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PNMAC (PFSI)

Filed: 2 Aug 18, 4:36pm

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

 


 

Form 10-Q

 


 

(Mark One)

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended June 30, 2018

 

Or

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from           to           

 

Commission file number: 001-35916

 


 

PennyMac Financial Services, Inc.

(Exact name of registrant as specified in its charter)

 


 

 

 

 

Delaware

 

80-0882793

(State or other jurisdiction of

 

(IRS Employer

incorporation or organization)

 

Identification No.)

 

 

 

 

 

3043 Townsgate Road, Westlake Village, California

 

91361

(Address of principal executive offices)

 

(Zip Code)

 

(818) 224-7442

(Registrant’s telephone number, including area code)

 


 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒ No ☐

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

 

 

 

 

           Large accelerated filer ☐

 

Accelerated filer ☒

 

 

 

           Non-accelerated filer ☐ (Do not check if a smaller reporting company)                                  

 

                Smaller reporting company ☐

          

           Emerging growth company ☐

 

 

 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

 

Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date.

 

 

 

 

Class

 

Outstanding at July 31, 2018

Class A Common Stock, $0.0001 par value

 

25,101,553

Class B Common Stock, $0.0001 par value

 

45

 

 

 

 

 


 

2


 

 

SPECIAL NOTE REGARDING FORWARD‑LOOKING STATEMENTS

 

This Quarterly Report on Form 10-Q (“Report”) contains certain forward‑looking statements that are subject to various risks and uncertainties. Forward‑looking statements are generally identifiable by use of forward‑looking terminology such as “may,” “will,” “should,” “potential,” “intend,” “expect,” “seek,” “anticipate,” “estimate,” “approximately,” “believe,” “could,” “project,” “predict,” “continue,” “plan” or other similar words or expressions. 

 

Forward‑looking statements are based on certain assumptions, discuss future expectations, describe future plans and strategies, contain financial and operating projections or state other forward‑looking information. Examples of forward‑looking statements include the following:

·

projections of our revenues, income, earnings per share, capital structure or other financial items;

·

descriptions of our plans or objectives for future operations, products or services;

·

forecasts of our future economic performance, interest rates, profit margins and our share of future markets; and

·

descriptions of assumptions underlying or relating to any of the foregoing expectations regarding the timing of generating any revenues.

 

Our ability to predict results or the actual effect of future events, actions, plans or strategies is inherently uncertain. Although we believe that the expectations reflected in such forward‑looking statements are based on reasonable assumptions, our actual results and performance could differ materially from those set forth in the forward‑looking statements. There are a number of factors, many of which are beyond our control that could cause actual results to differ significantly from management’s expectations. Some of these factors are discussed below.

 

You should not place undue reliance on any forward‑looking statement and should consider the following uncertainties and risks, as well as the risks and uncertainties discussed elsewhere in this Report and the section entitled “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2017, filed with the Securities and Exchange Commission (“SEC”) on March 9, 2018.

 

Factors that could cause actual results to differ materially from historical results or those anticipated include, but are not limited to:

 

·

the continually changing federal, state and local laws and regulations applicable to the highly regulated industry in which we operate;

 

·

lawsuits or governmental actions if we do not comply with the laws and regulations applicable to our businesses;

 

·

the mortgage lending and servicing-related regulations promulgated by the Consumer Financial Protection Bureau (“CFPB”) and its enforcement of these regulations;

 

·

our dependence on U.S. government‑sponsored entities and changes in their current roles or their guarantees or guidelines;

 

·

changes to government mortgage modification programs;

 

·

certain banking regulations that may limit our business activities;

 

·

foreclosure delays and changes in foreclosure practices;

 

·

the licensing and operational requirements of states and other jurisdictions applicable to our businesses, to which our bank competitors are not subject;

 

·

changes in macroeconomic and U.S. real estate market conditions;

 

·

difficulties inherent in growing loan production volume;

 

·

difficulties inherent in adjusting the size of our operations to reflect changes in business levels;

 

3


 

·

any required additional capital and liquidity to support business growth that may not be available on acceptable terms, if at all;

 

·

changes in prevailing interest rates;

 

·

increases in loan delinquencies and defaults;

 

·

our dependence on the success of the multifamily market for future originations of commercial mortgage loans and other commercial real estate-related loans;

 

·

our reliance on PennyMac Mortgage Investment Trust (“PMT”) as a significant source of financing for, and revenue related to, our mortgage banking business;

 

·

our obligation to indemnify third‑party purchasers or repurchase loans if loans that we originate, acquire, service or assist in the fulfillment of, fail to meet certain criteria or characteristics or under other circumstances;

 

·

our ability to realize the anticipated benefit of potential future acquisitions of mortgage servicing rights (“MSRs”);

 

·

our obligation to indemnify PMT and the Investment Funds if our services fail to meet certain criteria or characteristics or under other circumstances;

 

·

decreases in the returns on the assets that we select and manage for our clients, and our resulting management and incentive fees;

 

·

the extensive amount of regulation applicable to our investment management segment;

 

·

conflicts of interest in allocating our services and investment opportunities among ourselves and our Advised Entities;

 

·

the effect of public opinion on our reputation;

 

·

our recent growth;

 

·

our ability to effectively identify, manage, monitor and mitigate financial risks;

 

·

our initiation of new business activities or expansion of existing business activities;

 

·

our ability to detect misconduct and fraud;

 

·

our ability to mitigate cybersecurity risks and cyber incidents;

 

·

our exposure to risks of loss resulting from adverse weather conditions and man-made or natural disasters; and

 

·

our organizational structure and certain requirements in our charter documents.

 

Other factors that could also cause results to differ from our expectations may not be described in this Report or any other document.  Each of these factors could by itself, or together with one or more other factors, adversely affect our business, results of operations and/or financial condition.

 

Forward-looking statements speak only as of the date they are made, and we undertake no obligation to update any forward-looking statement to reflect the impact of circumstances or events that arise after the date the forward-looking statement was made.

 

4


 

 

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

PENNYMAC FINANCIAL SERVICES, INC.

CONSOLIDATED BALANCE SHEETS (UNAUDITED)

 

 

 

 

 

 

 

 

 

    

June 30, 

    

December 31, 

 

 

    

2018

    

2017

 

 

 

(in thousands, except share amounts)

 

ASSETS

 

 

 

 

 

 

 

Cash (includes $152,382 and $20,765 pledged to creditors)

 

 $

189,663

 

 $

37,725

 

Short-term investments at fair value

 

 

98,571

 

 

170,080

 

Mortgage loans held for sale at fair value (includes $2,498,583 and $3,081,987 pledged to creditors)

 

 

2,527,231

 

 

3,099,103

 

Derivative assets

 

 

92,471

 

 

78,179

 

Servicing advances, net (includes valuation allowance of $61,825 and $59,958; $94,715 and $114,643 pledged to creditors)

 

 

258,900

 

 

318,066

 

Carried Interest due from Investment Funds pledged to creditors

 

 

370

 

 

8,552

 

Investment in PennyMac Mortgage Investment Trust at fair value

 

 

1,424

 

 

1,205

 

Mortgage servicing rights (includes $2,486,157 and $638,010 at fair value; $2,333,750 and $2,098,067 pledged to creditors)

 

 

2,486,157

 

 

2,119,588

 

Real estate acquired in settlement of loans

 

 

2,300

 

 

2,447

 

Furniture, fixtures, equipment and building improvements, net (includes $20,656 and $23,915 pledged to creditors)

 

 

29,607

 

 

29,453

 

Capitalized software, net (includes $1,347 and $1,568 pledged to creditors)

 

 

31,913

 

 

25,729

 

Assets purchased from PennyMac Mortgage Investment Trust under agreements to resell pledged to creditors

 

 

138,582

 

 

144,128

 

Receivable from PennyMac Mortgage Investment Trust

 

 

19,661

 

 

27,119

 

Receivable from Investment Funds

 

 

12

 

 

417

 

Mortgage loans eligible for repurchase

 

 

879,621

 

 

1,208,195

 

Other 

 

 

85,223

 

 

98,107

 

Total assets

 

 $

6,841,706

 

 $

7,368,093

 

LIABILITIES

 

 

 

 

 

 

 

Assets sold under agreements to repurchase 

 

 $

1,825,813

 

 $

2,381,538

 

Mortgage loan participation purchase and sale agreements

 

 

528,368

 

 

527,395

 

Notes payable

 

 

1,140,546

 

 

891,505

 

Obligations under capital lease

 

 

13,032

 

 

20,971

 

Excess servicing spread financing payable to PennyMac Mortgage Investment Trust at fair value

 

 

229,470

 

 

236,534

 

Derivative liabilities

 

 

4,094

 

 

5,796

 

Accounts payable and accrued expenses

 

 

114,005

 

 

106,716

 

Mortgage servicing liabilities at fair value

 

 

10,253

 

 

14,120

 

Payable to Investment Funds

 

 

404

 

 

2,427

 

Payable to PennyMac Mortgage Investment Trust 

 

 

99,309

 

 

136,998

 

Payable to exchanged Private National Mortgage Acceptance Company, LLC unitholders under tax receivable agreement

 

 

46,903

 

 

44,011

 

Income taxes payable

 

 

67,357

 

 

52,160

 

Liability for mortgage loans eligible for repurchase

 

 

879,621

 

 

1,208,195

 

Liability for losses under representations and warranties  

 

 

20,587

 

 

20,053

 

Total liabilities

 

 

4,979,762

 

 

5,648,419

 

 

 

 

 

 

 

 

 

Commitments and contingencies  –  Note 14

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

Class A common stock—authorized 200,000,000 shares of $0.0001 par value; issued and outstanding, 25,008,655 and 23,529,970 shares, respectively

 

 

 3

 

 

 2

 

Class B common stock—authorized 1,000 shares of $0.0001 par value; issued and outstanding, 45 and 46 shares, respectively

 

 

 —

 

 

 —

 

Additional paid-in capital

 

 

229,941

 

 

204,103

 

Retained earnings

 

 

299,951

 

 

265,306

 

Total stockholders' equity attributable to PennyMac Financial Services, Inc. common stockholders

 

 

529,895

 

 

469,411

 

Noncontrolling interest in Private National Mortgage Acceptance Company, LLC

 

 

1,332,049

 

 

1,250,263

 

Total stockholders' equity

 

 

1,861,944

 

 

1,719,674

 

Total liabilities and stockholders’ equity

 

 $

6,841,706

 

 $

7,368,093

 

 

The accompanying notes are an integral part of these consolidated financial statements.

5


 

PENNYMAC FINANCIAL SERVICES, INC.

CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Quarter ended June 30, 

  

Six months ended June 30, 

 

 

 

2018

 

2017

  

2018

 

2017

 

 

 

(in thousands, except earnings per share)

 

Revenues

 

 

 

 

 

 

 

 

 

 

 

 

 

Net gains on mortgage loans held for sale at fair value:

 

 

 

 

 

 

 

 

 

 

 

 

 

From non-affiliates

 

$

46,019

 

$

99,597

 

$

105,047

 

$

188,248

 

From PennyMac Mortgage Investment Trust

 

 

14,927

 

 

(1,506)

 

 

27,313

 

 

(3,201)

 

 

 

 

60,946

 

 

98,091

 

 

132,360

 

 

185,047

 

Mortgage loan origination fees:

 

 

 

 

 

 

 

 

 

 

 

 

 

From non-affiliates

 

 

22,886

 

 

28,303

 

 

46,241

 

 

52,498

 

From PennyMac Mortgage Investment Trust

 

 

1,542

 

 

1,890

 

 

2,750

 

 

3,269

 

 

 

 

24,428

 

 

30,193

 

 

48,991

 

 

55,767

 

Fulfillment fees from PennyMac Mortgage Investment Trust

 

 

14,559

 

 

21,107

 

 

26,503

 

 

37,677

 

Net mortgage loan servicing fees:

 

 

 

 

 

 

 

 

 

 

 

 

 

Mortgage loan servicing fees:

 

 

 

 

 

 

 

 

 

 

 

 

 

From non-affiliates

 

 

138,871

 

 

112,348

 

 

274,354

 

 

218,815

 

From PennyMac Mortgage Investment Trust

 

 

9,431

 

 

10,099

 

 

20,450

 

 

20,585

 

From Investment Funds

 

 

 3

 

 

543

 

 

 3

 

 

1,039

 

Ancillary and other fees

 

 

13,637

 

 

11,202

 

 

27,808

 

 

23,068

 

 

 

 

161,942

 

 

134,192

 

