PennyMac Mortgage Funding Belief (NYSE:PMT) Q2 2020 Earnings Convention Name August 5, 2020 8:00 PM ET
Isaac Backyard – Vice President, Investor Relations
David Spector – President & Chief Government Officer
Vandy Fartaj – Chief Funding Officer
Andy Chang – Chief Monetary Officer
Convention Name Contributors
Good afternoon, and welcome to the Second Quarter Earnings Dialogue for PennyMac Mortgage Funding Belief. The slides that accompany this dialogue can be found from PennyMac Mortgage Funding Belief web site at www.pennymac-reit.com.
Earlier than we start, let me remind you that our dialogue accommodates forward-looking statements which can be topic to the dangers recognized on slide 2 that might trigger our precise outcomes to vary materially. Thanks.
Now, I would wish to introduce David Spector, PMT’s President and Chief Government Officer, who will talk about the corporate’s second quarter outcomes.
For the second quarter 2020, PMT reported internet revenue attributable to widespread shareholders of $458.Four million or $4.51 per widespread share. Our document earnings this quarter mirror document correspondent manufacturing phase outcomes and the partial restoration within the honest worth of our CRT investments from depressed ranges at March 31, 2020, on account of market dislocations associated to COVID-19. These earnings have been partially offset by honest worth losses on MSRs, pushed by higher-than-anticipated prepayments through the quarter and expectations for larger prepayments sooner or later pushed by decrease charges.
Rate of interest hedges additionally recorded honest worth losses, pushed by elevated hedge prices and honest worth losses on choices used to hedge MSRs as volatility decreased by June 30. PMT studies outcomes by way of 4 segments: credit-sensitive methods, which contributed $458.Eight million in pre-tax revenue, curiosity rate-sensitive methods, which contributed $117.5 million in pre-tax loss, correspondent manufacturing, which contributed $139.6 million in pre-tax revenue, and company with a pre-tax lack of $12.Eight million. As beforehand introduced, PMT paid a dividend of $0.40 per share for the quarter. E book worth per widespread share was $19.39 at June 30, up from $15.16 at March 31, 2020.
PMT’s capital deployment this quarter continued to be pushed by its standard mortgage manufacturing volumes, which totaled $18.9 billion in unpaid principal steadiness, up 17% from the prior quarter and up 76% from the second quarter 2019. New MSR investments for the quarter totaled $203 million and we delivered to Fannie Mae CRT eligible loans of $1.Eight billion in UPB, leading to a agency dedication to buy $48 million of latest CRT securities. In Might and June, we repurchased roughly 566,000 shares of PMT at a weighted common worth of $13.36 at a value of $7.6 million.
Now let’s flip to slip Four and talk about financial developments affecting our enterprise. Challenges within the U.S. financial system mirror the influence of COVID-19 as a current resurgence of the virus weighs on state’s plans to reopen. Reopening plans, together with a return to bodily work areas, at the moment are on pause in over 80% of the nation and the financial restoration is predicted to be extra gradual than beforehand forecasted. In line with the Bureau of Labor Statistics, the unemployment fee reached a current excessive of 14.7% at April 30 whereas main economists forecast a gradual restoration to six.9% by the tip of 2021.
New requests for mortgage forbearance have decreased considerably since March and April and debtors are starting to exit forbearance plans as they proceed or resume making funds or receive help by way of government-supported mortgage modification applications. And just lately, regardless of comparatively tight ranges of provide, economists have begun to forecast dwelling worth decreases in metropolitan areas with closely affected economies.
Fiscal stimulus advantages from the federal authorities have begun to roll off with an extension or additional stimulus remaining unsure as Congress has but to resolve variations on a number of points, together with the jobless profit, legal responsibility protections for enterprise, support to state and native governments, and direct funds to Individuals. Liquidity within the monetary markets has largely rebounded since March and April. Nonetheless, markets proceed to mirror uncertainty associated to the long-term impacts of COVID-19. The improved liquidity throughout Might and June resulted in a big restoration within the honest worth of credit-related belongings, and particularly, government-sponsored enterprise credit score danger switch investments that gained in worth.
