| 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 Interest-only security payable at fair value 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, 2022
Level 1
Level 2
Level 3
Total
(in thousands)
Assets:
Short-term investments
$
236,468
$
—
$
—
$
236,468
Mortgage-backed securities at fair value
—
3,070,330
—
3,070,330
Loans acquired for sale at fair value
—
1,684,420
24,325
1,708,745
Loans at fair value
—
1,822,533
3,949
1,826,482
Derivative assets:
Call options on interest rate futures purchase contracts
1,230
—
—
1,230
Put options on interest rate futures purchase contracts
65,358
—
—
65,358
Forward purchase contracts
—
7,597
—
7,597
Forward sale contracts
—
132,751
—
132,751
MBS put options
—
11,971
—
11,971
CRT derivatives
—
—
970
970
Interest rate lock commitments
—
—
1,649
1,649
Total derivative assets before netting
66,588
152,319
2,619
221,526
Netting
—
—
—
(143,703
)
Total derivative assets after netting
66,588
152,319
2,619
77,823
Mortgage servicing rights at fair value
—
—
3,391,172
3,391,172
$
303,056
$
6,729,602
$
3,422,065
$
10,311,020
Liabilities:
Asset-backed financings at fair value
$
—
$
1,712,650
$
—
$
1,712,650
Interest-only security payable at fair value
—
—
16,373
16,373
Derivative and credit risk transfer strip liabilities:
Put options on interest rate futures sale contracts
—
3,750
—
3,750
Forward purchase contracts
—
54,641
—
54,641
Forward sales contracts
—
12,886
—
12,886
CRT derivatives
—
—
9,019
9,019
Interest rate lock commitments
—
—
25,114
25,114
Total derivative liabilities before netting
—
71,277
34,133
105,410
Netting
—
—
—
(44,655
)
Total derivative liabilities after netting
—
71,277
34,133
60,755
Credit risk transfer strips
—
—
68,595
68,595
Total derivative and credit risk transfer strip liabilities
—
71,277
102,728
129,350
$
—
$
1,783,927
$
119,101
$
1,858,373
December 31, 2021
Level 1
Level 2
Level 3
Total
(in thousands)
Assets:
Short-term investments
$
167,999
$
—
$
—
$
167,999
Mortgage-backed securities at fair value
—
2,666,768
—
2,666,768
Loans acquired for sale at fair value
—
4,140,896
30,129
4,171,025
Loans at fair value
—
1,564,565
4,161
1,568,726
Derivative assets:
Call options on interest rate futures purchase contracts
2,828
—
—
2,828
Put options on interest rate futures purchase contracts
3,180
—
—
3,180
Forward purchase contracts
—
5,806
—
5,806
Forward sale contracts
—
6,307
—
6,307
MBS put options
—
3,662
—
3,662
Swaption purchase contracts
—
39
—
39
CRT derivatives
—
—
19,627
19,627
Interest rate lock commitments
—
—
3,897
3,897
Total derivative assets before netting
6,008
15,814
23,524
45,346
Netting
—
—
—
(11,108
)
Total derivative assets after netting
6,008
15,814
23,524
34,238
Mortgage servicing rights at fair value
—
—
2,892,855
2,892,855
$
174,007
$
8,388,043
$
2,950,669
$
11,501,611
Liabilities:
Asset-backed financings at fair value
$
—
$
1,469,999
$
—
$
1,469,999
Interest-only security payable at fair value
—
—
10,593
10,593
Derivative liabilities and credit risk transfer strips:
Forward purchase contracts
—
3,620
—
3,620
Forward sales contracts
—
13,782
—
13,782
CRT derivatives
—
—
663
663
Interest rate lock commitments
—
—
1,446
1,446
Total derivative liabilities before netting
—
17,402
2,109
19,511
Netting
—
—
—
(4,142
)
Total derivative liabilities after netting
—
17,402
2,109
15,369
Credit risk transfer strips
—
—
26,837
26,837
Total derivative and credit risk transfer strip liabilities
—
17,402
28,946
42,206
$
—
$
1,487,401
$
39,539
$
1,522,798
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, 2022
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, 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 of operations arising from:
Changes in instrument - specific credit risk
—
—
—
—
—
—
—
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 to loans acquired for sale (2)
—
—
—
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 the quarter relating to assets still held at March 31, 2022
$
(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 arising from:
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 to liability outstanding at March 31, 2022
$
5,780
Quarter ended March 31, 2021
Assets (1)
Loans acquired for sale
Loans at fair value
Excess servicing spread
CRT derivatives
Interest rate lock commitments
CRT strips
Mortgage servicing rights
Total
(in thousands)
Balance, December 31, 2020
$
33,875
$
8,027
$
131,750
$
31,795
$
72,386
$
(202,792
)
$
1,755,236
$
1,830,277
Purchases and issuances
15,898
—
—
—
(9,704
)
—
—
6,194
Repayments and sales
(16,070
)
(584
)
(134,624
)
(23,489
)
—
(32,604
)
—
(207,371
)
Capitalization of interest
—
198
1,280
—
—
—
—
1,478
ESS received pursuant to a recapture agreement with PFSI
—
—
557
—
—
—
—
557
Amounts received pursuant to sales of loans
—
—
—
—
—
—
407,696
407,696