 

322,615

 

 

263,507

 

Amortization, impairment and change in fair value of mortgage servicing rights and mortgage servicing liabilities

 

 

(47,257)

 

 

(94,435)

 

 

(84,220)

 

 

(152,360)

 

Change in fair value of excess servicing spread payable to PennyMac Mortgage Investment Trust

 

 

(996)

 

 

7,156

 

 

(7,917)

 

 

9,929

 

 

 

 

(48,253)

 

 

(87,279)

 

 

(92,137)

 

 

(142,431)

 

Net mortgage loan servicing fees

 

 

113,689

 

 

46,913

 

 

230,478

 

 

121,076

 

Management fees, net:

 

 

 

 

 

 

 

 

 

 

 

 

 

From PennyMac Mortgage Investment Trust

 

 

5,728

 

 

5,638

 

 

11,424

 

 

10,646

 

From Investment Funds

 

 

(64)

 

 

369

 

 

15

 

 

735

 

 

 

 

5,664

 

 

6,007

 

 

11,439

 

 

11,381

 

Carried Interest from Investment Funds

 

 

(168)

 

 

241

 

 

(348)

 

 

113

 

Net interest income (expense):

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest income:

 

 

 

 

 

 

 

 

 

 

 

 

 

From non-affiliates

 

 

53,206

 

 

32,948

 

 

93,845

 

 

55,002

 

From PennyMac Mortgage Investment Trust

 

 

1,898

 

 

2,025

 

 

3,874

 

 

3,830

 

 

 

 

55,104

 

 

34,973

 

 

97,719

 

 

58,832

 

Interest expense:

 

 

 

 

 

 

 

 

 

 

 

 

 

To non-affiliates

 

 

28,706

 

 

32,511

 

 

61,517

 

 

57,338

 

To PennyMac Mortgage Investment Trust

 

 

3,910

 

 

4,366

 

 

7,844

 

 

9,013

 

 

 

 

32,616

 

 

36,877

 

 

69,361

 

 

66,351

 

Net interest income (expense)

 

 

22,488

 

 

(1,904)

 

 

28,358

 

 

(7,519)

 

Change in fair value of investment in and dividends received from PennyMac Mortgage Investment Trust

 

 

108

 

 

76

 

 

290

 

 

215

 

Results of real estate acquired in settlement of loans

 

 

13

 

 

(119)

 

 

(15)

 

 

(144)

 

Other

 

 

2,571

 

 

1,116

 

 

4,443

 

 

2,581

 

Total net revenues

 

 

244,298

 

 

201,721

 

 

482,499

 

 

406,194

 

Expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

Compensation

 

 

98,540

 

 

82,967

 

 

200,553

 

 

168,207

 

Servicing

 

 

28,490

 

 

24,702

 

 

54,789

 

 

51,545

 

Technology

 

 

15,154

 

 

11,581

 

 

29,774

 

 

22,937

 

Occupancy and equipment

 

 

6,507

 

 

5,965

 

 

12,884

 

 

11,007

 

Professional services

 

 

5,587

 

 

4,523

 

 

11,325

 

 

8,341

 

Loan origination

 

 

5,144

 

 

5,116

 

 

7,259

 

 

9,249

 

Marketing

 

 

2,218

 

 

2,483

 

 

4,379

 

 

4,219

 

Other

 

 

7,960

 

 

6,424

 

 

13,842

 

 

10,697

 

Total expenses

 

 

169,600

 

 

143,761

 

 

334,805

 

 

286,202

 

Income before provision for income taxes

 

 

74,698

 

 

57,960

 

 

147,694

 

 

119,992

 

Provision for income taxes

 

 

6,293

 

 

7,214

 

 

12,363

 

 

14,860

 

Net income

 

 

68,405

 

 

50,746

 

 

135,331

 

 

105,132

 

Less: Net income attributable to noncontrolling interest

 

 

50,568

 

 

40,267

 

 

100,875

 

 

83,774

 

Net income attributable to PennyMac Financial Services, Inc. common stockholders

 

$

17,837

 

$

10,479

 

$

34,456

 

$

21,358

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Earnings per share

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

0.71

 

$

0.45

 

$

1.41

 

$

0.93

 

Diluted

 

$

0.70

 

$

0.44

 

$

1.38

 

$

0.91

 

Weighted average shares outstanding

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

24,959

 

 

23,388

 

 

24,399

 

 

23,006

 

Diluted

 

 

78,825

 

 

77,650

 

 

78,947

 

 

77,641

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

 

6


 

PENNYMAC FINANCIAL SERVICES, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (UNAUDITED)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Class A Common Stock

 

Noncontrolling

 

 

 

 

 

 

 

 

 

 

 

 

interest in Private

 

 

 

 

 

 

 

 

Additional

 

 

 

National Mortgage

 

Total

 

 

Number of

 

Par

 

paid-in

 

Retained

 

Acceptance

 

stockholders'

 

    

shares

    

value

    

capital

    

earnings

    

Company, LLC

    

equity

 

 

(in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at December 31, 2016

 

22,427

 

$

 2

 

$

182,772

 

$

164,549

 

$

1,052,033

 

$

1,399,356

Net income

 

 —

 

 

 —

 

 

 —

 

 

21,358

 

 

83,774

 

 

105,132

Stock and unit-based compensation

 

 —

 

 

 —

 

 

3,450

 

 

 —

 

 

7,256

 

 

10,706

Issuance of Class A common stock in settlement of directors' fees

 

 —

 

 

 —

 

 

108

 

 

 —

 

 

61

 

 

169

Exchange of Class A units of Private  National Mortgage Acceptance Company,  LLC to Class A common stock of PennyMac Financial Services, Inc.

 

1,046

 

 

 —

 

 

16,927

 

 

 —

 

 

(16,927)

 

 

 —

Tax effect of exchange of Class A units of Private National Mortgage Acceptance Company, LLC to Class A common stock of PennyMac Financial Services, Inc.

 

 —

 

 

 —

 

 

(4,111)

 

 

 —

 

 

 —

 

 

(4,111)

Balance at June 30, 2017

 

23,473

 

$

 2

 

$

199,146

 

$

185,907

 

$

1,126,197

 

$

1,511,252

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at December 31, 2017

 

23,530

 

$

 2

 

$

204,103

 

$

265,306

 

$

1,250,263

 

$

1,719,674

Cumulative effect of change in accounting principle accounting for all existing classes of mortgage servicing rights at fair value

 

 —

 

 

 —

 

 

 —

 

 

189

 

 

587

 

 

776

Balance at January 1, 2018

 

23,530

 

 

 2

 

 

204,103

 

 

265,495

 

 

1,250,850

 

 

1,720,450

Net income

 

 —

 

 

 —

 

 

 —

 

 

34,456

 

 

100,875

 

 

135,331

Stock and unit-based compensation

 

230

 

 

 —

 

 

7,728

 

 

 —

 

 

8,340

 

 

16,068

Issuance of Class A common stock in settlement of directors' fees

 

 —

 

 

 —

 

 

51

 

 

 —

 

 

109

 

 

160

Repurchase of Class A common stock

 

(236)

 

 

 —

 

 

(4,826)

 

 

 —

 

 

 —

 

 

(4,826)

Exchange of Class A units of Private National Mortgage Acceptance Company, LLC to Class A common stock of PennyMac Financial Services, Inc. by noncontrolling interest unitholders and issued as equity compensation

 

1,485

 

 

 1

 

 

28,124

 

 

 —

 

 

(28,125)

 

 

 —

Tax effect of exchange and repurchases of Class A units of Private National Mortgage Acceptance Company, LLC to Class A common stock of PennyMac Financial Services, Inc., net

 

 —

 

 

 —

 

 

(5,239)

 

 

 —

 

 

 —

 

 

(5,239)

Balance at June 30, 2018

 

25,009

 

$

 3

 

$

229,941

 

$

299,951

 

$

1,332,049

 

$

1,861,944

 

The accompanying notes are an integral part of these consolidated financial statements.

 

7


 

PENNYMAC FINANCIAL SERVICES, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

 

 

��

 

 

 

 

 

 

 

Six months ended June 30, 

 

 

    

2018

    

2017

 

 

 

(in thousands)

 

Cash flow from operating activities

 

 

 

 

 

 

 

Net income

 

$

135,331

 

$

105,132

 

Adjustments to reconcile net income to net cash used in operating activities:

 

 

 

 

 

 

 

Net gains on mortgage loans held for sale at fair value

 

 

(132,360)

 

 

(185,047)

 

Accrual of servicing rebate payable to Investment Funds

 

 

 —

 

 

100

 

Amortization, impairment and change in fair value of mortgage servicing rights, mortgage servicing liabilities and excess servicing spread

 

 

92,137

 

 

142,431

 

Carried Interest from Investment Funds

 

 

348

 

 

(113)

 

Capitalization of interest on mortgage loans held for sale at fair value

 

 

(39,390)

 

 

(21,615)

 

Accrual of interest on excess servicing spread financing

 

 

7,844

 

 

9,013

 

Amortization of premiums and debt issuance costs

 

 

(13,385)

 

 

7,122

 

Change in fair value of investment in common shares of PennyMac Mortgage Investment Trust

 

 

(219)

 

 

(144)

 

Results of real estate acquired in settlement in loans

 

 

15

 

 

144

 

Stock-based compensation expense

 

 

12,235

 

 

10,390

 

Provision for servicing advance losses

 

 

12,097

 

 

18,030

 

Loss from disposition of fixed assets and impairment of capitalized software

 

 

 —

 

 

377

 

Depreciation and amortization

 

 

5,647

 

 

4,117

 

Purchase of mortgage loans held for sale from PennyMac Mortgage Investment Trust

 

 

(19,267,316)

 

 

(21,244,194)

 

Originations of mortgage loans held for sale

 

 

(2,518,992)

 

 

(2,353,899)

 

Purchase of mortgage loans from Ginnie Mae securities and early buyout investors for modification and subsequent sale

 

 

(2,002,582)

 

 

(1,814,080)

 

Sale and principal payments of mortgage loans held for sale to non-affiliates

 

 

22,832,809

 

 

24,497,179

 

Sale of mortgage loans held for sale to PennyMac Mortgage Investment Trust

 

 

1,427,637

 

 

40,222

 

Repurchase of mortgage loans subject to representations and warranties

 

 

(12,974)

 

 

(11,520)

 

Settlement of repurchase agreeement derivatives

 

 

7,478

 

 

 —

 

Decrease in servicing advances

 

 

47,980

 

 

38,821

 

Collection of Carried Interest

 

 

7,834

 

 

 —

 

Sale of real estate acquired in settlement of loans

 

 

2,130

 

 

 —

 

Decrease (increase) in receivable from PennyMac Mortgage Investment Trust

 

 

5,873

 

 

(1,092)

 

Decrease (increase)  in receivable from Investment Funds

 

 

405

 

 

(211)

 

Decrease (increase) in other assets

 

 

7,792

 

 

(29,492)

 

Increase (decrease) in accounts payable and accrued expenses

 

 

5,349

 

 

(30,395)

 

Decrease in payable to Investment Funds

 

 

(2,023)

 

 

(5,157)

 

Decrease in payable to PennyMac Mortgage Investment Trust

 

 

(38,580)

 

 

(37,650)

 

Payments to exchanged Private National Mortgage Acceptance Company, LLC unitholders under tax receivable agreement

 

 

 —

 

 

(6,221)

 

Increase in income taxes payable

 

 

12,778

 

 

14,824

 

Net cash provided by (used in) operating activities

 

 

595,898

 

 

(852,928)

 

Cash flow from investing activities

 

 

 

 

 

 

 

Decrease (increase) in short-term investments

 

 

71,509

 

 

(59,476)

 

Net settlement of derivative financial instruments used for hedging

 

 

(126,918)

 

 

(30,949)

 

Purchase of mortgage servicing rights

 

 

(30,129)

 

 

(159,465)

 

Purchase of furniture, fixtures, equipment and leasehold improvements

 

 

(4,321)

 

 

(4,668)

 

Acquisition of capitalized software

 

 

(7,664)

 

 

(7,719)

 

Net change in assets purchased from PMT under agreement to resell

 

 

5,546

 

 

 —

 

Increase in margin deposits

 

 

(3,774)

 

 

(12,071)

 

Net cash used in investing activities

 

 

(95,751)

 

 

(274,348)

 

Cash flow from financing activities

 

 

 

 

 

 

 

Sale of assets under agreements to repurchase

 

 

20,763,584

 

 

13,332,610

 

Repurchase of assets sold under agreements to repurchase

 

 

(21,319,387)

 

 

(12,046,244)

 

Issuance of mortgage loan participation certificates

 

 

12,486,542

 

 

10,491,796

 

Repayment of mortgage loan participation certificates

 

 

(12,485,880)

 

 

(10,919,650)

 

Advances on notes payable

 

 

650,000

 

 

435,000

 

Repayment of notes payable

 

 

(400,000)

 

 

(153,073)

 

Advances of obligations under capital lease

 

 

 —

 

 

10,298

 

Repayment of obligations under capital lease

 

 

(7,939)

 

 

(7,081)

 

Repayment of excess servicing spread financing

 

 

(24,309)

 

 

(28,910)

 

Payment of debt issuance costs

 

 

(9,788)

 

 

(11,059)

 

Issuance of common stock pursuant to exercise of stock options

 

 

3,833

 

 

316

 

Repurchase of common stock

 

 

(4,826)

 

 

 —

 

Net cash (used in) provided by financing activities

 

 

(348,170)

 

 

1,104,003

 

Net increase (decrease) in cash and restricted cash

 

 

151,977

 

 

(23,273)

 

Cash and restricted cash at beginning of period

 

 

38,173

 

 

99,642

 

Cash and restricted cash at end of period

 

$

190,150

 

$

76,369

 

Cash and restricted cash at end of period are comprised of the following:

 

 

 

 

 

 

 

Cash

 

$

189,663

 

$

75,978

 

Restricted cash included in Other assets

 

 

487

 

 

391

 

 

 

$

190,150

 

$

76,369

 

The accompanying notes are an integral part of these consolidated financial statements.

