| 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 identified PMT’s asset-backed financings of VIEs and interest only security payable 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 this method debt issuance costs are amortized over the term of the debt facilities, thereby matching the debt issuance cost to the periods benefiting from the availability of these facilities. 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:
March 31, 2023
Level 1 Level 2 Level 3 Total
(in thousands)
Assets:
Short-term investments $ 292,153 $ — $ — $ 292,153
Mortgage-backed securities at fair value — 4,629,004 — 4,629,004
Loans acquired for sale at fair value — 3,133,409 10,109 3,143,518
Loans at fair value — 1,498,923 3,548 1,502,471
Derivative assets:
Call options on interest rate futures purchase contracts 13,508 — — 13,508
Put options on interest rate futures purchase contracts 6,570 — — 6,570
Forward purchase contracts — 16,477 — 16,477
Forward sale contracts — 7,711 — 7,711
MBS call options — 1,832 — 1,832
MBS put options — 3,573 — 3,573
CRT derivatives — — 2,883 2,883
Interest rate lock commitments — — 9,952 9,952
Total derivative assets before netting 20,078 29,593 12,835 62,506
Netting — — — 26,779
Total derivative assets after netting 20,078 29,593 12,835 89,285
Mortgage servicing rights at fair value — — 3,975,076 3,975,076
$ 312,231 $ 9,290,929 $ 4,001,568 $ 13,631,507
Liabilities:
Asset-backed financings at fair value $ — $ 1,403,080 $ — $ 1,403,080
Interest-only security payable at fair value — — 23,205 23,205
Derivative and credit risk transfer strip liabilities:
Forward purchase contracts — 5,302 — 5,302
Forward sales contracts — 86,918 — 86,918
MBS call options — 2,004 — 2,004
CRT derivatives — — 16,743 16,743
Interest rate lock commitments — — 1,403 1,403
Total derivative liabilities before netting — 94,224 18,146 112,370
Netting — — — ( 86,966 )
Total derivative liabilities after netting — 94,224 18,146 25,404
Credit risk transfer strips — — 113,065 113,065
Total derivative and credit risk transfer strip liabilities — 94,224 131,211 138,469
$ — $ 1,497,304 $ 154,416 $ 1,564,754
December 31, 2022
Level 1 Level 2 Level 3 Total
(in thousands)
Assets:
Short-term investments $ 252,271 $ — $ — $ 252,271
Mortgage-backed securities at fair value — 4,462,601 — 4,462,601
Loans acquired for sale at fair value — 1,811,225 10,708 1,821,933
Loans at fair value — 1,509,942 3,457 1,513,399
Derivative assets:
Call options on interest rate futures purchase contracts 2,906 — — 2,906
Put options on interest rate futures purchase contracts 8,130 — — 8,130
Forward purchase contracts — 418 — 418
Forward sale contracts — 43,435 — 43,435
MBS put options — 2,783 — 2,783
CRT derivatives — — 1,262 1,262
Interest rate lock commitments — — 3,877 3,877
Total derivative assets before netting 11,036 46,636 5,139 62,811
Netting — — — 22,129
Total derivative assets after netting 11,036 46,636 5,139 84,940
Mortgage servicing rights at fair value — — 4,012,737 4,012,737
$ 263,307 $ 7,830,404 $ 4,032,041 $ 12,147,881
Liabilities:
Asset-backed financings at fair value $ — $ 1,414,955 $ — $ 1,414,955
Interest-only security payable at fair value — — 21,925 21,925
Derivative liabilities and credit risk transfer strips:
Forward purchase contracts — 15,196 — 15,196
Forward sales contracts — 17,279 — 17,279
CRT derivatives — — 23,360 23,360
Interest rate lock commitments — — 4,355 4,355
Total derivative liabilities before netting — 32,475 27,715 60,190
Netting — — — ( 30,157 )
Total derivative liabilities after netting — 32,475 27,715 30,033
Credit risk transfer strips — — 137,193 137,193
Total derivative and credit risk transfer strip — 32,475 164,908 167,226
$ — $ 1,447,430 $ 186,833 $ 1,604,106 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 March 31, 2023
Assets (1) Loans Loans at CRT Interest rate CRT Mortgage 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 3,495 119 — ( 7,687 ) — — ( 4,073 )
