1 $1 billion in PV.
Speaker Change: Retaining $71 million of new investments.
Speaker Change: And we also completed our first jumbo loan securitization since 2013 with a total <unk> of $339 million and retained investments of $82 million.
David Spector: The graphic on the right of this slide highlights our rapid ascent to become a leading issuer of private label securitization. In recent periods, we've been a top three issuer of client-on-agency MVF. In fact, since the fourth quarter of 2024, we have successfully completed nine securitizations, totaling $3.2 billion in UPB, with new retained investments of $300 million. Targeted returns on equity for these investments are expected to be in the low to mid-teens. Looking ahead, we expect to continue executing one securitization of agency-eligible, non-owner-occupied loans per month and one jumbo loan securitization per quarter. This consistent cadence of securitization underscores our commitment to leveraging our organic investment creation ability and remaining a leader in the private label securitization market.
Speaker Change: Graphic on the right of this slide highlights our rapid ascent to become a leading issuer private label securitization.
Speaker Change: In recent periods, we've been a top three issuer client non agency MBS.
Speaker Change: In fact since the fourth quarter of 2024, we have successfully completed nine securitization totaling $3 2 billion and the PB with new retained investments of $300 million.
Speaker Change: Targeted returns on equity for these investments are expected to be in the low to mid teens.
Speaker Change: Looking ahead, we expect to continue executing one securitization of agency eligible non owner occupied loans per month.
Speaker Change: One jumbo loan securitization per quarter.
Speaker Change: This consistent cadence of securitization underscores our commitment to leveraging our organic investment creation ability and remaining a leader in the private label securitization market.
David Spector: Turning to slide seven, approximately two-thirds of PMT shareholders' equity is currently invested in a seasoned portfolio of MSR. and the unique GFC lender risk share transactions we invested in from 2015 to 2020. These are highly stable and seasoned assets with strong underlying fundamentals. Our MSR investments account for approximately 47% of our deployed equity, down from 56% at the high during the end of 2022. The majority of the mortgages underlying these MSRs were made far out of the money with a weighted average coupon of 3.9%, meaning borrowers have little incentive to refinance. As a result, we expect the MSR asset to continue producing stable cash flows over an extended period of time.
Speaker Change: Turning to slide seven approximately two thirds of PMT shareholders' equity is currently invested in a seasoned portfolio of MSR.
Speaker Change: And the unique GSE lender risk share transactions, we invested in.
Speaker Change: 2015 to 2020.
Speaker Change: These are highly stable and season assets with strong underlying fundamentals.
Speaker Change: Our MSR investments account for approximately 47% of our deployed equity down from 56% at the high during the end of 2022.
Speaker Change: The majority of the mortgages underlying these MSR remained far out of the money with a weighted average coupon of three 9%, meaning borrowers have little incentive to refinance.
Speaker Change: As a result, we expect the MSR asset to continue producing stable cash flows over an extended period of time.
David Spector: Furthermore, MSR values continue to benefit from the higher interest rate environment as the placement fee income PMT receives on custodial balances is closely tied to short-term interest . Similarly, P&T's unique credit risk transfer investments, representing 16% of shareholders' equity, are backed by seasoned loans, with strong fundamentals that were originated during periods of low interest For more information visit www.p&t.com Delinquencies have remained low on this portfolio as well. This can be attributed to the overall credit strength of the consumer, combined with the substantial accumulation of home equity in recent years, due to continued home price appreciation, as evidenced by the low-weighted average current loan-to-value ratio of below 50%.
Speaker Change: Furthermore, MSR values continue to benefit from the higher interest rate environment as the placement fee income PMT receives a custodial balances is closely tied to short term interest rates.
Speaker Change: Similarly, pmt's unique credit risk transfer investments, representing 60% of shareholders' equity are backed by seasoned lumped with strong fundamentals that were originated during periods of low interest rates.
Speaker Change: Delinquencies delinquencies have remained law in this portfolio as well.
Speaker Change: This can be attributed to the overall credit strength of the consumer combined with the substantial accumulation of home equity in recent years due to continued home price appreciation as evidenced by the low weighted average current loan to value ratio of below 50%.
David Spector: We continue to expect that real life losses will be limited and that these core investments will perform well over the foreseeable future.
Speaker Change: We continue to expect that realized losses will be limited and that these core investments will perform well over the foreseeable future.
David Spector: As you can see on slide 8, a significant portion of PMT's equity is allocated to investments that we have organically created through PennyMac's robust production volume. This is a key differentiator for PMT. Because we are the producer and servicer of the loan, we have unparalleled insight into their quality and performance. are positioned as the producer of the underlying loans as a competitive advantage. providing us with the ability to review and diligence the loans for securitization and subsequent investment. Additionally, as the servicer of the underlying loans, we are uniquely positioned to work directly with borrowers in times of stress to minimize losses, as evidenced by the strong historical performance of our investments in lender-credit-risk grants.
