Q2 2026 PennyMac Mortgage Investment Trust Earnings Call
Speaker #1: Call. After today's prepared remarks, we will host a Q&A session; if you would like to ask a question, please press *1 to raise your hand.
Speaker #1: To withdraw your question, press *1 again. Additional earnings materials, including the presentation slides that will be referred to in the call, as well as an Excel file with supplemental information, are available on the PennyMac Mortgage Investment Trust website at pmt.pennymac.com.
Speaker #1: Before we begin, let me remind you that this call may contain forward-looking statements that are subject to certain risks identified on slide 2 of the earnings presentation that could cause the company's actual results to differ materially, as well as non-GAAP measures that have been reconciled to their GAAP equivalent in their earnings materials.
Speaker #1: 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.
Speaker #1: Good afternoon, and welcome to PennyMac Mortgage Investment Trust's Q2 2026 earnings call. After today's prepared remarks, we will host a question-and-answer session. If you would like to ask a question, please press star one to raise your hand.
Speaker #1: Please go ahead.
Speaker #2: Thank you all, Operator. Good afternoon, and thank you to everyone for participating in our second quarter 2026 earnings call. Starting on slide 3, PMT's second quarter net income was $20 million or $23 cents per diluted common share representing a 6% annualized return on common equity.
Speaker #1: To withdraw your question, press star 1 again. Additional earnings materials, including the presentation slides that will be referred to during the call, as well as an Excel file with supplemental information, are available on the PennyMac Mortgage Investment Trust's website at pmt.pennymac.com.
Speaker #2: These results were impacted by a lower contribution from our credit-sensitive strategies, driven primarily by market-driven value declines. As well as lower contributions from our aggregation and securitization strategies primarily due to lower volumes.
Speaker #1: Before we begin, let me remind you that this call may contain forward-looking statements that are subject to certain risks identified on slide 2 of the earnings presentation, which could cause the company's actual results to differ materially, as well as non-GAAP measures that have been reconciled to their GAAP equivalent in the earnings materials.
Speaker #2: These impacts were partially offset by improved results in our interest rate-sensitive strategies. PMT paid a quarterly dividend of 40 cents per share, and book value per share at June 30 was $14.83, down 1% from the end of the prior quarter.
Speaker #1: 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.
Speaker #1: Please go ahead.
Speaker #2: Turning to slide 4, during the second quarter, PMT acquired 2.6 billion dollars in UPB of loans through correspondent production activities. For which PMT pays fulfillment fees to PFSI.
Speaker #2: Thank you, Operator. Good afternoon, and thank you to everyone for participating in our Q2 2026 earnings call. Starting on slide 3, PMT's Q2 net income was $20 million, or $0.23 per diluted common share, representing a 6% annualized return on common equity.
Speaker #2: This number was down 8% from their prior quarter, and 17% from the second quarter of 2025. PMT also acquired 2.2 billion dollars in UPB of loans from PFSI production, for inclusion in private label securitizations.
Speaker #2: These results were impacted by a lower contribution from our credit-sensitive strategies, driven primarily by market-driven value declines, as well as lower contributions from our aggregation and securitization strategies, primarily due to lower volumes.
Speaker #2: Up 44% from the prior quarter, and 123% from the second quarter of 2025. In total, during the second quarter, PMT acquired 4.8 billion dollars in UPB of loans.
Speaker #2: These impacts were partially offset by improved results in our interest rate-sensitive strategies. PMT paid a quarterly dividend of $0.40 per share, and book value per share at June 30 was $14.83.
Speaker #2: Beginning in June, PMT elected to stop acquiring agency-eligible conventional conforming loans through correspondent production but will continue acquiring 100% of all non-agency loan volume.
Speaker #2: Down 1% from the end of the prior quarter. Turning to slide 4, during Q2, PMT acquired $2.6 billion in UPB of loans through correspondent production activities.
Speaker #2: This strategic decision allows us to optimize our capital allocation by pivoting away from MSR investments, which have faced return headwinds in recent periods, and accelerating the redeployment of our capital into higher-yielding, credit-sensitive investments created from our private label securitization program.
Speaker #2: For which PMT pays fulfillment fees to PFSI. This number was down 8% from the prior quarter and 17% from Q2 2025. PMT also acquired $2.2 billion in UPB of loans from PFSI production for inclusion in private label securitizations.
Speaker #2: Consistent with this objective, I am pleased to announce that after quarter-end, we entered into agreement to sell 13 billion dollars in UPB of low-coupon agency MSRs, with a close expected at the end of August.
