KBRA Affirms Rating for PennyMac Mortgage Investment Trust

KBRA affirms the issuer rating of BB+ with a Stable Outlook for PennyMac Mortgage Investment Trust (NYSE: PMT or “the trust”), a real estate investment trust (REIT) that invests primarily in residential mortgage loans and mortgage related assets. Management of the company’s businesses, including its investment activities, is performed by PennyMac Financial Services, Inc. (NYSE: PFSI), based in Westlake Village, CA.

Key Credit Considerations

PMT’s rating remains anchored by its close association with PFSI, a leading residential mortgage originator and servicer that has demonstrated the ability to manage the cyclical nature of residential finance that stems primarily from interest rate levels and changes, which are key factors that drive loan origination activity and servicing economics.

PMT’s large loan servicing portfolio generates substantial net margins perennially and underpins its consolidated earnings profile. Accounting for associated MSR amortization and valuation adjustments can result in sizeable quarterly earnings volatility, but over time, this variation is moderated by the disciplined interest rate risk hedging approach. In 2024, earnings were impacted by reduced income on CRT investments and negative realized MTM declines on the RMBS portfolio which is financed on repo and used as part of PMT’s overall interest rate hedging approach.

Interest expense coverage on debt (excluding warehouse financing costs) remains low and in 2024 was affected modestly by lower investment income contribution from the CRT book and realized and unrealized losses on the RMBS portfolio. Interest coverage can vary in the shorter term, depending upon the level and changes in interest rates, but will perform more consistently over longer periods.

Consolidated financial leverage (excluding LHS warehouse debt) has stabilized in the 4x area in recent years, commensurate with the ratings, on relatively unchanged balance sheet total assets over the past two years.

KBRA evaluates liquidity and funding as adequate for the ratings and sufficient to meet cash needs, including needs from hedging the MSR in a rising interest rate environment. Sources of liquidity and funding include cash flow from servicing loans and RMBS and other investment portfolios, and the ability to manage investments and borrow further against the MSR assets.

Rating Sensitivities

PMT’s rating is well-positioned at the current level. While not expected, the rating would most likely be revisited if interest rate hedging results of the MSR were to become ineffective for several consecutive quarters, given the importance of loan servicing to its financial profile. Also, further erosion in the consolidated interest coverage ratio or (FCCR on parent only basis) that persists for several quarters could also lead to reconsideration of the rating.

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