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Fair Value
 6 Months Ended
Jun. 30, 2024
Fair Value Disclosures [Abstract]  
Fair Value

Note 7— Fair Value

The Company’s consolidated financial statements include assets and liabilities that are measured at or based on their fair values. Measurement at or based on fair value may be on a recurring or nonrecurring basis depending on the accounting principles applicable to the specific asset or liability and whether the Company 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.
•
Level 3—Prices determined using significant unobservable inputs. In situations where significant 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. Such differences may result in significantly different fair value measurements. Likewise, due to the general illiquidity of some of these assets and liabilities, subsequent transactions may be at values significantly different from those reported.

The Company reclassifies its assets and liabilities between levels of the fair value hierarchy when the inputs required to establish fair value at a level of the fair value hierarchy are no longer readily available, requiring the use of lower-level inputs, or when the inputs required to establish fair value at a higher level of the hierarchy become available.

Fair Value Accounting Elections

The Company identified all of PMT’s non-cash financial assets and MSRs to be accounted for at fair value. The Company has elected to account for these assets at fair value so such changes in fair value will be reflected in income as they occur and more timely reflect the results of the Company’s performance.

The Company has also identified its Asset-backed financings at fair value and Interest-only security payable at fair value to be accounted for at fair value to reflect the generally offsetting changes in fair value of these borrowings to changes in fair value of the assets at fair value collateralizing these financings. For other borrowings, the Company has determined that historical cost accounting is more appropriate because under historical cost accounting debt issuance costs are amortized over the term of the debt facility, thereby matching the debt issuance costs to the periods benefiting from the availability of the debt.

Financial Statement Items Measured at Fair Value on a Recurring Basis

Following is a summary of financial statement items that are measured at fair value on a recurring basis:

 

 

June 30, 2024

 

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Total

 

 

 

(in thousands)

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

Short-term investments

 

$

336,296

 

 

$

—

 

 

$

—

 

 

$

336,296

 

Mortgage-backed securities at fair value

 

 

—

 

 

 

3,980,496

 

 

 

87,841

 

 

 

4,068,337

 

Loans acquired for sale at fair value

 

 

—

 

 

 

686,397

 

 

 

7,994

 

 

 

694,391

 

Loans at fair value

 

 

—

 

 

 

1,375,838

 

 

 

1,998

 

 

 

1,377,836

 

Derivative assets:

 

 

 

 

 

 

 

 

 

 

 

 

Call options on interest rate futures purchase contracts

 

 

10,324

 

 

 

—

 

 

 

—

 

 

 

10,324

 

Put options on interest rate futures purchase contracts

 

 

4,474

 

 

 

—

 

 

 

—

 

 

 

4,474

 

Forward purchase contracts

 

 

—

 

 

 

3,812

 

 

 

—

 

 

 

3,812

 

Forward sale contracts

 

 

—

 

 

 

26,971

 

 

 

—

 

 

 

26,971

 

MBS put options

 

 

—

 

 

 

1,421

 

 

 

—

 

 

 

1,421

 

CRT derivatives

 

 

—

 

 

 

—

 

 

 

24,305

 

 

 

24,305

 

Interest rate lock commitments

 

 

—

 

 

 

—

 

 

 

2,587

 

 

 

2,587

 

Total derivative assets before netting

 

 

14,798

 

 

 

32,204

 

 

 

26,892

 

 

 

73,894

 

Netting

 

 

—

 

 

 

—

 

 

 

—

 

 

 

16,859

 

Total derivative assets after netting

 

 

14,798

 

 

 

32,204

 

 

 

26,892

 

 

 

90,753

 

Mortgage servicing rights at fair value

 

 

—

 

 

 

—

 

 

 

3,941,861

 

 

 

3,941,861

 

 

$

351,094

 

 

$

6,074,935

 

 

$

4,066,586

 

 

$

10,509,474

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

Asset-backed financings at fair value

 

$

—

 

 

$

1,288,180

 

 

$

—

 

 

$

1,288,180

 

Interest-only security payable at fair value

 

 

—

 

 

 

—

 

 

 

32,708

 

 

 

32,708

 

Derivative and credit risk transfer strip liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

Forward purchase contracts

 

 

—

 

 

 

8,661

 

 

 

—

 

 

 

8,661

 

Forward sales contracts

 

 

—

 

 

 

3,693

 

 

 

—

 

 

 

3,693

 

Interest rate lock commitments

 

 

—

 

 

 

—

 

 

 

1,035

 

 

 

1,035

 

Total derivative liabilities before netting

 

 

—

 

 

 

12,354

 

 

 

1,035

 

 

 

13,389

 

Netting

 

 

—

 

 

 

—

 

 

 

—

 

 

 

(11,471

)

Total derivative liabilities after netting

 

 

—

 

 

 

12,354

 

 

 

1,035

 

 

 

1,918

 

Credit risk transfer strips

 

 

—

 

 

 

—

 

 

 

16,974

 

 

 

16,974

 

Total derivative and credit risk transfer strip liabilities

 

 

—

 

 

 

12,354

 

 

 

18,009

 

 

 

18,892

 

 

$

—

 

 

$

1,300,534

 

 

$

50,717

 

 

$

1,339,780

 

 

 

 

 

December 31, 2023

 

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Total

 

 

 

(in thousands)

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

Short-term investments

 

$

128,338

 

 

$

—

 

 

$

—

 

 

$

128,338

 

Mortgage-backed securities at fair value

 

 

—

 

 

 

4,742,061

 

 

 

94,231

 

 

 

4,836,292

 

Loans acquired for sale at fair value

 

 

—

 

 

 

662,700

 

 

 

6,318

 

 

 

669,018

 

Loans at fair value

 

 

—

 

 

 

1,431,689

 

 

 

2,131

 

 

 

1,433,820

 

Derivative assets:

 

 

 

 

 

 

 

 

 

 

 

 

Call options on interest rate futures purchase contracts

 

 

41,712

 

 

 

—

 

 

 

—

 

 

 

41,712

 

Put options on interest rate futures purchase contracts

 

 

4,324

 

 

 

—

 

 

 

—

 

 

 

4,324

 

Forward purchase contracts

 

 

—

 

 

 

15,905

 

 

 

—

 

 

 

15,905

 

Forward sale contracts

 

 

—

 

 

 

671

 

 

 

—

 

 

 

671

 

MBS call options

 

 

—

 

 

 

3,218

 

 

 

—

 

 

 

3,218

 

MBS put options

 

 

—

 

 

 

5

 

 

 

—

 

 

 

5

 

CRT derivatives

 

 

—

 

 

 

—

 

 

 

16,160

 

 

 

16,160

 

Interest rate lock commitments

 

 

—

 

 

 

—

 

 

 

7,596

 

 

 

7,596

 

Total derivative assets before netting

 

 

46,036

 

 

 

19,799

 

 

 

23,756

 

 

 

89,591

 

Netting

 

 

—

 