Speaker #2: Up 44% from the prior quarter and 123% from Q2 2025. In total, during Q2, PMT acquired $4.8 billion in UPB of loans.
Speaker #2: Slide 5 highlights the continued success of our organic investment creation engine. During the quarter, we completed 6 private label securitizations, totaling 2.2 billion dollars in UPB.
Speaker #2: Beginning in June, PMT elected to stop acquiring agency-eligible conventional conforming loans through correspondent production, but will continue acquiring 100% of all non-agency loan volume.
Speaker #2: This activity resulted in the retention of 120 million dollars of new subordinate bond investments in the credit-sensitive strategies. We also generated 31 million dollars of new MSR investments.
Speaker #2: This strategic decision allows us to optimize our capital allocation by pivoting away from MSR investments, which have faced return headwinds in recent periods, and accelerating the redeployment of our capital into higher-yielding, credit-sensitive investments created from our private label securitization program.
Speaker #2: Our momentum is continued after quarter-end. With 2 additional securitizations completed, totaling 692 million dollars in UPB, and we remain on pace to complete approximately 30 securitizations in 2026.
Speaker #2: In total, through 2026, we expect we will have added more than 600 million dollars of retained investments, building a substantial foundation of investments with returns on equity in the low to mid-teens to support future earnings.
Speaker #2: Consistent with this objective, I am pleased to announce that after quarter-end, we entered into an agreement to sell $13 billion in UPB of low-coupon agency MSRs, with a close expected at the end of August.
Speaker #2: On slide 6, we provided a snapshot of high-quality investments we are creating through our private label securitization program. At quarter-end, the fair value of retained bonds from this program totaled 936 million dollars.
Speaker #2: Slide 5 highlights the continued success of our organic investment creation engine. During the quarter, we completed 6 private label securitizations, totaling $2.2 billion in UPB.
Speaker #2: This activity resulted in the retention of $120 million of new subordinate bond investments in the credit-sensitive strategies. We also generated $31 million of new MSR investments.
Speaker #2: 63% of this portfolio is comprised of bonds from non-owner-occupied loan securitizations, 21% is comprised of bonds from jumbo loan securitizations, with the remainder from agency-eligible owner-occupied loan securitizations.
Speaker #2: Our momentum has continued after quarter-end, with two additional securitizations completed, totaling $692 million in UPB, and we remain on pace to complete approximately 30 securitizations in 2026.
Speaker #2: As you can see, these investments feature exceptional credit characteristics, including a weighted average FICO at origination of 774, a weighted average LTV at origination of 72, and negligible delinquencies.
Speaker #2: In total, through 2026, we expect we will have added more than $600 million of retained investments, building a substantial foundation of investments with returns on equity in the low to mid-teens to support future earnings.
Speaker #2: The credit quality of these organically created assets underscores our ability to produce attractive, high-yielding investments in the current market. On slide 7, approximately half of PMT's shareholders' equity remains deployed, to long-standing investments in MSRs, and 13% is comprised of our unique GSC credit risk transfer investments.
Speaker #2: On slide 6, we provided a snapshot of high-quality investments we are creating through our private label securitization program. At quarter-end, the fair value of retained bonds from this program totaled $936 million.
Speaker #2: Mortgage servicing rights provide stable cash flows from a portfolio with a low weighted average coupon of 3.9%. And our organically created GSC CRT investments consist of seasoned loans with a weighted average current loan-to-value of 45%.
Speaker #2: Sixty-three percent of this portfolio is comprised of bonds from non-owner-occupied loan securitizations, 21% is comprised of bonds from jumbo loan securitizations, with the remainder from agency-eligible owner-occupied loan securitizations.
Speaker #2: Turning to slide 8, while our diversified portfolio is constructed of investments with strong underlying fundamentals, we acknowledge our earnings excluding market-driven value changes have been below our dividend level for the past several quarters.
Speaker #2: As you can see, these investments feature exceptional credit characteristics, including a weighted average FICO at origination of 774, a weighted average LTV at origination of 72%, and negligible delinquencies.
Speaker #2: As you can see, we are showing an average run-rate return of 33 cents per quarter for the next year, up from the 31-cent projection in the prior quarter.
Speaker #2: The credit quality of these organically created assets underscores our ability to produce attractive, high-yielding investments in the current market. On slide 7, approximately half of PMT's shareholders' equity remains deployed to longstanding investments in MSRs, and 13% is comprised of our unique GSE credit risk transfer investments.