 

 

8


 

PENNYMAC FINANCIAL SERVICES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

Note 1—Organization

 

PennyMac Financial Services, Inc. (“PFSI” or the “Company”) was formed as a Delaware corporation on December 31, 2012. Pursuant to a reorganization, the Company became a holding corporation and its primary asset is an equity interest in Private National Mortgage Acceptance Company, LLC (“PennyMac”). The Company is the managing member of PennyMac and operates and controls all of the businesses and affairs of PennyMac subject to the consent rights of other members under certain circumstances, and consolidates the financial results of PennyMac and its subsidiaries.

 

PennyMac is a Delaware limited liability company which, through its subsidiaries, engages in mortgage banking and investment management activities. PennyMac’s mortgage banking activities consist of residential mortgage loan production and mortgage loan servicing. PennyMac’s investment management activities and a portion of its mortgage loan servicing activities are conducted on behalf of investment vehicles that invest in residential mortgage loans and related assets. PennyMac’s primary wholly owned subsidiaries are:

 

·

PNMAC Capital Management, LLC (“PCM”)—a Delaware limited liability company registered with the Securities and Exchange Commission (“SEC”) as an investment adviser under the Investment Advisers Act of 1940, as amended. PCM enters into investment management agreements with entities that invest in residential mortgage loans and related assets.

 

Presently, PCM has a management agreement with PennyMac Mortgage Investment Trust (“PMT”), a publicly held real estate investment trust (“REIT”). Previously, PCM had management agreements with PNMAC Mortgage Opportunity Fund, LLC (the “Registered Fund”) and PNMAC Mortgage Opportunity Fund, L.P. (the “Master Fund”), both formerly registered under the Investment Company Act of 1940, as amended, an affiliate of these registered funds, and PNMAC Mortgage Opportunity Fund Investors, LLC (the Private Fund”) (collectively, the “Investment Funds”). Together, the Investment Funds and PMT are referred to as the “Advised Entities.” In 2017 and through the six months ended June 30, 2018, the Investment Funds sold or liquidated all of their remaining investments. The Registered Fund and the Master Fund obtained orders of de-registration on July 25, 2018, and the management agreements with the Registered Fund, the Master Fund and the Private Fund expired or were otherwise terminated on or before August 2, 2018. PCM expects to complete liquidation of the Investment Funds during 2018.

 

·

PennyMac Loan Services, LLC (“PLS”)  a Delaware limited liability company that services portfolios of residential mortgage loans on behalf of non-affiliates and PMT, purchases, originates and sells new prime credit quality residential mortgage loans and engages in other mortgage banking activities for its own account and the account of PMT.

 

PLS is approved as a seller/servicer of mortgage loans by the Federal National Mortgage Association (“Fannie Mae”) and the Federal Home Loan Mortgage Corporation (“Freddie Mac”) and as an issuer of securities guaranteed by the Government National Mortgage Association (“Ginnie Mae”). PLS is a licensed Federal Housing Administration Nonsupervised Title II Lender with the U.S. Department of Housing and Urban Development (“HUD”) and a lender/servicer with the Veterans Administration (“VA”) and U.S. Department of Agriculture (“USDA”) (each an “Agency” and collectively the “Agencies”).

 

·

PNMAC Opportunity Fund Associates, LLC (“PMOFA”)—a Delaware limited liability company and the general partner of the Master Fund. PMOFA is entitled to incentive fees representing allocations of profits (“Carried Interest”) from the Master Fund.

9


 

 

Note 2—Basis of Presentation and Accounting Changes

 

Basis of Presentation

 

The accompanying consolidated financial statements have been prepared in compliance with accounting principles generally accepted in the United States (“GAAP”) as codified in the Financial Accounting Standards Board’s (“FASB”) Accounting Standards Codification (“ASC”) for interim financial information and with the SEC’s instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, these financial statements and notes do not include all of the information required by GAAP for complete financial statements. This interim consolidated information should be read together with the Company’s Annual Report on Form 10-K for the year ended December 31, 2017.

 

The accompanying unaudited consolidated financial statements reflect all normal recurring adjustments necessary to present fairly the financial position, income, and cash flows for the interim periods, but are not necessarily indicative of income to be anticipated for the full year ending December 31, 2018. Intercompany accounts and transactions have been eliminated.

 

Preparation of financial statements in compliance with GAAP requires management to make judgments and estimates that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements, and revenues and expenses during the reporting period. Actual results will likely differ from those estimates.

 

Accounting Changes

 

During the six months ended June 30, 2018, the Company adopted changes to the accounting principles used in the preparation of its financial statements summarized below.

 

Mortgage Servicing Rights

 

Effective January 1, 2018, the Company has elected to change the accounting for the classes of mortgage servicing rights (“MSRs”) it had accounted for using the amortization method through December 31, 2017, to the fair value method as allowed in the Transfers and Servicing topic of the FASB’s ASC. The Company determined that a single accounting treatment across all MSRs is consistent with lender valuation under its financing arrangements and simplifies the Company’s hedging activities. As the result of this change, the Company recorded an adjustment to increase its investment in MSRs by $848,000, an increase in its liability for income taxes payable of $72,000 and in increase in stockholders’ equity of $776,000.

 

Revenue Recognition

 

In May 2014, the FASB issued Accounting Standards Update (“ASU”) 2014-09, Revenue from Contracts with Customers (Subtopic 606) (“ASU 2014-09”), which supersedes the guidance in the Revenue Recognition topic of the ASC. Effective January 1, 2018, the Company adopted ASU 2014-09 as amended using the modified retrospective method. The adoption of ASU 2014-09 did not require the Company to record a cumulative effect adjustment to its beginning retained earnings.

 

The Company’s revenues from contracts with customers that are subject to ASU 2014-09 include fulfillment fees, management fees, Carried Interest and certain reimbursed overhead costs. Other revenue and income streams are not subject to ASU 2014-09 as they are financial instruments or other contractual rights and obligations accounted for under the Receivables,  Investments and Debt and Equity Securities,  Transfers and Servicing,  Financial Instruments and  Derivatives and Hedging topics of the ASC.

 

10


 

Fulfillment Fees

 

Fulfillment fees represent fees the Company collects for services it performs on behalf of PMT in connection with the acquisition, packaging and sale of mortgage loans. Fulfillment fee amounts are based upon a negotiated fee schedule and the unpaid principal balance of the mortgage loans purchased by PMT. The Company’s obligation under the agreement is fulfilled when PMT completes the sale or securitization of a mortgage loan it purchases. Fulfillment fees are generally collected within 30 days of purchase by PMT, although a portion of the fulfillment fees may not be collected until 30 days following sale or securitization to the extent such sale or securitization does not occur in the month of purchase. Fulfillment fee revenue is recognized in the month the fee is earned. Fulfillment fees receivable contract assets are disclosed in Note 4Transactions with Affiliates.  

 

Management fees

   

Management fees represent compensation to the Company for its management services provided to the Advised Entities. Management fees are earned based on the Investment Funds’ net assets and PMT’s shareholders’ equity amounts and profitability in excess of specified thresholds, and are recognized as services are provided and are paid to the Company on a quarterly basis within 30 days of the end of the quarter. Management fees receivable contract assets are disclosed in Note 4Transactions with Affiliates.

 

Carried Interest

 

The Company’s Carried Interest arrangements with the Investment Funds represent capital allocations to the Company. As a result, the Company has concluded as part of its assessment of the effect of the adoption of ASU 2014-09 that its Carried Interest represents an equity method investment subject to the InvestmentsEquity Method and Joint Ventures topic of the ASC. Therefore, effective January 1, 2018, the Company recharacterized its Carried Interest as financial instruments under the equity method of accounting. Carried Interest balances are disclosed in Note 9Carried Interest Due from Investment Funds.

 

Expense reimbursements

 

Under the Company’s management agreement with PMT, PMT is required to pay its pro rata portion of rent, telephone, utilities, office furniture, equipment, machinery and other office, internal and overhead expenses of the Company and its affiliates required for PMT’s and its subsidiaries’ operations. These expenses are allocated based on the ratio of PMT’s proportion of gross assets compared to all remaining gross assets managed by the Company as calculated at each fiscal quarter end. Before the adoption of ASU 2014-09, the Company accounted for such reimbursements as reductions to expenses. With the adoption of ASU 2014-09, the Company is required to include such expense reimbursements in its net revenues. As a result of the adoption of ASU 2014-09, certain overhead reimbursement amounts were reclassified from the following expense line items to Other revenue as summarized below:

 

 

 

 

 

 

 

 

 

 

Quarter ended

 

Six months ended

Income statement line

 

June 30, 2018

 

June 30, 2018

 

 

(in thousands)

Occupancy and equipment

 

$

647

 

$

1,236

Technology

 

 

302

 

 

522

Compensation

 

 

120

 

 

240

Other

 

 

227

 

 

419

Total expense reimbursements included in Other revenue

 

$

1,296

 

$

2,417

 

 

 

 

 

 

 

11


 

Cash Flows

 

During the six months ended June 30, 2018, the Company adopted ASU 2016-18, Statement of Cash Flows (Topic 230) – Restricted Cash (“ASU 2016-18”). ASU 2016-18 requires that a statement of cash flows explain the change during the reporting period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. Therefore, amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the consolidated statement of cash flows. Accordingly, the Company retrospectively changed the presentation of its consolidated statements of cash flows to conform to the requirements of ASU 2016-18. For the purpose of reporting statement of cash flows, the Company has identified tenant security deposits relating to rental properties owned by PMT and managed by the Company as restricted cash. The tenant security deposits are included in Other asset on the Company’s consolidated balance sheets. As the result of adoption of ASU 2016-18, the Company’s consolidated statements of cash flows for the six months ended June 30, 2017 changed as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As previously

 

 

Effect of adoption

 

��

 

 

 

 

reported

    

 

of ASU 2016-18

    

 

As reported

 

 

(in thousands)

Cash flow from operating activities

 

$

(853,044)

 

$

116

 

$

(852,928)

Cash and restricted cash at quarter end

 

$

75,978

 

$

391

 

$

76,369

 

 

 

Note 3—Concentration of Risk

 

A substantial portion of the Company’s activities relate to the Advised Entities. Revenues generated from these entities (generally comprised of gains on mortgage loans held for sale, mortgage loan origination fees, fulfillment fees, mortgage loan servicing fees, change in fair value of excess servicing spread financing (“ESS”), management fees, Carried Interest, net interest charged to these entities and change in fair value of investment and dividend received from PMT) totaled 18% and 21% of total net revenue for the quarters ended June 30, 2018 and 2017, respectively, and 16% and 19% for the six months ended June 30, 2018 and 2017, respectively.