Changes in fair value included in results of operations arising from:
Changes in instrument - specific credit risk
—
—
—
—
—
—
—
—
Other factors
531
95
1,037
36,370
(275,515
)
125,826
278,282
166,626
531
95
1,037
36,370
(275,515
)
125,826
278,282
166,626
Transfers:
Loans to REO
—
66
—
—
—
—
—
66
Interest rate lock commitments to loans acquired for sale (2)
—
—
—
—
147,975
—
—
147,975
Balance, March 31, 2021
$
34,234
$
7,802
$
—
$
44,676
$
(64,858
)
$
(109,570
)
$
2,441,214
$
2,353,498
Changes in fair value recognized during the quarter relating to assets still held at March 31, 2021
$
337
$
81
$
—
$
12,874
$
(64,858
)
$
93,222
$
278,282
$
319,938
(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, 2021
(in thousands)
Interest-only security payable:
Balance, December 31, 2020
$
10,757
Changes in fair value included in income arising from:
Changes in instrument - specific credit risk
—
Other factors
8,165
8,165
Balance, March 31, 2021
$
18,922
Changes in fair value recognized during the quarter relating to liability outstanding at March 31, 2021
$
8,165
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, 2022
December 31, 2021
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
$
1,704,140
$
1,704,707
$
(567
)
$
4,166,177
$
4,048,967
$
117,210
90 or more days delinquent:
Not in foreclosure
4,605
5,183
(578
)
4,848
5,801
(953
)
In foreclosure
—
—
—
—
—
—
4,605
5,183
(578
)
4,848
5,801
(953
)
$
1,708,745
$
1,709,890
$
(1,145
)
$
4,171,025
$
4,054,768
$
116,257
Loans at fair value:
Loans held in consolidated VIEs:
Current through 89 days delinquent
$
1,819,997
$
1,886,199
$
(66,202
)
$
1,561,794
$
1,514,575
$
47,219
90 or more days delinquent:
Not in foreclosure
1,920
2,527
(607
)
2,141
2,722
(581
)
In foreclosure
616
809
(193
)
630
809
(179
)
2,536
3,336
(800
)
2,771
3,531
(760
)
1,822,533
1,889,535
(67,002
)
1,564,565
1,518,106
46,459
Distressed loans:
Current through 89 days delinquent
781
1,338
(557
)
782
1,455
(673
)
90 or more days delinquent:
Not in foreclosure
1,207
2,713
(1,506
)
1,181
3,824
(2,643
)
In foreclosure
1,961
5,729
(3,768
)
2,198
5,490
(3,292
)
3,168
8,442
(5,274
)
3,379
9,314
(5,935
)
3,949
9,780
(5,831
)
4,161
10,769
(6,608
)
$
1,826,482
$
1,899,315
$
(72,833
)
$
1,568,726
$
1,528,875
$
39,851
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, 2022
Net (losses) gains on investments and financings
Net gains on loans acquired for sale
Net loan servicing fees
Net interest expense
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
)
$
(227,266
)
$
303,721
$
(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
Quarter ended March 31, 2021
Net (losses) gains on investments and financings
Net gains on loans acquired for sale
Net loan servicing fees
Net interest expense
Total
(in thousands)
Assets:
Mortgage-backed securities at fair value
$
(71,117
)
$
—
$
—
$
(2,523
)
$
(73,640
)
Loans acquired for sale at fair value
—
(106,664
)
—
—
(106,664
)
Loans at fair value
(2,250
)
—
—
825
(1,425
)
ESS at fair value
1,037
—
—
1,280
2,317
Credit risk transfer strips
125,826
—
—
—
125,826
MSRs at fair value
—
—
278,282
—
278,282
$
53,496
$
(106,664
)
$
278,282
$
(418
)
$
224,696
Liabilities:
Interest-only security payable at fair value
$
(8,165
)
$
—
$
—
$
—
$
(8,165
)
Asset-backed financings at fair value
900
—
—
789
1,689
$
(7,265
)
$
—
$
—
$
789
$
(6,476
) 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, 2022
$
—
$
—
$
1,983
$
1,983
December 31, 2021
$
—
$
—
$
5,147
$
5,147
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,
2022
2021
(in thousands)
Real estate asset acquired in settlement of loans
$
(148
)
$
(649
) 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 cost 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 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 Exchangeable senior notes The Company has concluded that the fair values of these borrowings other than Notes payable secured by credit risk transfer and mortgage servicing assets Exchangeable senior notes Following are the carrying and fair values of the Notes payable secured by credit risk transfer and mortgage servicing assets Exchangeable senior notes
March 31, 2022
December 31, 2021
Instrument
Carrying value
Fair value
Carrying value
Fair value
(in thousands)
Notes payable secured by credit risk transfer and mortgage servicing assets
$
2,372,279
$
2,354,174
$
2,471,961
$
2,480,842
Exchangeable senior notes
$
544,100
$
531,434
$
502,459
$
536,460