Speaker #2: In the credit-sensitive strategies, return dynamics are similar to the prior quarter. The improvement of the overall run-rate versus the prior quarter is driven by reallocation of equity to subordinate bond investments and higher expected returns of our MSR assets and a higher rate environment.
Speaker #2: As is our standard practice, we continue to monitor our portfolio mix and allocate capital toward investments with the most attractive return protection potential. Our momentum in organic investment creation remains strong, and we have successfully positioned PMT as a leader in the private label securitization market.
Speaker #2: Mortgage servicing rights provide stable cash flows from a portfolio with a low weighted average coupon of 3.9%. Our organically created GSE CRT investments consist of seasoned loans with a weighted average current loan-to-value of 45%.
Speaker #2: Turning to slide 8, while our diversified portfolio is constructed of investments with strong underlying fundamentals, we acknowledge our earnings, excluding market-driven value changes, have been below our dividend level for the past several quarters.
Speaker #2: Given the success of our securitization program, we are shifting our equity allocation toward creative credit-sensitive strategies. And I am confident this realignment of our balance sheet will bolster PMT's return profile to deliver attractive total returns over the long term.
Speaker #2: As you can see, we are showing an average run-rate return of $0.33 per quarter for the next year, up from the $0.31 projection in the prior quarter.
Speaker #2: Now, I'll turn it over to Dan to review the second quarter financial performance.
Speaker #2: In the credit-sensitive strategies, return dynamics are similar to the prior quarter. The improvement of the overall run-rate versus the prior quarter is driven by the reallocation of equity to subordinate bond investments, higher expected returns of our MSR assets, and a higher rate environment.
Speaker #3: Thank you, David. That income to common shareholders was 20 million dollars, or 23 cents, per diluted common share in the second quarter. For a 6% annualized return on equity to common shareholders.
Speaker #3: Our credit-sensitive strategies contributed 11 million dollars to pre-tax income. Generating an annualized return on equity of 11%. The contribution to pre-tax income from organically created CRT investments was 6 million dollars, which included 7 million dollars of realized gains in carry and 1 million dollars of market-driven value declines.
Speaker #2: As is our standard practice, we continue to monitor our portfolio mix and allocate capital toward investments with the most attractive return potential and risk protection. Our momentum in organic investment creation remains strong, and we have successfully positioned PMT as a leader in the private label securitization market.
Speaker #3: Investments in subordinate MBS from our private label securitizations generated gains of 5 million dollars, down from 6 million dollars in the prior quarter primarily due to lower valuation-related gains.
Speaker #2: Given the success of our securitization program, we are shifting our equity allocation towards creative, credit-sensitive strategies. I am confident this realignment of our balance sheet will bolster PMT's return profile and deliver attractive total returns over the long term.
Speaker #3: The interest rate-sensitive strategies contributed pre-tax income of 9 million dollars for an annualized ROE of 3%. Income excluding market-driven value changes for this segment was 20 million dollars, up from 11 million dollars in the prior quarter as decreased prepayment speeds during the quarter, particularly on higher note-rate MSRs, drove slower runoff of our MSR assets.
Speaker #2: Now, I'll turn it over to Dan to review the Q2 financial performance.
Speaker #3: Thank you, David. Net income attributable to common shareholders was $20 million, or $0.23 per diluted common share in Q2, for a 6% annualized return on equity to common shareholders.
Speaker #3: During the quarter, we purchased 486 million dollars of agency floating-rate MBS, and the fair value of our MBS portfolio increased to 4.1 billion dollars at June 30th, up from 3.8 billion dollars at March 31st.
Speaker #3: Our credit-sensitive strategies contributed $11 million to pre-tax income, generating an annualized return on equity of 11%. The contribution to pre-tax income from organically created CRT investments was $6 million, which included $7 million of realized gains in carry and $1 million of market-driven value declines.
Speaker #3: Regarding market-driven fair value changes, our hedging activities during the quarter effectively mitigated our interest rate risk exposure, as the 18 million dollar MSR fair value increase was offset by 18 million dollars of net declines in fair value of MBS and interest rate hedges, including the related tax benefits.
Speaker #3: Investments in subordinate MBS from our private label securitizations generated gains of $5 million, down from $6 million in the prior quarter, primarily due to lower valuation-related gains.
