Transactions with Related Parties

6 Months Ended

Jun. 30, 2024

Related Party Transactions [Abstract]

Transactions with Related parties

Note 4—Transactions with Related Parties

The Company enters into transactions with subsidiaries of PFSI in support of its operating, investing and financing activities as summarized below.

Operating Activities

Loan Servicing

The Company has a loan servicing agreement with PLS (the “Servicing Agreement”) pursuant to which PLS provides subservicing for the Company's portfolio of MSRs, loans held for sale and loans held in VIEs (prime servicing), and its portfolio of residential loans purchased with credit deterioration (special servicing). The Servicing Agreement provides for servicing fees earned by PLS that are established at a per loan monthly amount based on the delinquency, bankruptcy and/or foreclosure status of the serviced loan or real estate acquired in settlement of loans (“REO").

Prime Servicing

The per-loan base servicing fees for prime loans subserviced by PLS on the Company’s behalf are $7.50 per month for fixed-rate loans and $8.50 per month for adjustable-rate loans.

To the extent that these prime loans become delinquent, PLS is entitled to an additional servicing fee per loan ranging from $10 to $55 per month based on the delinquency, bankruptcy and foreclosure status of the loan or $75 per month if the underlying mortgaged property becomes REO.

PLS is also entitled to customary ancillary income and certain market-based fees and charges, including boarding and deboarding fees, liquidation and disposition fees, assumption, modification and origination fees and certain fees for pandemic-related forbearance and modification activities.

Special Servicing

The per-loan base servicing fee rates for loans purchased with credit deterioration (distressed loans) range from $30 per month for current loans up to $95 per month for loans in foreclosure proceedings. The base servicing fee rate for REO is $75 per month. PLS also receives a supplemental servicing fee of $25 per month for each special servicing loan.

PLS receives activity-based fees for modifications, foreclosures and liquidations that it facilitates with respect to special servicing, as well as other market-based refinancing and loan disposition fees.

The Servicing Agreement expires on June 30, 2025, subject to automatic renewal for additional 18-month periods, unless terminated earlier in accordance with its terms.

MSR Recapture Agreement

The Company has an MSR recapture agreement with PLS. Pursuant to the terms of the MSR recapture agreement, if PLS refinances (recaptures) mortgage loans for which the Company previously held the MSRs, PLS is generally required to transfer and convey to the Company cash in an amount equal to:

•40% of the fair market value of the MSRs relating to the recaptured loans subject to the first 15% of the “recapture rate”;

•35% of the fair market value of the MSRs relating to the recaptured loans subject to the “recapture rate” in excess of 15% and up to 30%; and

•30% of the fair market value of the MSRs relating to the recaptured loans subject to the “recapture rate” in excess of 30%.

The “recapture rate” means, during each month, the ratio of (i) the aggregate unpaid principal balance ("UPB") of all recaptured loans, to (ii) the aggregate UPB of all mortgage loans for which the Company held the MSRs and that were refinanced or otherwise paid off in such month. PFSI has further agreed to allocate sufficient resources to target a recapture rate of at least 15%.

The MSR recapture agreement expires, unless terminated earlier in accordance with its terms, on June 30, 2025, subject to automatic renewal for additional 18-month periods, unless terminated in accordance with its terms.

Following is a summary of loan servicing fees and recapture earned by PLS:

	Quarter ended June 30,				Six months ended June 30,
	2024		2023		2024		2023
	(in thousands)
Loan servicing fees:
Loans acquired for sale at fair value	$	94	$	172	$	184	$	457
Loans at fair value		63		31		125		151
Mortgage servicing rights		20,107		20,114		40,217		40,158
	$	20,264	$	20,317	$	40,526	$	40,766
Average investment in loans:
Acquired for sale at fair value	$	854,406	$	1,609,816	$	779,997	$	1,992,706
At fair value	$	1,380,857	$	1,491,357	$	1,403,094	$	1,500,936
Average MSR portfolio unpaid principal balance	$	229,124,554	$	232,008,151	$	229,767,433	$	231,381,212
MSR recapture fees	$	473	$	509	$	826	$	994
UPB of loans recaptured	$	74,208	$	98,126	$	136,281	$	193,317