 

 

—

 

 

 

—

 

 

 

88,393

 

Total derivative assets after netting

 

 

46,036

 

 

 

19,799

 

 

 

23,756

 

 

 

177,984

 

Mortgage servicing rights at fair value

 

 

—

 

 

 

—

 

 

 

3,919,107

 

 

 

3,919,107

 

 

$

174,374

 

 

$

6,856,249

 

 

$

4,045,543

 

 

$

11,164,559

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

Asset-backed financings at fair value

 

$

—

 

 

$

1,336,731

 

 

$

—

 

 

$

1,336,731

 

Interest-only security payable at fair value

 

 

—

 

 

 

—

 

 

 

32,667

 

 

 

32,667

 

Derivative liabilities and credit risk transfer strips:

 

 

 

 

 

 

 

 

 

 

 

 

Call options on interest rate futures purchase contracts

 

 

2,005

 

 

 

—

 

 

 

—

 

 

 

2,005

 

Call options on interest rate futures sell contracts

 

 

1,328

 

 

 

—

 

 

 

—

 

 

 

1,328

 

Forward purchase contracts

 

 

—

 

 

 

490

 

 

 

—

 

 

 

490

 

Forward sales contracts

 

 

—

 

 

 

50,363

 

 

 

—

 

 

 

50,363

 

Interest rate lock commitments

 

 

—

 

 

 

—

 

 

 

64

 

 

 

64

 

Total derivative liabilities before netting

 

 

3,333

 

 

 

50,853

 

 

 

64

 

 

 

54,250

 

Netting

 

 

—

 

 

 

—

 

 

 

—

 

 

 

(49,561

)

Total derivative liabilities after netting

 

 

3,333

 

 

 

50,853

 

 

 

64

 

 

 

4,689

 

Credit risk transfer strips

 

 

—

 

 

 

—

 

 

 

46,692

 

 

 

46,692

 

Total derivative and credit risk transfer strip
   liabilities

 

 

3,333

 

 

 

50,853

 

 

 

46,756

 

 

 

51,381

 

 

$

3,333

 

 

$

1,387,584

 

 

$

79,423

 

 

$

1,420,779

 

 

The following is a summary of changes in items measured at fair value on a recurring basis using Level 3 inputs that are significant to the estimation of the fair values of the assets and liabilities at either the beginning or end of the periods presented:

 

 

Quarter ended June 30, 2024

 

Assets (1)

 

Interest-only stripped mortgage-backed securities

 

 

Loans
acquired
for sale

 

 

Loans at
fair value

 

 

CRT
derivatives

 

 

Interest rate
lock
commitments

 

 

CRT
strips

 

 

Mortgage
servicing
rights

 

 

Total

 

 

 

(in thousands)

 

Balance, March 31, 2024

 

$

94,667

 

 

$

5,096

 

 

$

2,034

 

 

$

22,899

 

 

$

4,845

 

 

$

(17,352

)

 

$

3,951,737

 

 

$

4,063,926

 

Purchases issuances and (purchase
   adjustments)

 

 

—

 

 

 

4,013

 

 

 

—

 

 

 

—

 

 

 

4,760

 

 

 

—

 

 

 

(13

)

 

 

8,760

 

Repayments and sales

 

 

(4,984

)

 

 

(1,018

)

 

 

(32

)

 

 

(3,633

)

 

 

—

 

 

 

(11,693

)

 

 

—

 

 

 

(21,360

)

Accrual of unearned discount

 

 

2,390

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

2,390

 

Amounts received pursuant to sales
  of loans

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

40,619

 

 

 

40,619

 

Changes in fair value included in results
of operations arising from:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Changes in instrument -
   specific credit risk

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

Other factors

 

 

(4,232

)

 

 

(97

)

 

 

(4

)

 

 

5,039

 

 

 

(4,147

)

 

 

12,071

 

 

 

(50,556

)

 

 

(41,926

)

 

 

(4,232

)

 

 

(97

)

 

 

(4

)

 

 

5,039

 

 

 

(4,147

)

 

 

12,071

 

 

 

(50,556

)

 

 

(41,926

)

Transfers of:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate lock commitments to loans
   acquired for sale (2)

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

(3,906

)

 

 

—

 

 

 

—

 

 

 

(3,906

)

Mortgage servicing rights relating to
   delinquent loans to Agency

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

74

 

 

 

74

 

Balance, June 30, 2024

 

$

87,841

 

 

$

7,994

 

 

$

1,998

 

 

$

24,305

 

 

$

1,552

 

 

$

(16,974

)

 

$

3,941,861

 

 

$

4,048,577

 

Changes in fair value recognized during
the quarter relating to assets still held
at June 30, 2024

 

$

(4,232

)

 

$

(112

)

 

$

(11

)

 

$

5,039

 

 

$

1,552

 

 

$

378

 

 

$

(50,556

)

 

$

(47,942

)

 

(1)
For the purpose of this table, CRT derivative, interest rate lock commitment (“IRLC”), and CRT strip asset and liability positions are shown net.
(2)
The Company had transfers among the fair value levels arising from transfers of IRLCs to loans acquired for sale at fair value upon purchase of the respective loans.

 

Liabilities

 

Quarter ended June 30, 2024

 

 

 

(in thousands)

 

Interest-only security payable:

 

 

 

Balance, March 31, 2024

 

$

32,227

 

Changes in fair value included in income arising from:

 

 

 

Changes in instrument - specific credit risk

 

 

—

 

Other factors

 

 

481

 

 

 

481

 

Balance, June 30, 2024

 

$

32,708

 

Changes in fair value recognized during the quarter relating
to liability outstanding at June 30, 2024

 

$

481

 

 

 

 

Quarter ended June 30, 2023

 

Assets (1)

 

Loans
acquired
for sale

 

 

Loans at
fair
value

 

 

CRT
derivatives

 

 

Interest
rate lock
commitments

 

 

CRT
strips

 

 

Mortgage
servicing
rights

 

 

Total

 

 

 

(in thousands)

 

Balance, March 31, 2023

 

$

10,109

 

 

$

3,548

 

 

$

(13,860

)

 

$

8,549

 

 

$

(113,065

)

 

$

3,975,076

 

 

$

3,870,357

 

Purchases and issuances

 

 

767

 

 

 

—

 

 

 

—

 

 

 

3,756

 

 

 

—

 

 

 

—

 

 

 

4,523

 

Repayments and sales

 

 

(4,637

)

 

 

(4

)

 

 

(5,367

)

 

 

—

 

 

 

(11,984

)

 

 

—

 

 

 

(21,992

)

Amounts received pursuant to sales
  of loans

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

90,747

 

 

 

90,747

 

Changes in fair value included in results of
operations arising from:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Changes in instrument -
   specific credit risk

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

Other factors

 

 

391

 

 

 

(879

)

 

 

14,833

 

 

 

(14,355

)

 

 

46,480

 

 

 

(87,997

)

 

