David Spector; Chairman of the Board, Chief Executive Officer; PennyMac Mortgage Investment Trust
Daniel Perotti; Chief Financial Officer, Senior Managing Director; PennyMac Mortgage Investment Trust
Bose George; Analyst; KBW
Matthew Erdner; Analyst; Jones Trading
Trevor Cranston; Analyst; Citizens JMP
Jake Katsikas; Analyst; BTIG
Douglas Harter; Analyst; UBS
Operator
Good afternoon, and welcome to PennyMac Mortgage Investment Trust fourth-quarter and full-year 2024 earnings call. Additional earnings materials, including the presentation slides that will be referred to in this call are available on PennyMac Mortgage Investment Trust website at pmt.pennymac.com.
Before we begin, let me remind you that this call may contain forward-looking statements that are subject to certain risks identified on slide 2 of the earnings presentation that could cause the company's actual results to differ materially, as well as non-GAAP measures that have filed their GAAP equivalent to the earnings materials.
Now, I'd like to introduce David Spector PennyMac Mortgage Investment Trust's Chairman and Chief Executive Officer; and Dan Perotti, PennyMac Mortgage Investment Trust's Chief Financial Officer. You may begin.
David Spector
Thank you, operator. PMT produced very strong results in the fourth quarter, generating a 10% return on equity, driven by strong levels of income, excluding market-driven value changes and excellent performance across all three investment strategies.
Net income to common shareholders was $36 million or diluted earnings per share of $0.41, and PMT declared a fourth quarter common dividend of $0.40 per share. Book value per share at year-end was $15.87, up from the end of the prior quarter. Importantly, the fourth quarter marked a return to the organic creation of credit investments for PMT, which I will expand on later.
Turning to slide 4, for the full year, PMT produced a return on common equity of 8% with $119 million of net income attributable to common shareholders and income contributions from all three investment strategies. 2024 was a year characterized by significant interest rate volatility as evidenced by the yield on the 10-year treasury, which range from 3.6% to 4.7%.
Even with this volatility, our dividend remained consistent and book value per share was stable throughout the year as the active hedging of mortgage servicing rights offset the majority of fair value changes in the interest rate-sensitive strategies.
Also, during 2024, we worked on multiple facets of the business to reposition PMT's balance sheet for success in a higher interest rate environment. This included the opportunistic sale of certain investments as credit spreads tightened, a major re-balance of our agency MBS portfolio, and the issuance of $1.3 billion in term debt to address and extend upcoming maturities, generally a tighter financing spreads.
We also renewed PMT's mortgage banking agreement with our manager, an industry leader, PFSI, solidify this unique synergistic partnership between the two companies for another half a decade. All of these activities position PMT with a very strong foundation as we enter 2025.
Turning to the origination market, current third-party estimates for total originations in 2025 averaged $2 trillion, reflecting growth in overall volumes. Though mortgage rates are back up into the 7% range, we believe ongoing volatility in rates will present opportunities in the origination market from time to time. PMT's stable performance in recent periods of heightened volatility highlights the strength of the fundamentals underlying its long-term mortgage assets and our expertise managing mortgage-related investments in its changing environment.
Turning to slide 6, a key competitive advantage throughout PMT's history has been the ability to organically create MSR and credit investments from its own production volumes. We believe that our position as the producer of the underlying loans is a competitive advantage, providing us with an ability to review and diligence the loans selected for securitization and subsequent investment.
Additionally, as the servicer of the underlying loans, we are uniquely positioned with the ability to work directly with borrowers in times of stress to minimize losses as evidenced by the strong historical performance of our unique investments in lender credit risk transfer. In recent periods, volume or pricing limits for the GSEs on certain type of loans, such as nonowner-occupied and second homes, coupled with strong investor demand has driven increased private label securitizations of such loans.
This development has created a renewed opportunity for PMT to organically create credit investments from its own production. We leveraged the strength of our correspondent production franchise and securitization expertise to complete two securitizations of agency-eligible investor loans, where we retained $52 million of new investments in credit subordinate bonds.
After quarter end, we completed a third securitization of investor loans and thus retain an additional $21 million of new investments in credit subordinate bonds. Return on equity for these investments is expected to be in the low to mid-teens. With a growing pipeline of loans available for private label securitization and a receptive market for these securities, we expect similar levels of activity well into 2025 with the potential for increased investment opportunities through securitization of other loan products such as jumbo loans as the origination market grows.
Turning to slide 7, approximately two-thirds of PMT's shareholders' equity is currently invested in a seasoned portfolio of MSRs and the unique GSE lender risk share transactions we invested in from 2015 to 2020. As the majority of mortgages underlying these assets were originated during periods of very low interest rates, we continue to believe these investments will perform well over the foreseeable future as low expected prepayments have extended the expected lives of these assets.
