KBRA Assigns Ratings to PMT ISSUER TRUST – FMSR and PMT CO-ISSUER TRUST I - FSMR, MSR Collateralized Notes, Series 2024-VF1 Notes
15 Mar 2024 | New York
KBRA assigns a rating of ‘BBB- (sf)’ to the Series 2024-VF1 Variable Funding Notes issued by PMT ISSUER TRUST – FMSR, and PMT CO-ISSUER TRUST I – FMSR, master trust issuers of notes backed by participation certificates evidencing participation interests in MSRs that are created on mortgage loans originated or purchased by Pennymac Corp. (PMC) or acquired by PMC on other mortgage loans included in Fannie Mae MBS or otherwise owned by Fannie Mae or a portion of the cash flows related to certain MSRs from an affiliate. The participation interests represent an undivided interest in a portion of servicing fees payable to PMC as Servicer under the Fannie Mae Lender Contract, the agreement pursuant to which the Servicer performs loan servicing functions and is entitled to retain servicing fees and to collect certain ancillary income in accordance with the Fannie Mae Guide. KBRA’s rating on the notes is primarily dependent upon the rating of PennyMac Mortgage Investment Trust (PMT) (KBRA Rating: BB+/Stable) as repurchase guarantor under a repo facility in support of the MSRs granted by Fannie Mae to PMT’s subsidiary, PMC. Revisions to PMT’s issuer rating will likely result in a commensurate rating movement to the rated notes.
Key Credit Considerations
KBRA’s rating reports for the Series 2018-FT1, Series 2021-FT1 and Series 2022-FT1 term notes for the previously-rated term notes describe the rating rationale which is also generally applicable to the rating for the currently outstanding Variable Funding Notes for a which a rating is now provided, with some distinctions as described herein.
In addition to the VFNs listed above, the following series of notes were also previously issued by the master trust:
Credit Considerations for Variable Funding Notes and Distinguishing Features
Series 2024-VF1
These notes are backed by the same participation interests created in the underlying MSRs that support the previously rated term notes. They are also subject to the same risks presented to the term note holders subject with respect to the priority claims of Fannie Mae under the associated acknowledgment agreement (AA). This may include, without limitation, Fannie Mae’s right to terminate PMC’s rights to the MSRs with or without cause, and the right to sell, or have transferred, the MSRs.
From a credit perspective the VFN stands in a somewhat preferential position relative to the term note holders, as the VFN will be paid down by the issuer to cure periodic borrowing base deficiencies, while the term notes are not paid prior to maturity unless certain events occur. These events include early amortization of the term notes upon events which include breaching minimum portfolio thresholds or market value metrics, exceeding Fannie Mae performance thresholds with respect to delinquency, or other material uncured breach by the Servicer under the Fannie Mae Lender Contract.
The advance rate for the Series 2024-VF1 notes is 90.0%, and it is noted that the higher advance rates associated with Fannie Mae MSRs is consistent with the recovery entitlements of the noteholders pursuant to the Fannie Mae AA. Unlike Ginnie Mae servicing rights in which MSR extinguishment can result in a loss of all MSR proceeds, potential losses to noteholders under the Fannie Mae AA are constrained through use of a Stop Loss Cap formula which limits Fannie Mae’s claim on remaining MSR value.
Rating Sensitivities
A rating upgrade to PMT is not anticipated in the intermediate term. Although not anticipated, in the context of higher interest expense and preferred dividend burdens, rating pressure would most likely emanate from either a) unexpectedly poor performance within the CRT investment book or subordinated retained interest holdings or b) negative operational developments – such as a change in MSR hedge effectiveness – that results in ongoing bottom-line earnings compression (as was the case in both 2020 and 2021 – for various reasons). Additional fixed obligations – debt or preferred – would be viewed negatively in the current earnings backdrop.
ESG Considerations
KBRA typically analyzes Environmental, Social, and Governance (ESG) factors through the lens of how management teams plan for and manage relevant ESG risks and opportunities. More information on KBRA’s approach to ESG risk management in financial institution ratings can be found here. Over the medium-term, financial institutions will need to prioritize ESG risk management and disclosure with the likelihood of expansions in ESG-related regulation and rising investor focus on ESG issues. For supplementary information on risk management and other considerations, please reference the qualitative rating determinants section beginning on page 9 of the PMT Surveillance Report.
Environmental Factors
There were no environmental factors that were key rating drivers, although environmental considerations including climate-related risks are embedded in the company’s management practices. PMT supports home ownership across the U.S., by originating and servicing residential loans guaranteed or insured by the U.S. government or its sponsored enterprises.
Social Factors
PMT supports home ownership across the U.S. by originating and servicing residential loans guaranteed or insured by the U.S. government or its sponsored enterprises. As a top 10 residential lender and loan servicer, PFSI seeks to originate and service loans at the lowest cost, which benefits all of its stakeholders; this includes offering governmentally induced forbearance programs and financial assistance guidance. PFSI, PMT’s external manager, is well regarded within the industry and its record of supporting homeownership is well documented.
Governance Factors
Governance factors that had a significant impact of this rating analysis include a well-regarded management team, diverse board of directors, comprehensive risk management policies and practices, and a history of operational excellence across enterprise. For supplementary information on investment and risk management as well as other governance considerations, please refer to pages 9-11 of the PMT Surveillance Report.
To access rating and relevant documents, click here.