 

(41,527

)

 

 

391

 

 

 

(879

)

 

 

14,833

 

 

 

(14,355

)

 

 

46,480

 

 

 

(87,997

)

 

 

(41,527

)

Transfers of:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate lock commitments
   to loans acquired for sale (2)

 

 

—

 

 

 

—

 

 

 

—

 

 

 

752

 

 

 

—

 

 

 

—

 

 

 

752

 

Mortgage servicing rights relating to
   delinquent loans to Agency

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

112

 

 

 

112

 

Balance, June 30, 2023

 

$

6,630

 

 

$

2,665

 

 

$

(4,394

)

 

$

(1,298

)

 

$

(78,569

)

 

$

3,977,938

 

 

$

3,902,972

 

Changes in fair value recognized during
the quarter relating to assets still held at
June 30, 2023

 

$

(193

)

 

$

(879

)

 

$

9,410

 

 

$

(1,298

)

 

$

34,496

 

 

$

(87,997

)

 

$

(46,461

)

 

(1)
For the purpose of this table, CRT derivative, IRLC, and CRT strip asset and liability positions are shown net.
(2)
The Company had transfers among the fair value levels arising from transfers of IRLCs to loans acquired for sale at fair value upon purchase of the respective loans.

 

 

Liabilities

 

Quarter ended June 30, 2023

 

 

 

(in thousands)

 

Interest-only security payable:

 

 

 

Balance, March 31, 2023

 

$

23,205

 

Changes in fair value included in results of operations arising from:

 

 

 

Changes in instrument - specific credit risk

 

 

—

 

Other factors

 

 

855

 

 

 

855

 

Balance, June 30, 2023

 

$

24,060

 

Changes in fair value recognized during the quarter relating
to liability outstanding at June 30, 2023

 

$

855

 

 

 

 

 

Six months ended June 30, 2024

 

Assets (1)

 

Interest-only stripped mortgage-backed securities

 

 

Loans
acquired
for sale

 

 

Loans at
fair
value

 

 

CRT
derivatives

 

 

Interest rate
lock
commitments

 

 

CRT
strips

 

 

Mortgage
servicing
rights

 

 

Total

 

 

 

(in thousands)

 

Balance, December 31, 2023

 

$

94,231

 

 

$

6,318

 

 

$

2,131

 

 

$

16,160

 

 

$

7,532

 

 

$

(46,692

)

 

$

3,919,107

 

 

$

3,998,787

 

Purchases and issuances

 

 

—

 

 

 

5,497

 

 

 

—

 

 

 

—

 

 

 

7,871

 

 

 

—

 

 

 

29,428

 

 

 

42,796

 

Repayments and sales

 

 

(10,054

)

 

 

(3,676

)

 

 

(91

)

 

 

(7,084

)

 

 

—

 

 

 

(23,378

)

 

 

—

 

 

 

(44,283

)

Accrual of unearned discounts

 

 

4,606

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

4,606

 

Amounts received pursuant to sales
   of loans

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

71,868

 

 

 

71,868

 

Changes in fair value included in results
of operations arising from:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Changes in instrument - specific
   credit risk

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

Other factors

 

 

(942

)

 

 

(145

)

 

 

(42

)

 

 

15,229

 

 

 

(5,002

)

 

 

53,096

 

 

 

(78,758

)

 

 

(16,564

)

 

 

(942

)

 

 

(145

)

 

 

(42

)

 

 

15,229

 

 

 

(5,002

)

 

 

53,096

 

 

 

(78,758

)

 

 

(16,564

)

Transfers of:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate lock commitments to loans
   acquired for sale (2)

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

(8,849

)

 

 

—

 

 

 

—

 

 

 

(8,849

)

Mortgage servicing rights relating to
   delinquent loans to Agency

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

216

 

 

 

216

 

Balance, June 30, 2024

 

$

87,841

 

 

$

7,994

 

 

$

1,998

 

 

$

24,305

 

 

$

1,552

 

 

$

(16,974

)

 

$

3,941,861

 

 

$

4,048,577

 

Changes in fair value recognized during
the period relating to assets still held
at June 30, 2024

 

$

(942

)

 

$

(199

)

 

$

(52

)

 

$

8,256

 

 

$

1,552

 

 

$

29,718

 

 

$

(78,758

)

 

$

(40,425

)

 

(1)
For the purpose of this table, CRT derivative, IRLC, and CRT strip asset and liability positions are shown net.
(2)
The Company had transfers among the fair value levels arising from transfers of IRLCs to loans acquired for sale at fair value upon purchase of the respective loans.

 

 

Liabilities

 

Six months ended June 30, 2024

 

 

 

(in thousands)

 

Interest-only security payable:

 

 

 

Balance, December 31, 2023

 

$

32,667

 

Changes in fair value included in income arising from:

 

 

 

Changes in instrument - specific credit risk

 

 

—

 

Other factors

 

 

41

 

 

 

41

 

Balance, June 30, 2024

 

$

32,708

 

Changes in fair value recognized during the period relating
to liability outstanding at June 30, 2024

 

$

41

 

 

 

 

 

 

Six months ended June 30, 2023

 

Assets (1)

 

Loans
acquired
for sale

 

 

Loans at
fair
value

 

 

CRT
derivatives

 

 

Interest
rate lock
commitments

 

 

CRT strips

 

 

Mortgage
servicing
rights

 

 

Total

 

 

 

(in thousands)

 

Balance, December 31, 2022

 

$

10,708

 

 

$

3,457

 

 

$

(22,098

)

 

$

(478

)

 

$

(137,193

)

 

$

4,012,737

 

 

$

3,867,133

 

Purchases and issuances

 

 

4,262

 

 

 

119

 

 

 

—

 

 

 

(3,931

)

 

 

—

 

 

 

—

 

 

 

450

 

Repayments and sales

 

 

(8,404

)

 

 

(24

)

 

 

(8,255

)

 

 

—

 

 

 

(24,288

)

 

 

—

 

 

 

(40,971

)

Amounts received pursuant to sales
  of loans

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

191,365

 

 

 

191,365

 

Changes in fair value included in results
of operations arising from:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Changes in instrument - specific credit
   risk

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

Other factors

 

 

64

 

 

 

(427

)

 

 

25,959

 

 

 

12,677

 

 

 

82,912

 

 

 

(225,441

)

 

 

(104,256

)

 

 

64

 

 

 

(427

)

 

 

25,959

 

 

 

12,677

 

 

 

82,912

 

 

 

(225,441

)

 

 

(104,256

)

Transfers of:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans to REO

 

 

—

 

 

 

(460

)

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

(460

)

Interest rate lock commitments
  to loans acquired for sale (2)

 

 

—

 

 

 

—

 

 

 

—

 

 

 

(9,566

)

 

 

—

 

 

 

—

 

 

 

(9,566

)

Mortgage servicing rights relating to
   delinquent loans to Agency

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

(723

)

 

 

(723

)

Balance, June 30, 2023

 

$

6,630

 

 

$

2,665

 

 

$

(4,394

)

 

$

(1,298

)

 

$

(78,569

)

 

$

3,977,938

 

 

$

3,902,972

 

Changes in fair value recognized during
the period relating to assets still held at
June 30, 2023

 

$

(176

)

 

$

(886

)

 

$

17,506

 

 

$

(1,298

)

 

$

58,624

 

 

$

(225,441

)

 

$

(151,671

)

(1)
For the purpose of this table, CRT derivative, IRLC, and CRT strip asset and liability positions are shown net.
(2)
The Company had transfers among the fair value levels arising from transfers of IRLCs to loans acquired for sale at fair value upon purchase of the respective loans.

