| Fair Value | Note 6—Fair Value Most of the Company’s assets and certain of its liabilities are measured at or based on their fair values. 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 significant 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 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. Fair Value Accounting Elections The Company identified its MSRs, its mortgage servicing liabilities (“MSLs”) and all of its non-cash financial assets to be accounted for at fair value so changes in fair value will be reflected in income as they occur and more timely reflect the results of the Company’s performance. Assets and Liabilities Measured at Fair Value on a Recurring Basis Following is a summary of assets and liabilities 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 investment $ 3,584 $ — $ — $ 3,584 Loans held for sale at fair value — 6,459,634 312,789 6,772,423 Derivative assets: Interest rate lock commitments — — 62,641 62,641 Forward purchase contracts — 78,507 — 78,507 Forward sales contracts — 19,232 — 19,232 MBS put options — 6,604 — 6,604 MBS call options — 7,218 — 7,218 Put options on interest rate futures purchase contracts 11,129 — — 11,129 Call options on interest rate futures purchase contracts 20,949 — — 20,949 Total derivative assets before netting 32,078 111,561 62,641 206,280 Netting — — — (95,616) Total derivative assets 32,078 111,561 62,641 110,664 Mortgage servicing rights at fair value — — 6,003,390 6,003,390 Investment in PennyMac Mortgage Investment Trust 925 — — 925 $ 36,587 $ 6,571,195 $ 6,378,820 $ 12,890,986 Liabilities: Derivative liabilities: Interest rate lock commitments $ — $ — $ 3,795 $ 3,795 Forward purchase contracts — 17,064 — 17,064 Forward sales contracts — 135,827 — 135,827 MBS call options — 7,830 — 7,830 Call options on interest rate futures sales contracts 2,250 — — 2,250 Total derivative liabilities before netting 2,250 160,721 3,795 166,766 Netting — — — (117,679) Total derivative liabilities 2,250 160,721 3,795 49,087 Mortgage servicing liabilities at fair value — — 2,011 2,011 $ 2,250 $ 160,721 $ 5,806 $ 51,098 December 31, 2022 Level 1 Level 2 Level 3 Total (in thousands) Assets: Short-term investment $ 12,194 $ — $ — $ 12,194 Loans held for sale at fair value — 3,163,528 345,772 3,509,300 Derivative assets: Interest rate lock commitments — — 36,728 36,728 Forward purchase contracts — 2,433 — 2,433 Forward sales contracts — 80,754 — 80,754 MBS put options — 6,057 — 6,057 Put options on interest rate futures purchase contracts 29,203 — — 29,203 Call options on interest rate futures purchase contracts 2,820 — — 2,820 Total derivative assets before netting 32,023 89,244 36,728 157,995 Netting — — — (58,992) Total derivative assets 32,023 89,244 36,728 99,003 Mortgage servicing rights at fair value — — 5,953,621 5,953,621 Investment in PennyMac Mortgage Investment Trust 929 — — 929 $ 45,146 $ 3,252,772 $ 6,336,121 $ 9,575,047 Liabilities: Derivative liabilities: Interest rate lock commitments $ — $ — $ 10,884 $ 10,884 Forward purchase contracts — 48,670 — 48,670 Forward sales contracts — 20,684 — 20,684 Put options on interest rate futures sales contracts 3,008 — — 3,008 Total derivative liabilities before netting 3,008 69,354 10,884 83,246 Netting — — — (61,534) Total derivative liabilities 3,008 69,354 10,884 21,712 Mortgage servicing liabilities at fair value — — 2,096 2,096 $ 3,008 $ 69,354 $ 12,980 $ 23,808 As shown above, certain of the Company’s loans held for sale, Interest Rate Lock Commitments (“IRLCs”), MSRs and MSLs are measured using Level 3 fair value inputs. Following are roll forwards of assets and liabilities measured at fair value using “Level 3” inputs at either the beginning or the end of the period presented: Quarter ended March 31, 2023 Net interest Mortgage Loans held rate lock servicing Assets for sale commitments (1) rights Total (in thousands) Balance, December 31, 2022 $ 345,772 $ 25,844 $ 5,953,621 $ 6,325,237 Purchases and issuances, net 437,650 62,508 — 500,158 Capitalization of interest and advances 7,655 — — 7,655 Sales and repayments (122,858) — (232) (123,090) Mortgage servicing rights resulting from loan sales — — 286,533 286,533 Changes in fair value included in income arising from: Changes in instrument-specific credit risk 9,543 — — 9,543 Other factors 793 72,412 (236,532) (163,327) 10,336 72,412 (236,532) (153,784) Transfers from Level 3 to Level 2 (365,714) — — (365,714) Transfers to real estate acquired in