Speaker #3: The aggregation of securitization segment reported pre-tax income of 11 million dollars, down from 16 million dollars in the prior quarter. Net gains on loans acquired for sale declined by approximately 8 million dollars from the prior quarter, primarily due to lower volumes.
Speaker #3: The interest rate-sensitive strategies contributed pre-tax income of $9 million for an annualized ROE of 3%. Income excluding market-driven value changes for this segment was $20 million, up from $11 million in the prior quarter, as decreased prepayment speeds during the quarter, particularly on higher note-rate MSRs, drove slower runoff of our MSR assets.
Speaker #3: In total, PMT reported 32 million dollars of net income across its strategies, excluding market-driven value changes. Up from 28 million dollars in the prior quarter, primarily due to an increased contribution from the interest rate-sensitive strategies.
Speaker #3: During the quarter, we purchased $486 million of agency floating-rate MBS, and the fair value of our MBS portfolio increased to $4.1 billion at June 30th, up from $3.8 billion at March 31st.
Speaker #3: I want to address our dividend in the context of our current results and the updated run-rate return potential. While projections for income excluding market-driven value changes remain below the dividend level, it is important to note that we expect to maintain the common share dividend at 40 cents per share.
Speaker #3: Regarding market-driven fair value changes, our hedging activities during the quarter effectively mitigated our interest rate risk exposure, as the $18 million MSR fair value increase was offset by $18 million of net declines in the fair value of MBS and interest rate hedges, including the related tax benefits.
Speaker #3: This is supported by our taxable income, which we expect to be sufficient to fully cover the dividend at its current level in coming periods.
Speaker #3: Turning to slide 12, we highlight the flexible and sophisticated financing structures PMT has in place to support its diversified portfolio of investments. And finally, on slide 13, we continue to believe that debt-to-equity excluding non-recourse debt is the best metric for measuring our core leverage.
Speaker #3: The Aggregation and Securitization segment reported pre-tax income of $11 million, down from $16 million in the prior quarter. Net gains on loans acquired for sale declined by approximately $8 million from the prior quarter, primarily due to lower volumes.
Speaker #3: That ratio increased to 6.2 times at quarter end from 5.6 times at the prior quarter end, due to growth in loans held for sale and remains in line with our expected levels.
Speaker #3: In total, PMT reported $32 million of net income across its strategies, excluding market-driven value changes, up from $28 million in the prior quarter, primarily due to an increased contribution from the interest rate-sensitive strategies.
Speaker #3: PMT's total debt-to-equity increased to approximately 12 to 1 from 11 to 1 at March 31st, as we continue to retain investments from securitizations. The increase in our total debt-to-equity ratio reflects growth in non-recourse debt associated with these transactions.
Speaker #3: I want to address our dividend in the context of our current results and the updated run-rate return potential. While projections for income, excluding market-driven value changes, remain below the dividend level, it is important to note that we expect to maintain the common share dividend at $0.40 per share.
Speaker #3: Where all securitized loans are required to be consolidated on our balance sheet for accounting purposes. As a reminder, the source of repayment for this debt is limited to the cash flows from the associated loans in each private label securitization, mitigating any additional exposure to PMT.
Speaker #3: This is supported by our taxable income, which we expect to be sufficient to fully cover the dividend at its current level in coming periods.
Speaker #3: We expect a divergence between these two metrics to continue increasing as our securitization program continues to grow. We'll now open it up for questions.
Speaker #3: Turning to slide 12, we highlight the flexible and sophisticated financing structures PMT has in place to support its diversified portfolio of investments. And finally, on slide 13, we continue to believe that debt-to-equity, excluding non-recourse debt, is the best metric for measuring our core leverage.
Speaker #3: Operator?
Speaker #1: We will now begin the question-and-answer session. Please limit yourself to one question and one follow-up. If you'd like to ask a question, please press star 1 to raise your hand.
Speaker #3: That ratio increased to 6.2 times at quarter-end from 5.6 times at the prior quarter-end, due to growth in loans held for sale, and remains in line with our expected levels.
Speaker #1: To withdraw your question, press star 1 again. We ask that you pick up your handset when asking a question to allow for optimum sound quality.
Speaker #3: PMT's total debt-to-equity increased to approximately 12-to-1 from 11-to-1 at March 31st, as we continue to retain investments from securitizations. The increase in our total debt-to-equity ratio reflects growth in non-recourse debt associated with these transactions, where all securitized loans are required to be consolidated on our balance sheet for accounting purposes.