Speaker Change: As you can see on slide eight a significant portion of Pmt's equity is allocated to investments that we have organically created through panamax robust production volume.
Speaker Change: This is a key differentiator for PMT.
Speaker Change: Because we are the producer and servicer of the loans, we have unparalleled insight into their quality and performance.
Speaker Change: Our position as the producer of the underlying loans as a competitive advantage, providing us with the ability to review and diligence of loans for securitization and subsequent investment.
Speaker Change: Additionally, as the service survey underlying loans, we're uniquely positioned to work directly with borrowers with times of stress to minimize losses as evidenced by the strong historical performance of our investments in lender credit risk transfer.
David Spector: This deep understanding, from origination through servicing, allows us to directly influence the ultimate credit outcome, minimizing losses and maximizing returns for our shareholders.
Speaker Change: This deep understanding from origination through servicing allows us to directly influence the ultimate credit outcome, minimizing losses and maximizing returns for our shareholders.
David Spector: In closing, our risk management capabilities and diversified investment strategies, which includes seasoned MSR and CRT portfolios, combined with a growing securitization platform built on our unique origination capability, positions us exceptionally well to deliver attractive risk-adjusted returns to our shareholders in 2025 and beyond. We remain confident in our ability to successfully navigate a volatile and evolving market by leveraging our competitive advantage.
Speaker Change: In closing our risk management capabilities and diversified investment strategies, which includes season MSR in CRT portfolio combined with a growing securitization platform built on our unique origination capabilities positions us exceptionally well to deliver attractive risk adjusted returns to our shareholders.
Speaker Change: In 2025 and beyond.
Speaker Change: We remain confident in our ability to successfully navigate a volatile and evolving market by leveraging our competitive advantages.
David Spector: Now I'll turn it over to Dan who will review the drivers of PMT's second quarter financial performance and PMT's run great return potential.
Speaker Change: Now I'll turn it over to Dan who will review the drivers of Pmt's second quarter financial performance and Pmt's run great return potential. Thank.
Daniel Perotti: Thank you, David. TMT reported a net loss to common shareholders of $3 million in the second quarter, or negative four cents per diluted common share. Credit Sensitive Strategies contributed $22 million to pre-tax Gains from organically created CRT investments were $17 million, including $9 million, primarily consisting of realized gains and carry. and $8 million of market-driven value changes from credit spread. TAS and stacker bonds generated gains of $4 million, and investments in PMT non-agency subordinate MBS generated gains of $1 million.
Dan Karate: Thank you David.
Dan Karate: PMT reported a net loss to common shareholders of $3 million in the second quarter were negative <unk> <unk> per diluted common share.
Dan Karate: The credit sensitive strategies contributed $22 million to pre tax income.
Dan Karate: Gains from organically created CRT investments were $17 million, including $9 million, primarily consisting of realized gains and carry.
Dan Karate: $8 million of market driven value changes from credit spread tightening.
Dan Karate: CASM stacker bonds generated gains of $4 million and investments in PMT non agency subordinate MBS generated gains of $1 million.
Daniel Perotti: The interest rate sensitive strategies contributed a pre-tax loss of $5 million. Fair value increases on MSR investments were $23 million. These fair value increases were more than offset by the combined impact of changes in the fair value of MBS. Trade Hedges, and Related Income Tax Benefits totaling $45 million. MBS fair value which includes agent CTOs and securitized interest only strips increased by $12 million.
Dan Karate: The interest rate sensitive strategies contributed a pretax loss of $5 million.
Dan Karate: Fair value increases on MSR investments were $23 million.
Dan Karate: These fair value increases were more than offset by the combined impact of changes in the fair value of MBS interest rate hedges and related income tax benefits totaling $45 million.
Dan Karate: MBS fair value, which includes agent Cts and securitized interest only strips increased by $12 million interest rate hedges decreased by $60 million.
Daniel Perotti: interest rate hedges decreased by In the second quarter, PMT reported an income tax expense of $9 million, driven primarily by a $14 million non-recurring repricing of deferred tax balances due to state apportionment changes driven by recent legislation. The fair value of PMT's MSR asset at the end of the quarter was $3.8 billion, down slightly from March 31st as fair value increases and newly originated MSR investments were more than offset by Rome. Delinquency rates for borrowers underlying PMT's MSR portfolio remain low, and Servicing Advances Outstanding decreased to $70 million from $84 million at March 31. No principal and interest advances are currently outstanding.
Dan Karate: In the second quarter PMT reported an income tax expense of $9 million.
Dan Karate: Driven primarily by a $14 million nonrecurring repricing of deferred tax balances due to state state apportionment changes driven by recent legislation.
Dan Karate: The fair value of Pmt's MSR asset at the end of the quarter was $3 8 billion.
Dan Karate: Down slightly from March 31, as fair value increases in newly originated MSR investments were more than offset by runoff.