settlement of loans (52) — — (52) Transfers to loans held for sale — (101,918) — (101,918) Balance, March 31, 2023 $ 312,789 $ 58,846 $ 6,003,390 $ 6,375,025 Changes in fair value recognized during the quarter relating to assets still held at March 31, 2023 $ 8,413 $ 58,846 $ (236,532) $ (169,273) (1) For the purpose of this table, the IRLC asset and liability positions are shown net. Quarter ended Liabilities March 31, 2023 (in thousands) Mortgage servicing liabilities: Balance, December 31, 2022 $ 2,096 Changes in fair value included in income (85) Balance, March 31, 2023 $ 2,011 Changes in fair value recognized during the quarter relating to liabilities still outstanding at March 31, 2023 $ (85) Quarter ended March 31, 2022 Net interest Mortgage Loans held rate lock servicing Assets for sale commitments (1) rights Total (in thousands) Balance, December 31, 2021 $ 1,128,876 $ 322,193 $ 3,878,078 $ 5,329,147 Purchases and issuances, net 2,134,778 161,309 — 2,296,087 Capitalization of interest and advances 32,111 — — 32,111 Sales and repayments (1,134,992) — — (1,134,992) Mortgage servicing rights resulting from loan sales — — 616,302 616,302 Changes in fair value included in income arising from: Changes in instrument-specific credit risk (5,816) — — (5,816) Other factors (12,396) (399,377) 212,659 (199,114) (18,212) (399,377) 212,659 (204,930) Transfers from Level 3 to Level 2 (1,365,971) — — (1,365,971) Transfers to loans held for sale — (46,226) — (46,226) Balance, March 31, 2022 $ 776,590 $ 37,899 $ 4,707,039 $ 5,521,528 Changes in fair value recognized during the quarter relating to assets still held at March 31, 2022 $ (17,092) $ 37,899 $ 212,659 $ 233,466 (1) For the purpose of this table, the IRLC asset and liability positions are shown net. Liabilities Quarter ended March 31, 2022 (in thousands) Mortgage servicing liabilities Balance, December 31, 2021 $ 2,816 Changes in fair value included in income (252) Balance, March 31, 2022 $ 2,564 Changes in fair value recognized during the quarter relating to liabilities still outstanding at March 31, 2022 $ (252) The Company had transfers among the fair value levels arising from the return to salability in the active secondary market of certain loans held for sale and from transfers of IRLCs to loans held for sale at fair value upon purchase or funding. Assets and Liabilities Measured at Fair Value under the Fair Value Option Net changes in fair values included in income for assets and liabilities carried at fair value as a result of management’s election of the fair value option by income statement line item are summarized below: Quarter ended March 31, 2023 2022 Net gains on Net Net gains on Net loans held loan loans held loan for sale at servicing for sale at servicing fair value fees Total fair value fees Total (in thousands) Assets: Loans held for sale $ 165,947 $ — $ 165,947 $ (107,978) $ — $ (107,978) Mortgage servicing rights — (236,532) (236,532) — 212,659 212,659 $ 165,947 $ (236,532) $ (70,585) $ (107,978) $ 212,659 $ 104,681 Liabilities: Mortgage servicing liabilities $ — $ 85 $ 85 $ — $ 252 $ 252 Following are the fair value and related principal amounts due upon maturity of loans held for sale: March 31, 2023 December 31, 2022 Principal Principal amount amount Fair due upon Fair due upon Loans held for sale value maturity Difference value maturity Difference (in thousands) Current through 89 days delinquent $ 6,721,454 $ 6,628,953 $ 92,501 $ 3,450,578 $ 3,428,052 $ 22,526 90 days or more delinquent: Not in foreclosure 40,384 45,002 (4,618) 47,252 53,351 (6,099) In foreclosure 10,585 18,200 (7,615) 11,470 16,811 (5,341) $ 6,772,423 $ 6,692,155 $ 80,268 $ 3,509,300 $ 3,498,214 $ 11,086 Assets Measured at Fair Value on a Nonrecurring Basis Following is a summary of assets that were measured at 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 $ — $ — $ 2,324 $ 2,324 December 31, 2022 $ — $ — $ 1,850 $ 1,850 The following table summarizes the losses recognized on assets when they were remeasured at fair value on a nonrecurring basis: Quarter ended March 31, 2023 2022 (in thousands) Real estate acquired in settlement of loans $ (558) $ (514) Fair Value of Financial Instruments Carried at Amortized Cost The Company’s Assets sold under agreements to repurchase Mortgage loan participation purchase and sale agreements, Notes payable secured by mortgage servicing assets, Unsecured senior notes Obligations under capital lease These liabilities are classified as “Level 3” fair value items due to the Company’s reliance on unobservable inputs to estimate their fair values. The Company has concluded that the fair values of these liabilities other than term notes and term loans included in Notes payable secured by mortgage servicing assets Unsecured senior notes The Company estimates the fair value of the term notes and the Unsecured senior notes March 31, 2023 December 31, 2022 Fair value Carrying value Fair value Carrying value (in thousands) Term notes and term loans $ 2,466,450 $ 2,471,930 $ 1,677,476 $ 1,794,475 Unsecured senior notes $ 1,490,375 $ 1,780,833 $ 1,550,750 $ 1,779,920 Valuation Governance Most of the Company’s financial assets, and all of its derivatives, MSRs and MSLs, are carried at fair value with changes in fair value recognized in current period income. Certain of the Company’s financial assets and derivatives and all of its MSRs and MSLs are “Level 3” fair value assets and liabilities which require use of unobservable inputs that are significant to the estimation of the items’ fair values. 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 and subjects the valuation process to significant senior management oversight: ● The Company’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. ● The Company’s Capital Markets Risk Management staff develops the fair values of the Company’s IRLCs which is reviewed by its Capital Markets Operations group. With respect to the non-IRLC “Level 3” valuations, the FAV group reports to the Company’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, including the models’ performance versus actual results, and reports those results as well as changes in the valuation of the non-IRLC “Level 3” fair value assets and liabilities, including major factors affecting the valuations and any changes in model methods and inputs, to the Company’s senior management valuation committee. To assess the reasonableness of its valuations, the FAV group presents an analysis of the effect on the valuations of changes to the significant inputs to the models and, for MSRs, comparisons of its estimates of fair value of key inputs to those procured from nonaffiliated brokers and published surveys. The Company’s senior management valuation committee includes the Company’s chief financial, risk, and capital market officers as well as other senior members of the Company’s finance, capital markets and risk management staffs. Valuation Techniques and Inputs 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: Loans Held for Sale Most of the Company’s loans held for sale at fair value are saleable into active markets and are therefore categorized as “Level 2” fair value assets. The fair values of “Level 2” fair value loans are determined using their contracted selling prices or quoted market prices or market price equivalents. Certain of the Company’s loans held for sale are not saleable into active markets and are therefore categorized as “Level 3” fair value assets. Loans held for sale categorized as “Level 3” fair value assets include: ● Early buy out (“EBO”) loans. EBO loans are Government guaranteed or insured loans purchased by the Company from Ginnie Mae guaranteed securities in its loan servicing portfolio. The Company’s right to purchase a government guaranteed or insured loan arises as the result of the loan being at least three months delinquent on the date of purchase by the Company and provides an alternative to the Company’s obligation to continue advancing principal and interest at the coupon rate of the related Ginnie Mae security. Such a loan may be resold to an investor and thereafter may be repurchased to the extent it becomes eligible for resale into a new Ginnie Mae guaranteed security. A loan becomes eligible for resale into a new Ginnie Mae security when the loan becomes current either through completion of a modification of the loan’s terms or after six months of timely payments following either the completion of certain types of payment deferral programs or borrower reperformance and when the issuance date of the new security is at least 120 days after the date the loan was last delinquent. ● Scratch and dent loans. Loans that are not saleable into active markets due to identification of a defect by the Company or to the repurchase by the Company of a loan with an identified defect. ● Closed-end second loans. At present, there is no active market with observable inputs that are significant to the estimation of fair value