 

 

Liabilities

 

Six months ended June 30, 2023

 

 

 

(in thousands)

 

Interest-only security payable:

 

 

 

Balance, December 31, 2022

 

$

21,925

 

Changes in fair value included in results of operations arising from:

 

 

 

Changes in instrument - specific credit risk

 

 

—

 

Other factors

 

 

2,135

 

 

 

2,135

 

Balance, June 30, 2023

 

$

24,060

 

Changes in fair value recognized during the period relating
to liability outstanding at June 30, 2023

 

$

2,135

 

 

Financial Statement Items Measured at Fair Value under the Fair Value Option

Following are the fair values and related principal amounts due upon maturity of loans accounted for under the fair value option (including loans acquired for sale, loans held in consolidated VIEs, and distressed loans):

 

 

June 30, 2024

 

 

December 31, 2023

 

 

 

Fair value

 

 

Principal
amount due
upon maturity

 

 

Difference

 

 

Fair value

 

 

Principal
amount due
upon maturity

 

 

Difference

 

 

 

(in thousands)

 

Loans acquired for sale at fair value:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Current through 89 days delinquent

 

$

693,724

 

 

$

678,677

 

 

$

15,047

 

 

$

667,857

 

 

$

648,283

 

 

$

19,574

 

90 or more days delinquent:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Not in foreclosure

 

 

594

 

 

 

864

 

 

 

(270

)

 

 

433

 

 

 

617

 

 

 

(184

)

In foreclosure

 

 

73

 

 

 

96

 

 

 

(23

)

 

 

728

 

 

 

845

 

 

 

(117

)

 

 

667

 

 

 

960

 

 

 

(293

)

 

 

1,161

 

 

 

1,462

 

 

 

(301

)

 

$

694,391

 

 

$

679,637

 

 

$

14,754

 

 

$

669,018

 

 

$

649,745

 

 

$

19,273

 

Loans at fair value:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Held in consolidated VIEs:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Current through 89 days delinquent

 

$

1,375,028

 

 

$

1,646,940

 

 

$

(271,912

)

 

$

1,430,427

 

 

$

1,697,305

 

 

$

(266,878

)

90 or more days delinquent:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Not in foreclosure

 

 

481

 

 

 

607

 

 

 

(126

)

 

 

1,262

 

 

 

1,582

 

 

 

(320

)

In foreclosure

 

 

329

 

 

 

423

 

 

 

(94

)

 

 

—

 

 

 

—

 

 

 

—

 

 

 

810

 

 

 

1,030

 

 

 

(220

)

 

 

1,262

 

 

 

1,582

 

 

 

(320

)

 

 

1,375,838

 

 

 

1,647,970

 

 

 

(272,132

)

 

 

1,431,689

 

 

 

1,698,887

 

 

 

(267,198

)

Distressed:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Current through 89 days delinquent

 

 

461

 

 

 

672

 

 

 

(211

)

 

 

569

 

 

 

728

 

 

 

(159

)

90 or more days delinquent:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Not in foreclosure

 

 

277

 

 

 

1,398

 

 

 

(1,121

)

 

 

393

 

 

 

2,023

 

 

 

(1,630

)

In foreclosure

 

 

1,260

 

 

 

2,934

 

 

 

(1,674

)

 

 

1,169

 

 

 

2,546

 

 

 

(1,377

)

 

 

1,537

 

 

 

4,332

 

 

 

(2,795

)

 

 

1,562

 

 

 

4,569

 

 

 

(3,007

)

 

 

1,998

 

 

 

5,004

 

 

 

(3,006

)

 

 

2,131

 

 

 

5,297

 

 

 

(3,166

)

 

$

1,377,836

 

 

$

1,652,974

 

 

$

(275,138

)

 

$

1,433,820

 

 

$

1,704,184

 

 

$

(270,364

)

 

Following are the changes in fair value included in current period income by consolidated statement of income line item for financial statement items accounted for under the fair value option:

 

 

Quarter ended June 30, 2024

 

 

 

Net loan
servicing fees

 

 

Net gains on loans acquired for sale

 

 

Net (losses) gains on investments and financings

 

 

Net interest
expense

 

 

Total

 

 

 

(in thousands)

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Mortgage-backed securities at fair value

 

$

—

 

 

$

—

 

 

$

(34,925

)

 

$

6,586

 

 

$

(28,339

)

Loans acquired for sale at fair value

 

 

—

 

 

 

1,969

 

 

 

—

 

 

 

—

 

 

 

1,969

 

Loans at fair value

 

 

—

 

 

 

—

 

 

 

(2,742

)

 

 

(605

)

 

 

(3,347

)

Credit risk transfer strips

 

 

—

 

 

 

—

 

 

 

12,071

 

 

 

—

 

 

 

12,071

 

MSRs at fair value

 

 

(50,556

)

 

 

—

 

 

 

—

 

 

 

—

 

 

 

(50,556

)

 

$

(50,556

)

 

$

1,969

 

 

$

(25,596

)

 

$

5,981

 

 

$

(68,202

)

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest-only security payable at fair value

 

$

—

 

 

$

—

 

 

$

(481

)

 

$

—

 

 

$

(481

)

Asset-backed financing of VIEs at fair value

 

 

—

 

 

 

—

 

 

 

1,295

 

 

 

(604

)

 

 

691

 

 

$

—

 

 

$

—

 

 

$

814

 

 

$

(604

)

 

$

210

 

 

 

 

 

Quarter ended June 30, 2023

 

 

 

Net loan
servicing fees

 

 

Net gains on loans acquired for sale

 

 

Net (losses) gains on investments and financings

 

 

Net interest
expense

 

 

Total

 

 

 

(in thousands)

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Mortgage-backed securities at fair value

 

$

—

 

 

$

—

 

 

$

(61,621

)

 

$

(264

)

 

$

(61,885

)

Loans acquired for sale at fair value

 

 

—

 

 

 

(9,424

)

 

 

—

 

 

 

—

 

 

 

(9,424

)

Loans at fair value

 

 

—

 

 

 

—

 

 

 

(19,130

)

 

 

(1,185

)

 

 

(20,315

)

Credit risk transfer strips

 

 

—

 

 

 

—

 