Dan Karate: Delinquency rates for borrowers underlying pmt's MSR portfolio remained low and servicing advances outstanding decreased to $70 million from $84 million at March 31.
Dan Karate: No principal and interest advances are currently outstanding.
Daniel Perotti: Total correspondent loan acquisition volume was $30 billion in the second quarter, up 30% from the prior quarter and consistent with the estimated increase in the size of the overall origination. Correspondent loans acquired for PMT's account total $3 billion, up 11% from the prior DMT retained 17% total conventional correspondent production in the second quarter, down from 21% in the first Under the Renewed Mortgage Banking Services Agreement with PFSI, effective July 1, 2025, correspondent loans are initially acquired by PFSI. However, PMT will retain the right to purchase up to 100% of non-government correspondent production from PFSI. We expect this percentage to remain between 15 to 25% in the third quarter of 2025 as we continue pursuing investment opportunities in the private label securitization market.
Dan Karate: Total correspondent loan acquisition volume was $30 billion in the second quarter up 30% from the prior quarter and consistent with the estimated increase in the size of the overall origination market.
Dan Karate: Correspondent loans acquired for Pmt's account totaled $3 billion.
Dan Karate: Up 11% from the prior quarter.
Dan Karate: DMT retained 17% of total conventional correspondent production in the second quarter down from 21% in the first quarter.
Dan Karate: Under the renewed mortgage banking services services agreement with <unk> effective July one 2025 correspondent loans are initially acquired by the at the time.
Dan Karate: However, PMT will retain the right to purchase up to 100% of nongovernment correspondent production from <unk>.
Dan Karate: We expect this percentage to remain between 15% to 25% in the third quarter of 2025, as we continue pursuing investment opportunities in the private label securitization market.
Daniel Perotti: PMT also acquired $1 billion in UTP of loans acquired or originated by PFSI for inclusion in private label security up from $637 million in the prior Income from PMT's correspondent production segment was $14 million, up from the prior quarter, primarily due to gains on non-owner-occupied and jumbo loans due to credit spread type . The weighted average fulfillment fee rate was 19 basis points unchanged from the prior In total, PMC reported $36 million of net income across its strategies, excluding market-driven value changes and the related impacts, down from $41 million in the prior quarter, driven primarily by increased realization of cash flows due to higher realized and projected prepayment.
Dan Karate: PMT also acquired $1 billion in <unk> of loans acquired or originated by CSI for inclusion in private label securitization up from $637 million in the prior quarter.
Dan Karate: Income from Pmt's correspondent production segment was $14 million up from the prior quarter, primarily due to gains on non owner occupied and jumbo loans due to credit spread tightening.
Dan Karate: The weighted average fulfillment fee rate was 19 basis points unchanged from the prior quarter.
In total PMT reported $36 million of net income across its strategies, excluding market driven value changes and the related impacts down from $41 million in the prior quarter, driven primarily by increased realization of cash flows due to higher realized and projected prepayment activity.
Daniel Perotti: Slide 14 of our earnings presentation outlines the run rate return potential expected from PMT's investment strategies over the next four quarters. PMT's current run rate reflects a quarterly average of $0.38 per share, up from $0.35 per share in the prior. Overall, we expect increased investment activity in accretive, non-agency, subordinate, and senior bonds, primarily through organic securitization activities. Additionally, correspondent and aggregation activities have positive momentum, driving improved execution and an overall increase to our correspondent production segments return to If the yield curve steepens further, we expect TMT's overall run rate would increase further driven by higher overall yields in the interest rate sensitive strategy.
Dan Karate: Slide 14 of our earnings presentation outlines the run rate return potential expected from Pmt's investment strategies over the next four quarters.
Dan Karate: Pmt's current run rate reflects a quarterly average of 38 per share up from 35 per share in the prior quarter.
Dan Karate: Overall, we expect increased investment activity and accretive non agency subordinate and senior bonds, primarily through organic securitization activity.
Dan Karate: Additionally, correspondent and aggregation activities has positive momentum driving improved execution and an overall increase to our correspondent production segment return potential.
Dan Karate: If the yield curve Steepens further we expect Tmt's overall run rate would increase further driven by higher overall yields in the interest rate sensitive strategies.
Daniel Perotti: Turning to capital, in June, we issued $105 million in unsecured senior notes due in 2030. And we currently expect that the $345 million in exchangeable senior notes due in 2026 will be retired closer to maturity by utilizing capacity from existing financing lines.
Dan Karate: Turning to capital in June we issued $105 million in unsecured senior notes due in 2013, and we currently expect that the $345 million in exchangeable senior notes due in 2026 will be retired closer to maturity by utilizing capacity from existing financing lines.