of the closed-end second loans the Company produces. The Company uses a discounted cash flow model to estimate the fair value of its “Level 3” fair value loans held for sale. The significant unobservable inputs used in the fair value measurement of the Company’s “Level 3” fair value loans held for sale are discount rates, home price projections, voluntary prepayment/resale and total prepayment/resale speeds. Significant changes in any of those inputs in isolation could result in a significant change to the loans’ fair value measurement. Increases in home price projections are generally accompanied by an increase in voluntary prepayment speeds. Following is a quantitative summary of key “Level 3” fair value inputs used in the valuation of loans held for sale: March 31, 2023 December 31, 2022 Fair value (in thousands) $ 312,789 $ 345,772 Key inputs (1): Discount rate: Range 5.1% – 10.2% 5.5% – 10.2% Weighted average 5.3% 5.7% Twelve-month projected housing price index change: Range (1.8)% – (1.7)% (1.9)% – (1.7)% Weighted average (1.8)% (1.8)% Voluntary prepayment/resale speed (2): Range 4.7% – 25.0% 4.7% – 25.6% Weighted average 21.7% 21.6% Total prepayment/resale speed (3): Range 4.8% – 35.5% 4.8% – 36.1% Weighted average 30.0% 29.4% (1) Weighted average inputs are based on the fair values of the “Level 3” loans. (2) Voluntary prepayment/resale speed is measured using Life Voluntary Conditional Prepayment Rate (“CPR”). (3) Total prepayment/resale speed is measured using Life Total CPR, which includes both voluntary and involuntary prepayment/resale speeds. Changes in fair value of loans held for sale attributable to changes in the loan’s instrument-specific credit risk are measured with reference to the change in the respective loan’s delinquency status and performance history at period end from the later of the beginning of the quarter or acquisition date. Changes in fair value of loans held for sale are included in Net gains on loans held for sale at fair value Derivative Financial Instruments Interest Rate Lock Commitments The Company categorizes IRLCs as “Level 3” fair value assets or liabilities. The Company estimates the fair values of IRLCs based on quoted Agency MBS prices, its estimate of the fair value of the MSRs it expects to receive in the sale of the loans and the probability that the loans will be funded or purchased (the “pull-through rate”). The significant unobservable inputs used in the fair value measurement of the Company’s IRLCs are the pull-through rate and the estimated fair values of MSRs attributable 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, could result in significant changes in the IRLCs’ fair value measurements. 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 IRLC fair value, but increase the pull-through rate for the loan principal and interest payment cash flow component, which has decreased in fair value. Changes in fair value of IRLCs are included in Net gains on loans held for sale at fair value 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) $ 58,846 $ 25,844 Key inputs Pull-through rate: Range 8.0% – 100% 10.3% – 100% Weighted average 81.1% 82.8% Mortgage servicing rights fair value expressed as: Servicing fee multiple: Range 1.7 – 7.8 (1.3) – 7.7 Weighted average 4.2 4.3 Percentage of loan commitment amount: Range 0.4% – 4.1% (0.2)% – 3.8% Weighted average 2.1% 2.0% (1) For purpose 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 gains on loans held for sale at fair value, Net loan servicing fees – Mortgage servicing rights hedging results . Mortgage Servicing Rights MSRs are categorized as “Level 3” fair value assets. The Company uses a discounted cash flow approach to estimate the fair value of MSRs. The key inputs used in the estimation of the fair value of MSRs include the applicable prepayment rate (prepayment speed), pricing spread (discount rate), and annual per-loan cost to service the underlying 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 Change in fair value of mortgage servicing rights and mortgage servicing liabilities Following are the key inputs used in determining the fair value of MSRs received by the Company when it retains the obligation to service the mortgage loans it sells: Quarter ended March 31, 2023 2022 (Amount recognized and unpaid principal balance of underlying loans in thousands) MSR and pool characteristics: Amount recognized $ 286,533 $ 616,302 Unpaid principal balance of underlying loans $ 13,695,364 $ 30,575,969 