The Company is a variable interest holder in various VIEs that relate to its investing and financing activities as discussed below.

The Company has previously entered into certain loan sales arrangements pursuant to which it accepted credit risk relating to the loans sold in exchange for a portion of the interest earned on such loans. These arrangements absorb scheduled or realized credit losses on those loans and comprise the Company’s investments in CRT arrangements.

The Company, through its subsidiary, PennyMac Corp. (“PMC”), entered into CRT arrangements with Fannie Mae, pursuant to which the Company sold pools of loans into Fannie Mae-guaranteed securitizations while retaining recourse obligations as part of the retention of IO ownership interests in such loans. CRT arrangements include:

The Company placed Deposits securing CRT arrangements into subsidiary trust entities to secure its recourse obligations. The Deposits securing CRT arrangements represent the Company’s maximum contractual exposure to claims under its recourse obligations and are the sole source of settlement of losses under the CRT arrangements.

The Company’s exposure to losses under its recourse obligations was initially established at rates ranging from 3.5% to 4.0% of the UPB of the loans sold under the CRT arrangements. As the UPB of the underlying loans subject to each CRT arrangement decreased through repayments, the percentage exposure to losses of each CRT arrangement increased to maximums ranging from 4.5% to 5.0% of outstanding UPB, although the total dollar amount of exposure to losses did not increase.

The Company has concluded that the subsidiary trust entities holding its CRT arrangements are VIEs and the Company is the primary beneficiary of the VIEs as it is the holder of the primary beneficial interests which absorb the variability of the trusts’ income. For CRT arrangements where losses are triggered based on the loans’ delinquency status, the Company recognizes its IO ownership interests and recourse obligations on the consolidated balance sheets as CRT Derivatives in Derivative assets and Derivative and credit risk transfer strip liabilities. For CRT securities where losses are absorbed when the reference loans realize credit losses, the Company recognizes its IO ownership interests and recourse obligations as CRT strips which are included on the consolidated balance sheet in Derivative and credit risk transfer strip liabilities. Gains and losses on the derivatives and strips (including the IO ownership interest sold to a nonaffiliate) included in the CRT arrangements are included in Net gains (losses) on investments and financings in the consolidated statements of income.

Following is a summary of the CRT arrangements:


	Quarter ended September 30,						Nine months ended September 30,
	2024			2023			2024			2023
	(in thousands)
Net investment income:
Net gains (losses) on investments and financings
CRT derivatives and strips:
CRT derivatives
Realized	$	3,275		$	4,051		$	10,248		$	12,504
Valuation changes		5,460			9,113			13,716			26,619
		8,735			13,164			23,964			39,123
CRT strips
Realized		10,990			11,241			34,368			35,529
Valuation changes		3,499			9,977			33,217			68,601
		14,489			21,218			67,585			104,130
Interest-only security payable at fair value		(2,390	)		(4,228	)		(2,431	)		(6,363	)
		20,834			30,154			89,118			136,890
Interest income — Deposits securing CRT arrangements		15,042			16,419			46,121			46,410
	$	35,876		$	46,573		$	135,239		$	183,300

Net payments made to settle losses on CRT arrangements	$	827		$	496		$	1,140		$	2,252


	September 30, 2024			December 31, 2023
	(in thousands)
Carrying value of CRT arrangements:
Derivative assets - CRT derivatives	$	29,690		$	16,160
CRT strip liabilities		(13,475	)		(46,692	)
Deposits securing CRT arrangements		1,135,447			1,209,498
Interest-only security payable at fair value		(35,098	)		(32,667	)
	$	1,116,564		$	1,146,299

CRT arrangement assets pledged to secure borrowings:
Derivative assets	$	29,690		$	16,160
Deposits securing CRT arrangements (1)	$	1,135,447		$	1,209,498

UPB of loans underlying CRT arrangements	$	21,708,165		$	23,152,230
Collection status (UPB):
Delinquency
Current	$	21,105,679		$	22,531,905
30-89 days delinquent	$	424,102		$	411,991
90-180 days delinquent	$	119,236		$	120,011
180 or more days delinquent	$	42,283		$	64,647
Foreclosure	$	16,865		$	23,676
Bankruptcy	$	64,331		$	58,696

(1)

Deposits securing credit risk transfer arrangements also secure $13.5 million and $46.7 million in CRT strip liabilities at September 30, 2024 and December 31, 2023, respectively.

The Company retains or purchases subordinate MBS in transactions sponsored by PMC or a nonaffiliate. Cash inflows from the loans underlying these securities are distributed to investors and service providers in accordance with the respective securities' contractual priorities of payments and, as such, most of these inflows must be directed first to service and repay the senior securities.

The rights of holders of subordinate securities to receive distributions of principal and/or interest, as applicable, are subordinate to the rights of holders of senior securities. After the senior securities are repaid, substantially all cash inflows will be directed to the subordinate securities, including those held by the Company, until they are fully repaid.

The Company’s retention or purchase of subordinate MBS exposes PMT to the credit risk in the underlying loans because the Company’s investments are among the first beneficial interests to absorb credit losses on those assets. The Company’s exposure to losses from its investments in subordinate MBS is limited to its recorded investment in such securities.

The Company has concluded that the trusts holding the assets underlying these transactions are VIEs. The Company also has concluded that it is the primary beneficiary of certain of the VIEs as it has the power, through PLS, in its role as the servicer or sub-servicer of the underlying loans, to direct the activities of the trusts that most significantly impact the trusts’ economic performance and, as a holder of subordinate securities, that PMT is exposed to losses that could potentially be significant to the VIEs. Therefore, PMT consolidates those VIEs.

The Company recognizes the interest income earned on the loans owned by the VIEs and the interest expense attributable to the asset-backed securities issued to nonaffiliates by its consolidated VIEs on its consolidated statements of income.

Following is a summary of the Company’s investment in subordinate MBS backed by assets held in consolidated VIEs:


	Quarter ended September 30,						Nine months ended September 30,
	2024			2023			2024			2023
	(in thousands)
Net investment income:
Net gains (losses) on investments and financings:
Loans at fair value	$	75,360		$	(54,082	)	$	71,381		$	(61,318	)
Asset-backed financings at fair value		(72,922	)		58,474			(64,151	)		66,108
Interest income		16,037			9,505			41,594			38,315
Interest expense		10,838			13,652			34,918			38,796
	$	7,637		$	245		$	13,906		$	4,309


	September 30, 2024		December 31, 2023
	(in thousands)
Loans at fair value	$	1,427,575	$	1,431,689
Asset-backed financings at fair value	$	1,334,797	$	1,336,731
Retained subordinate MBS at fair value pledged to secure Assets sold under agreements to repurchase	$	83,417	$	85,344

The Company entered into financing transactions in which VIEs issued variable funding notes, term notes and term loans backed by beneficial interests in Fannie Mae MSRs. The Company acts as guarantor of the variable funding notes, term notes and term loans. The Company determined that it is the primary beneficiary of the VIEs because, as the holder of the variable funding notes and issuer of performance guarantees, it holds the variable interests in the VIEs. Therefore, the Company consolidates the VIEs.

For financial reporting purposes, the MSRs financed by the consolidated VIEs are included in Mortgage servicing rights at fair value, the variable funding notes sold under agreements to repurchase are included in Assets sold under agreements to repurchase and the term notes and term loans are included in Notes payable secured by credit risk transfer and mortgage servicing assets on the Company’s consolidated balance sheets. The financing is described in Note 15 – Long Term Debt.