Additionally, delinquencies remain low due to the overall strength of the consumer as well as the substantial accumulation of home equity in recent years due to continued home price appreciation. MSR investments account for approximately half of PMT's deployed equity. The majority of the underlying mortgages of these MSRs remain far out of the money, and we expect the MSR asset to continue to producing stable cash flows over the extended period of time.
MSR values also continue to benefit from the higher interest rate environment as the placement fee income PMT receives on custodial balances is closely tied to short-term interest rates. Similarly, mortgages underlying PMT's large investment in lender originated risk share have low delinquencies and a low weighted average current loan to valuation of below 50%.
These characteristics are expected to support the performance of these assets over the long term, and we continue to expect that realized losses will be limited. Given our expectations for PMT to be a consistent issuer and investor in private label securitization alongside a seasoned portfolio of MSRs and CRT with strong underlying fundamentals, I am confident the company will continue to deliver attractive risk-adjusted returns in 2025 and beyond.
Now I'll turn it over to Dan, who will review the drivers of PMT's fourth-quarter financial performance and PMT's run rate return potential.
Daniel Perotti
Thank you, David. PMT earned $36 million in net income to common shareholders in the fourth quarter or $0.41 per diluted common share. The credit-sensitive strategies contributed $20 million in pretax income. The contribution from organically created CRT investments was $20 million, while the contribution from opportunistic investments in CAS and stacker bonds was offset by losses on non-agency subordinate MBS due to increasing interest rates and losses on other credit-sensitive strategies.
As David mentioned, the outlook for our current investments in organically created CRT remains favorable, with a low underlying current weighted average loan-to-value ratio below 50% and a 60-day delinquency rate of 1.5%, both as of December 31.
The interest rate sensitive strategies contributed pretax income of $25 million. Fair value increases on MSR investments were $184 million as the increase in mortgage rates drove a decrease in future prepayment projections. These fair value increases were offset by the combined impact of changes in the fair value of MBS, interest rate hedges and the related income tax effects.
MBS fair value decreased by $140 million due to the increase in mortgage rates. Interest rate hedges decreased by $51 million. Income from correspondent production and gains on MSRs held in PMT's taxable REIT subsidiary were the primary driver of the $9 million tax expense.
The fair value of PMT's MSR asset at the end of the quarter was $3.9 billion, up slightly from $3.8 billion at September 30, as fair value gains and newly originated MSR investments were slightly offset by runoff from prepayments. Delinquency rates for borrowers underlying PMT's MSR portfolio remain low, while servicing advances outstanding increased to $105 million from $71 million at September 30, due to seasonal property tax payments.
No principal and interest advances are currently outstanding. Total correspondent loan acquisition volume was $28 billion in the fourth quarter, up 9% from the prior quarter, driven by the larger overall market. Correspondent loans acquired for PMT's account totaled $3.5 billion, down 41% from the prior quarter due to PMT retaining a smaller percentage of the conventional conforming correspondent loan production.
PMT retained 19% of total conventional correspondent production in the fourth quarter, down from 42% in the third quarter. We expect this percentage to remain between 15% to 25% in the first quarter of 2025 as we continue pursuing investment opportunities in the private label securitization market.
Income from PMT's Correspondent Production segment was up from last quarter, driven by increased demand for private label securitization and whole loan execution for investor loans during the quarter. The contribution of pretax income related to the strong execution of our private label securitizations in the quarter was approximately $9 million.
Profitability in the segment in recent periods has also benefited from the release of liabilities related to representations and warranties provided at the time of securitization as the high volumes of loans produced from 2020 to 2022, that's the three-year window for violations with minimal repurchase related losses.
The weighted average fulfillment fee rate was 18 basis points down from 19 basis points in the prior quarter. Under the renewed mortgage banking services agreement with PFSI, effective July 1, 2025, correspondent loans will initially be acquired by PFSI. However, PMT will retain the right to purchase up to 100% of nongovernment correspondent production from PFSI.
In total, PMT reported $51 million of net income across its strategies, excluding market-driven value changes and the related tax impacts, up from $35 million in the prior quarter, driven primarily by decreased realization of MSR cash flows and correspondent production income.
Looking ahead, slide 8 outlines the run rate return potential expected from PMT's investment strategies over the next four quarters. PMT's current run rate reflects a quarterly average of $0.37 per share, unchanged from the prior quarter. We see slightly increased return potential for the credit-sensitive strategies as short-term interest rates are expected to remain higher for longer.
We also see improvement in the interest-sensitive strategy segment as the yield curve is steepened. The improvements in these segments were somewhat offset by a slightly decreased return potential in correspondent production, given the current expected margin environment. If the yield curve steepens further, we expect PMC's overall run rate would increase, closer to the $0.40 range, driven by higher overall yields in the interest rate-sensitive strategies.