The Company estimates the fair value of the Notes payable secured by credit risk transfer and mortgage servicing assets Exchangeable senior notes Valuation Governance Most of the Company’s assets, its Asset-backed financings at fair value, Interest-only security payable at fair value Derivative and credit risk transfer strip liabilities at fair value 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 develops 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, investment and credit 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. 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 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 (losses) gains on investments and financings 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. Inputs to the discounted cash flow model include current interest rates, loan amount, payment status, property type, discount rates and forecasts of future interest rates, home prices, prepayment speeds, default speeds, loss severities or contracted selling price when applicable.
•
Fair value for distressed loans is estimated based on the expected resolution to be realized from the individual asset’s disposition strategy. When a cash flow projection is used to estimate the fair value of the resolution, 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 Deposits securing credit risk transfer arrangements pledged to creditors 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 (losses) gains on investments and financings 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, 2022
December 31, 2021
(dollars in thousands)
Fair value
CRT derivatives
Assets
$
970
$
19,627
Liabilities
$
9,019
$
663
UPB of loans in reference pools
$
6,791,035
$
7,426,288
Key inputs (1)
Discount rate
Range
5.7% – 8.6%
3.3% – 5.9%
Weighted average
8.2%
5.7%
Voluntary prepayment speed (2)
Range
7.0% – 7.7%
12.6% – 13.1%
Weighted average
7.4%
12.7%
Involuntary prepayment speed (3)
Range
0.2% – 0.9%
(0.1)% – 0.8%
Weighted average
0.3%
0.1%
Remaining loss (recovery) expectation (4)
Range
0.3% – 0.6%
(0.1)% – 0.6%
Weighted average
0.3%
0.1%
(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. Negative involuntary prepayment speeds reflect the expectation for reinstatement to the reference pool of a portion of the loans that previously triggered contractual losses due to delinquency while under CARES Act forbearance upon their expected re-performance, as contractually provided for in certain CRT Agreements.
(4)
Remaining loss (recovery) expectation is measured as expected future contractual losses divided by the UPB of the reference loans. Negative remaining loss expectations reflect the expectation of contractual reversals of previously incurred contractual losses due to the expected re-performance of a portion of the loans that experienced delinquency while under CARES Act forbearance. 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 loan will be purchased under the commitment (the “pull-through rate”) and the Company’s estimate of the fair value of the MSRs it expects to receive upon sale of the loan. The significant unobservable inputs used in the fair value measurement of the Company’s IRLCs are the pull-through rate and the estimated MSR attributed to the mortgage loans it has committed to purchase. 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 IRLCs’ 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 Following is a quantitative summary of key unobservable inputs used in the valuation of IRLCs:
March 31, 2022
December 31, 2021
Fair value (in thousands) (1)
$
(23,465
)
$
2,451
Committed amount (in thousands)
$
1,871,490
$
2,092,129
Key inputs (2)
Pull-through rate
Range
54.8% – 100%
64.3% – 100%
Weighted average
91.4%
91.4%
MSR fair value expressed as:
Servicing fee multiple
Range
0.4 – 6.6
0.5 – 6.3
Weighted average
4.6
4.5
Percentage of UPB
Range
0.3% – 2.9%
0.3% – 2.7%
Weighted average
1.6%
1.5%
(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 (losses) gains on investments and financings, Net gains on loans acquired for sale Net loan servicing fees – from nonaffiliates – Mortgage servicing rights hedging results 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 certificates representing the beneficial interests in the trust holding the Deposits securing credit risk transfer arrangements pledged to creditors, Fair value of the CRT strips is derived by deducting the balance of the Deposits securing credit risk transfer arrangements pledged to creditors 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 (losses) gains on investments and financings 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 value of the CRT strip liabilities:
March 31, 2022
December 31, 2021
(dollars in thousands)
Fair value
$
68,595
$
26,837
UPB of loans in the reference pools
$
21,369,832
$
23,382,619
Key inputs (1)
Discount rate
Range
4.8% – 8.6%
3.8% – 6.4%
Weighted average
8.1%
6.0%
Voluntary prepayment speed (2)
Range
7.8% – 10.7%
14.9% – 17.6%
Weighted average
8.2%
17.2%
Involuntary prepayment speed (3)
Range
0.4% – 1.3%
0.5% – 1.4%
Weighted average
0.5%
0.6%
Remaining loss expectation (4)
Range
0.4% – 1.4%
0.3% – 1.1%
Weighted average
0.6%
0.5%
(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.