 

Note 4—Transactions with Affiliates

 

Transactions with PMT

 

Operating Activities

 

Mortgage Loan Production Activities and Mortgage Servicing Rights (“MSR”) Recapture

 

The Company sells newly originated loans to PMT under a mortgage loan purchase agreement. Historically, the Company has used the mortgage loan purchase agreement for the purpose of selling to PMT prime jumbo residential mortgage loans. Beginning in the quarter ended September 30, 2017, the Company also sells non-government insured or guaranteed mortgage loans to PMT under the mortgage loan purchase agreement.

 

Pursuant to the terms of an amended and restated MSR recapture agreement, effective September 12, 2016, if the Company refinances mortgage loans for which PMT previously held the MSRs, the Company is generally required to transfer and convey cash in an amount equal to 30% of the fair market value of the MSRs related to all the mortgage loans so originated. The MSR recapture agreement expires, unless terminated earlier in accordance with the agreement, on September 12, 2020, subject to automatic renewal for additional 18-month periods, unless terminated earlier in accordance with the terms of the agreement.

 

12


 

The Company provides fulfillment and other services to PMT under an amended and restated mortgage banking services agreement for which it receives a fulfillment fee. Pursuant to the terms of mortgage banking services agreement, the monthly fulfillment fee is an amount that shall equal (a) no greater than the product of (i) 0.35% and (ii) the aggregate initial unpaid principal balance (the “Initial UPB”) of all mortgage loans purchased in such month, plus (b) in the case of all mortgage loans other than mortgage loans sold to or securitized through Fannie Mae or Freddie Mac, no greater than the product of (i) 0.50% and (ii) the aggregate Initial UPB of all such mortgage loans sold and securitized in such month; provided, however, that no fulfillment fee shall be due or payable to the Company with respect to any mortgage loans underwritten to the Ginnie Mae Mortgage‑Backed Securities (“MBS”) Guide. PMT does not hold the Ginnie Mae approval required to issue Ginnie Mae MBS and act as a servicer. Accordingly, under the agreement, the Company currently purchases mortgage loans underwritten in accordance with the Ginnie Mae MBS Guide “as is” and without recourse of any kind from PMT at PMT’s cost less an administrative fee plus accrued interest and a sourcing fee ranging from two to three and one-half basis points, generally based on the average number of calendar days mortgage loans are held by PMT before being purchased by the Company.

 

In consideration for the mortgage banking services provided by the Company with respect to PMT’s acquisition of mortgage loans under the Company’s early purchase program, the Company is entitled to fees accruing (i) at a rate equal to $1,500 per year per early purchase facility administered by the Company, and (ii) in the amount of $35 for each mortgage loan that PMT acquires thereunder. The mortgage banking services agreement expires, unless terminated earlier in accordance with the agreement, on September 12, 2020, subject to automatic renewal for additional 18-month periods.

 

Following is a summary of mortgage loan production activities and MSR recapture between the Company and PMT:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Quarter ended June 30, 

 

Six months ended June 30, 

 

 

    

2018

    

2017

   

2018

    

2017

 

 

 

(in thousands)

 

Net gain (loss) on mortgage loans held for sale at fair value:

 

 

 

 

 

 

 

 

 

 

 

 

 

Net gain on mortgage loans held for sale to PMT

 

$

15,863

 

$

 —

 

$

29,674

 

$

 —

 

Mortgage servicing rights and excess servicing spread recapture incurred

 

 

(936)

 

 

(1,506)

 

 

(2,361)

 

 

(3,201)

 

 

 

$

14,927

 

$

(1,506)

 

$

27,313

 

$

(3,201)

 

Sale of mortgage loans held for sale to PMT

 

$

646,311

 

$

18,692

 

$

1,427,637

 

$

40,222

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fulfillment fee revenue

    

$

14,559

    

$

21,107

    

$

26,503

 

$

37,677

 

Unpaid principal balance of mortgage loans fulfilled for PMT subject to fulfillment fees

 

$

5,396,370

 

$

5,918,027

 

$

9,622,001

 

$

10,549,933

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Sourcing fees paid to PMT

 

$

2,891

 

$

3,204

 

$

5,532

 

$

6,065

 

Unpaid principal balance of mortgage loans purchased from PMT

 

$

9,639,495

 

$

10,641,243

 

$

18,487,368

 

$

20,215,960

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Tax service fees received from PMT included in Mortgage loan origination fees

 

$

1,542

 

$

1,890

 

$

2,750

 

$

3,269

 

Early purchase program fees earned from PMT included in Mortgage loan servicing fees

 

$

 —

 

$

 1

 

$

 —

 

$

 6

 

 

Mortgage Loan Servicing

 

The Company has a mortgage loan servicing agreement with PMT (“Servicing Agreement”). The Servicing Agreement provides for servicing fees of per‑loan monthly amounts based on the delinquency, bankruptcy and/or foreclosure status of the serviced mortgage loan or the real estate acquired in settlement of loans (“REO”). The Company also remains entitled to customary ancillary income and market-based fees and charges relating to mortgage loans it services for PMT. These include boarding and deboarding fees, liquidation and disposition fees, assumption, modification and origination fees and a percentage of late charges.

 

13


 

·

The base servicing fee rates for distressed whole mortgage loans range from $30 per month for current loans up to $85 per month for loans where the borrower has declared bankruptcy. The base servicing fee rate for REO is $75 per month.

 

·

To the extent the Company facilitates rentals of PMT's REO under its REO rental program, the Company collects an REO rental fee of $30 per month per REO, an REO property lease renewal fee of $100 per lease renewal, and a property management fee in an amount equal to the Company’s cost if property management services and/or any related software costs are outsourced to a third-party property management firm or 9% of gross rental income if the Company provides property management services directly. The Company is also entitled to retain any tenant paid application fees and late rent fees and seek reimbursement for certain third-party vendor fees.

 

·

Except as otherwise provided in the MSR recapture agreement, when the Company effects a refinancing of a mortgage loan on behalf of PMT and not through a third-party lender and the resulting mortgage loan is readily saleable, or the Company originates a loan to facilitate the disposition of a REO, the Company is entitled to receive from PMT market-based fees and compensation consistent with pricing and terms the Company offers unaffiliated parties on a retail basis.

 

·

Because PMT has a small number of employees and limited infrastructure, the Company is required to provide a range of services and activities significantly greater in scope than the services provided in connection with a customary servicing arrangement. For these services, the Company receives a supplemental servicing fee of $25 per month for each distressed mortgage loan. The Company is entitled to reimbursement for all customary, good faith reasonable and necessary out-of-pocket expenses incurred by the Company in performance of its servicing obligations.

 

·

The Company is entitled to retain any incentive payments made to it and to which it is entitled under the U.S. Department of Treasury’s Home Affordable Modification Plan; provided, however, that with respect to any such incentive payments paid to the Company in connection with a mortgage loan modification for which PMT previously paid the Company a modification fee, the Company is required to reimburse PMT an amount equal to the incentive payments.

 

·

The Company is also entitled to certain activity-based fees for distressed whole mortgage loans that are charged based on the achievement of certain events. These fees range from $750 for a streamline modification to $1,750 for a liquidation and $500 for a deed-in-lieu of foreclosure. The Company is not entitled to earn more than one liquidation fee, reperformance fee or modification fee per mortgage loan in any 18-month period.

 

·

The base servicing fees for non-distressed mortgage loans are calculated through a monthly per-loan dollar amount, with the actual dollar amount for each loan based on whether the mortgage loan is a fixed-rate or adjustable-rate loan. The base servicing fee rates are $7.50 per month and $8.50 per month for fixed-rate loans and adjustable-rate loans, respectively.

 

The Servicing Agreement expires on September 12, 2020, subject to automatic renewal for additional 18-month periods, unless terminated earlier in accordance with the terms of the agreement.

 

14


 

Following is a summary of mortgage loan servicing fees earned from PMT:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Quarter ended June 30, 

 

Six months ended June 30, 

 

    

2018

    

2017

 

2018

   

2017

 

 

(in thousands)

Mortgage loans acquired for sale at fair value:

 

 

 

 

 

 

 

 

 

 

 

 

Base and supplemental

    

$

96

    

$

82

    

$

152

    

$

147

Activity-based

 

 

149

 

 

176

 

 

271

 

 

319

 

 

 

245

 

 

258

 

 

423

 

 

466

Mortgage loans at fair value:

 

 

 

 

 

 

 

 

 

 

 

 

Base and supplemental

 

 

709

 

 

1,754

 

 

1,714

 

 

3,713

Activity-based

 

 

463

 

 

1,767

 

 

2,543

 

 

4,157

 

 

 

1,172

 

 

3,521

 

 

4,257

 

 

7,870

Mortgage servicing rights:

 

 

 

 

 

 

 

 

 

 

 

 

Base and supplemental

 

 

7,900

 

 

6,188

 

 

15,549

 

 

12,025

Activity-based

 

 

114

 

 

132

 

 

221

 

 

224

 

 

 

8,014

 

 

6,320

 

 

15,770

 

 

12,249

 

 

$

9,431

 

$

10,099

 

$

20,450

 

$

20,585

Property management fees received from PMT included in Other income

 

$

112

 

$

95

 

$

211

 

$

166

 

Investment Management Activities

 

The Company has a management agreement with PMT (“Management Agreement”). The Management Agreement provides that:

 

·

The base management fee is calculated quarterly and is equal to the sum of (i) 1.5% per year of PMT’s average shareholders’ equity up to $2 billion, (ii) 1.375% per year of PMT’s average shareholders’ equity in excess of $2 billion and up to $5 billion, and (iii) 1.25% per year of PMT’s average shareholders’ equity in excess of $5 billion.

 

·

The performance incentive fee is calculated quarterly at a defined annualized percentage of the amount by which PMT’s “net income,” on a rolling four‑quarter basis and before deducting the incentive fee, exceeds certain levels of return on “equity.”

 

The performance incentive fee is equal to the sum of: (a) 10% of the amount by which PMT’s net income for the quarter exceeds (i) an 8% return on equity plus the “high watermark,” up to (ii) a 12% return on PMT’s equity; plus (b) 15% of the amount by which PMT’s net income for the quarter exceeds (i) a 12% return on PMT’s equity plus the “high watermark,” up to (ii) a 16% return on PMT’s equity; plus (c) 20% of the amount by which PMT’s net income for the quarter exceeds a 16% return on equity plus the “high watermark.”

 

For the purpose of determining the amount of the performance incentive fee:

 

“Net income” is defined as net income or loss attributable to PMT’s common shares of beneficial interest computed in accordance with GAAP adjusted for certain other non‑cash charges determined after discussions between the Company and PMT’s independent trustees and approval by a majority of PMT’s independent trustees.

 

“Equity” is the weighted average of the issue price per common share of all of PMT’s public offerings, multiplied by the weighted average number of common shares outstanding (including restricted share units) in the rolling four‑quarter period.

 

15


 

The “high watermark” is the quarterly adjustment that reflects the amount by which the net income (stated as a percentage of return on equity) in that quarter exceeds or falls short of the lesser of 8% and the average Fannie Mae 30‑year MBS yield (the “Target Yield”) for the four quarters then ended. If the net income is lower than the Target Yield, the high watermark is increased by the difference. If the net income is higher than the Target Yield, the high watermark is reduced by the difference. Each time a performance incentive fee is earned, the high watermark returns to zero. As a result, the threshold amounts required for the Company to earn a performance incentive fee are adjusted cumulatively based on the performance of PMT’s net income over (or under) the Target Yield, until the net income in excess of the Target Yield exceeds the then‑current cumulative high watermark amount, and a performance incentive fee is earned.

 

The base management fee and the performance incentive fee are both receivable quarterly in arrears. The performance incentive fee may be paid in cash or a combination of cash and PMT’s common shares (subject to a limit of no more than 50% paid in common shares), at PMT’s option.

 

The Management Agreement expires on September 12, 2020, subject to automatic renewal for additional 18-month periods, unless terminated earlier in accordance with the terms of the agreement. In the event of termination of the Management Agreement between PMT and the Company, the Company may be entitled to a termination fee in certain circumstances. The termination fee is equal to three times the sum of (a) the average annual base management fee, and (b) the average annual performance incentive fee earned by the Company, in each case during the 24-month period immediately preceding the date of termination.