Weighted average servicing fee rate (in basis points) 50 43 Key inputs (1): Annual total prepayment speed (2): Range 9.2% – 23.2% 6.0% – 23.4% Weighted average 11.7% 8.3% Equivalent average life (in years): Range 3.0 – 8.4 3.7 – 8.8 Weighted average 7.3 8.3 Pricing spread (3): Range 5.5% – 11.7% 5.8% – 16.1% Weighted average 7.7% 7.5% Per-loan annual cost of servicing: Range $68 – $125 $80 – $177 Weighted average $103 $104 (1) Weighted average inputs are based on the UPB of the underlying loans. (2) Annual total prepayment speed is measured using Life Total CPR, which includes both voluntary and involuntary prepayments. Equivalent average life is provided as supplementary information. (3) Pricing spread represents a margin that is applied to a reference interest rate’s forward rate curve to develop periodic discount rates. The Company applies a pricing spread to the United State Treasury Securities (the “Treasury”) yield curve for purposes of discounting cash flows relating to MSRs. Following is a quantitative summary of key inputs used in the valuation of the Company’s MSRs and the effect on the fair value from adverse changes in those inputs: March 31, 2023 December 31, 2022 (Fair value, unpaid principal balance of underlying loans and effect on fair value amounts in thousands) Fair value $ 6,003,390 $ 5,953,621 Pool characteristics: Unpaid principal balance of underlying loans $ 321,263,982 $ 314,567,639 Weighted average note interest rate 3.5% 3.4% Weighted average servicing fee rate (in basis points) 37 36 Key inputs (1): Annual total prepayment speed (2): Range 5.2% – 18.0% 5.0% – 17.7% Weighted average 8.2% 7.5% Equivalent average life (in years): Range 3.7 – 9.0 3.7 – 9.3 Weighted average 8.1 8.4 Effect on fair value of (3): 5% adverse change ($85,106) ($77,346) 10% adverse change ($167,216) ($152,192) 20% adverse change ($323,085) ($294,872) Pricing spread (4): Range 4.9% – 14.2% 4.9% – 14.3% Weighted average 6.5% 6.5% Effect on fair value of (3): 5% adverse change ($80,273) ($81,021) 10% adverse change ($158,416) ($159,863) 20% adverse change ($308,614) ($311,329) Per-loan annual cost of servicing: Range $68 – $144 $68 – $144 Weighted average $108 $109 Effect on fair value of (3): 5% adverse change ($41,653) ($41,263) 10% adverse change ($83,305) ($82,527) 20% adverse change ($166,610) ($165,053) (1) Weighted average inputs are based on the UPB of the underlying loans. (2) Annual total prepayment speed is measured using Life Total CPR, which includes both voluntary and involuntary prepayments. Equivalent average life is provided as supplementary information. (3) These sensitivity analyses are limited in that they were performed as of a particular date; only contemplate the movements in the indicated inputs; do not incorporate changes 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 made to account for changing circumstances. For these reasons, the estimates should not be viewed as earnings forecasts. (4) The Company applies a pricing spread to the Treasury yield curve for purposes of discounting cash flows relating to MSRs. Mortgage Servicing Liabilities MSLs are categorized as “Level 3” fair value liabilities. The Company uses a discounted cash flow approach to estimate the fair value of MSLs. The key inputs used in the estimation of the fair value of MSLs include the applicable pricing spread, annual total prepayment speed, and the per-loan annual cost of servicing the underlying loans. Changes in the fair value of MSLs are included in Net servicing fees Change in fair value of mortgage servicing rights and mortgage servicing liabilities Following are the key inputs used in determining the fair value of MSLs: March 31, December 31, 2023 2022 Fair value (in thousands) $ 2,011 $ 2,096 Pool characteristics: Unpaid principal balance of underlying loans (in thousands) $ 28,380 $ 33,157 Servicing fee rate (in basis points) 25 25 Key inputs (1): Pricing spread (2) 8.0% 7.8% Annual total prepayment speed (3) 17.0% 17.2% Equivalent average life (in years) 4.9 4.9 Per-loan annual cost of servicing $ 1,136 $ 1,177 (1) Weighted average inputs are based on UPB of the underlying mortgage loans. (2) The Company applies a pricing spread to the Treasury yield curve for purposes of discounting cash flows relating to MSLs. (3) Annual total prepayment speed is measured using Life Total CPR, which includes both voluntary and involuntary prepayments. Equivalent average life is provided as supplementary information. |