Now let’s flip to slip 5 to debate PMT’s alternative within the mortgage origination market. Financial forecast for whole originations in 2020 have elevated to almost $Three trillion, the best degree since 2003 and forecast for whole originations in 2021 have just lately elevated to $2.Three trillion, just like the sturdy market we noticed in 2019. These forecasts are supported by all-time low mortgage charges, which proceed to drive sturdy refinance and buy mortgage demand. Forecasts for buy mortgage originations have additionally elevated just lately on account of larger demand, together with in suburban areas.
Moreover, gross sales of beforehand owned properties posted their largest ever month-to-month enhance in June and gross sales of latest properties have been above consensus expectations. Achieve on sale margins stay elevated, extra particularly, within the direct lending channels pushed by capability constraints. Whereas corresponding achieve on sale margins have decreased from document ranges seen early within the quarter as different market members have returned. And on account of its capital construction, danger administration disciplines and vital know-how and infrastructure investments made by PFSI in recent times, PMT was in a position to efficiently capitalize available on the market alternative and proceed to amass, fund, and settle loans all through the disaster.
Now let’s flip to slip 6 to debate PMT’s funding exercise by technique through the quarter. On slide 6, we element funding exercise for every of PMT’s funding methods through the second quarter. PMT’s funding alternatives are pushed by its standard correspondent manufacturing enterprise. CRT belongings elevated as a consequence of honest worth beneficial properties of $453 million and decreased from substantial runoff as a consequence of prepayment exercise, together with a big discount within the unfunded dedication associated to CRT-6.
New investments in CRT have been $48 million as we wind down this system with Fannie. PMT’s distressed mortgage and actual property owned portfolio declined additional to $52 million in honest worth on the finish of the second quarter from $60 million at March 31. This portfolio is primarily comprised of REO. New MSR and ESS investments primarily sourced from the securitization of $18.9 billion in UPB of standard mortgage manufacturing have been $204 million and internet of runoff elevated $139 million. On account of the decline in rates of interest through the quarter, the honest worth of MSR and ESS investments declined by $112 million, partially offsetting the online new investments.
Company MBS are held by PMT as a part of the great technique designed to mitigate the rate of interest sensitivity of the MSR and ESS belongings. The discount of Company MBS within the quarter displays a rebalancing of the hedge in favor of MBS forwards and doesn’t mirror a big change in invested fairness. General, the online change in PMT’s invested fairness was a lower of roughly $60 million within the second quarter.
Now let’s flip to slip 7 and talk about the run fee return potential from PMT’s funding methods. PMT’s run fee return potential represents the common annualized return and quarterly earnings potential. PMT expects to earn on common every quarter from its methods over the following 4 quarters. Our expectation for PMT’s funding methods is a median diluted EPS per quarter of $0.65, which might end in an annualized return on widespread fairness of roughly 13%. PMT’s fairness allocation associated to credit-sensitive methods is predicted to common 37% with a run fee annualized potential return on fairness of 16.1%.
Our credit-sensitive methods primarily consists of our investments in CRT with a return potential that has decreased from earlier estimates as a result of enhance in honest worth within the second quarter, which decreased our go-forward anticipated charges of return. The CRT markets proceed to mirror uncertainty associated to COVID-19 and its related losses. Fairness allotted to curiosity rate-sensitive methods is predicted to common 33%, with an annualized return on fairness of 11.1%. We contemplate the outcomes on this phase in combination as MBS and hedge positions are primarily used to average the influence of rate of interest volatility on MSR and ESS returns. Our expectations mirror larger return potential on MSRs pushed by a discount within the anticipated influence on servicing from COVID-19.
Fairness allotted to the correspondent manufacturing phase is predicted to common 14%, with an annualized return on fairness of roughly 38%. That is decrease than prior projections as standard margins have returned to normalized ranges quicker than initially anticipated.
That concludes my presentation, and I would now like to show the dialogue over to Vandy Fartaj, PMT’s Chief Funding Officer; who will evaluate our mortgage funding actions.