Correspondent Production Activities

The Company is provided fulfillment and other services for the operation of its correspondent business under an amended and restated mortgage banking services agreement with PLS. These services include: provision of models and technology for the pricing of loans and MSRs; reviews of loan data; documentation and appraisals to assess loan quality and risk; hedging the Company's mortgage pipeline to protect it from fluctuations in value due to movements in interest rates; correspondent seller performance and credit monitoring procedures; and the subsequent sale and securitization of loans through secondary mortgage markets on behalf of the Company.

Fulfillment and sourcing fees are summarized below:

•Fulfillment fees shall not exceed the following:

(i)the number of loan commitments issued by the Company multiplied by a pull-through factor of either .99 or .80 depending on whether the loan commitments are subject to a “mandatory trade confirmation” or a “best efforts lock confirmation”, respectively, and then multiplied by $585 for each pull-through adjusted loan commitment up to and including 16,500 per quarter and $355 for each pull-through adjusted loan commitment in excess of 16,500 per quarter, plus

(ii)$315 multiplied by the number of purchased loans up to and including 16,500 per quarter and $195 multiplied by the number of purchased loans in excess of 16,500 per quarter, plus

(iii)$750 multiplied by the number of all purchased loans that are sold or securitized to parties other than Fannie Mae and Freddie Mac; provided however, that no fulfillment fee shall be due or payable to PLS with respect to any Ginnie Mae loans and, as of October 1, 2022, designated Fannie Mae or Freddie Mac loans acquired by PLS.

The Company does not hold the Ginnie Mae approval required to issue securities guaranteed by Ginnie Mae for a pool of securitized loans or to act as a servicer for such pool of loans. Accordingly, under the agreement, PLS currently purchases loans saleable in accordance with the Ginnie Mae MBS Guide “as is” and without recourse of any kind from the Company at cost less any administrative fees paid by the correspondent to the Company plus accrued interest and a sourcing fee. The Company may also sell conventional loans to PLS under the same arrangement subject to mutual agreement between the parties. Sourcing fees range from one to two basis points of the loans' UPB, generally based on the average number of calendar days the loans are held by PMT before purchase by PLS.

The mortgage banking services agreement expires, unless terminated earlier in accordance with its terms, on June 30, 2025, subject to automatic renewal for additional 18-month periods, unless terminated in accordance with its terms.

The Company may purchase newly originated conforming balance non-government insured or guaranteed loans from PLS under a mortgage loan purchase and sale agreement.

Following is a summary of correspondent production activity between the Company and PLS:

	Quarter ended June 30,				Six months ended June 30,
	2024		2023		2024		2023
	(in thousands)
Loan fulfillment fees earned by PLS	$	4,427	$	5,441	$	8,443	$	17,364
UPB of loans fulfilled by PLS	$	2,229,397	$	3,029,274	$	4,001,078	$	9,658,084
Sourcing fees received from PLS included in    Net gains on loans acquired for sale	$	2,050	$	1,832	$	3,655	$	3,160
UPB of loans sold to PLS:
Government guaranteed or insured	$	10,500,415	$	11,307,342	$	18,357,340	$	20,521,054
Conventional conforming		10,006,706		7,017,890		18,196,636		11,080,764
	$	20,507,121	$	18,325,232	$	36,553,976	$	31,601,818
Tax service fees paid to PLS	$	431	$	701	$	790	$	2,111

	June 30, 2024		December 31, 2023
	(in thousands)
Loans included in Loans acquired for sale at fair value    pending sale to PLS	$	281,020	$	168,303

Management Fees

The Company has a management agreement with PCM pursuant to which PMT pays PCM management fees as follows:

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

•A performance incentive fee that is calculated quarterly at a defined annualized percentage of the amount by which “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:

•10% of the amount by which “net income” for the quarter exceeds (i) an 8% return on “equity” plus the “high watermark”, up to (ii) a 12% return on “equity”; plus

•15% of the amount by which “net income” for the quarter exceeds (i) a 12% return on “equity” plus the “high watermark”, up to (ii) a 16% return on “equity”; plus

•20% of the amount by which “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 the Company’s common shares of beneficial interest (“Common Shares”) calculated in accordance with GAAP, and adjusted to exclude one-time events pursuant to changes in GAAP and certain other non-cash charges after discussion between PCM and the Company’s independent trustees and after approval by a majority of the Company’s independent trustees.