Daniel Perotti: I want to take a minute to comment on PMT's overall leverage ratio, which has increased in recent quarters. The increase is primarily a reflection of growth in non-recourse debt related to our increased private label securitization activity and the related accounting treatment for these transactions, which requires us to record the transactions as a financing of the loans, rather than retain interest in the securitization. The source of repayment for this non-recourse debt is limited to the cash flows from the associated loans in each private label securitization, mitigating any additional exposure to PMF. We believe that the best metric to measure the leverage of our balance sheet is debt-to-equity excluding the non-recourse debt related to securitization, which we have shown on page 15.
Dan Karate: I wanted to take a minute to comment on Pmt's overall leverage ratio, which has increased in recent quarters the increase.
Dan Karate: This is primarily a reflection of growth in non recourse debt related to our increased private label securitization activity and the related accounting treatment for these transactions, which requires us to record the transactions as the financing of the loans rather than retained interest in the securitization.
Dan Karate: The source of repayment for this non recourse debt is limited to the cash flows from the associated loans and each private label securitization mitigating any additional exposure to PMT.
Dan Karate: We believe that the best metric to measure the leverage of our balance sheet is debt to equity excluding the nonrecourse debt related to Securitizations, which we've shown on page 15.
Daniel Perotti: This metric incorporates our exposure to the investments we are making in subordinate securities in a similar way to what we've seen in prior periods with our CRT investment, which has similar credit exposures to associated loan. We expect this divergence between total debt-to-equity and debt-to-equity excluding non-recourse debt to increase in future periods as we continue our retention of investments from our securitization program.
Dan Karate: This metric incorporates our exposure to the investments we are making in subordinate securities in a similar way to what we've seen in prior periods with our CRT investment, which has similar credit exposures to associated loan performance.
Dan Karate: We expect this divergence between total debt to equity and debt to equity excluding non recourse debt to increase in future periods. As we continue our retention of investments from our securitization program.
Daniel Perotti: Excluding non-recourse debt, our debt to equity ratio June 30th was 5.6 times within the range of our expected and historical We'll now open it up for questions.
Dan Karate: Excluding non recourse debt our debt to equity ratio at June 30 was five six times within the range of our expected at historical levels.
Dan Karate: We will now open it up for questions operator.
Operator: Operator? Thank you. I would like to remind everyone we will only take questions related to PennyMac Mortgage Investment Trust, or PMT. We also ask that you please keep your questions limited to one preliminary question and one follow up question, as we'd like to ensure we can answer as many questions as possible. If you would like to ask a question during this time, simply press star followed by the number one on your telephone keypad. And if you'd like to withdraw your question, it's star one again.
Dan Karate: Thank you I would like to remind everyone. We will only take questions related to Pennymac mortgage investment trust or PMT. We also ask that you. Please keep your questions limited to one preliminary question and one follow up question because we'd like to ensure we can answer as many questions as possible if.
Dan Karate: If you would like to ask a question. During this time simply press star followed by the number one on your telephone keypad.
Dan Karate: You'd like to withdraw your question its star one again.
Jason Weaver: We'll take the first question from Doug Harter, UBS. Thanks. Hoping to talk a little bit more about the non-agency securitization opportunity. Can you just talk, you know, kind of how the returns progressed over the course of the quarter, kind of given the volatility, you know, and kind of how you, you know, kind of are positioning the risk of those holdings, you know, kind of going forward? So overall, the non-agency subordinate MBS, we obviously during the quarter had a significant amount of both rate and spread volatility, the non-agency subordinates are six rates. was in line with our expectation of really mid-to-low-teens returns.
Doug Harter: We will take the first question from Doug Harter UBS.
Dan Karate: Okay.
Dan Karate: Thanks, hoping you talk a little bit more about the.
Dan Karate: Non agency securitization opportunity.
Dan Karate: Can you just talk kind of how how the returns progressed over the course of the quarter kind of given given the volatility.
Dan Karate: And kind of how are you.
Dan Karate: Kind of our positioning the risk of that of those holdings kind of going forward.
Dan Karate: So overall.
Dan Karate: The non agency subordinate MBS, we are obviously during the quarter had a significant amount of both the rate and speed.
Dan Karate: Fred volatility the non agency subordinate our fixed rate securities and so overall during the quarter with respect to credit investments, we did see generally.
Dan Karate: Spread tightening you can see the reflection of that on the GSE credit risk transfer telco saw a fair amount of interest rate volatility and so that led to a slight decline in terms of the fair value of the non agency subordinate MBS.
Dan Karate: Income excluding market driven value changes was in line with our expectation.
Dan Karate: Early mid teens or mid to low teens returns.
Jason Weaver: And so as we continue, as we continue to add our additional additional subordinate investments, as well as non-agency senior MBS. We expect those to be to continue to be in the mid mid low to mid teams returns in terms of their, you know, returns through time. And those are very stable in terms of the the returns with respect to, you know, reasonable shocks in terms of credit performance as well.
Dan Karate: And so.
Dan Karate: As we continue as we continue to add our additional.
Dan Karate: Traditional sub.