Speaker #1: If you're muted locally, please remember to unmute your device. Please stand by while we compile the Q&A roster. Your first question is from Bose George from KBW.
Speaker #1: Your line is now open. Please go ahead.
Speaker #3: As a reminder, the source of repayment for this debt is limited to the cash flows from the associated loans in each private label securitization, mitigating any additional exposure to PMT.
Speaker #4: Hi guys. Just in terms of the move we've had in rates since quarter end, can you just talk about the impact of that on the run-rate earnings?
Speaker #4: Is that going to help with the MSR returns? Yeah, just call around. That would be great.
Speaker #3: We expect the divergence between these two metrics to continue increasing as our securitization program continues to grow. We'll now open it up for questions.
Speaker #3: Yeah. Overall, thanks for the question, Dos. Overall, as interest rates move higher in particularly long rates and talked about this a little bit before, it's beneficial to the expected earnings in run-rate.
Speaker #3: Operator?
Speaker #1: We will now begin the question-and-answer session. Please limit yourself to one question and one follow-up. If you'd like to ask a question, please press *1 to raise your hand.
Speaker #3: Especially with the MSR, so we mentioned it in terms of the context of the run-rate, that as interest rates are moved higher, it's driven up our expectation for the returns of the MSR portfolio.
Speaker #1: To withdraw your question, press star 1 again. We ask that you pick up your handset when asking a question to allow for optimum sound quality.
Speaker #1: If you're muted locally, please remember to unmute your device. Please stand by while we compile the Q&A roster. Your first question is from Bose George from KBW.
Speaker #3: As rates as or if rates continue to move higher longer rates, and mortgage rates, that further dampens the prepayment speeds on the MSR and could drive additional increases in the MSR returns, which would help to further bolster the would help to further bolster the MSR returns.
Speaker #1: Your line is now open. Please go ahead.
Speaker #4: Hey, guys. Just in terms of the move we've had in rates since quarter-end, can you just talk about the impact of that on the run-rate earnings?
Speaker #3: I would say a little bit of an offset to that is that to the extent that short rates increase meaningfully or the Fed increases short rates meaningfully, that has a bit of a dampening effect on the overall returns as that would drive up our financing costs.
Speaker #4: Does that help with the MSR returns? Yeah, just call her on. That would be great.
Speaker #3: Yeah. Overall, thanks for the question, Bose. Overall, as interest rates move higher, particularly long rates—and we've talked about this a little bit before—it's beneficial to the expected earnings and run-rate.
Speaker #3: For any of our longer-dated fixed-rate assets, in particular in the interest rate-sensitive strategies and with respect to our subordinate bonds. We have some of our investments in recent periods we've invested those in assets that are less sensitive to that, in particular CMO floaters.
Speaker #3: Especially with the MSR, we mentioned it in terms of the context of the run rate. As interest rates have moved higher, it has driven up our expectation for the returns of the MSR portfolio.
Speaker #3: But those are the two sort of offsetting potential impacts from interest rates increasing.
Speaker #3: As rates as or if rates continue to move higher longer rates, and mortgage rates, that further dampens the prepayment speeds on the MSR and could drive additional increases in the MSR returns, which would help to further bolster the would help to further bolster the MSR returns.
Speaker #4: Okay. But net could we be a couple of pennies higher than the 33 cents that you showed?
Speaker #3: Given our concentration in mortgage servicing rights and the fact that we generally seen the long rates, I'd say move up a bit faster than we expect short rates to, it would generally be beneficial to the run-rate.
Speaker #3: I would say a little bit of an offset to that is that, to the extent that short rates increase meaningfully or the Fed increases short rates meaningfully, that has a bit of a dampening effect on the overall returns, as that would drive up our financing costs.
Speaker #4: Okay. Great. And then just on the MSR sales, I mean, could we see more MSR sales? It seems like the market for low coupon MSRs, at least, is very strong.
Speaker #4: And would it make sense to potentially do that, maybe park some in agency MBS as this pivot happens?
Speaker #3: For any of our longer-dated fixed-rate assets, in particular in the interest rate-sensitive strategies and with respect to our subordinate bonds, we have—some of our investments in recent periods—we’ve invested those in assets that are less sensitive to that; in particular, CMO floaters.
Speaker #3: Look, as you know, Bose, we've become much more active in terms of managing the portfolio. And I think as we look at the opportunities and we see the returns, in securitizations combined with the fact that there is a very robust bid for MSRs with low note rates, that's something that will clearly be looking at.