Let’s start with Slide 9 for a have a look at our correspondent manufacturing highlights. Correspondent acquisitions by PMT within the second quarter totaled $29.9 billion in UPB, up barely from the prior quarter, and up 40% yr over yr, 63% of our acquisitions have been standard loans and 37% have been authorities loans. Standard correspondent acquisitions totaled $18.9 billion in UPB, up 17% from the prior quarter, and up 76% from the second quarter of 2019. Authorities mortgage acquisitions within the quarter for which PMT earns a sourcing price from PennyMac Monetary, totaled $11 billion in UPB, down 19% from the prior quarter, and up 4% from the second quarter of 2019. Standard lock quantity was a document $24.Eight billion in UPB, up 30% from the prior quarter, and up 96% from the second quarter of 2019.
I am excited to announce that as of July 31, roughly 80% of PMT’s correspondent sellers at the moment are on P3, the brand new correspondent lending portal launched by PennyMac Monetary, our supervisor and repair supplier through the second quarter. This portal leverages PennyMac’s proprietary know-how and Ellie Mae’s next-generation Embody Digital Lending platform for a best-in-class expertise. Importantly, P3 seamlessly integrates with PennyMac’s proprietary mortgage bidding system that immediately costs loans for distinctive traits and required returns.
We imagine that this new system will enhance the general buyer expertise whereas additionally rising the pace at which we are able to deploy updates or system enhancements in a quickly altering mortgage market surroundings. Greater-margin finest efforts commitments elevated to 38% of lock quantity within the second quarter from 23% within the prior quarter, enabled by our sturdy capital place and our managers’ experience to effectively hedge manufacturing pipelines throughout totally different market environments.
Taking a look at July, volumes stay elevated. Whole correspondent mortgage acquisitions for the month have been $12.7 billion in UPB whereas rate of interest lock commitments have been a document $16 billion in UPB.
Now let’s flip to slip 10 and talk about PMT’s investments in GSE credit score danger switch. In alignment with the wind down of investments in CRT, PMT delivered $1.Eight billion in UPB of CRT-eligible loans to Fannie Mae within the second quarter.
On a professional forma foundation, at June 30, PMT’s excellent CRT investments totaled $3.1 billion, primarily unchanged from the prior quarter as honest worth beneficial properties have been offset by larger prepayments and a discount within the anticipated face quantity of agency dedication to buy CRT securities. The 60-plus day delinquency fee was 7.3%, up sharply from 0.3% within the prior quarter on account of hardships associated to COVID-19. The anticipated enhance in losses is but to materialize and realized losses within the second quarter totaled $2.7 million, bringing cumulative lifetime losses to $13 million. The UPB of the loans underlying PMT’s CRT agreements was $80.5 billion.
Now let’s flip to slip 11 to look at how beneficial properties on PMT’s CRT investments differ from CAS and STACR securities. PMT’s CRT investments recorded $453 million in honest worth beneficial properties within the second quarter, representing a big restoration of the honest worth loss within the first quarter. The beneficial properties have been decrease relative to the extra liquid tranches of comparable CAS and STACR securities. Though PMT’s GSE CRT investments are just like CAS and STACR, the investments have structural variations that yield totally different outcomes.
The construction of PMT’s fifth CRT transaction is proven on the left whereas a comparable money transaction is proven on the best. PMT owns everything of the loss place as much as 4%, together with the true first loss place or subordinate tranche, labeled B2. That is the primary tranche to soak up losses and is essentially the most price-sensitive in an antagonistic financial surroundings. Additional, the credit score enhancement on PMT’s subordinate tranche could differ from the credit score enhancement on the subordinate tranche of an identical Fannie Mae CAS transaction as proven within the instance.
Moreover, as famous within the diagram, the primary loss tranches retained by Fannie Mae and Freddie Mac in respective CAS and STACR transactions, which makes comparability to the honest market worth of PMT securities troublesome.