 

Following is a summary of the base management and performance incentive fees earned from PMT:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Quarter ended June 30, 

 

Six months ended June 30, 

 

    

2018

    

2017

 

2018

   

2017

 

 

(in thousands)

Base management

 

$

5,728

 

$

5,334

    

$

11,424

    

$

10,342

Performance incentive

 

 

 —

 

 

304

 

 

 —

 

 

304

 

 

$

5,728

 

$

5,638

 

$

11,424

 

$

10,646

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Expense Reimbursement

 

Under the Management Agreement, PMT reimburses the Company for its organizational and operating expenses, including third-party expenses, incurred on PMT’s behalf, it being understood that the Company and its affiliates shall allocate a portion of their personnel’s time to provide certain legal, tax and investor relations services for the direct benefit of PMT. With respect to the allocation of the Company’s and its affiliates’ personnel, from and after September 12, 2016, the Company shall be reimbursed $120,000 per fiscal quarter, such amount to be reviewed annually and not preclude reimbursement for any other services performed by the Company or its affiliates.

 

PMT is also required to pay its pro rata portion of rent, telephone, utilities, office furniture, equipment, machinery and other office, internal and overhead expenses of the Company and its affiliates required for PMT’s and its subsidiaries’ operations. These expenses will be allocated based on the ratio of PMT’s proportion of gross assets compared to all remaining gross assets managed by the Company as calculated at each fiscal quarter end.

 

16


 

The Company received reimbursements from PMT for expenses as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Quarter ended June 30, 

 

Six months ended June 30, 

 

 

    

2018

    

2017

   

2018

   

2017

 

 

 

(in thousands)

 

Reimbursement of:

    

 

                

    

 

                

    

 

                

 

 

 

 

Common overhead incurred by the Company (1)

 

$

1,176

 

$

1,593

 

$

2,177

 

$

3,027

 

Compensation

 

 

120

 

 

 —

 

 

240

 

 

 —

 

Expenses incurred on (the Company's) PMT's behalf, net

 

 

(514)

 

 

398

 

 

59

 

 

653

 

 

 

$

782

 

$

1,991

 

$

2,476

 

$

3,680

 

Payments and settlements during the quarter (2)

 

$

15,957

 

$

16,070

 

$

23,615

 

$

40,463

 


(1)

The Company adopted ASU 2014-09 using the modified retrospective method effective January 1, 2018. Adoption of ASU 2014-09 using the modified retrospective method required the Company to include those reimbursements from PMT in Other revenue starting January 1, 2018.

 

(2)

Payments and settlements include payments for management fees and correspondent production activities itemized in the preceding tables and netting settlements made pursuant to master netting agreements between the Company and PMT.

 

Conditional Reimbursement of Underwriting Fees

 

In connection with its initial public offering of common shares of beneficial interest on August 4, 2009 (“IPO”), PMT conditionally agreed to reimburse the Company up to $2.9 million for underwriting fees paid to the IPO underwriters by the Company on PMT’s behalf. In the event a termination fee is payable to the Company under the Management Agreement, and the Company has not received the full amount of the reimbursements and payments under the reimbursement agreement, such amount will be paid in full. The term of the reimbursement agreement expires on February 1, 2019. The Company received no reimbursement of underwriting fees from PMT during the six months ended June 30, 2018 and 2017.

 

Investing Activities

 

Master Repurchase Agreement

 

On December 19, 2016, the Company, through PLS, entered into a master repurchase agreement with one of PMT’s wholly-owned subsidiaries, PennyMac Holdings, LLC (“PMH”) (the “PMH Repurchase Agreement”), pursuant to which PMH may borrow from the Company for the purpose of financing PMH’s participation certificates representing beneficial ownership in ESS. PLS then re-pledges such participation certificates to PNMAC GMSR ISSUER TRUST (the “Issuer Trust”) under a master repurchase agreement by and among PLS, the Issuer Trust and PennyMac, as guarantor (the “PC Repurchase Agreement”). The Issuer Trust was formed for the purpose of allowing PLS to finance MSRs and ESS relating to such MSRs (the “GNMA MSR Facility”).

 

In connection with the GNMA MSR Facility, PLS pledges and/or sells to the Issuer Trust participation certificates representing beneficial interests in MSRs and ESS pursuant to the terms of the PC Repurchase Agreement. In return, the Issuer Trust (a) has issued to PLS, pursuant to the terms of an indenture, the Series 2016-MSRVF1 Variable Funding Note, dated December 19, 2016, known as the “PNMAC GMSR ISSUER TRUST MSR Collateralized Notes, Series 2016-MSRVF1” (the “VFN”), and (b) has issued and may, from time to time pursuant to the terms of any supplemental indenture, issue to institutional investors additional term notes (“Term Notes”), in each case secured on a pari passu basis by the participation certificates relating to the MSRs and ESS. The maximum principal balance of the VFN is $1,000,000,000.

 

The principal amount paid by PLS for the participation certificates under the PMH Repurchase Agreement is based upon a percentage of the market value of the underlying ESS. Upon PMH’s repurchase of the participation certificates, PMH is required to repay PLS the principal amount relating thereto plus accrued interest (at a rate reflective of the current market and consistent with the weighted average note rate of the VFN and any outstanding Term Notes) to the date of such repurchase. PLS is then required to repay the Issuer Trust the corresponding amount under the PC Repurchase Agreement.

17


 

 

Prior to the Company’s entry into the PMH Repurchase Agreement and PC Repurchase Agreement in connection with the GNMA MSR Facility, the Company was a party to a repurchase agreement with Credit Suisse First Boston Mortgage Capital LLC (“CSFB”) (the “MSR Repo”), pursuant to which it financed Ginnie Mae MSRs and servicing advance receivables and pledged to CSFB all of its rights and interests in any Ginnie Mae MSRs it owned or acquired, and a separate acknowledgement agreement with respect thereto, by and among Ginnie Mae, CSFB and the Company.

 

In connection with the MSR Repo described above, the Company and PMT entered into an underlying loan and security agreement, dated as of April 30, 2015, pursuant to which PMT was able to borrow up to $150 million from the Company for the purpose of financing ESS (the “Underlying LSA”). In order to secure its borrowings, PMT pledged its ESS to the Company under the Underlying LSA and the Company, in turn, re-pledged such ESS to CSFB under the MSR Repo. The principal amount of the borrowings under the Underlying LSA was based upon a percentage of the market value of the ESS pledged by PMT, subject to the $150 million sublimit described above. Pursuant to the Underlying LSA, PMT granted to the Company a security interest in all of its right, title and interest in, to and under the ESS pledged to secure the borrowings.

 

The Company and PMT agreed in connection with the Underlying LSA that PMT was required to repay the Company the principal amount of borrowings plus accrued interest to the date of such repayment, and the Company was required to repay CSFB the corresponding amount under the MSR Repo. Interest accrued on PMT’s note relating to the Underlying LSA at a rate based on CSFB’s cost of funds under the MSR Repo. PMT was also required to pay the Company a fee for the structuring of the Underlying LSA in an amount equal to the portion of the corresponding fee paid by the Company to CSFB and allocable to the $150 million relating to the ESS. The Underlying LSA was replaced by the PMH Repurchase Agreement upon the closing of the GNMA MSR facility.

 

The Company holds an investment in PMT in the form of 75,000 common shares of beneficial interest.

 

Following is a summary of investing activities between the Company and PMT:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Quarter ended June 30, 

 

Six months ended June 30, 

 

    

2018

    

2017

    

2018

    

2017

 

 

 

(in thousands)

Interest income relating to Assets purchased from PennyMac Mortgage Investment Trust under agreements to resell

 

$

1,898

 

$

2,025

 

$

3,874

 

$

3,830

 

Common shares of beneficial interest of PennyMac Mortgage Investment Trust:

 

 

 

 

 

 

 

 

 

 

 

 

 

Dividends received from PennyMac Mortgage Investment Trust

 

$

36

 

$

35

 

$

71

 

$

71

 

Change in fair value of investment in common shares of
PennyMac Mortgage Investment Trust

 

 

72

 

 

41

 

 

219

 

 

144

 

 

 

$

108

 

$

76

 

$

290

 

$

215

 

 

 

 

 

 

 

 

 

 

 

June 30, 

 

December 31, 

 

    

2018

    

2017

 

 

(in thousands)

Assets purchased from PennyMac Mortgage Investment Trust under agreements to

 resell

 

$

138,582

 

$

144,128

Common shares of beneficial interest of PennyMac Mortgage Investment Trust:

 

 

 

 

 

 

Fair value

 

$

1,424

 

$

1,205

Number of shares

 

 

75

 

 

75

 

18


 

Financing Activities

 

Spread Acquisition and MSR Servicing Agreements

 

On December 19, 2016, the Company amended and restated a master spread acquisition and MSR servicing agreement with PMT (the “Spread Acquisition Agreement”), pursuant to which the Company may sell to PMT, from time to time, the right to receive participation certificates representing beneficial ownership in ESS arising from Ginnie Mae MSRs acquired by the Company, in which case the Company generally would be required to service or subservice the related mortgage loans for Ginnie Mae. The primary purpose of the amendment and restatement was to facilitate the continued financing of the ESS owned by PMT in connection with the parties’ participation in the GNMA MSR Facility.

 

To the extent the Company refinances any of the mortgage loans relating to the ESS it has acquired, the Spread Acquisition Agreement also contains recapture provisions requiring that the Company transfer to PMT, at no cost, the ESS relating to a certain percentage of the unpaid principal balance of the newly originated mortgage loans. However, under the Spread Acquisition Agreement, in any month where the transferred ESS relating to newly originated Ginnie Mae mortgage loans is not equivalent to at least 90% of the product of the excess servicing fee rate and the unpaid principal balance of the refinanced mortgage loans, the Company is also required to transfer additional ESS or cash in the amount of such shortfall. Similarly, in any month where the transferred ESS relating to modified Ginnie Mae mortgage loans is not equivalent to at least 90% of the product of the excess servicing fee rate and the unpaid principal balance of the modified mortgage loans, the Spread Acquisition Agreement contains provisions that require the Company to transfer additional ESS or cash in the amount of such shortfall. To the extent the fair market value of the aggregate ESS to be transferred for the applicable month is less than $200,000, the Company may, at its option, wire cash to PMT in an amount equal to such fair market value in lieu of transferring such ESS.

 

Following is a summary of financing activities between the Company and PMT:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Quarter ended June 30, 

 

Six months ended June 30, 

 

 

    

2018

    

2017

   

2018

   

2017

 

 

 

(in thousands)

 

Excess servicing spread financing:

 

 

 

 

 

 

 

 

 

 

 

 

 

Issuance pursuant to recapture agreement

 

$

580

 

$

1,380

    

$

1,484

    

$

2,953

 

Repayment

 

$

12,018

 

$

14,278

 

$

24,309

 

$

28,910

 

Change in fair value

 

$

996

 

$

(7,156)

 

$

7,917

 

$

(9,929)

 

Interest expense

 

$

3,910

 

$

4,366

 

$

7,844

 

$

9,013

 

Recapture incurred pursuant to refinancings by the Company of mortgage loans subject to excess servicing spread financing included in Net gains on mortgage loans held for sale at fair value

 

$

524

 

$

1,271

 

$

1,354

 

$

2,674

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30, 

 

December 31, 

 

 

 

 

 

 

 

 

 

2018

 

2017

 

 

 

 

 

 

 

 

 

(in thousands)

 

Excess servicing spread financing at fair value

 

 

 

 

 

 

 

$

229,470

 

$

236,534

 

 

19


 

Receivable from and Payable to PMT

 

Amounts receivable from and payable to PMT are summarized below:

 

 

 

 

 

 

 

 

 

 

 

June 30, 

 

December 31, 

 

 

    

2018

    

2017

 

 

 

(in thousands)

 

Receivable from PMT:

 

 

 

 

 

 

 

Management fees

 

$

5,728

 

$

5,901

 

Fulfillment fees

 

 

4,696

 

 

346

 

Allocated expenses and expenses incurred on PMT's behalf

 

 

3,496

 

 

11,542

 

Servicing fees

 

 

3,110

 

 

6,583

 

Correspondent production fees

 

 

1,633

 

 

1,735

 

Conditional Reimbursement

 

 

870

 

 

870

 

Interest on assets purchased under agreements to resell

 

 

128

 

 

142

 

 

 

$

19,661

 

$

27,119

 

Payable to PMT:

 

 

 

 

 

 

 

Deposits made by PMT to fund servicing advances

 

$

95,299

 

$

132,844

 

Mortgage servicing rights recapture payable

 

 

153

 

 

282

 

Other

 

 

3,857

 

 

3,872

 

 

 

$

99,309

 

$

136,998

 

 

20


 

Investment Funds

 

Management Agreements

 

The Company had investment management agreements with the Investment Funds pursuant to which it received management fees consisting of base management fees and Carried Interest. The management fees were based on the lesser of the funds’ net asset values or aggregate capital contributions. The base management fees accrued at annual rates ranging from 1.5% to 2.0% of the applicable amounts on which they were based.