Speaker #3: But those are the two sort of offsetting potential impacts from interest rates increasing.
Speaker #4: Okay. But net, could we be a couple of pennies higher than the $0.33 that you showed?
Speaker #4: So okay. Great. Thank you.
Speaker #3: Given our concentration in mortgage servicing rights, and the fact that we generally see long rates move up a bit faster than we expect short rates to, it would generally be beneficial to the run-rate.
Speaker #1: The next question is from Marissa Lobo of UBS. Your line is open. Please go ahead.
Speaker #5: Hi. Thank you. Just on the shift and the relationship to PFSI on the shift to 100% non-agency acquisition. I mean, how does that alter the economic relationship or the management agreement with PFSI?
Speaker #4: Okay, great. And then, just on the MSR sales—could we see more MSR sales? It seems like the market for low coupon MSRs, at least, is very strong.
Speaker #4: And would it make sense to potentially do that, maybe park some in agency MBSs as it happens?
Speaker #3: So it doesn't alter the management agreement. Really, overall, the impact that that would have is that there are less loans flowing through the correspondence arrangements or the fulfillment agreement.
Speaker #3: Look, we have, as you know, Bose, we've become much more active in terms of managing the portfolio. And I think as we look at the opportunities and we see the returns in securitizations, combined with the fact that there is a very robust bid for MSRs with low note rates, that's something that we're clearly looking at.
Speaker #3: So we do PMT does pay a fulfillment fee to PFSI for all of the loans that come through that correspondent loan arrangement or correspondent loan channel to directly to PMT.
Speaker #3: So to the extent that there's a lower number of loans, none of the agency-eligible conventional loans flowing through that correspondent arrangement, that would be a bit lower gain on sale, being generated at PMT from those loans.
Speaker #4: So okay. Great. Thank you.
Speaker #1: The next question is from Marissa Lobo of UBS. Your line is open; please go ahead.
Speaker #5: Hi, thank you. Just on the shift and the relationship to PFSI, on the shift to 100% non-agency acquisition—how does that alter the economic relationship or the management agreement with PFSI?
Speaker #3: But lower fulfillment fees flowing back to PFSI. The just to emphasize the reason or rationale for that change is really to getting back to the allocation of equity to reduce the amounts of capital that continues to be invested in MSRs, in particular higher-rate MSRs.
Speaker #3: So it doesn't alter the management agreement. Really, overall, the impact that would have is that there are fewer loans flowing through the correspondence arrangements or the fulfillment agreement.
Speaker #3: Where we believe PMT has a better allocation of equity into the subordinate bonds that it's generating from its private label securitizations. And so that drives we expect to drive more beneficial and increased run-rate over time, through the reallocation of that equity.
Speaker #3: So we do—PMT does pay a fulfillment fee to PFSI for all of the loans that come through that correspondent loan arrangement, or correspondent loan channel, directly to PMT.
Speaker #3: So, to the extent that there's a lower number of loans—none of the agency-eligible conventional loans—flowing through that correspondent arrangement, there would be a bit lower gain on sale being generated at PMT from those loans.
Speaker #5: Okay. Got it. And on rate sensitivity, following the sale of the MSR and your capital rate appointment, I mean, how should we think about PMT's interest rate sensitivity and book value volatility versus today?
Speaker #3: Overall should be very similar. Our hedging practices remain the same as they have been. And our overall strategy in PMT has generally been to insulate it from significant book value changes due to interest rate movements as you can see from this quarter's hedge results in particular, have been successful in accomplishing that.
Speaker #3: But lower fulfillment fees flowing back to PFSI. Just to emphasize, the reason or rationale for that change is really to get back to the allocation of equity, to reduce the amount of capital that continues to be invested in MSRs, in particular higher-rate MSRs, where we believe PMT has a better allocation of equity into the subordinate bonds that it's generating from its private label securitizations.
Speaker #3: And we expect that to continue as we reallocate equity away from MSRs and into the private label securitizations. So we do include the those holdings from the private label securitizations.
Speaker #3: And so, we expect that to drive more beneficial and increased run-rate over time through the reallocation of that equity.
Speaker #3: Those are also included in our global interest rate hedging and management and so are considered in terms of our hedging positions.
Speaker #5: Okay, got it. And on rate sensitivity, following the sale of the MSR and your capital redeployment, how should we think about PMT's interest rate sensitivity and book value volatility versus today?