 

 

46,480

 

 

 

—

 

 

 

46,480

 

MSRs at fair value

 

 

(87,997

)

 

 

—

 

 

 

—

 

 

 

—

 

 

 

(87,997

)

 

$

(87,997

)

 

$

(9,424

)

 

$

(34,271

)

 

$

(1,449

)

 

$

(133,141

)

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest-only security payable at fair value

 

$

—

 

 

$

—

 

 

$

(855

)

 

$

—

 

 

$

(855

)

Asset-backed financings at fair value

 

 

—

 

 

 

—

 

 

 

17,794

 

 

 

76

 

 

 

17,870

 

 

$

—

 

 

$

—

 

 

$

16,939

 

 

$

76

 

 

$

17,015

 

 

 

 

 

Six months ended June 30, 2024

 

 

 

Net loan
servicing fees

 

 

Net gains on loans acquired for sale

 

 

Net (losses) gains on investments and financings

 

 

Net interest
expense

 

 

Total

 

 

 

(in thousands)

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Mortgage-backed securities at fair value

 

$

—

 

 

$

—

 

 

$

(73,123

)

 

$

9,677

 

 

$

(63,446

)

Loans acquired for sale at fair value

 

 

—

 

 

 

1,632

 

 

 

—

 

 

 

—

 

 

 

1,632

 

Loans at fair value

 

 

—

 

 

 

—

 

 

 

(4,020

)

 

 

(2,740

)

 

 

(6,760

)

Credit risk transfer strips

 

 

—

 

 

 

—

 

 

 

53,096

 

 

 

—

 

 

 

53,096

 

MSRs at fair value

 

 

(78,758

)

 

 

—

 

 

 

—

 

 

 

—

 

 

 

(78,758

)

 

$

(78,758

)

 

$

1,632

 

 

$

(24,047

)

 

$

6,937

 

 

$

(94,236

)

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest-only security payable at fair value

 

$

—

 

 

$

—

 

 

$

(41

)

 

$

—

 

 

$

(41

)

Asset-backed financings at fair value

 

 

—

 

 

 

—

 

 

 

8,771

 

 

 

(112

)

 

 

8,659

 

 

$

—

 

 

$

—

 

 

$

8,730

 

 

$

(112

)

 

$

8,618

 

 

 

 

 

Six months ended June 30, 2023

 

 

 

Net loan
servicing fees

 

 

Net gains on loans acquired for sale

 

 

Net (losses) gains on investments and financings

 

 

Net interest
expense

 

 

Total

 

 

 

(in thousands)

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Mortgage-backed securities at fair value

 

$

—

 

 

$

—

 

 

$

16,597

 

 

$

(2,220

)

 

$

14,377

 

Loans acquired for sale at fair value

 

 

—

 

 

 

5,891

 

 

 

—

 

 

 

—

 

 

 

5,891

 

Loans at fair value

 

 

—

 

 

 

—

 

 

 

(7,662

)

 

 

(1,059

)

 

 

(8,721

)

Credit risk transfer strips

 

 

—

 

 

 

—

 

 

 

82,912

 

 

 

—

 

 

 

82,912

 

MSRs at fair value

 

 

(225,441

)

 

 

—

 

 

 

—

 

 

 

—

 

 

 

(225,441

)

 

$

(225,441

)

 

$

5,891

 

 

$

91,847

 

 

$

(3,279

)

 

$

(130,982

)

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest-only security payable at fair value

 

$

—

 

 

$

—

 

 

$

(2,135

)

 

$

—

 

 

$

(2,135

)

Asset-backed financings at fair value

 

 

—

 

 

 

—

 

 

 

7,634

 

 

 

(466

)

 

 

7,168

 

 

$

—

 

 

$

—

 

 

$

5,499

 

 

$

(466

)

 

$

5,033

 

 

 

Financial Statement Item Measured at Fair Value on a Nonrecurring Basis

Following is a summary of the carrying value of assets that were remeasured during the period based on fair value on a nonrecurring basis:

Real estate acquired in settlement of loans

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Total

 

 

 

(in thousands)

 

June 30, 2024

 

$

—

 

 

$

—

 

 

$

713

 

 

$

713

 

December 31, 2023

 

$

—

 

 

$

—

 

 

$

753

 

 

$

753

 

 

The following table summarizes the fair value changes recognized during the periods on assets held at period end that were remeasured at fair value on a nonrecurring basis:

 

 

Quarter ended June 30,

 

 

Six months ended June 30,

 

 

 

2024

 

 

2023

 

 

2024

 

 

2023

 

 

 

(in thousands)

 

Real estate acquired in settlement of loans

 

$

(246

)

 

$

(124

)

 

$

(150

)

 

$

(62

)

The Company remeasures its REO based on fair value when it evaluates the REO properties for impairment. The Company evaluates its REO for impairment with reference to the respective properties’ fair values less costs to sell. REO may be revalued after acquisition due to the Company receiving greater access to the property, the property being held for an extended period or receiving indications that the property’s fair value may not be supported by developing market conditions. Any subsequent change in fair value to a level that is less than or equal to the property’s cost is recognized in Results of real estate acquired in settlement of loans in the Company’s consolidated statements of income.

Fair Value of Financial Instruments Carried at Amortized Cost

Most of the Company’s borrowings are carried at amortized cost. The Company’s Assets sold under agreements to repurchase, Mortgage loan participation purchase and sale agreements, Notes payable secured by credit risk transfer and mortgage servicing assets and the Exchangeable Notes, defined in Note 15 – Long-Term Debt, are classified as “Level 3” fair value liabilities due to the Company’s reliance on unobservable inputs to estimate these instruments’ fair values. The Company classifies the 2028 Senior Notes, defined in Note 15 – Long-Term Debt, as “Level 2” fair value liabilities.

The Company has concluded that the fair values of these borrowings other than term notes and term loans included in Notes payable secured by credit risk transfer and mortgage servicing assets and the Unsecured senior notes approximate the agreements’ carrying values due to the borrowing agreements’ variable interest rates and short maturities.

The Company estimates the fair values of the term notes and term loans included in Notes payable secured by credit risk transfer and mortgage servicing assets using indications of fair value provided by nonaffiliate brokers for the term notes and internal estimates of fair value for the term loans, and uses pricing services for estimates of fair value of its Unsecured senior notes. The fair values and carrying values of these liabilities are summarized below:

 

 

June 30, 2024

 

 

December 31, 2023

 

Instrument

 

Carrying value

 

 

Fair value

 

 

Carrying value

 

 

Fair value

 

 

 

(in thousands)

 

Notes payable secured by credit risk transfer
      and mortgage servicing assets

 

$

2,933,845

 

 

$

2,942,231

 

 

$

2,910,605

 

 

$

2,904,678

 

Unsecured senior notes

 

$

813,838

 

 

$

800,382

 

 

$

600,458

 

 

$

580,090

 

Valuation Governance

Most of the Company’s assets, its Asset-backed financings at fair value, Interest-only security payable at fair value and Derivative and credit risk transfer strip liabilities at fair value are carried at fair value with changes in fair value recognized in current period income. A substantial portion of these items are “Level 3” fair value assets and liabilities which require the use of unobservable inputs that are significant to the estimation of the fair values of the assets and liabilities. 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 under the circumstances.