 

The Carried Interest that the Company recognizes from the Investment Funds is determined by the Investment Funds’ performance and its contractual rights to share in the Investments Funds’ returns in excess of the preferred returns, if any, accruing to the funds’ investors. The Company recognizes Carried Interest as a participation in the profits in the Investment Funds after the investors in the Investment Funds have achieved a preferred return as defined in the fund agreements. After the investors have achieved the preferred returns specified in the respective fund agreements, a “catch up” return accrues to the Company until it receives a specified percentage of the preferred return. Thereafter, the Company participates in future returns in excess of the preferred return at the rates specified in the fund agreements. The Company received $61.3 million in cash in settlement of the majority of its Carried Interest in 2017. During the six months ended June 30, 2018, the Company received an additional distribution of $7.8 million in cash.

 

In 2017 and through the six months ended June 30, 2018, the Investment Funds sold or liquidated all of their remaining investment assets. During the six months ended June 30, 2018, the Company discontinued charging management fees to the Investment Funds. The Registered Fund and the Master Fund obtained orders of de-registration on July 25, 2018, and all of the management agreements with the Registered Fund, the Master Fund and the Private Fund expired or were otherwise terminated on or before August 2, 2018. The Company expects to complete liquidation of the Investment Funds during 2018.

 

Mortgage Loan Servicing Agreements

 

The Company had loan servicing agreements with the Investment Funds. The loan servicing provided by the Company under the loan servicing agreements with the Investment Funds included collecting principal, interest and escrow account payments, if any, with respect to mortgage loans, as well as managing loss mitigation, which included, among other things, collection activities, loan workouts, modifications, foreclosures and short sales. The Company also engaged in certain loan origination activities that included refinancing mortgage loans and arranging financings that facilitate sales of REOs.

 

The loan servicing agreements with the Investment Funds generally provided for fee revenue, which varied depending on the type and quality of the loans being serviced. The Company was also entitled to certain customary market-based fees and charges. All of the servicing agreements with the Investment Funds expired or were otherwise terminated on or before August 2, 2018.

 

 

21


 

Amounts due from and payable to the Investment Funds are summarized below:

 

 

 

 

 

 

 

 

 

 

 

June 30, 

 

December 31, 

 

 

    

2018

    

2017

 

 

 

(in thousands)

 

Carried Interest due from Investment Funds:

 

 

 

 

 

 

 

PNMAC Mortgage Opportunity Fund, LLC

 

$

191

 

$

6,389

 

PNMAC Mortgage Opportunity Fund Investors, LLC

 

 

179

 

 

2,163

 

 

 

$

370

 

$

8,552

 

Receivable from Investment Funds:

 

 

 

 

 

 

 

Mortgage loan servicing fees

 

$

11

 

$

 2

 

Expense reimbursements

 

 

 1

 

 

27

 

Mortgage loan servicing fee rebate deposit

 

 

 —

 

 

300

 

Management fees

 

 

 —

 

 

88

 

 

 

$

12

 

$

417

 

Payable to Investment Funds:

 

 

 

 

 

 

 

Deposits received to fund servicing advances

 

$

 —

 

$

2,329

 

Other

 

 

404

 

 

98

 

 

 

$

404

 

$

2,427

 

 

Exchanged Private National Mortgage Acceptance Company, LLC Unitholders

 

The Company entered into a tax receivable agreement with owners of PennyMac other than the Company on the date of the IPO that provides for the payment from time to time by the Company to PennyMac’s exchanged unitholders an amount equal to 85% of the amount of the net tax benefits, if any, that the Company is deemed to realize as a result of (i) increases in tax basis of PennyMac’s assets resulting from such unitholders’ exchanges and (ii) certain other tax benefits related to entering into the tax receivable agreement, including tax benefits attributable to payments under the tax receivable agreement.

 

Based on the PennyMac unitholder exchanges to date, the Company has recorded a $46.9 million and $44.0 million Payable to exchanged Private National Mortgage Acceptance Company, LLC unitholders under tax receivable agreement as of June 30, 2018 and December 31, 2017, respectively. The Company did not make any payments under the tax receivable agreement during the six months ended June 30, 2018. The Company made payments of $6.2 million during the six months ended June 30, 2017.

 

 

 .

Note 5—Loan Sales and Servicing Activities

 

The Company originates or purchases and sells mortgage loans in the secondary mortgage market without recourse for credit losses. However, the Company maintains continuing involvement with the mortgage loans in the form of servicing arrangements and the liability under representations and warranties it makes to purchasers and insurers of the mortgage loans.

 

The following table summarizes cash flows between the Company and transferees as a result of the sale of mortgage loans in transactions where the Company maintains continuing involvement as servicer of the mortgage loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Quarter ended June 30, 

 

Six months ended June 30, 

 

 

    

2018

    

2017

    

2018

    

2017

 

 

 

(in thousands)

 

Cash flows:

   

 

 

   

 

 

 

 

 

   

 

 

 

Sales proceeds

 

$

11,729,024

 

$

12,637,046

 

$

22,832,809

 

$

24,497,179

 

Servicing fees received (1)

 

$

117,818

 

$

89,970

 

$

230,909

 

$

174,991

 

Net servicing advances

 

$

(14,082)

 

$

15,700

 

$

(24,719)

 

$

13,791

 


(1)

Net of guarantee fees paid to the Agencies.

 

22


 

The following table summarizes the UPB of the mortgage loans sold by the Company in which it maintains continuing involvement:

 

 

 

 

 

 

 

 

 

 

June 30, 

 

December 31,

 

    

2018

   

2017

 

 

(in thousands)

Unpaid principal balance of mortgage loans outstanding

 

$

133,557,592

 

$

120,853,138

Delinquencies:

 

 

 

 

 

 

30-89 days

 

$

4,505,170

 

$

5,097,688

90 days or more:

 

 

 

 

 

 

Not in foreclosure

 

$

2,279,270

 

$

2,303,114

In foreclosure

 

$

619,365

 

$

606,744

Foreclosed

 

$

30,777

 

$

30,310

Bankruptcy

 

$

829,270

 

$

657,368

 

 

The following tables summarize the UPB of the Company’s mortgage loan servicing portfolio:

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30, 2018

 

 

 

 

Contract

 

Total

 

 

Servicing

 

 servicing and

 

mortgage

 

    

rights owned

    

subservicing

    

loans serviced

 

 

(in thousands)

Investor:

 

 

 

 

 

 

 

 

 

Non-affiliated entities:

    

 

 

 

 

 

 

 

 

Originated

 

$

133,557,592

    

$

 —

    

$

133,557,592

Purchased

 

 

46,276,250

 

 

 —

 

 

46,276,250

 

 

 

179,833,842

 

 

 —

 

 

179,833,842

Advised Entities

 

 

 —

 

 

81,214,629

 

 

81,214,629

Mortgage loans held for sale

 

 

2,448,908

 

 

 —

 

 

2,448,908

 

 

$

182,282,750

 

$

81,214,629

 

$

263,497,379

Subserviced for the Company (1)

 

$

319,772

 

$

 —

 

$

319,772

Delinquent mortgage loans:

 

 

 

 

 

 

 

 

 

30 days

 

$

4,755,968

 

$

406,645

 

$

5,162,613

60 days

 

 

1,388,516

 

 

99,027

 

 

1,487,543

90 days or more:

 

 

 

 

 

 

 

 

 

Not in foreclosure

 

 

3,110,052

 

 

353,653

 

 

3,463,705

In foreclosure

 

 

893,302

 

 

164,000

 

 

1,057,302

Foreclosed

 

 

44,394

 

 

216,052

 

 

260,446

 

 

$

10,192,232

 

$

1,239,377

 

$

11,431,609

Bankruptcy

 

$

1,214,891

 

$

124,107

 

$

1,338,998

Custodial funds managed by the Company (2)

 

$

3,833,295

 

$

1,184,620

 

$

5,017,915


(1)

Certain of the mortgage loans serviced by the Company are subserviced on the Company’s behalf by other mortgage loan servicers on a transitional basis when the Company has purchased the rights to service the loans but servicing of the loans has not yet been transferred to the Company’s servicing system.

 

(2)

Custodial funds include borrower and investor custodial cash accounts relating to mortgage loans serviced under servicing agreements and are not recorded on the Company’s consolidated balance sheets. The Company earns placement fees on certain of the custodial funds it manages on behalf of the mortgage loans’ investors, which are included in Interest income in the Company’s consolidated statements of income.

 

 

23


 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2017

 

 

 

 

Contract

 

Total

 

 

Servicing

 

servicing and

 

mortgage

 

    

rights owned

    

subservicing

    

loans serviced

 

 

(in thousands)

Investor:

 

 

 

 

 

 

 

 

 

Non-affiliated entities:

 

 

 

 

 

 

 

 

 

Originated

 

$

120,853,138

 

$

 —

 

$

120,853,138

Purchased

 

 

47,016,708

 

 

 —

 

 

47,016,708

 

 

 

167,869,846

 

 

 —

 

 

167,869,846

Advised Entities

 

 

 —

 

 

74,980,268

 

 

74,980,268

Mortgage loans held for sale

 

 

2,998,377

 

 

 —

 

 

2,998,377

 

 

$

170,868,223

 

$

74,980,268

 

$

245,848,491

Delinquent mortgage loans:

 

 

 

 

 

 

 

 

 

30 days

 

$

5,326,710

 

$

515,922

 

$

5,842,632

60 days

 

 

1,935,216

 

 

215,957

 

 

2,151,173

90 days or more:

 

 

 

 

 

 

 

 

 

Not in foreclosure

 

 

3,690,159

 

 

541,945

 

 

4,232,104

In foreclosure

 

 

916,614

 

 

293,835

 

 

1,210,449

Foreclosed

 

 

41,244

 

 

278,890

 

 

320,134

 

 

$

11,909,943

 

$

1,846,549

 

$

13,756,492

Bankruptcy

 

$

1,046,969

 

$

176,324

 

$

1,223,293

Custodial funds managed by the Company (1)

 

$

3,267,279

 

$

901,041

 

$

4,168,320


(1)

Custodial funds include borrower and investor custodial cash accounts relating to mortgage loans serviced under servicing agreements and are not recorded on the Company’s consolidated balance sheets. The Company earns placement fees on certain of the custodial funds it manages on behalf of the mortgage loans’ investors, which are included in Interest income in the Company’s consolidated statements of income.

 

Following is a summary of the geographical distribution of mortgage loans included in the Company’s mortgage loan servicing portfolio for the top five and all other states as measured by UPB:

 

 

 

 

 

 

 

 

 

 

 

June 30, 

 

December 31, 

 

State

    

2018

    

2017

 

 

 

(in thousands)

 

California

 

$

48,100,011

 

$

45,621,369

 

Texas

 

 

21,041,435

 

 

19,741,970

 

Florida

 

 

19,258,138

 

 

17,490,194

 

Virginia

 

 

17,205,597

 

 

16,210,673

 

Maryland

 

 

12,423,212

 

 

11,350,939

 

All other states

 

 

145,468,986

 

 

135,433,346

 

 

 

$

263,497,379

 

$

245,848,491

 

 

 

 

24


 

Note 6—Fair Value

 

Most of the Company’s assets and certain of its liabilities are measured based on their fair values. The application of fair value may be on a recurring or nonrecurring basis depending on the accounting principles applicable to the specific asset or liability and whether management has elected to carry the item at its fair value as discussed in the following paragraphs.

 

The Company groups its assets and liabilities at fair value in three levels, based on the markets in which the assets and liabilities are traded and the observability of the inputs used to determine fair value. These levels are:

 

·

Level 1—Quoted prices in active markets for identical assets or liabilities.

 

·

Level 2—Prices determined or determinable using other significant observable inputs. Observable inputs are inputs that other market participants would use in pricing an asset or liability and are developed based on market data obtained from sources independent of the Company. These may include quoted prices for similar assets and liabilities, interest rates, prepayment speeds, credit risk and other inputs.

 

·

Level 3—Prices determined using significant unobservable inputs. In situations where observable inputs are unavailable, unobservable inputs may be used. Unobservable inputs reflect the Company’s own judgments about the factors that market participants use in pricing an asset or liability, and are based on the best information available in the circumstances.