Repayments and sales ( 3,767 ) ( 20 ) ( 2,888 ) — ( 12,304 ) — ( 18,979 )
Amounts received pursuant to sales of loans — — — — — 100,618 100,618
Changes in fair value included in results of arising from:
Changes in instrument - specific — — — — — — —
Other factors ( 327 ) 452 11,126 27,032 36,432 ( 137,444 ) ( 62,729 )
( 327 ) 452 11,126 27,032 36,432 ( 137,444 ) ( 62,729 )
Transfers of:
Loans to REO — ( 460 ) — — — — ( 460 )
Interest rate lock commitments to loans — — — ( 10,318 ) — — ( 10,318 )
Mortgage servicing rights relating to — — — — — ( 835 ) ( 835 )
Balance, March 31, 2023 $ 10,109 $ 3,548 $ ( 13,860 ) $ 8,549 $ ( 113,065 ) $ 3,975,076 $ 3,870,357
Changes in fair value recognized during $ 161 $ ( 8 ) $ 8,096 $ 8,549 $ 24,128 $ ( 137,444 ) $ ( 96,518 ) (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 March 31, 2023
(in thousands)
Interest-only security payable:
Balance, December 31, 2022 $ 21,925
Changes in fair value included in results of operations :
Changes in instrument - specific credit risk —
Other factors 1,280
1,280
Balance, March 31, 2023 $ 23,205
Changes in fair value recognized during the year relating $ 1,280
Quarter ended March 31, 2022
Assets (1) Loans Loans at CRT Interest CRT strips Mortgage Total
(in thousands)
Balance, December 31, 2021 $ 30,129 $ 4,161 $ 18,964 $ 2,451 $ ( 26,837 ) $ 2,892,855 $ 2,921,723
Purchases and issuances 24,105 — — ( 28,144 ) — — ( 4,039 )
Repayments and sales ( 29,498 ) ( 654 ) ( 21,165 ) — ( 17,763 ) — ( 69,080 )
Amounts received pursuant to sales of loans — — — — — 194,596 194,596
Changes in fair value included in results
Changes in instrument - — — — — — — —
Other factors ( 411 ) 442 ( 5,848 ) ( 118,799 ) ( 23,995 ) 303,721 155,110
( 411 ) 442 ( 5,848 ) ( 118,799 ) ( 23,995 ) 303,721 155,110
Transfers:
Interest rate lock commitments — — — 121,027 — — 121,027
Balance, March 31, 2022 $ 24,325 $ 3,949 $ ( 8,049 ) $ ( 23,465 ) $ ( 68,595 ) $ 3,391,172 $ 3,319,337
Changes in fair value recognized during $ ( 229 ) $ 66 $ ( 27,049 ) $ ( 23,465 ) $ ( 41,758 ) $ 303,721 $ 211,286 (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 March 31, 2022
(in thousands)
Interest-only security payable:
Balance, December 31, 2021 $ 10,593
Changes in fair value included in results of operations
Changes in instrument - specific credit risk —
Other factors 5,780
5,780
Balance, March 31, 2022 $ 16,373
Changes in fair value recognized during the quarter relating $ 5,780 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):
March 31, 2023 December 31, 2022
Fair value Principal Difference Fair value Principal Difference
(in thousands)
Loans acquired for sale at fair value:
Current through 89 days delinquent $ 3,140,761 $ 3,089,597 $ 51,164 $ 1,819,551 $ 1,795,445 $ 24,106
90 or more days delinquent:
Not in foreclosure 2,551 3,449 ( 898 ) 1,666 1,927 ( 261 )
In foreclosure 206 300 ( 94 ) 716 809 ( 93 )
2,757 3,749 ( 992 ) 2,382 2,736 ( 354 )
$ 3,143,518 $ 3,093,346 $ 50,172 $ 1,821,933 $ 1,798,181 $ 23,752
Loans at fair value:
Held in consolidated VIEs:
Current through 89 days delinquent $ 1,498,108 $ 1,766,772 $ ( 268,664 ) $ 1,508,540 $ 1,788,911 $ ( 280,371 )
90 or more days delinquent:
Not in foreclosure 815 1,077 ( 262 ) 1,231 1,642 ( 411 )
In foreclosure — — — 171 226 ( 55 )
815 1,077 ( 262 ) 1,402 1,868 ( 466 )
1,498,923 1,767,849 ( 268,926 ) 1,509,942 1,790,779 ( 280,837 )
Distressed:
Current through 89 days delinquent 480 714 ( 234 ) 498 682 ( 184 )
90 or more days delinquent:
Not in foreclosure 1,404 2,561 ( 1,157 ) 1,230 2,964 ( 1,734 )
In foreclosure 1,664 2,575 ( 911 ) 1,729 2,728 ( 999 )
3,068 5,136 ( 2,068 ) 2,959 5,692 ( 2,733 )
3,548 5,850 ( 2,302 ) 3,457 6,374 ( 2,917 )
$ 1,502,471 $ 1,773,699 $ ( 271,228 ) $ 1,513,399 $ 1,797,153 $ ( 283,754 ) Following are the changes in fair value included in current period results of operations by consolidated statement of operations line item for financial statement items accounted for under the fair value option:
Quarter ended March 31, 2023