Turning to our capital position, we retired $43 million of CRT term notes that were due to mature in October, where the remaining assets were financed via repurchase agreement due to the size of the position. Also, we repaid in full $210 million of exchangeable senior notes that matured in November. Through 2025, we will continue to look for opportunities to raise additional debt capital to address the maturity of our exchangeable note in 2026, as well as to provide additional funding for potential expansion of our securitization efforts.
We'll now open it up for questions. Operator?
Operator
(Operator Instructions) Bose George, KBW.
Bose George
So you mentioned if the yield curve steepens, that helps the run rate outlook. Again, does that matter if it's -- if we see a sell off on the long end, does that kind of get you there as well? Or do we need the Fed to cut a little bit?
David Spector
No, that's correct, Bose. If we see the long end go up, basically, if we see differentiation, the greater the spread between really truly short-term rates and longer-dated rates really improves the outlook for the interest rate sensitive strategies to the overall steepness of the curve there. And from that perspective or somewhat ambivalent around whether the longer end goes up, or the shorter end goes down.
Bose George
Great. And then in terms of your MSR hedge, is your strategy kind of similar at PMT versus PFS? Or is it sort of a tighter hedge here? Or just how would you characterize it?
David Spector
Generally speaking, we run a tighter hedge at PMT over time where we have run a tighter hedge from a hedge ratio perspective. The composition of the MSR portfolio in PMT versus PFSI is somewhat different at this point since PMT's MSR portfolio given that it has acquired fewer loans. More loans have been going to PFSI through the correspondent channel over the last few years than PMT has retained.
It has a greater concentration of lower note rate loans, which are less -- have less sensitivity to interest rates changing and refinance. And also, PMT has less benefit on the other side from origination upticking because although it gets some of the recapture benefit due to its agreement with PFSI, if those loans are refinanced through PFSI, it only retains really a portion of the benefit, not the same amount of benefit that PFSI retains if it refinances its own loans.
And so for those reasons because -- for those two reasons, we run generally a tighter hedge at PMT. But I think it's also important to note that the sensitivity at PMT of the MSR portfolio is also lower.
Operator
Matthew Erdner, Jones Trading.
Matthew Erdner
I'd like to touch on GSE reform and kind of how you guys are seeing it play out. And then kind of as a follow-up to it with the new FHFA director coming in, what are you guys expecting? And do you expect their footprint to just kind of shrink as a whole?
David Spector
Well, thank you, Matthew. Look, I think that it's still really early to really have a point of view on what the new FHFA director is going to do via the prior one. I can tell you, we've always had a good relationship with FHFA and the GSEs, and I'm excited to work with the new director.
I think my general sense is it's going to be a little bit of a return to the way things were the last time we had this administration in place. I think as a pertinent GSE reform have a similar point of view, that it's still really early to say one way or another how it's going to play out.
But I can tell you, since we started the company, number one, always managed to a range of outcomes. So we're very much prepared to operate in an environment where 90% of the production goes to the GSEs like we saw during the Obama administration. Or we see GPs increase or continue to increase, thus removing loans from the GSEs in the private label market.
So that's what's really exciting about what's taking place in PMT. Because as we've seen guarantee fees go up, and we've seen credit spreads tighten, the ability to take investor loans and second home loans that we've historically delivered to the GSEs and securitize those has given us the ability to organically create investments for PMT at appropriate returns. And that's how this company was set up to operate. It just took a long time for private label securitization to come back.
We're on pace to do a deal a quarter, and I expect that to continue into the future. But obviously, that's subject to things that we can't control. But I think that the investor loan securitization market is one that we're very excited about.
Similarly, the organization is looking at other investments as well. Our jumbo loan originations between PFSI and PMT are on pace to be over $1 billion in the first quarter of this year. And a lot of those loans are being sold a long, but they're -- my plan is to do a securitization sometime in the first half of this year. And that will create an investment that has -- call it, low to mid-teens as well.
And so as we continue to create investments in the low to mid-teens range, that's going to be very, very important for PMT in its ability to grow. And I'm really -- I've been excited about PMT in a very long time. I just think that we're in a very good position with the work that's been done over the last year and kind of repositioning the assets and the ability to do securitization to play a meaningful role in a market that we would see if the GSE footprint were to continue to shrink.
Having said that, we can have status quo, and PMT will be fine. And I don't see guarantee fees decline. So I feel really good about where we're at and I'm generally -- not generally, I'm very bullish about what the opportunity set is for PMT.
Operator
Trevor Cranston, Citizens JMP.
Trevor Cranston
A bit of a follow-up to the previous comments on the credit opportunities. When you say on slide 6, you're on track for a securitization per month, can you clarify that specifically just related to investor loans? Or would that incorporate other products such as prime jumbo?