Speaker #5: Appreciate the answers.
Speaker #1: Our next question is from Trevor Cranston of Citizens JPM. Your line is open. Please go ahead.
Speaker #3: Overall, things should be very similar. Our hedging practices remain the same as they have been, and our overall strategy in PMT has generally been to insulate it from significant book value changes due to interest rate movements. As you can see from this quarter's hedge results in particular, we have been successful in accomplishing that.
Speaker #4: Okay. Thanks. As we think about the pace of capital transition going forward, it seems like broadly speaking, kind of non-agency securitization activity has been fairly robust recently.
Speaker #4: Are you guys finding any opportunities to potentially deploy capital into third-party securitizations or should the expectation be more so that you guys will continue to focus on your own organically created investments?
Speaker #3: And we expect that to continue as we reallocate equity away from MSRs and into the private label securitizations. So we do include those holdings from the private label securitizations.
Speaker #3: Yeah. So we look at a lot of bonds being offered by street desks. We buy smaller pieces here and there. Not because we have any bias necessarily to wanting to be to do the organic creation, but we believe in the economic value of it.
Speaker #3: Those are also included in our global interest rate hedging and management, and so are considered in terms of our hedging positions.
Speaker #5: Appreciate the answers.
Speaker #1: Our next question is from JPM. Your line is open. Please go ahead.
Speaker #3: I think given the fact that our manager is servicing the loans and we have the investment in the loans and our manager has done the diligence on the loans, we feel very, very comfortable with the underlying assets in the securitization versus buying in the secondary market from other originators for loans that are being serviced by others.
Speaker #6: Hey, thanks. As we think about the pace of capital transition going forward, it seems like, broadly speaking, non-agency securitization activity has been fairly robust recently.
Speaker #6: Are you guys finding any opportunities to potentially deploy capital into third-party securitizations, or should the expectation be more so that you will continue to focus on your own organically created investments going forward?
Speaker #3: But it's not a policy we won't do it. For the well, we believe in appropriate return. We have bought in the past and we will buy in the future, but it's just from a best execution standpoint, the best path to redeploying the capitals to redeploy it into the securitizations that we have been doing.
Speaker #3: Yeah. So we look at a lot of bonds being offered by street desks. We buy smaller pieces here and there—not because we have any bias necessarily toward wanting to do organic creation, but because we believe in the economic value of it.
Speaker #4: Okay. Okay. Thank you.
Speaker #1: Our next question is from Doug Harter of VTIG. Your line is open. Please go ahead.
Speaker #3: I think, given the fact that our manager is servicing the loans, and we have the investment in the loans, and our manager has done the diligence on the loans, we feel very, very comfortable with the underlying assets in the securitization versus buying in the secondary market from other originators, for loans that are being serviced by others.
Speaker #4: Thanks. And good afternoon. Can you talk about the pacing of securitization activity to the extent that you're able to free up more capital through MSR sales?
Speaker #4: Do you think that could accelerate or is the pace that you've been operating at kind of the pace that the market that you see the opportunity as today?
Speaker #3: No, look, this is the advantage that PMT has given its synergistic relationship with PFSI. And look, I think that as we have capital to deploy, I can see us doing a larger securitizations to create larger investments.
Speaker #3: But it's not a policy that we won't do it, and for the, well, we believe in appropriate return—we have bought in the past, and we will buy in the future. But it's just, from a best execution standpoint, the best path to redeploying the capital is to redeploy it into the securitizations that we have been doing.
Speaker #3: We've been redeploying some of the capital into the floaters. But I don't I think that we have look, with the leading PFSIs, the leading correspondent aggregator, there's securitization activity around call it 25 to 30 percent of the owner-occupied loans that go to the GSEs.
Speaker #6: Okay. Okay. Thank you.
Speaker #1: Our next question is from Doug Harder of BTIG. Your line is open. Please go ahead.
Speaker #4: Thanks, and good afternoon. Can you talk about the pacing of securitization activity, to the extent that you're able to free up more capital through MSR sales?
Speaker #3: There's securitization activity around the investor in second homes that go to the GSEs. We in PMT could do jumbo securitizations. And given the pace of activity of non-QM that we're doing in PMT, combined with the fact that PFSI is doing a robust amount out of its broker division and is selling in the secondary market for which PMT could buy, we could do a non-QM securitization, which I'm hopeful we can get one done in the second half of the year.
Speaker #4: Do you think that could accelerate, or is the pace that you've been operating at kind of the pace that you see the opportunity as today?