Due to the difficulty in estimating the fair values of “Level 3” fair value assets and liabilities, the Company has assigned responsibility for estimating the fair values of these assets and liabilities to specialized staff within PFSI's capital markets group and subjects the valuation process to significant senior management oversight.

With respect to “Level 3” valuations other than IRLCs, the capital markets valuation staff reports to PFSI’s senior management valuation committee, which oversees the valuations. The capital markets valuation staff monitors the models used for valuation of the Company’s “Level 3” fair value assets and liabilities other than IRLCs, including the models’ performance versus actual results, and

reports those results to PFSI’s senior management valuation committee. PFSI’s senior management valuation committee includes the Company’s chief financial and investment officers as well as other senior members of PFSI’s finance, risk management and capital markets staffs.

The capital markets valuation staff is responsible for reporting to PFSI’s senior management valuation committee on the changes in the valuation of the non-IRLC “Level 3” fair value assets and liabilities, including major factors affecting the valuation and any changes in model methods and inputs. To assess the reasonableness of its valuations, the capital markets valuation staff presents an analysis of the effect on the valuation of changes to the significant inputs to the models and, for MSRs, comparisons of its estimates of fair value and key inputs to those procured from nonaffiliate brokers and published surveys.

The fair values of the Company’s IRLCs are developed by PFSI's capital markets risk management staff and are reviewed by its capital markets operations staff.

Valuation Techniques and Inputs

The following is a description of the techniques and inputs used in estimating the fair values of “Level 2” and “Level 3” fair value assets and liabilities:

Mortgage-Backed Securities

The Company’s categorization of its current holdings of MBS is based on whether the respective security is an IO security:

•
The Company categorizes the majority of its current holdings of MBS as “Level 2” fair value assets. Fair value of these securities is established based on quoted market prices for the Company’s MBS holdings or similar securities.
•
The Company categorizes its current holdings of IO securities as “Level 3” fair value assets. The Company uses a discounted cash flow approach to estimate the fair values of its IO securities.

The key inputs used in the estimation of the fair value of IO securities include discount rate (pricing spread) and prepayment speed. Significant changes to those inputs in isolation may result in significant changes in the IO securities' fair value measurements. Changes in these key inputs are not directly related.

Following are the key inputs used in determining the fair value of IO securities:

 

 

 

June 30, 2024

 

 

December 31, 2023

 

Fair value (in thousands)

 

$

87,841

 

 

$

94,231

 

Key inputs (1)

 

 

 

 

 

 

Pricing spread (2)

 

 

 

 

 

 

Range

 

5.9% - 6.4%

 

 

5.1% – 5.1%

 

Weighted average

 

6.4%

 

 

5.1%

 

Annual total prepayment speed (3)

 

 

 

 

 

 

Range

 

10.1% - 10.3%

 

 

10.9% – 11.0%

 

Weighted average

 

10.1%

 

 

10.9%

 

Equivalent life (in years)

 

 

 

 

 

 

Range

 

4.7 - 7.5

 

 

4.7 – 7.2

 

Weighted average

 

7.4

 

 

7.1

 

 

(1)
Weighted-average inputs are based on the UPB of the underlying loans.
(2)
Pricing spread represents a margin that is applied to a reference forward rate to develop periodic discount rates. The Company uses the pricing spread over a derived United States Treasury Securities (“Treasury”) yield curve for the purpose of discounting cash flows relating to IO securities.
(3)
Prepayment speed is measured using life total Conditional Prepayment Rate (“CPR”). Equivalent life is provided as supplementary information.

Changes in the fair value of MBS are included in Net (losses) gains on investments and financings in the consolidated statements of income.

Loans

Fair value of loans is estimated based on whether the loans are saleable into active markets:

•
Loans that are saleable into active markets, comprised of most of the Company’s loans acquired for sale at fair value and all of the loans at fair value held in VIEs, are categorized as “Level 2” fair value assets:
•
For loans acquired for sale, the fair values are established using the loans’ contracted selling prices, quoted market prices or market price equivalents.
•
For the loans at fair value held in VIEs, the quoted indications of fair value of all of the individual securities issued by the securitization trusts are used to derive fair values for the loans. The Company obtains indications of fair value from nonaffiliate brokers based on comparable securities and validates the brokers’ indications of fair value using pricing models and inputs the Company believes are similar to the pricing models and inputs used by other market participants. The Company adjusts the fair values received from brokers to include the fair value of MSRs attributable to the loans included in the VIEs.
•
Loans that are not saleable into active markets, comprised of previously sold loans that the Company repurchased pursuant to the representation and warranties it provided to the purchaser and distressed loans, are categorized as “Level 3” fair value assets:
•
Fair values for loans acquired for sale categorized as “Level 3” assets are estimated using a discounted cash flow approach or the loans' contracted selling prices when applicable. Inputs to the discounted cash flow model include current interest rates, payment statuses, property types, discount rates and forecasts of future interest rates, home prices, prepayment speeds, default speeds and loss severities.
•
Distressed loans’ fair values are estimated based on the expected resolution from the individual asset’s disposition strategy. When a cash flow projection is used to estimate fair values, those cash flows are discounted at annual rates up to 20%.

Derivative and Credit Risk Transfer Strip Assets and Liabilities

CRT Derivatives

The Company categorizes CRT derivatives as “Level 3” fair value assets and liabilities. The fair values of CRT derivatives are based on indications of fair value provided to the Company by nonaffiliate brokers for the certificates representing the beneficial interests in the trusts holding the Deposits securing credit risk transfer arrangements pledged to creditors, the recourse obligations and the IO ownership interests. Together, the recourse obligation and the IO ownership interest comprise the CRT derivative. Fair values of the CRT derivatives are derived by deducting the balance of the Deposits securing credit risk transfer arrangements pledged to creditors from the fair values of the certificates.

The Company assesses the fair values it receives from nonaffiliate brokers using the discounted cash flow approach. The significant unobservable inputs used by the Company in its review and approval of the valuation of CRT derivatives are the discount rates, voluntary and involuntary prepayment speeds and the remaining loss expectations of the reference loans. Changes in fair value of CRT derivatives are included in Net (losses) gains on investments and financings in the consolidated statements of income.