Net gains (losses) Net loan Net gains on Net interest Total
(in thousands)
Assets:
Mortgage-backed securities at fair value $ 78,218 $ — $ — $ ( 1,956 ) $ 76,262
Loans acquired for sale at fair value — — 15,315 — 15,315
Loans at fair value 11,468 — — 126 11,594
Credit risk transfer strips 36,432 — — — 36,432
MSRs at fair value — ( 137,444 ) — — ( 137,444 )
$ 126,118 $ ( 137,444 ) $ 15,315 $ ( 1,830 ) $ 2,159
Liabilities:
Interest-only security payable at fair value $ ( 1,280 ) $ — $ — $ — $ ( 1,280 )
Asset-backed financings at fair value ( 10,160 ) — — ( 542 ) ( 10,702 )
$ ( 11,440 ) $ — $ — $ ( 542 ) $ ( 11,982 )
Quarter ended March 31, 2022
Net gains (losses) Net loan Net gains on Net interest Total
(in thousands)
Assets:
Mortgage-backed securities at fair value $ ( 186,525 ) $ — $ — $ ( 1,411 ) $ ( 187,936 )
Loans acquired for sale at fair value — — ( 227,266 ) — ( 227,266 )
Loans at fair value ( 96,121 ) — — ( 949 ) ( 97,070 )
Credit risk transfer strips ( 23,995 ) — — — ( 23,995 )
MSRs at fair value — 303,721 — — 303,721
$ ( 306,641 ) $ 303,721 $ ( 227,266 ) $ ( 2,360 ) $ ( 232,546 )
Liabilities:
Interest-only security payable at fair value $ ( 5,780 ) $ — $ — $ — $ ( 5,780 )
Asset-backed financings at fair value 89,174 — — ( 834 ) 88,340
$ 83,394 $ — $ — $ ( 834 ) $ 82,560 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)
March 31, 2023 $ — $ — $ 325 $ 325
December 31, 2022 $ — $ — $ 1,292 $ 1,292 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 March 31,
2023 2022
(in thousands)
Real estate asset acquired in settlement of loans $ 73 $ ( 148 ) The Company remeasures its REO based on fair value when it evaluates the REO 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 operations. 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 Exchangeable senior notes 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 has concluded that the fair values of these borrowings other than Notes payable secured by credit risk transfer and mortgage servicing assets and Exchangeable senior notes approximate the agreements’ carrying values due to the borrowing agreements’ variable interest rates and short maturities. Following are the carrying and fair values of the Notes payable secured by credit risk transfer and mortgage servicing assets and Exchangeable senior notes :
March 31, 2023 December 31, 2022
Instrument Carrying value Fair value Carrying value Fair value
(in thousands)
Notes payable secured by credit risk transfer $ 2,790,958 $ 2,763,386 $ 2,804,028 $ 2,721,391
Exchangeable senior notes $ 547,003 $ 496,073 $ 546,254 $ 471,781 The Company estimates the fair value of the Notes payable secured by credit risk transfer and mortgage servicing assets and Exchangeable senior notes using indications of fair value provided by nonaffiliate brokers. 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 results of operations. 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 value of these assets and liabilities to specialized staff and subjects the valuation process to significant senior management oversight: • PFSI’s Financial Analysis and Valuation group (the “FAV group”) is responsible for estimating the fair values of “Level 3” fair value assets and liabilities other than IRLCs and maintaining its valuation policies and procedures. • PFSI’s Capital Markets Risk Management staff is responsible for estimating the fair value of the Company’s IRLCs which is reviewed by PFSI’s Capital Markets Operations group. With respect to the non-IRLC “Level 3” valuations, the FAV group reports to PFSI’s senior management valuation committee, which oversees the valuations. The FAV group 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, risk, credit, and capital markets officers as well as other senior members of the Company’s finance, capital markets and risk management staffs. The FAV group 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 FAV group 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 of key inputs to those procured from nonaffiliated brokers and published surveys. 