Dan Karate: Subordinate investments as well as non agency senior MBS.
Dan Karate: We expect those to be to continue to be in the mid mid low to mid teens returns in terms of their returns through time and.
Dan Karate: Our.
Dan Karate: Very stable in terms of the returns with respect to reasonable shocks.
Dan Karate: A credit performance as well.
Jason Weaver: And, and so we believe that those are very stable and accretive investments for us over the next year. Great. And just as a follow up, much like the amount of retained interest on the jumbo was was a much higher percentage. um relative to the non-owner occupied you just talk about you know i guess how high up the stack and is that was that opportunistic or is that something that you would expect to continue on the jumbo So, with respect to that, we did retain a senior mezzanine tranche on the jumbo securitization. As we look on a deal by deal basis, we are sort of making the decision based on the amount of capital we have to deploy.
Dan Karate: And so we believe that those are very stable.
Dan Karate: Stable and accretive investments for us overtime.
Speaker Change: Okay, Great and then just as a follow up.
Dan Karate: Much like the.
Dan Karate: The amount of retained interests on the jumbo was a much higher percentage.
Dan Karate: Relative to the non owner occupied can you just talk about I guess, how high up the stack and is that.
Dan Karate: Was that opportunistic or is that something that you would expect to continue on the jumbo side.
Dan Karate: So with respect to that we did retain senior mezzanine tranche on the jumbo securitization.
Dan Karate: As we look on a deal by deal basis, we are sort of making the decision based on the amount of capital we have to deploy.
Jason Weaver: The jumbo securitization did occur after we had raised the additional debt, unsecured debt. And so, as we're looking to deploy additional capital, I think at least over the next few periods, it's likely that we will be retaining a greater portion of the interest, both the subordinate bonds and the senior mezzanine piece from many of these securitizations. But we do make the decision on a deal by deal basis based on, you know, the capital that we're to deploy. And look, I think the important thing is that the team is dynamically managing the portfolio. So, as you raise capital, you have capital to deploy.
Dan Karate: The jumbo securitization did occur after.
Dan Karate: We had to raise the additional debt.
Dan Karate: Unsecured debt and so as we're looking to deploy additional capital I think at least over the next few periods, it's likely that we would be retaining.
Dan Karate: A greater proportion of the interest both the subordinate bonds and the senior mezzanine piece from many of the securitization, but we do make the decision on a deal by deal basis based on.
Speaker Change: The capital that we're looking to deploy and look I think I think Debbie and important thing is that the.
Speaker Change: The team is dynamically managing the portfolio, so as you've raised capital new capital deploy obviously.
Jason Weaver: Obviously, We're clawing it into the subordinate tranches as something that's more of a long-term investment in nature.
Speaker Change: Calling it into the subordinate tranches is something thats more of a long term investment in nature, but there are other tranches you can invest at appropriate return that as we're doing more securitizations, if we need to recycle the capital we can do so.
Jason Weaver: But there are other tranches you can invest at an appropriate return, but as we're doing more securitizations, if we need to recycle the capital, we can do so. Great, thank you both.
Bob: Great. Thank you Bob.
Bose George: We'll take the next question from Jason Weaver, Jones Trading. Hi, guys. Hope you're doing well. Thanks for taking my time to take my questions.
Speaker Change: Okay. The next question from Jason Weaver with Jones trading.
Jason Weaver: Hi, guys hope you're doing well thanks for taking my taking my question.
David Spector: First of all, David, I think we've talked about this before, but maybe just an update if you have any insights under possible GSE privatization for the future of credit risk transfers. Yeah, look, I think that right now, we're not hearing much out of the folks in DC on anything GFC report related to GFC. have been active in their credit risk transfer program using the reinsurance vehicles and in terms of a return to lender CRT, like we were able to do from 2015 to 2020. I don't see that really on the horizon. And this is what's so exciting about our non-agency securitization program is the fact that we can create very comparable investments, albeit not as rapidly or not as voluminously, but we can create a similar type investment by doing these securitizations.
Speaker Change: First of all David I think we've talked about this before but maybe.
Speaker Change: Just an update if you have any insight under possible GSE privatization for the future of credit risk transfer.
Speaker Change: Yes look I think that.
Speaker Change: Right now we're.
Speaker Change: We're not hearing much of the folks in DC on anything.
Speaker Change: GSE reform related the GSC.
Speaker Change: Have been active in their credit risk transfer program using the reinsurance vehicles and in terms of a return to lenders CRT.
Speaker Change: We were able to do from 2015 to 2020, I don't see that really on the horizon.
Speaker Change: And this is what's so exciting about our non agency securitization program is the fact that we can create very comparable investments, albeit not as rapidly or not is illumina slate, but we can create a similar type investment by doing a securitization and thats what.