Following is a quantitative summary of key unobservable inputs used in the Company’s review and approval of broker-provided fair values for CRT derivatives:

 

 

June 30, 2024

 

 

December 31, 2023

 

 

 

(dollars in thousands)

 

Fair value

 

$

24,305

 

 

$

16,160

 

UPB of loans in reference pools

 

$

5,198,283

 

 

$

5,437,551

 

Key inputs (1)

 

 

 

 

 

 

Discount rate

 

 

 

 

 

 

Range

 

9.7% – 11.9%

 

 

9.0% – 9.7%

 

Weighted average

 

9.9%

 

 

9.6%

 

Voluntary prepayment speed (2)

 

 

 

 

 

 

Range

 

7.0% – 7.4%

 

 

6.9% – 7.6%

 

Weighted average

 

7.2%

 

 

7.4%

 

Involuntary prepayment speed (3)

 

 

 

 

 

 

Range

 

0.1% – 0.1%

 

 

0.2% – 0.8%

 

Weighted average

 

0.1%

 

 

0.3%

 

Remaining loss expectation

 

 

 

 

 

 

Range

 

0.0% – 0.2%

 

 

0.2% – 0.3%

 

Weighted average

 

0.1%

 

 

0.3%

 

 

(1)
Weighted average inputs are based on fair value amounts of the CRT Agreements, except for remaining loss expectation which is based on the UPB of the loans in the reference pools.
(2)
Voluntary prepayment speed is measured using life voluntary CPR.
(3)
Involuntary prepayment speed is measured using life involuntary CPR.

Interest Rate Lock Commitments

The Company categorizes IRLCs as “Level 3” fair value assets and liabilities. The Company estimates the fair values of IRLCs based on quoted Agency MBS prices, the probability that the loans will be purchased under the commitments (the “pull-through rate”) and the Company’s estimate of the fair values of the MSRs it expects to receive upon sale of the loans.

The significant unobservable inputs used in the fair value measurement of the Company’s IRLCs are the pull-through rates and the estimated MSRs attributed to the mortgage loans subject to the commitments. Significant changes in the pull-through rates or the MSR components of the IRLCs, in isolation, may result in a significant change in the IRLCs’ fair values. The financial effects of changes in these inputs are generally inversely correlated as increasing interest rates have a positive effect on the fair value of the MSR component of an IRLC’s fair value, but also increase the pull-through rate for the loan principal and interest payment cash flow component that has decreased in fair value. Changes in fair value of IRLCs are included in Net gains on loans acquired for sale in the consolidated statements of income.

Following is a quantitative summary of key unobservable inputs used in the valuation of IRLCs:

 

 

June 30, 2024

 

 

December 31, 2023

 

Fair value (in thousands) (1)

 

$

1,552

 

 

$

7,532

 

Committed amount (in thousands)

 

$

1,006,730

 

 

$

874,017

 

Key inputs (2)

 

 

 

 

 

 

Pull-through rate

 

 

 

 

 

 

Range

 

56.5% – 99.0%

 

 

50.0% - 98.0%

 

Weighted average

 

83.9%

 

 

82.5%

 

MSR fair value expressed as

 

 

 

 

 

 

Servicing fee multiple

 

 

 

 

 

 

Range

 

3.0 – 7.0

 

 

1.7 - 6.5

 

Weighted average

 

5.1

 

 

4.6

 

Percentage of unpaid principal balance

 

 

 

 

 

 

Range

 

0.8% – 2.4%

 

 

0.4% - 2.4%

 

Weighted average

 

1.9%

 

 

1.7%

 

 

(1)
For purposes of this table, IRLC asset and liability positions are shown net.
(2)
Weighted-average inputs are based on the committed amounts.

Hedging Derivatives

Fair values of derivative financial instruments actively traded on exchanges are categorized by the Company as “Level 1” fair value assets and liabilities. Fair values of derivative financial instruments based on observable interest rates, volatilities and prices in the MBS or other markets are categorized by the Company as “Level 2” fair value assets and liabilities. Changes in the fair values of hedging derivatives are included in Net loan servicing fees – from nonaffiliates – Mortgage servicing rights hedging results, Net gains on loans acquired for sale, or Net (losses) gains on investments and financings, as applicable, in the consolidated statements of income.

Credit Risk Transfer Strips

The Company categorizes CRT strips as “Level 3” fair value liabilities. The fair values of CRT strips are based on indications of fair value provided to the Company by nonaffiliate brokers for the securities representing the beneficial interests in the trusts holding the Deposits securing credit risk transfer arrangements pledged to creditors, the IO ownership interests and the recourse obligations. Together, the IO ownership interest and the recourse obligation comprise the CRT strip.

Fair values of the CRT strips are derived by deducting the balance of the Deposits securing credit risk transfer arrangements pledged to creditors from the indications of fair value of the securities provided by the nonaffiliate brokers.

The Company assesses the indications of fair value it receives from nonaffiliate brokers using the discounted cash flow approach. The significant unobservable inputs used by the Company in its review and approval of the valuation of the CRT strips are the discount rates, voluntary and involuntary prepayment speeds and the remaining loss expectations of the reference loans. Changes in fair value of CRT strips are included in Net (losses) gains on investments and financings in the consolidated statements of income.

Following is a quantitative summary of key unobservable inputs used in the Company’s review and approval of the broker-provided fair values of the CRT strip liabilities:

 

 

June 30, 2024

 

 

December 31, 2023

 

 

 

(dollars in thousands)

 

Fair value

 

$

16,974

 

 

$

46,692

 

Unpaid principal balance of loans in the reference pools

 

$

17,006,523

 

 

$

17,714,679

 

Key inputs (1)

 

 

 

 

 

 

Discount rate

 

 

 

 

 

 

Range

 

8.2% – 9.4%

 

 

7.9% – 9.6%

 

Weighted average

 

9.3%

 

 

9.4%

 

Voluntary prepayment speed (2)

 

 

 

 

 

 

Range

 

7.3% – 7.4%

 

 

6.6% – 8.2%

 

Weighted average

 

7.3%

 

 

6.8%

 

Involuntary prepayment speed (3)

 

 

 

 

 

 

Range

 

0.1% – 0.2%

 

 

0.2% – 0.3%

 

Weighted average

 

0.1%

 

 

0.2%

 

Remaining loss expectation

 

 

 

 

 

 

Range

 

0.4% – 1.5%

 

 

0.5% – 1.6%

 

Weighted average

 

0.5%

 

 

0.6%

 

 

(1)
Weighted average inputs are based on fair value amounts of the CRT arrangements, except for remaining loss expectation which is based on the UPB of the loans in the reference pools.
(2)
Voluntary prepayment speed is measured using life voluntary CPR.
(3)
Involuntary prepayment speed is measured using life involuntary CPR.

Mortgage Servicing Rights

The Company categorizes MSRs as “Level 3” fair value assets. The Company uses a discounted cash flow approach to estimate the fair values of MSRs. The fair values of MSRs are derived from the net positive cash flows associated with the servicing agreements. The Company receives a servicing fee based on the remaining UPB of the loans subject to the servicing agreements and generally has the right to receive other remuneration including various mortgagor-contracted fees such as late charges and collateral reconveyance charges, and is generally entitled to retain any placement fees earned on certain custodial funds held pending remittance of mortgagor principal, interest, tax and insurance payments.