(4)
Remaining loss expectation is measured as expected future losses divided by the UPB of the loans in the reference pools. Mortgage Servicing Rights 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. The Company generally has the right to receive other remuneration including various mortgagor-contracted fees such as late charges and collateral reconveyance charges, and the Company 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 spread, 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 MSRs are generally subject to loss in fair value when returns required by market participants (pricing spreads) increase, when mortgage interest rates decrease, 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,
2022
2021
(MSR recognized and UPB of underlying loans amounts in thousands)
MSR recognized
$
194,596
$
407,696
UPB of underlying loans
$
11,929,172
$
32,448,891
Weighted average annual servicing fee rate (in basis points)
31
26
Key inputs (1)
Pricing spread (2)
Range
5.8% – 7.8%
8.0% – 8.0%
Weighted average
6.6%
8.0%
Prepayment speed (3)
Range
6.0% – 9.0%
6.0% – 9.3%
Weighted average
8.4%
7.5%
Equivalent average life (in years)
Range
4.0 – 8.4
3.9 – 8.9
Weighted average
8.0
8.5
Annual per-loan cost of servicing
Range
$80 – $80
$81 – $81
Weighted average
$80
$81
(1)
Weighted average inputs are based on UPB of the underlying loans.
(2)
Through December 31, 2021, the Company applied pricing spreads to the forward rates implied by the United States Dollar London Inter-Bank Offered Rate (“LIBOR”) swap curve for purposes of discounting cash flows relating to MSRs. Effective January 1, 2022, the Company adopted the United States Treasury (“Treasury”) securities yield curve for purpose of discounting cash flows relating to MSRs. The change in reference rate did not have a significant effect on the Company’s estimates of fair value.
(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, 2022
December 31, 2021
(Fair value, UPB of underlying loans and effect on fair value amounts in thousands)
Fair value
$
3,391,172
$
2,892,855
UPB of underlying loans
$
219,017,091
$
216,065,626
Weighted average annual servicing fee rate (in basis points)
28
28
Weighted average note interest rate
3.3%
3.0%
Key inputs (1)
Pricing spread (2)
Range
4.9% – 9.0%
6.0% – 8.0%
Weighted average
5.9%
7.2%
Effect on fair value of:
5% adverse change
$(45,375)
$(39,826)
10% adverse change
$(89,600)
$(78,613)
20% adverse change
$(174,758)
$(153,220)
Prepayment speed (3)
Range
6.9% – 21.5%
5.5% – 12.5%
Weighted average
7.8%
8.2%
Equivalent average life (in years)
Range
3.4 – 8.5
3.5 – 9.1
Weighted average
8.1
8.1
Effect on fair value of:
5% adverse change
$(54,398)
$(59,726)
10% adverse change
$(106,919)
$(117,162)
20% adverse change
$(206,727)
$(225,672)
Annual per-loan cost of servicing
Range
$78 – $80
$80 – $81
Weighted average
$80
$80
Effect on fair value of:
5% adverse change
$(19,465)
$(17,585)
10% adverse change
$(38,930)
$(35,169)
20% adverse change
$(77,859)
$(70,338)
(1)
Weighted-average inputs are based on the UPB of the underlying loans.
(2)
Through December 31, 2021, the Company applied pricing spreads to the forward rates implied by the United States Dollar LIBOR swap curve for purposes of discounting cash flows relating to MSRs. Effective January 1, 2022, the Company adopted the Treasury securities yield curve for purpose of d |