 

As a result of the difficulty in observing certain significant valuation inputs affecting “Level 3” fair value assets and liabilities, the Company is required to make judgments regarding these items’ fair values. Different persons in possession of the same facts may reasonably arrive at different conclusions as to the inputs to be applied in valuing these assets and liabilities and their fair values. Likewise, due to the general illiquidity of some of these assets and liabilities, subsequent transactions may be at values significantly different from those reported.

 

Fair Value Accounting Elections

 

Management identified all of its non-cash financial assets other than Assets purchased from PennyMac Mortgage Investment Trust under agreements to resell and Mortgage servicing liabilities (“MSLs”) to be accounted for at fair value so changes in fair value will be reflected in income as they occur and more timely reflect the results of the Company’s performance. Management has also identified its ESS to be accounted for at fair value as a means of hedging the related MSRs’ fair value risk. Beginning January 1, 2018, the Company accounts for all MSRs at fair value. Before January 1, 2018, originated MSRs backed by mortgage loans with initial interest rates of less than or equal to 4.5% were accounted for using the amortization method.

 

25


 

Assets and Liabilities Measured at Fair Value on a Recurring Basis

 

Following is a summary of assets and liabilities that are measured at fair value on a recurring basis:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30, 2018

 

    

Level 1

    

Level 2

    

Level 3

    

Total

 

 

(in thousands)

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

Short-term investments

 

$

98,571

 

$

 —

 

$

 —

 

$

98,571

Mortgage loans held for sale at fair value

 

 

 —

 

 

2,193,065

 

 

334,166

 

 

2,527,231

Derivative assets:

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate lock commitments

 

 

 —

 

 

 —

 

 

58,370

 

 

58,370

Repurchase agreement derivatives

 

 

 —

 

 

 —

 

 

25,781

 

 

25,781

Forward purchase contracts

 

 

 —

 

 

11,450

 

 

 —

 

 

11,450

Forward sales contracts

 

 

 —

 

 

1,256

 

 

 —

 

 

1,256

MBS put options

 

 

 —

 

 

844

 

 

 —

 

 

844

Put options on interest rate futures purchase contracts

 

 

772

 

 

 —

 

 

 —

 

 

772

Call options on interest rate futures purchase contracts

 

 

2,117

 

 

 —

 

 

 —

 

 

2,117

Total derivative assets before netting

 

 

2,889

 

 

13,550

 

 

84,151

 

 

100,590

Netting

 

 

 —

 

 

 —

 

 

 —

 

 

(8,119)

Total derivative assets

 

 

2,889

 

 

13,550

 

 

84,151

 

 

92,471

Investment in PennyMac Mortgage Investment Trust

 

 

1,424

 

 

 —

 

 

 —

 

 

1,424

Mortgage servicing rights at fair value

 

 

 —

 

 

 —

 

 

2,486,157

 

 

2,486,157

 

 

$

102,884

 

$

2,206,615

 

$

2,904,474

 

$

5,205,854

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

Excess servicing spread financing at fair value payable to PennyMac Mortgage Investment Trust

 

$

 —

 

$

 —

 

$

229,470

 

$

229,470

Derivative liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate lock commitments

 

 

 —

 

 

 —

 

 

2,681

 

 

2,681

Forward purchase contracts

 

 

 —

 

 

377

 

 

 —

 

 

377

Forward sales contracts

 

 

 —

 

 

12,720

 

 

 —

 

 

12,720

Total derivative liabilities before netting

 

 

 —

 

 

13,097

 

 

2,681

 

 

15,778

Netting

 

 

 —

 

 

 —

 

 

 —

 

 

(11,684)

Total derivative liabilities

 

 

 —

 

 

13,097

 

 

2,681

 

 

4,094

Mortgage servicing liabilities at fair value

 

 

 —

 

 

 —

 

 

10,253

 

 

10,253

 

 

$

 —

 

$

13,097

 

$

242,404

 

$

243,817

 

26


 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2017

 

    

Level 1

    

Level 2

    

Level 3

    

Total

 

 

(in thousands)

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

Short-term investments

 

$

170,080

 

$

 —

 

$

 —

 

$

170,080

Mortgage loans held for sale at fair value

 

 

 —

 

 

2,316,892

 

 

782,211

 

 

3,099,103

Derivative assets:

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate lock commitments

 

 

 —

 

 

 —

 

 

60,012

 

 

60,012

Repurchase agreement derivatives

 

 

 —

 

 

 —

 

 

10,656

 

 

10,656

Forward purchase contracts

 

 

 —

 

 

4,288

 

 

 —

 

 

4,288

Forward sales contracts

 

 

 —

 

 

2,101

 

 

 —

 

 

2,101

MBS put options

 

 

 —

 

 

3,481

 

 

 —

 

 

3,481

Put options on interest rate futures purchase contracts

 

 

3,570

 

 

 —

 

 

 —

 

 

3,570

Call options on interest rate futures purchase contracts

 

 

938

 

 

 —

 

 

 —

 

 

938

Total derivative assets before netting

 

 

4,508

 

 

9,870

 

 

70,668

 

 

85,046

Netting

 

 

 —

 

 

 —

 

 

 —

 

 

(6,867)

Total derivative assets

 

 

4,508

 

 

9,870

 

 

70,668

 

 

78,179

Investment in PennyMac Mortgage Investment Trust

 

 

1,205

 

 

 —

 

 

 —

 

 

1,205

Mortgage servicing rights at fair value

 

 

 —

 

 

 —

 

 

638,010

 

 

638,010

 

 

$

175,793

 

$

2,326,762

 

$

1,490,889

 

$

3,986,577

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

Excess servicing spread financing at fair value payable to PennyMac Mortgage Investment Trust

 

$

 —

 

$

 —

 

$

236,534

 

$

236,534

Derivative liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate lock commitments

 

 

 —

 

 

 —

 

 

1,740

 

 

1,740

Forward purchase contracts

 

 

 —

 

 

1,272

 

 

 —

 

 

1,272

Forward sales contracts

 

 

 —

 

 

7,031

 

 

 —

 

 

7,031

Total derivative liabilities before netting

 

 

 —

 

 

8,303

 

 

1,740

 

 

10,043

Netting

 

 

 —

 

 

 —

 

 

 —

 

 

(4,247)

Total derivative liabilities

 

 

 —

 

 

8,303

 

 

1,740

 

 

5,796

Mortgage servicing liabilities at fair value

 

 

 —

 

 

 —

 

 

14,120

 

 

14,120

 

 

$

 —

 

$

8,303

 

$

252,394

 

$

256,450

 

27


 

As shown above, all or a portion of the Company’s mortgage loans held for sale, Interest Rate Lock Commitments (“IRLCs”), repurchase agreement derivatives, MSRs at fair value, ESS at fair value and MSLs are measured using Level 3 fair value inputs. Following are roll forwards of these items for each of the quarters and six months ended June 30, 2018 and 2017:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Quarter ended June 30, 2018

 

 

 

Mortgage

 

Net interest 

 

Repurchase

 

Mortgage 

 

 

 

 

 

 

loans held

 

rate lock

 

agreement

 

servicing 

 

 

 

 

 

    

for sale

    

commitments (1)

    

derivatives

    

rights

    

 

Total

 

 

 

(in thousands)

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, March 31, 2018

 

$

460,399

 

$

50,896

 

$

20,974

 

$

2,354,489

 

$

2,886,758

 

Purchases and issuances, net

 

 

824,592

 

 

50,330

 

 

12,970

 

 

2,523

 

 

890,415

 

Sales and repayments

 

 

(286,433)

 

 

 —

 

 

(7,471)

 

 

 —

 

 

(293,904)

 

Mortgage servicing rights resulting from mortgage loan sales

 

 

 —

 

 

 —

 

 

 —

 

 

155,694

 

 

155,694

 

Changes in fair value included in income arising from:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 —

 

Changes in instrument-specific credit risk

 

 

3,727

 

 

 —

 

 

 —

 

 

 —

 

 

3,727

 

Other factors

 

 

 —

 

 

5,590

 

 

(692)

 

 

(26,549)

 

 

(21,651)

 

 

 

 

3,727

 

 

5,590

 

 

(692)

 

 

(26,549)

 

 

(17,924)

 

Transfers from Level 3 to Level 2

 

 

(665,298)

 

 

 —

 

 

 —

 

 

 —

 

 

(665,298)

 

Transfers to real estate acquired in settlement of loans

 

 

(2,821)

 

 

 —

 

 

 —

 

 

 —

 

 

(2,821)

 

Transfers of interest rate lock commitments to mortgage loans held for sale

 

 

 —

 

 

(51,127)

 

 

 —

 

 

 —

 

 

(51,127)

 

Balance, June 30, 2018

 

$

334,166

 

$

55,689

 

$

25,781

 

$

2,486,157

 

$

2,901,793

 

Changes in fair value recognized during the quarter relating to assets still held at June 30, 2018

 

$

(3,584)

 

$

55,689

 

$

 —

 

$

(26,549)

 

$

25,556

 


(1)

For the purpose of this table, the IRLC asset and liability positions are shown net.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Quarter ended June 30, 2018

 

 

 

Excess

 

 

 

 

 

 

 

 

servicing

 

Mortgage

 

 

 

 

 

 

spread

 

servicing

 

 

 

 

 

    

financing

    

liabilities

    

Total

  

 

 

(in thousands)

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

Balance, March 31, 2018

 

$

236,002

 

$

12,063

 

$

248,065

 

Issuance of excess servicing spread financing pursuant to a recapture agreement with PennyMac Mortgage Investment Trust

 

 

580

 

 

 —

 

 

580

 

Accrual of interest

 

 

3,910

 

 

 —

 

 

3,910

 

Repayments

 

 

(12,018)

 

 

 —

 

 

(12,018)

 

Mortgage servicing liabilities resulting from mortgage loan sales

 

 

 —

 

 

1,770

 

 

1,770

 

Changes in fair value included in income

 

 

996

 

 

(3,580)

 

 

(2,584)

 

Balance, June 30, 2018

 

$

229,470

 

$

10,253

 

$

239,723

 

Changes in fair value recognized during the quarter relating to liabilities still outstanding at June 30, 2018

 

$

996

 

$

(3,580)

 

$

(2,584)

 

 

 

 

 

 

 

 

 

 

 

 

28


 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Quarter ended June 30, 2017

 

 

 

 

 

Mortgage

 

Net interest 

 

Mortgage

 

 

 

 

 

 

 

 

loans held

 

rate lock

 

servicing

 

 

 

 

 

 

 

 

for sale

    

commitments (1)

    

rights

    

 

Total

 

 

 

 

(in thousands)

 

 

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, March 31, 2017

    

$

327,682

 

$

66,007

 

$

506,916

 

$

900,605

 

 

 

Purchases

 

 

625,492

 

 

 —

 

 

183,586

 

 

809,078

 

 

 

Sales and repayments

 

 

(264,558)

 

 

 —

 

 

 —

 

 

(264,558)

 

 

 

Interest rate lock commitments issued, net

 

 

 —

 

 

71,062

 

 

 —

 

 

71,062

 

 

 

Mortgage servicing rights resulting from mortgage loan sales

 

 

 —

 

 

 —

 

 

7,945

 

 

7,945

 

 

 

Changes in fair value included in income arising from:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Changes in instrument-specific credit risk

 

 

(3,046)

 

 

 —

 

 

 —

 

 

(3,046)

 

 

 

Other factors

 

 

 —

 

 

32,613

 

 

(20,006)

 

 

12,607

 

 

 

 

 

 

(3,046)

 

 

32,613

 

 

(20,006)

 

 

9,561

 

 

 

Transfers from Level 3 to Level 2

 

 

(305,486)

 

 

 —

 

 

 —

 

 

(305,486)

 

 

 

Transfers of interest rate lock commitments to mortgage loans held for sale

 

 

 —

 

 

(123,524)

 

 

 —

 

 

(123,524)

 

 

 

Balance, June 30, 2017

 

$

380,084

 

$

46,158

 

$

678,441

 

$

1,104,683

 

 

 

Changes in fair value recognized during the quarter relating to assets still held at June 30, 2017

 

$

(3,042)

 

$

46,158

 

$

(20,006)

 

$

23,110

 

 

 


(1)

For the purpose of this table, the IRLC asset and liability positions are shown net.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Quarter ended June 30, 2017

 

 

 

Excess

 

 

 

 

 

 

 

servicing

 

Mortgage 

 

 

 

 

 

spread

 

servicing

 

 

 

 

    

financing

    

liabilities

    

Total

 

 

 

(in thousands)

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

Balance, March 31, 2017

 

$

277,484

 

$

15,994

 

$

293,478

 