The key inputs used in the estimation of the fair value of MSRs include the applicable pricing spreads, the prepayment speeds of the underlying loans, and the annual per-loan costs to service the loans, all of which are unobservable. Significant changes to any of those inputs in isolation could result in significant changes in the MSR fair value measurements. Changes in these key inputs are not directly related. Changes in the fair value of MSRs are included in Net loan servicing fees – From nonaffiliates – Change in fair value of mortgage servicing rights in the consolidated statements of income.

MSRs are generally subject to loss in fair value when prepayment speed expectations and experience increase, when returns required by market participants (pricing spreads) increase, or when annual per-loan costs of servicing increase. Reductions in the fair value of MSRs affect income primarily through recognition of the change in fair value.

Following are the key inputs used in determining the fair value of MSRs at the time of initial recognition:

 

Quarter ended June 30,

 

 

Six months ended June 30,

 

 

 

2024

 

 

2023

 

 

2024

 

 

2023

 

MSRs recognized (in thousands)

 

$

40,619

 

 

$

90,747

 

 

$

71,868

 

 

$

191,365

 

Unpaid principal balance of underlying loans (in thousands)

 

$

2,242,511

 

 

$

4,856,301

 

 

$

4,073,529

 

 

$

10,405,626

 

Weighted average annual servicing fee rate (in basis points)

 

35

 

 

39

 

 

35

 

 

40

 

Key inputs (1)

 

 

 

 

 

 

 

 

 

 

 

 

Pricing spread (2)

 

 

 

 

 

 

 

 

 

 

 

 

Range

 

5.9% – 8.1%

 

 

5.5% – 8.8%

 

 

5.5% – 8.5%

 

 

5.5% – 8.8%

 

Weighted average

 

6.0%

 

 

5.9%

 

 

5.8%

 

 

5.9%

 

Prepayment speed (3)

 

 

 

 

 

 

 

 

 

 

 

 

Range

 

10.8% – 17.8%

 

 

11.8% – 20.2%

 

 

10.8% – 17.8%

 

 

11.8% – 21.8%

 

Weighted average

 

11.5%

 

 

11.9%

 

 

12.4%

 

 

12.6%

 

Equivalent average life (in years)

 

 

 

 

 

 

 

 

 

 

 

 

Range

 

3.4 – 7.2

 

 

2.9 - 7.1

 

 

3.4 – 7.2

 

 

2.8 - 7.1

 

Weighted average

 

7.1

 

 

7.0

 

 

6.8

 

 

6.7

 

Annual per-loan cost of servicing

 

 

 

 

 

 

 

 

 

 

 

 

Range

 

$69 – $87

 

 

$68 – $69

 

 

$69 – $87

 

 

$68 – $69

 

Weighted average

 

$69

 

 

$69

 

 

$70

 

 

$69

 

 

(1)
Weighted average inputs are based on UPB of the underlying loans.
(2)
The Company uses the pricing spread over a derived Treasury yield curve for the purpose of discounting cash flows relating to MSRs.
(3)
Prepayment speed is measured using life total CPR, which includes both voluntary and involuntary prepayments. Equivalent average life is provided as supplementary information.

Following is a quantitative summary of key inputs used in the valuation of MSRs as of the dates presented, and the effect on the fair value from adverse changes in those inputs:

 

 

 

June 30, 2024

 

 

December 31, 2023

 

Fair value (in thousands)

 

$

3,941,861

 

 

$

3,919,107

 

Unpaid principal balance of underlying loans (in thousands)

 

$

227,842,960

 

 

$

230,294,583

 

Weighted average annual servicing fee rate (in basis points)

 

28

 

 

28

 

Weighted average note interest rate

 

3.7%

 

 

3.7%

 

Key inputs (1)

 

 

 

 

 

 

Pricing spread (2)

 

 

 

 

 

 

Range

 

5.4% - 8.1%

 

 

5.5% – 8.5%

 

Weighted average

 

5.5%

 

 

5.5%

 

Effect on fair value (in thousands) of (3):

 

 

 

 

 

 

5% adverse change

 

$(48,117)

 

 

$(48,362)

 

10% adverse change

 

$(95,095)

 

 

$(95,575)

 

20% adverse change

 

$(185,782)

 

 

$(186,699)

 

Prepayment speed (4)

 

 

 

 

 

 

Range

 

6.7% - 17.7%

 

 

6.5% – 17.9%

 

Weighted average

 

6.8%

 

 

7.0%

 

Equivalent average life (in years)

 

 

 

 

 

 

Range

 

2.6 - 9.2

 

 

2.7 – 9.4

 

Weighted average

 

8.5

 

 

8.5

 

Effect on fair value (in thousands) of (3):

 

 

 

 

 

 

5% adverse change

 

$(54,297)

 

 

$(53,964)

 

10% adverse change

 

$(106,844)

 

 

$(106,144)

 

20% adverse change

 

$(207,027)

 

 

$(205,509)

 

Annual per-loan cost of servicing

 

 

 

 

 

 

Range

 

$68 - $89

 

 

$70 – $89

 

Weighted average

 

$68

 

 

$70

 

Effect on fair value (in thousands) of (3):

 

 

 

 

 

 

5% adverse change

 

$(16,566)

 

 

$(17,276)

 

10% adverse change

 

$(33,131)

 

 

$(34,551)

 

20% adverse change

 

$(66,262)

 

 

$(69,103)

 

 

(1)
Weighted-average inputs are based on the UPB of the underlying loans.
(2)
The Company uses a pricing spread over a derived Treasury yield curve for the purpose of discounting cash flows relating to MSRs.
(3)
These sensitivity analyses are limited in that they were performed as of a particular date; only account for the estimated effect of the movements in the indicated inputs; do not incorporate changes in those inputs in relation to other inputs; are subject to the accuracy of the models and inputs used; and do not incorporate other factors that would affect the Company’s overall financial performance in such events, including operational adjustments to account for changing circumstances. For these reasons, these analyses should not be viewed as earnings forecasts.
(4)
Prepayment speed is measured using life total CPR, which includes both voluntary and involuntary prepayments. Equivalent average life is provided as supplementary information.

Real Estate Acquired in Settlement of Loans

REO is measured based on its fair value on a nonrecurring basis and is categorized as a “Level 3” fair value asset. Fair value of REO is established by using a current estimate of fair value from either a broker’s price opinion, a full appraisal, or the price given in a pending contract of sale.

REO fair values are reviewed by PLS staff appraisers when the Company obtains multiple indications of fair value and there is a significant difference between the indications of fair value. PLS staff appraisers will attempt to resolve the difference between the indications of fair value. In circumstances where the staff appraisers are not able to generate adequate data to support a fair value conclusion, the staff appraisers obtain an additional appraisal to determine fair value. Recognized changes in the fair value of REO are included in Results of real estate acquired in settlement of loans in the consolidated statements of income.