Now let’s flip to slip 12 to debate how prepayments permit PMT to recoup CRT honest worth losses. PMT avoids any precise losses and expects to acknowledge honest worth beneficial properties on its CRT investments when the underlying loans repay. Since principal is acquired at par or for CRT 6, the dedication quantity is lowered. The reporting conventions utilized in CRT valuations create a two-month lag within the reporting of prepayments on CRT investments. Subsequently, the excessive degree of prepayments in Might and June will probably be mirrored within the valuation at September 30, 2020.
Now let’s flip to slip 13 to debate developments in MSR and ESS investments. Regardless of elevated prepayment exercise through the quarter, PMT’s MSR belongings elevated to $1.2 billion pushed by funding development from sturdy standard manufacturing volumes.
New MSR investments totaled $203 million. The UPB of PMT’s MSR portfolio totaled $145.Three billion at June 30, up from $141.Eight billion at March 31. PMT’s ESS investments ensuing from bulk, mini-bulk and circulate MSR acquisitions by PennyMac Monetary from 2013 to 2015, decreased to $151.2 million at June 30, pushed by repayments of the underlying loans. The UPB related to ESS investments totaled $18.2 billion at June 30, down from $19.2 billion at March 31.
Now let’s flip to slip 14 to debate the efficiency from the rate of interest delicate methods phase within the second quarter. PMT seeks to handle rate of interest publicity on a world foundation, recognizing rate of interest sensitivities throughout its funding methods. PMT has a historical past of efficiently hedging to offset the vast majority of the rate of interest danger inherent in mortgage servicing rights. Within the second quarter, MSR honest worth decreased as a consequence of expectations for elevated prepayment exercise sooner or later associated to decrease rates of interest, in addition to, larger than modeled precise prepayments.
Rate of interest hedges reported a internet loss. Whereas we maintained our hedge self-discipline all through the market turmoil, elevated volatility early within the second quarter drove the price of choices to close document highs. Subsequently, volatility decreased by June 30, leading to honest worth losses on choices. Yr-to-date, by way of June 30, MSR and ESS honest worth losses totaled $690.1 million, greater than offset by beneficial properties in honest worth of company MBS and rate of interest hedges totaling $825.Three million. This displays PMT’s disciplined deal with capital preservation and danger administration to guard the worth of the MSR and ESS belongings throughout various rate of interest environments.
Now, I would like to show the dialogue over to Andy Chang, PMT’s Chief Monetary Officer, to evaluate the second quarter’s monetary outcomes.
Let’s flip to slip 16 and talk about the second quarter outcomes and return contributions by technique. PMT’s actions within the second quarter mirrored a internet revenue attributable to widespread shareholders of $458.Four million or an annualized return on widespread fairness of 103% internet of all bills.
In whole, credit-sensitive methods contributed $458.Eight million of pre-tax revenue or a 283% annualized return on fairness for the quarter. Throughout the phase, CRT investments contributed pre-tax revenue of $457.Four million, which I’ll increase upon later. Rate of interest-sensitive methods, which embody the efficiency of our MSRs, ESS, and company and non-agency senior MBS positions and associated rate of interest hedges, collectively contributed a pre-tax lack of $117.5 million or a unfavourable 64% annualized return on fairness for the quarter.
As Vandy mentioned earlier, the phase outcomes have been primarily pushed by honest worth losses on MSR belongings and rate of interest hedges. Whereas we present the revenue contribution for every of those curiosity rate-sensitive methods individually, they’re managed collectively because the rate of interest sensitivity of the MSRs and ESS has sometimes been inversely correlated to that of the MBS and our rate of interest hedges. Correspondent manufacturing contributed a document $139.6 million to pre-tax revenue or a 122% annualized return on fairness for the quarter, pushed by record-high margins and powerful manufacturing volumes.
The company phase contributed a pre-tax lack of $12.Eight million. And at last, we recorded $3.Four million in revenue tax expense.
Now let’s flip to slip 17 to debate the efficiency of PMT’s CRT investments within the second quarter. PMT’s CRT investments contributed $457.Four million of pre-tax revenue within the second quarter, consisting of $403.1 million in beneficial properties from market-driven worth adjustments and $54.Three million of revenue, excluding market-driven worth adjustments. Market-driven worth adjustments on our current CRT investments included honest worth beneficial properties of $410.7 million, primarily reflecting a lower in market low cost charges and an enchancment out there’s credit score outlook since March 31.