David Spector: And that's what, you know, the team has done a really great job at, is being able to really, really issue these securitizations really every three weeks on a relative basis. And I think that that's something that's really exciting. And so we're able to take the product that executes better outside the GSEs and be able to create comparable securitizations. Now, you know, obviously it allows us also to get expertise and real muscle memory if we need to do more. And so if we want to issue more, if there's other agency eligible product that executes better outside the GSEs, that's where P&T is in a really advantageous state.
Speaker Change: The team has done a really great job at is being able to really really issue Securitizations really every every three weeks.
Speaker Change: On a relative basis, and I think that Thats, something thats really exciting and so we're able to take the product that execute better outside the GSC and be able to create comparable securitization now obviously it allows us also to get expertise and real muscle memory.
Speaker Change: If we need to do more.
Speaker Change: And so if we want to issue.
Speaker Change: If theres other agency eligible product that executes better outside the Gse's, that's where P&C is in a really advantageous stayed in the factors really got this credit investment.
David Spector: And the fact that it's really got this credit investment, you know, thesis that it can continue to grow credit investments that the team returns. And that's something that we want to continue to focus on. We have very good exposure to MSRs and their low-rate MSRs with a range of outcomes are much more limited than current no-rate MSRs. And so you can find those with the existing CRT that we have from 2015 to 2020, along with new credit investments that I think that, you know, you're going to continue to see us climbing to consistent mid-team returns.
Thesis that it can continue to grow credit investments that mid teen returns and Thats something that we want to continue to focus on with very good exposure to MSR and a lower MSR with a range of outcomes are much more limited than current no rate MSR and so you can find those.
Speaker Change: The existing CRT that we have from 2015 to 2020, along with new credit investments that I think that youre going to continue to see us climbing to consistent mid teen mid teen returns.
David Spector: Gotcha. And just to refresh on the three, sorry, was it three securitizations you've done so far this quarter? What sort of execution levels were you getting on your on your AAAs? And what sort of advance rates? Um, you know, I don't want to speak out of school. We're getting, you know, spreads are, spreads are leaning into their tights. I mean, you know, we had a really volatile period at the beginning of the quarter, but things, you know, quickly, quickly snapped back. And so, you know, I don't want to speak out of school. We'll, we'll, we'll definitely get back to you with, you know, more detailed reporting on, on, you know, the embedded leverage.
Speaker Change: Got you.
Speaker Change: And just to refresh on the three.
Speaker Change: Sorry was it three securitizations you've done so far this quarter.
Speaker Change: What sort of execution levels, where you're getting on your on your AAA, then what sort of advance rate.
Speaker Change: I don't want to speak out of school, we're getting.
Speaker Change: Spreads are spreads are leaning into their tight I mean, we had a really volatile period.
Speaker Change: Beginning of the quarter, but things quickly quickly snapped back.
And so I don't want to speak out of school will hold.
Speaker Change: We'll definitely get back to you with more detailed reporting on on.
Speaker Change: Embedded leverage in.
David Spector: And, you know, I think, suffice it to say, it beats agency execution by a material amount. And I think that that, you know, that was the goal of FHFA and the GSEs was to drive out some of the more non-owner-occupied and second homes into the private label markets. And it's done a really nice job revitalizing the private label markets. I mean, it's a very active market, and it's had, you know, benefits not just to agency-eligible production, but you can see in the Jumbo Loan Securitization Market, that's become a lot more active. Non-QM is running at about a $75 to $80 billion pace this year.
Speaker Change: I think suffice it to say it beats agency execution by a material amount.
Speaker Change: And I think that that's you know that that was the goal of FHFA and the <unk> was to drive out some of the more.
Speaker Change: Non owner occupied and second homes into the it's the private label market and its done a really nice job revitalizing the private label market I mean, it's a very active market and it's had.
Speaker Change: Benefits not just the agency eligible production, but you can see in the jumbo loan securitization market thats become a lot more active non QM is running at about a $75 to $80 billion pace. This year and so it's really the most active robust private label securitization market I've seen in our 18 plus.
David Spector: And so it's really the most active, robust private label securitization market I've seen in our 18-plus years here at the company.
Speaker Change: Years here at the company.
Operator: helpful. Thank you.
Speaker Change: That's helpful. Thank you gentlemen.
Nick: Thank you Nick.
Crispin Love: Next up is Bose George from KBW. Hey, guys, good afternoon. So in slide 13, you know, where you have the run rate ROE, it looks like the increase there is really mainly on the on the rate side.
Nick: Next up is Bose George from <unk>.
Bose George: Hey, guys good afternoon.
Speaker Change: So on slide 13, where you have the run rate Roe.
Speaker Change: It looks like the increase there is really mainly on the REIT side can you just walk through the drivers of the increase over last quarter.
Daniel Perotti: Can you just walk through, you know, the drivers of the increase over the last quarter? Um, sure. Well, if you really look the, you know, what contributes to the bottom line there, there's a slight increase in the net interest rate sensitive. I think that is really driven by some additions on the non-agency or addition in terms of the equity allocated to the non-agency senior in IOMBS. And so that's really the retention of those interests from the securitization side that we're expecting over the next 12 months to help. That should, given the expected returns from that, help push up or slightly increase the net interest rate sensitive strategy.