And can you guys also maybe talk a little bit about kind of the product set and if there are other things you guys are thinking about for securitization beyond the investor loans and (inaudible)?
David Spector
Yes. Look, we did two investor loans, second one securitization in Q4. We closed our first one of the year today as a matter of fact. And so I feel really good about maintaining that pace of activity. Having said that, we're also looking, as I said, at jumbo loans, which is another asset class under the residential umbrella that I'm really encouraged about.
As I mentioned, we'll do -- my plans to at least do at least one securitization in the first half of this year. I think we also just full disclosure, we PFSI is originating over $300 million a month of closed-end seconds. We've looked at securitizing those loans and retaining investment there.
It doesn't quite achieve our return targets. And so there, it's not on the radar yet. I mean, it's not on the radar, obviously, but it's not something that I see as an opportunity in the first half of this year. And the only asset class, that we're starting to look at a little bit as non-QM, particularly the prime non-QM where we kind of are intrigued about the returns there, but there's a lot of work to be done there before we do anything in that market.
But it's really -- it's a testament to the organization that in PMT, that they've built out this enterprise that can value and price and understand all of the different assets that they can invest in, and it's something that as we see more and more opportunities we're going to seize upon.
As it pertains to agency loans in particular, I mean, look, obviously, if we see guarantee fees go up or low level price adjustments go up, or I don't -- if they don't like high balance loans and they want to put an LLPA on that, obviously, we're going to use our capabilities and our robust best execution engines to optimize for the best execution for PMT.
Operator
Eric Hagen, BTIG.
Jake Katsikas
You have Jake Katsikas on here for Eric. Can you guys share how much liquidity you currently have, including the room you have to borrow more against the MSRs? And what is your most readily available source of liquidity to draw upon as you get closer to the maturity of the unsecured?
Daniel Perotti
Sure. So if you look at the balance sheet in terms of the liquidity that we had, the direct liquidity that we had outstanding at the end of the quarter was about $430 million. In terms of our financing facilities, we have a few hundred million dollars also available to be able to draw against the current collateral that we have outstanding at the end of the quarter.
As we're moving toward the maturity upcoming of -- or the maturity early next year in 2026 of the convertible, we are looking at opportunities as I mentioned in the prepared remarks to access the capital markets to potentially replace that that debt or replace portion of that debt. So we -- a couple of years back, had done a baby bond issuance, that's an area that we would look at, again, potentially accessing the convertible debt markets as we did last year is also something that's available to us.
But as we move through 2025, we will actively be looking at opportunities to add us to the market to offset some of that or to replace some of that maturity that's upcoming next year.
Operator
Doug Harter, UBS.
Douglas Harter
I appreciate you giving us some details around the gain from the non-agency securitization. How should we think about the profitability of that business compared to the traditional conventional correspondent business?
Daniel Perotti
So the gains overall in the correspondent section in terms of the aggregation gains are generally a bit better or help influence the margin of the correspondent business upwards. However, we have been engaged in that business.
And although not necessarily securitizing, selling those loans through whole loan channels for the past few or several quarters, and although that business has been building over time, it's not necessarily going to significantly impact upward versus our historical performance prior to this quarter, the overall margin in the correspondent channel. And I think if you look at our run rate sort of it reflects that.
What we did see in this quarter was actually an improvement in the spreads at which those loans could execute over typical GSE execution. And that was true both in terms of whole loan as well as securitization. And so given that we have been aggregating over a period of time to be able to execute these deals that we've been doing on a month for the past three months that did have a benefit on our overall aggregation pipeline. That's what led to that improvement that we saw or that contribution that we saw to the correspondent channel in this quarter.
But as you can see from our run rate, we don't necessarily expect that same level of contribution in each of the future quarters was a bit more specific to the tightening in that market that we saw in this quarter as we were aggregating.
David Spector
Doug, the really nice part of the investor loans in second homes is that right now, the securitization execution is really strong. But having said that, the bid for home loans is very deep. And many of those investors are holding the loans and not securitizing them. So there's is a pretty robust market away from securitization if you were to see an event in the private label markets that caused spreads to widen rather dramatically.
And then finally, those loans are deliverable to the GSE. And so there is that third avenue. And so it's not like other private label product that we've seen in the past where it's solely reliant on securitization. There's multiple avenues and pads for that product to be delivered.
Operator
And we have no further questions at this time. I would like to turn it back to David Spector for closing remarks.
David Spector
Well, I want to thank everyone for joining us this afternoon. I want to encourage any of you with any additional questions to contact our Investor Relations team by an e-mail or phone, and they're available all every day. And I suppose if you want to follow up with me or Dan, please don't hesitate to reach out. Thank you all for joining. Bye-bye.
Operator
Thank you, presenters. And this concludes today's conference call. Thank you all for participating. You may now disconnect.