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 categorizes its current holdings of securities accounted for as MBS as “Level 2” fair value assets. Fair value of these MBS is established based on quoted market prices for the Company’s MBS holdings or similar securities. Changes in the fair value of MBS are included in Net gains (losses) on investments and financings in the consolidated statements of operations. 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 price or quoted market price or market price equivalent. • 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 nonaffiliated 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 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 held by the Company 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 value for loans acquired for sale categorized as “Level 3” assets is estimated using a discounted cash flow approach or their contracted selling price when applicable. Inputs to the discounted cash flow model include current interest rates, payment status, 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 the fair value, 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 value of CRT derivatives is based on indications of fair value provided to the Company by nonaffiliated 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 value of the CRT derivatives is derived by deducting the balance of the Deposits securing credit risk transfer arrangements pledged to creditors from the fair value of the certificates. The Company assesses the fair values it receives from nonaffiliated 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 rate, 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 gains (losses) on investments and financings in the consolidated statements of operations. 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:
March 31, 2023 December 31, 2022
(dollars in thousands)
Fair value
CRT derivatives:
Assets $ 2,883 $ 1,262
Liabilities $ 16,743 $ 23,360
UPB of loans in reference pools $ 5,865,196 $ 5,972,060
Key inputs (1)
Discount rate
Range 8.3 % – 10.0 % 8.7 % – 11.1 %
Weighted average 9.9 % 10.8 %
Voluntary prepayment speed (2)
Range 7.3 % – 8.4 % 7.5 % – 8.3 %
Weighted average 7.6 % 7.6 %
Involuntary prepayment speed (3)
Range 0.5 % – 1.2 % 0.5 % – 1.3 %
Weighted average 0.6 % 0.6 %
Remaining loss expectation
Range 0.4 % – 0.6 % 0.4 % – 0.7 %
Weighted average 0.6 % 0.6 % (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 Conditional Prepayment Rate (“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 value 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 value 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 rate or the MSR component of the IRLCs, in isolation, may result in a significant change in the IRLCs’ fair value. 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 operations. Following is a quantitative summary of key unobservable inputs used in the valuation of IRLCs:
March 31, 2023 December 31, 2022
Fair value (in thousands) (1) $ 8,549 $ ( 478 )
Committed amount (in thousands) $ 1,806,398 $ 1,484,384
Key inputs (2)
Pull-through rate
Range 42.0 % – 100 % 54.8 % – 100 %
Weighted average 86.7 % 92.1 %
MSR fair value expressed as
Servicing fee multiple
Range 1.5 – 7.4 1.9 – 7.1
Weighted average 4.4 4.7
Percentage of UPB
Range 0.5 % – 3.1 % 0.7 % – 3.1 %