Speaker Change: Sure.
Speaker Change: If you really look the what contributes to the bottom line there there's a slight increase in the net interest rate sensitive.
Speaker Change: I think that is.
Speaker Change: Really driven by some some additions on the non agency or ambition in terms of the.
Speaker Change: Equity allocated to the non agency <unk> and Io MBS and so thats really the retention of those interests from the securitization securitization side that we're expecting over the next 12 months to help that.
Speaker Change: Should given the expected returns from that.
Speaker Change: Helped push up or slightly increase the net interest rate sensitive strategies.
Daniel Perotti: We also have an increase or the ROE from correspondent production. The ROE from correspondent production is also up quarter over quarter based on the outlook that we have for really volumes and margins and the margin activity that we've seen coming into the third quarter, which we expect to, which we currently project to persist over the next few quarters. And additionally, additionally, driving up the helping to drive up the, the The overall run rate is additional investment in the non-agency subordinate piece, which also has, you know, returns which help pull up the, you know, the rest of the overall forecast and, you know, sort of greater allocation there.
Speaker Change: Hi.
Speaker Change: We also have an increase or the ROE from correspondent production.
Speaker Change: <unk>.
Speaker Change: The ROE from correspondent production is also up quarter over quarter based on.
Speaker Change: The outlook.
Speaker Change: Outlook that we have four.
Speaker Change: Really volumes and margins and the margin activity that we've seen coming into the third quarter, which we expect to.
Speaker Change: Which we currently project to persist over the next few quarters.
Speaker Change: Additionally, Additionally, driving up the helping to drive up the.
Speaker Change: The overall run rate as additional investments in the non agency subordinate piece, which also has returns which help pull up the.
Speaker Change: The rest of the overall forecast.
Speaker Change: Sort of greater allocation there.
Daniel Perotti: Okay, so the so as you retain more, more sub pieces from the securitization, that cat the the NII from that is flowing through the the rate sensitive line. Uh, it's it's it's both so both the so the if we're retaining seniors or and Net Interest Rate Sensitive. We, for every securitization, are retaining non-agency subordinate MBS, and that flows through to credit sensitive. And, you know, both of those are having positive contributions to the run rate. Okay. Okay, great. Thank you.
Speaker Change: So as you retain more.
Speaker Change: More sub pieces from the securitization debt.
Speaker Change: NII from that is flowing through.
Speaker Change: The.
Speaker Change: The rate sensitive line.
Speaker Change: It's it's both so both the if we're retaining seniors.
Speaker Change: The net interest rate sensitive.
Speaker Change: We for every securitization are retaining non agency subordinate MBS and that flows through the credit sensitive.
Speaker Change: And.
Speaker Change: And both of those are having positive contributions to the run rate.
Speaker Change: Okay. Okay, great. Thank you.
Crispin Love: Our next question is from Crispin Love, Piper Sandler. Thank you. Good afternoon.
Speaker Change: Our next.
Speaker Change: <unk> is from Crispin love with Piper Sandler.
Speaker Change: Thank you good afternoon.
Daniel Perotti: Can you just discuss your thoughts on the sustainability of the $0.40 dividend level here? The operating earnings run rate that you discussed improved quarter over quarter, but still slightly below the dividend. And you did mention some ways how you could see that level improve further in the coming quarters, but we're curious on you and the board's comfortability with the dividend today.
Speaker Change: Can you just discuss your thoughts on the sustainability of the 40 dividend level here the operating earnings run rate that you discussed.
Speaker Change: Prove quarter over quarter, but still slightly below the dividend and you did mentioned some ways. How you could see that level of improved further in the coming quarters, but curious on.
Speaker Change: You and the board comparability.
Speaker Change: Hi.
Daniel Perotti: Yeah, thanks, Kristen. We continue to be comfortable with the $0.40 dividend level. When we look at the potential for returns as we're moving out through the next four quarters at the $0.38 level, which as you noted, you know, improved from $0.35, really, we think has the potential to further increase up towards $0.40. If you look at our history, you know, we do place a value in the stability of the dividend, and especially with the trajectory and, you know, proximity of the run rate currently to the expected dividend. We are comfortable with our position at the $0.40 level currently.
Speaker Change: Yeah. Thanks, Kristen we continue to be comfortable with the 40 <unk> dividend level when we.
Speaker Change: Look at the potential for returns as were moving out through the next four quarters at the 38% level, which as you noted improved from 35.
Speaker Change: Really we think has the potential to further increase up towards 40.
Speaker Change: If you look at our history.
Speaker Change: We do place a value and the stability of the dividend and especially with the trajectory and proximity of the run rate currently to the expected dividend.