Internet losses on mortgage loans acquired on the market have been $7.6 million. These honest worth losses have been acknowledged upon mortgage supply through the second quarter below the agency dedication to buy CRT securities. Earnings, excluding market-driven worth adjustments, consisted of internet realized beneficial properties and internet curiosity expense associated to our CRT investments.
For the quarter, realized beneficial properties and keep it up CRT investments totaled $63.Eight million whereas losses acknowledged have been $2.7 million. Curiosity revenue earned on money deposits securing CRT investments was $0.5 million whereas curiosity expense referring to the financing of those investments was $7.Three million.
Now let’s flip to Slide 18 and talk about the delinquency and forbearance developments we see in PMT’s MSR portfolio. The proportion of loans in PMT’s MSR portfolio that have been 30 days or extra delinquent, was 5.3% at July 31, down from 6.3% at June 30, and up from 5% at April 30. Servicing advances excellent have been $42 million at July 31 versus $34 million at April 30.
Fannie Mae and Freddie Mac require a servicer to advance principal and curiosity funds for delinquent loans for less than 4 months. PMT has not paid any advances associated to principal and curiosity and presently has no principal and curiosity advances excellent as prepayment exercise continues to be enough to cowl the GSE necessities. The vast majority of advances associated to PMT’s company MSR portfolio are anticipated to narrate to property taxes and insurance coverage to guard buyers’ curiosity within the properties collateralizing the mortgages.
PMT has traditionally funded servicing advances with company money. PMT has roughly $1.Four billion in obtainable liquidity, much less $100 million in minimal liquidity covenants as of July 31.
Now, let’s flip to slip 19 and talk about COVID forbearances. 59% of forbearance plans that have been in impact for PMT’s servicing portfolio as of April 30 have been prolonged. As you possibly can see on this slide, the proportion of loans in forbearance inside PMT’s MSR portfolio decreased to five.2% at July 31 from 7.3% at April 30, a 13% enhance in new forbearance plans added since April 30 was greater than offset by 39% of debtors in forbearance plans as of April 30, who’ve exited. The 39% of debtors who exited forbearance have been comprised of 31% that stay present or went delinquent and subsequently reperformed, 4% which can be transitioning to lively loss mitigation; primarily for fee deferral and streamlined modifications, and 4% that repaid their mortgage.
Forbearances in impact at April 30 associated to loans underlying PMT’s earliest CRT investments, PMTT1, PMTT2, and PMTT3 declined at a fee in step with PMT’s MSR portfolio general. Such cures out of forbearance associated to those CRT transactions cut back the loss realization potential, which might consequence if loans migrate to 100 days late below these buildings.
And with that, I am going to flip the dialogue again over to David Spector for some closing remarks.
Thanks, Andy. PMT delivered document earnings within the second quarter, rebounding from the numerous first quarter loss, which drove a considerable restoration in e book worth from the prior quarter.
On account of our managers’ dedication to danger administration and operational self-discipline, PMT not solely protected the worth of its belongings in a risky year-to-date interval, however was in a position to regularly purchase, fund, and settle loans all through the disaster as others retreated. This led to document profitability within the correspondent manufacturing phase.
Moreover, PMT’s CRT investments recorded substantial honest worth beneficial properties as they benefited from the numerous restoration within the worth of danger belongings and elevated prepayments all through the quarter. On the identical time, our supervisor and repair supplier, PFSI, continues to carefully work with debtors affected by the pandemic to assist them efficiently refinance or modify their loans to emerge from forbearance plans.
Wanting forward, we mission e book worth development as we count on the earnings potential of PMT’s funding methods to exceed the present dividend degree.
This concludes PennyMac Mortgage Funding Belief’s second quarter earnings dialogue. For any questions, please go to our web site at www.pennymac-reit.com, or name our Investor Relations division at 818-224-7028. Thanks.
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