Weighted average 1.9 % 1.9 % (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 value 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 value of hedging derivatives are included in Net gains (losses) on investments and financings, Net loan servicing fees – from nonaffiliates – Mortgage servicing rights hedging results, or Net gains on loans acquired for sale , as applicable, in the consolidated statements of operations. Credit Risk Transfer Strips The Company categorizes CRT strips as “Level 3” fair value assets or liabilities. The fair value of CRT strips is based on indications of fair value provided to the Company by nonaffiliated 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 interest and recourse obligation. Together, the IO ownership interest and the recourse obligation comprise the CRT strip. Fair value of the CRT strips is derived by deducting the balance of the Deposits securing credit risk transfer arrangements pledged to creditors from the fair value of the securities derived from indications provided by the nonaffiliated brokers. Through December 31, 2021, the Company applied adjustments to the fair value derived from these indications to account for contractual restrictions limiting PMT’s ability to sell certain of the certificates. During the quarter ended March 31, 2022, the contractual restrictions on the Company’s ability to sell the certificates were removed. The Company recognized the effect of the removal of this restriction in Net gains (losses) on investments and financing during the quarter ended March 31, 2022. The Company assesses the indications of fair value it receives from nonaffiliated 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 rate, 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 gains (losses) on investments and financings in the consolidated statements of operations . Following is a quantitative summary of key unobservable inputs used in the Company’s review and approval of the adjusted broker-provided fair values used to derive the fair value of the CRT strip liabilities:
March 31, 2023 December 31, 2022
(dollars in thousands)
Fair value $ 113,065 $ 137,193
UPB of loans in the reference pools $ 18,959,166 $ 19,343,464
Key inputs (1)
Discount rate
Range 6.6 % – 10.3 % 4.3 % – 11.3 %
Weighted average 9.8 % 10.5 %
Voluntary prepayment speed (2)
Range 7.7 % – 7.9 % 7.7 % – 7.9 %
Weighted average 7.7 % 7.7 %
Involuntary prepayment speed (3)
Range 0.5 % – 1.5 % 0.6 % – 2.0 %
Weighted average 0.6 % 0.8 %
Remaining loss expectation
Range 0.7 % – 2.0 % 0.7 % – 2.0 %
Weighted average 0.9 % 0.9 % (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 value of MSRs. The fair value of MSRs is 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 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 cost to service the loans, all of which are unobservable. Significant changes to any of those inputs in isolation could result in a significant change in the MSR fair value measurement. 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 operations. MSRs are generally subject to loss in fair value when mortgage interest rates decrease, when returns required by market participants (pricing spreads) increase, or when annual per-loan cost of servicing increases. 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 March 31,
2023 2022
(MSR recognized and UPB of underlying loans amounts
MSR recognized $ 100,618 $ 194,596
UPB of underlying loans $ 5,549,325 $ 11,929,172
Weighted average annual servicing fee rate (in basis points) 41 31
Key inputs (1)
Pricing spread (2)
Range 5.5 % – 8.7 % 5.8 % – 7.8 %
Weighted average 5.8 % 6.6 %
Prepayment speed (3)
Range 13.1 % – 21.8 % 6.0 % – 9.0 %
Weighted average 13.2 % 8.4 %
Equivalent average life (in years)
Range 2.8 – 6.6 4.0 – 8.4
Weighted average 6.5 8.0
Annual per-loan cost of servicing
Range $ 69 – $ 69 $ 80 – $ 80
Weighted average $ 69 $ 80 (1) Weighted average inputs are based on UPB of the underlying loans. (2) The Company uses the pricing spread over the United States Treasury (“Treasury”) securities 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:
March 31, 2023 December 31, 2022
(Fair value, UPB of underlying loans
Fair value $ 3,975,076 $ 4,012,737
UPB of underlying loans $ 231,615,214 $ 229,971,035
Weighted average annual servicing fee rate (in basis points) 29 29
Weighted average note interest rate 3.5 % 3.5 %
Key inputs (1)
Pricing spread (2)
Range 4.9 % – 8.9 % 4.9 % – 8.8 %
Weighted average 5.8 % 5.7 %
Effect on fair value of (3):
5% adverse change $( 52,336 |