“Equity” is the weighted average of the issue price per Common Share of all of the Company’s public offerings, multiplied by the weighted average number of Common Shares outstanding (including restricted share units) in the rolling four-quarter period.

“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. The “high watermark” starts at zero and is adjusted quarterly. 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 PCM 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.

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

In the event of termination of the management agreement between the Company and PCM, PCM 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 PCM, in each case during the 24-month period before termination of the management agreement.

Following is a summary of management fee expenses:

	Quarter ended June 30,				Six months ended June 30,
	2024		2023		2024		2023
	(in thousands)
Base management	$	7,133	$	7,078	$	14,321	$	14,335
Performance incentive		—		—		—		—
	$	7,133	$	7,078	$	14,321	$	14,335
Average shareholders' equity amounts used to calculate     base management fee expense	$	1,912,522	$	1,892,505	$	1,919,962	$	1,927,305

Expense Reimbursement

Under the management agreement, PCM is entitled to reimbursement of its organizational and operating expenses, including third-party expenses, incurred on the Company’s behalf, it being understood that PCM 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 the Company. PCM is reimbursed $165,000 per fiscal quarter for these services, such amount to be reviewed annually and to not preclude reimbursement for any other services performed by PCM or its affiliates.

The Company is required to pay PCM and its affiliates a portion of the rent, telephone, utilities, office furniture, equipment, machinery and other office, internal and overhead expenses of PCM and its affiliates required for the Company’s and its subsidiaries’ operations. These expenses are allocated based on the ratio of the Company’s and its subsidiaries’ proportion of gross assets compared to all remaining gross assets managed or owned by PCM and/or its affiliates as calculated at each fiscal quarter end.

Following is a summary of the Company’s reimbursements to PCM and its affiliates for expenses:

	Quarter ended June 30,				Six months ended June 30,
	2024		2023		2024		2023
	(in thousands)
Reimbursement of:
Expenses incurred on the Company’s behalf, net	$	2,779	$	3,978	$	9,193	$	9,639
Common overhead incurred by PCM and its affiliates		2,000		2,140		3,944		3,961
Compensation		165		165		330		330
	$	4,944	$	6,283	$	13,467	$	13,930
Payments and settlements during the quarter (1)	$	29,263	$	30,872	$	59,348	$	63,256

(1)Payments and settlements include payments and netting settlements made pursuant to master netting agreements between the Company and PFSI for the operating, investing and financing activities itemized in this Note.

Financing Activities

PFSI held 75,000 of the Company’s Common Shares at both June 30, 2024 and December 31, 2023.

Amounts Receivable from and Payable to PFSI

Amounts receivable from and payable to PFSI are summarized below:

	June 30, 2024		December 31, 2023
	(in thousands)
Due from PFSI-Miscellaneous receivables	$	1	$	56
Due to PFSI:
Correspondent production fees	$	9,145	$	8,288
Management fees		7,133		7,252
Loan servicing fees		6,792		6,809
Allocated expenses and expenses and costs paid by PFSI    on PMT’s behalf		5,166		5,612
Fulfillment fees		1,177		1,301
	$	29,413	$	29,262

The Company has also transferred cash to PLS to fund loan servicing advances and REO property acquisition and preservation costs on its behalf. Such amounts are included in various balance sheet items of the Company as summarized below:

Balance sheet line including advance amount	June 30, 2024		December 31, 2023
	(in thousands)
Loan servicing advances	$	98,989	$	206,151
Other assets-Real estate acquired in settlement of loans		1,230		2,003
	$	100,219	$	208,154