Speaker Change: We are comfortable with our position at the 40% level. Currently in addition to that as we look at our taxable income and the taxable income being generated.
Daniel Perotti: In addition to that, as we look at our taxable income and the taxable income being generated from our strategies, It continues to move toward that $0.40 level as well and be supportive of the $0.40 level and so our expectation is that that taxable income level will also be maintained and as we add additional investments that are not in our taxable REIT subsidiary, namely the non-agency subordinate and senior MBS, that further bolsters that underlying taxable income supporting the $0.40 dividend level.
Speaker Change: From our strategies.
Speaker Change: It continues.
Speaker Change: B to move towards that 40% level as well and.
Speaker Change: And be supportive of the 40% level and so our expectation.
Speaker Change: Is that that taxable income level will be will also be maintained and as we add additional.
Speaker Change: Investments into our.
Speaker Change: That are not in our taxable REIT subsidiary, namely non agency subordinate and senior.
Speaker Change: MBS.
Speaker Change: That further bolsters that underlying taxable income supporting the <unk> 40 dividend level.
Crispin Love: Great.
Daniel Perotti: And then are you able to provide an update on book value in July to date? Overall book value in July to date is very stable with respect to where we ended the prior quarter. Great. Thank you. I appreciate you taking my question. Thank you.
Speaker Change: Great and then are you able to provide an update on book value in July to date.
Speaker Change: Okay.
Speaker Change: Overall book value in July to date is very stable with respect to where we ended the.
Speaker Change: In the prior quarter.
Speaker Change: Great. Thank you I appreciate you taking my questions.
Speaker Change: Thank you.
Operator: And just a reminder, everyone, it is star one.
Speaker Change: And just to reminder, everyone. It is star one if you have a question. We will go next to Eric Hagen <unk>.
Eric Hagen: If you have a question, we'll go next to Eric Hagen, BTIG. Thank you guys. Feels like a lot of attention. A lot more of a concerted effort around finally making reforms to title insurance. Got the new pilots from the GSEs. I mean, when we combine that with really strong HPA, I mean, do you see that potentially driving these low coupon borrowers to mobilize or do a cash out refinance at some point?
Speaker Change: Thank you guys.
Speaker Change: Feels like a lot of attention.
Speaker Change: A lot more of a conservative effort around finally, making reforms to title insurance.
Speaker Change: New pilots from the GSE.
Speaker Change: When we combine that with really strong HPA I mean, do you see that potentially driving a low coupon borrowers to mobilize or doing a cash out refinance somewhat.
David Spector: I don't, I don't. I think that it's going to help on the purchase side, obviously. But I think that Look, we're seeing we're seeing on the PFSI side an increasing amount of closed end seconds coming out of low interest rate homeowners. I think that, you know, anything we can do to drag down the cost is a good thing. It's going to be about four hundred dollars a loan. But I think that I'm not I, you know, I'm not expecting to really accelerate the prepayment speeds on the on the low interest rate homes loans. Gotcha. Thank you.
Speaker Change: I doubt I don't I think thats.
Speaker Change: It's going to help on the purchase side, obviously, but I think that.
Speaker Change: Look we're seeing we're seeing.
Speaker Change: On the <unk> side, an increasing amount of closed end seconds coming out of low interest rates.
Speaker Change: Owners and I think that.
Speaker Change: Anything we can do to drive down the cost is a good thing it's going to be about $400 alone.
Speaker Change: <unk>.
Speaker Change: I think that.
Speaker Change: I'm not expecting you to really accelerate the prepayment speeds.
Speaker Change: On the low interest rate homes loans.
Speaker Change: Gotcha.
Speaker Change: Thanks again.
Speaker Change: Thank you.
Operator: And everyone, at this time, there are no further questions.
Speaker Change: And everyone. At this time there are no further questions I would like to turn the conference back to David Spector for closing remarks.
David Spector: I would like to turn the conference back to David Spector for closing remarks. Thank you, operator. And thank you, everyone, for joining us here today and asking good, thoughtful questions. And we're obviously here for any follow up that you may have and reach out to Isaac and the team. And thanks again for the time.
David Spector: Well. Thank you operator, and thank you everyone for joining us here today and asking good thoughtful questions.
Speaker Change: We're obviously here for any follow up.
Speaker Change: You may have and reach out to Isaac and the team and thanks again for the time and I look forward to speaking to all of you in the future.
David Spector: I look forward to speaking to all of you in the future.
Operator: And ladies and gentlemen, that does conclude today's conference. We would like to thank you all for your participation today. We do encourage investors with additional questions to contact our investor relations team by email or phone. Thank you.
Speaker Change: And ladies and gentlemen that does conclude today's conference I would like to thank you all for your participation today.
Speaker Change: Do encourage investors with additional questions to contact our investor relations team by email or phone. Thank you.
Speaker Change: Yeah.
Speaker Change: Yes.
Speaker Change: Yeah.