Speaker #3: No, look, this is the advantage that PMT has, given its synergistic relationship with PFSI. And look, I think that as we have capital to deploy, I can see us doing larger securitizations to create larger investments.
Speaker #3: And so there is a lot of opportunity for us to deploy capital into the securitization market. So it's not a necessarily a function of redeployment.
Speaker #3: We've been redeploying some of the capital into the floaters. But I don't I think that we have look, with the leading PFSI is the leading correspondent aggregator.
Speaker #3: As we sell assets, it's understanding that if we're going to sell servicing, what the servicing landscape looks like, and identifying that are we maximizing the capital upon the sale?
Speaker #3: There's securitization activity around, call it, 25 to 30 percent of the owner-occupied loans that go to the GSEs. There's securitization activity around the investor and second homes that go to the GSEs.
Speaker #3: In addition to maximizing the return, upon the redeployment.
Speaker #3: We in PMT could do jumbo securitizations. And given the pace of activity of non-QM that we're doing in PMT, combined with the fact that PFSI is doing a robust amount out of its broker division and is selling in the secondary market for which PMT could buy, we could do a non-QM securitization, which I'm hopeful we can get one done in the second half of the year.
Speaker #4: I appreciate that. David, and can you just briefly talk what impact if any do you think the move higher in rates that we've seen will have on kind of securitization execution?
Speaker #3: Look, any higher anytime you move higher in rates, it does have an effect on production. But I will tell you, we've been running it I would say slower levels over the past call it two months.
Speaker #3: And so there is a lot of opportunity for us to deploy capital into the securitization market. So, it's not necessarily a function of redeployment as we sell assets.
Speaker #3: And I think that you're going to continue to see things slow down. There's still a lot of activity. On the origination side, and the non-QM space, there's a lot of activity on the investor in second home space.
Speaker #3: It's understanding that, if we're going to sell servicing, what the servicing landscape looks like, and identifying whether we are maximizing the capital upon the sale in addition to maximizing the return upon the redeployment.
Speaker #3: And there's a good amount of activity in cash out refinances. But there's no escaping the fact that mortgage is a cyclical endeavor and as rates go up, activity does slow down.
Speaker #4: I appreciate that, David. Can you just briefly talk about what impact, if any, you think the move higher in rates that we've seen will have on securitization execution?
Speaker #2: With respect to the execution, a bit of the offset to that too though, when we're talking about execution, is that to the extent that there's less supply flowing into the market, that can help in terms of investor demand for the securitization?
Speaker #3: Look, any time you move higher in rates, it does have an effect on production. But I will tell you, we've been running at, I would say, slower levels over the past, call it, two months, and I think that you're going to continue to see things slow down.
Speaker #2: Just because there's less overall supply. And so to the extent that there's still a good amount of loans, as David was talking about, sort of raw materials to generate the securitization, coming through from PMT's partnership with PFSI, that does give us that advantage and potentially a little bit of tailwinds with respect to the securitization execution.
Speaker #3: There's still a lot of activity on the origination side, and in the non-QM space, there's a lot of activity on the investor and second home space as well.
Speaker #4: Great. Appreciate it. Thank you.
Speaker #3: And there's a good amount of activity in cash-out refinances. But there's no escaping the fact that mortgage is a cyclical endeavor, and as rates go up—
Speaker #1: There are no further questions at this time. I will now turn the call back to David Spector for closing remarks.
Speaker #2: Thank you, Operator. And thank you all for joining us. If you have any additional questions, please don't hesitate to reach out to our investor relations team.
Speaker #3: It's activity does slow down.
Speaker #2: With respect to the execution, a bit of the offset to that too, though, when we're talking about execution, is that to the extent that there's less supply flowing into the market, that can help in terms of investor demand for the securitization.
Speaker #2: Thank you so much.
Speaker #2: Just because there's less overall supply. And so, to the extent that there's still a good amount of loans, as David was talking about—sort of raw materials to generate the securitization—coming through from PMT's partnership with PFSI, that does give us that advantage and potentially a little bit of tailwind with respect to the securitization execution.
Speaker #4: Great. Appreciate it. Thank you.
Speaker #1: There are no further questions at this time. I will now turn the call back to David Spector for closing remarks.
Speaker #3: Thank you, operator. And thank you all for joining us. If you have any additional questions, please don't hesitate to reach out to our Investor Relations team.
Speaker #3: Thank you so much.