Issuance of excess servicing spread financing pursuant to a recapture agreement with PennyMac Mortgage Investment Trust

 

 

1,380

 

 

 —

 

 

1,380

 

Accrual of interest

 

 

4,366

 

 

 —

 

 

4,366

 

Repayments

 

 

(14,278)

 

 

 —

 

 

(14,278)

 

Mortgage servicing liabilities resulting from mortgage loan sales

 

 

 —

 

 

3,810

 

 

3,810

 

Changes in fair value included in income

 

 

(7,156)

 

 

(1,509)

 

 

(8,665)

 

Balance, June 30, 2017

 

$

261,796

 

$

18,295

 

$

280,091

 

Changes in fair value recognized during the quarter relating to liabilities still outstanding at June 30, 2017

 

$

(7,156)

 

$

(1,509)

 

$

(8,665)

 

 

29


 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Six months ended June 30, 2018

 

 

 

Mortgage

 

Net interest 

 

Repurchase

 

Mortgage 

 

 

 

 

 

 

loans held

 

rate lock

 

agreement

 

servicing 

 

 

 

 

 

 

for sale

 

commitments (1)

 

derivatives

 

rights

 

 

Total

 

 

    

(in thousands)

 

Assets:

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Balance, December 31, 2017

 

$

782,211

 

$

58,272

 

$

10,656

 

$

638,010

 

$

1,489,149

 

Reclassification of mortgage servicing rights previously accounted for under the amortization method pursuant to a change in accounting principle

 

 

 —

 

 

 —

 

 

 —

 

 

1,482,426

 

 

1,482,426

 

Balance, January 1, 2018

 

 

782,211

 

 

58,272

 

 

10,656

 

 

2,120,436

 

 

2,971,575

 

Purchases and issuances, net

 

 

1,471,861

 

 

115,928

 

 

23,721

 

 

30,129

 

 

1,641,639

 

Sales and repayments

 

 

(890,527)

 

 

 —

 

 

(7,478)

 

 

 —

 

 

(898,005)

 

Mortgage servicing rights resulting from mortgage loan sales

 

 

 —

 

 

 —

 

 

 —

 

 

299,604

 

 

299,604

 

Changes in fair value included in income arising from:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Changes in instrument-specific credit risk

 

 

(5,028)

 

 

 —

 

 

 —

 

 

 —

 

 

(5,028)

 

Other factors

 

 

 —

 

 

(39,323)

 

 

(1,118)

 

 

35,988

 

 

(4,453)

 

 

 

 

(5,028)

 

 

(39,323)

 

 

(1,118)

 

 

35,988

 

 

(9,481)

 

Transfers from Level 3 to Level 2

 

 

(1,021,530)

 

 

 —

 

 

 —

 

 

 —

 

 

(1,021,530)

 

Transfers to real estate acquired in settlement of loans

 

 

(2,821)

 

 

 —

 

 

 —

 

 

 —

 

 

(2,821)

 

Transfers of interest rate lock commitments to mortgage loans held for sale

 

 

 —

 

 

(79,188)

 

 

 —

 

 

 —

 

 

(79,188)

 

Balance, June 30, 2018

 

$

334,166

 

$

55,689

 

$

25,781

 

$

2,486,157

 

$

2,901,793

 

Changes in fair value recognized during the period relating to assets still held at June 30, 2018

 

$

(5,061)

 

$

55,689

 

$

 —

 

$

35,988

 

$

86,616

 


(1)

For the purpose of this table, the IRLC asset and liability positions are shown net.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Six months ended June 30, 2018

 

 

 

Excess

 

 

 

 

 

 

 

 

servicing

 

Mortgage

 

 

 

 

 

 

spread

 

servicing

 

 

 

 

 

 

financing

 

liabilities

 

Total

 

 

 

(in thousands)

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

Balance, December 31, 2017

    

$

236,534

    

$

14,120

    

$

250,654

 

Issuance of excess servicing spread financing pursuant to a recapture agreement with PennyMac Mortgage Investment Trust

 

 

1,484

 

 

 —

 

 

1,484

 

Accrual of interest

 

 

7,844

 

 

 —

 

 

7,844

 

Repayments

 

 

(24,309)

 

 

 —

 

 

(24,309)

 

Mortgage servicing liabilities resulting from mortgage loan sales

 

 

 —

 

 

3,807

 

 

3,807

 

Changes in fair value included in income

 

 

7,917

 

 

(7,674)

 

 

243

 

Balance, June 30, 2018

 

$

229,470

 

$

10,253

 

$

239,723

 

Changes in fair value recognized during the period relating to liabilities still outstanding at June 30, 2018

 

$

7,917

 

$

(7,674)

 

$

243

 

 

30


 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Six months ended June 30, 2017

 

 

 

 

 

Mortgage

 

Net interest 

 

Mortgage

 

 

 

 

 

 

 

 

loans held

 

rate lock

 

servicing

 

 

 

 

 

 

 

    

for sale

 

commitments (1)

 

rights

 

Total

 

 

 

 

 

(in thousands)

 

 

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance December 31, 2016

    

$

47,271

    

$

59,391

    

$

515,925

    

$

622,587

 

 

 

Purchases

 

 

1,315,963

 

 

 —

 

 

183,789

 

 

1,499,752

 

 

 

Sales and repayments

 

 

(538,860)

 

 

 —

 

 

 —

 

 

(538,860)

 

 

 

Interest rate lock commitments issued, net

 

 

 —

 

 

142,819

 

 

 —

 

 

142,819

 

 

 

Mortgage servicing rights resulting from mortgage loan sales

 

 

 —

 

 

 —

 

 

13,929

 

 

13,929

 

 

 

Changes in fair value included in income arising from:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Changes in instrument-specific credit risk

 

 

(4,974)

 

 

 —

 

 

 —

 

 

(4,974)

 

 

 

Other factors

 

 

 —

 

 

57,732

 

 

(35,202)

 

 

22,530

 

 

 

 

 

 

(4,974)

 

 

57,732

 

 

(35,202)

 

 

17,556

 

 

 

Transfers from Level 3 to Level 2

 

 

(439,316)

 

 

 —

 

 

 —

 

 

(439,316)

 

 

 

Transfers of interest rate lock commitments to mortgage loans held for sale

 

 

 —

 

 

(213,784)

 

 

 —

 

 

(213,784)

 

 

 

Balance, June 30, 2017

 

$

380,084

 

$

46,158

 

$

678,441

 

$

1,104,683

 

 

 

Changes in fair value recognized during the year relating to assets still held at June 30, 2017

 

$

(4,620)

 

$

46,158

 

$

(35,202)

 

$

6,336

 

 

 


(1)

For the purpose of this table, the IRLC asset and liability positions are shown net.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Six months ended June 30, 2017

 

 

 

Excess

 

 

 

 

 

 

 

 

 

servicing

 

Mortgage 

 

 

 

 

 

 

spread

 

servicing

 

 

 

 

 

    

financing

    

liabilities

    

Total

 

 

 

(in thousands)

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

Balance December 31, 2016

 

$

288,669

    

$

15,192

    

$

303,861

 

Issuance of excess servicing spread financing pursuant to a recapture agreement with PennyMac Mortgage Investment Trust

 

 

2,953

 

 

 —

 

 

2,953

 

Accrual of interest

 

 

9,013

 

 

 —

 

 

9,013

 

Repayments

 

 

(28,910)

 

 

 —

 

 

(28,910)

 

Mortgage servicing liabilities resulting from mortgage loan sales

 

 

 —

 

 

7,869

 

 

7,869

 

Mortgage servicing liabilities assumed

 

 

 —

 

 

 —

 

 

 —

 

Changes in fair value included in income

 

 

(9,929)

 

 

(4,766)

 

 

(14,695)

 

Balance, June 30, 2017

 

$

261,796

 

$

18,295

 

$

280,091

 

Changes in fair value recognized during the year relating to liabilities still outstanding at June 30, 2017

 

$

(9,929)

 

$

(4,766)

 

$

(14,695)

 

 

The information used in the preceding roll forwards represents activity for assets and liabilities measured at fair value on a recurring basis and identified as using “Level 3” significant fair value inputs at either the beginning or the end of the periods presented. The Company had transfers among the fair value levels arising from transfers of IRLCs to mortgage loans held for sale at fair value upon purchase or funding of the respective mortgage loans and from the return to salability in the active secondary market of certain mortgage loans held for sale.

 

31


 

Assets and Liabilities Measured at Fair Value under the Fair Value Option

 

Net changes in fair values included in income for assets and liabilities carried at fair value as a result of management’s election of the fair value option by income statement line item are summarized below:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Quarter ended June 30, 

 

 

 

2018

 

2017

 

 

    

Net gains on 

    

 

    

 

    

Net gains on 

    

 

    

 

 

 

 

mortgage

 

Net mortgage

 

 

 

mortgage

 

Net mortgage

 

 

 

 

 

loans held

 

loan

 

 

 

loans held

 

loan

 

 

 

 

 

for sale at 

 

servicing

 

 

 

for sale at 

 

servicing

 

 

 

 

 

fair value

 

fees

 

Total

 

fair value

 

fees

 

Total

 

 

 

(in thousands)

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Mortgage loans held for sale at fair value

 

$

56,861

 

$

 —

 

$

56,861

 

$

123,657

 

$

 —

 

$

123,657

 

Mortgage servicing rights at fair value

 

 

 —

 

 

(26,549)

 

 

(26,549)

 

 

 —

 

 

(20,006)

 

 

(20,006)

 

 

 

$

56,861

 

$

(26,549)

 

$

30,312

 

$

123,657

 

$

(20,006)

 

$

103,651

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Excess servicing spread financing at fair value payable to PennyMac Mortgage Investment Trust

 

$

 —

 

$

(996)

 

$

(996)

 

$

 —

 

$

7,156

 

$

7,156

 

Mortgage servicing liabilities at fair value

 

 

 —

 

 

3,580

 

 

3,580

 

 

 —

 

 

1,509

 

 

1,509

 

 

 

$

 —

 

$

2,584

 

$

2,584

 

$

 —

 

$

8,665

 

$

8,665

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Six months ended June 30, 

 

 

2018

 

2017

 

 

    

Net gains on 

   

Net

   

 

 

   

Net gains on 

   

Net

 

 

 

 

 

 

mortgage

 

mortgage

 

 

 

 

mortgage

 

mortgage

 

 

 

 

 

 

loans held

 

loan

 

 

 

 

loans held

 

loan

 

 

 

 

 

 

for sale at 

 

servicing

 

 

 

 

for sale at 

 

servicing

 

 

 

 

 

    

fair value

    

fees

    

Total

    

fair value

    

fees

    

Total

 

 

 

(in thousands)

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Mortgage loans held for sale at fair value

 

$

50,743

 

$

 —

 

$

50,743

 

$

205,967

 

$

 —

 

$

205,967

 

Mortgage servicing rights at fair value

 

 

 —

 

 

35,988

 

 

35,988

 

 

 —

 

 

(35,202)

 

 

(35,202)

 

 

 

$

50,743

 

$

35,988

 

$

86,731

 

$

205,967

 

$

(35,202)

 

$

170,765

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Excess servicing spread financing at fair value payable to PennyMac Mortgage Investment Trust

 

$

 —

 

$

(7,917)

 

$

(7,917)

 

$

 —

 

$

9,929

 

$

9,929

 

Mortgage servicing liabilities at fair value

 

 

 —

 

 

7,674

 

 

7,674

 

 

 —

 

 

4,766

 

 

4,766

 

 

 

$

 —

 

$

(243)

 

$

(243)

 

$

 —

 

$

14,695

 

$

14,695

 

 

 

32


 

Following are the fair value and related principal amounts due upon maturity of assets accounted for under the fair value option:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30, 2018

 

December 31, 2017

 

 

 

 

Principal

 

 

 

 

 

Principal

 

 

 

 

 

 

amount

 

 

 

 

 

amount

 

 

 

 

Fair

 

 due upon 

 

 

 

Fair

 

 due upon 

 

 

 

    

value

    

maturity

    

Difference

    

value

    

maturity

    

Difference

 

 

(in thousands)

Mortgage loans held for sale:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Current through 89 days delinquent

 

$

2,272,208

 

$

2,187,924

 

$

84,284

 

$

2,430,517

 

$

2,326,772

 

$

103,745

90 days or more delinquent:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Not in foreclosure

 

 

201,899

 

 

204,529

 

 

(2,630)

 

 

614,329

 

 

614,357

 

 

(28)

In foreclosure