PennyMac Mortgage Investment Trust (PMT) 2012 Q2 法說會逐字稿

Good morning and welcome to PennyMac Mortgage Investment Trust second-quarter earnings conference call.

Before we begin, please take a moment to familiarize yourself with the forward-looking disclaimer on slide two.

Thank you.

I would now like to turn it over to Stan Kurland, PMT's Chairman and Chief Executive Officer.

Stan?

Thank you, Chris.

The second quarter's results demonstrated the significant earnings power of PMT and its potential for future growth.

Both of the Company's business segments, Correspondent Lending and Investment Activity, delivered strong results in the second quarter, leveraging solid operational execution of our manager, PNMAC Capital Management and fulfillment and servicing provider PennyMac Loan Services, to drive double-digit pretax earnings growth.

The Company successfully raised $201 million of new equity capital, immediately deploying the proceeds in accretive investments.

PMT's business model and relationship with PLS and PCM combines the expertise and infrastructure that enables the Company to pursue the many opportunities present in today's mortgage market.

Today I would like to talk to you about our second-quarter results, discuss emerging market trends and touch on PMT's positioning in the current competitive landscape.

Then I will turn it over to Anne McCallion, PMT's CFO, to discuss the quarterly financials in greater detail.

Then David Spector, PMT's President and Chief Operating Officer, will take you through our Investment Activities and discuss how are our distressed portfolio performed during the quarter.

And finally, I would ask Doug Jones, the head of Correspondent Lending group, to discuss the quarterly results for Correspondent, as well as our future growth strategies for that business.

Before we get into the details, let's review PMT's second-quarter highlights.

Net income was $29.6 million in the second quarter, up 55% from the first quarter on revenues of $64.4 million.

Diluted earnings per share reached an all-time high of $0.79, a 22% increase from the first quarter.

Return on equity was 17% for the quarter.

We believe this is particularly notable considering that we raised over $200 million in new equity in the quarter, roughly a third of our market capitalization at that time, demonstrating our ability to quickly and efficiently deploy capital.

The new capital allowed for the purchase of four distressed whole loan pools, provided for continued growth in our Correspondent business and facilitated the pay down of our borrowings under the forward purchase agreements.

All of these activities contributed to PMT's strong quarterly results.

Our Correspondent business continued to perform exceptionally well.

Correspondent purchased activity increased 88% during the quarter to $3.4 billion in total purchases, of which conventional purchases accounted for $1.8 billion.

Our selective client-focused model drives growth through deeper relationships with our Correspondent business partners.

This simply means that we seek to do business with Correspondent sellers who view the relationship with PMT as a partnership that is mutually beneficial to the long-term success of both parties.

Doug will expand on this later in the presentation.

Turning to our activities, we are pleased with the performance of PMT's distressed mortgage loan investments during the quarter with pretax earnings increasing 82% from the first quarter driven by 144% increase in net investment income.

These results were driven by a combination of increased valuation on the loans in the portfolio and strong liquidation activity.

Moreover, we purchased $402 million in UPB of distressed whole loans during the quarter.

The purchases were comprised of $224 million in UPB of non-performing whole loans and $178 million of UPB in reperforming whole loans, which is our largest purchase of reperforming loans thus far.

As we have mentioned in the past, reperforming pools are likely to become more prevalent in the auction process and expand the amount of whole loans available to purchase.

David will go into additional details regarding our strategy around investments and reperforming whole loans, but initial borrower response from this pool has been encouraging, and we will continue to pursue additional reperforming whole loan investments going forward.

The second-quarter results underscore the strength of PMT's business model and our ability to capitalize on opportunities as they emerge.

Our success is occurring at a time when the mortgage markets appear to be showing signs of stabilizing.

Let's turn to slide four and examine a few of the potentially positive indicators.

In the second quarter, we began to see signs of stabilization in home prices generally and in specific areas of the country real improvement.

Indicators of stabilization were evident in the economic data of home values released in the second quarter, in addition to market feedback we received through our own REO and third-party foreclosure liquidation process.

The general sense that housing is nearing the bottom seems to be finding growing consensus among economists, which is a departure from the negative housing forecast we have seen over the last five years.

Some of the recent improvement in housing indicators can be attributed to seasonal factors that typically accompany the spring and summer buying season.

But taken as a whole, it seems that home prices are nearing or have reached the bottom.

The chart on slide four shows the change in the index values from the trough in the post real estate collapse cycle from 2007 to present.

And you can see that all of the cities in the index are above their trough.

Many of these cities have only recently come back above their lows, and some are still below year ago levels.

However, most of the cities in the Case Shiller index have either experienced year-to-date increases in their respective home value index or have seen levels of price declines slow when compared to year ago levels.

Also, it is important to acknowledge that improvement will not be evenly distributed across the country.

Some areas will recover more quickly than others as evidenced by the wide range of values on the chart.

These data points suggest to us that the demand versus supply equation is beginning to find equilibrium, and prices are beginning to stabilize.

Our experience with second-quarter REO and foreclosure sale liquidations suggests that demand increased in the second quarter, and the prices received for these properties were generally higher than the sales of comparable properties in the previous quarter.

Ultimately, price stability is necessary for consumers to feel confident that home values are not going to collapse after they buy a home.

We may not be quite there yet on a national basis as our model still forecasts home declines for some areas in the country into early 2013, and downside risks from weak job markets and slow economic activity are cause for concern.

However, we are hopeful that the housing market will continue to stabilize, and we remain cautiously optimistic about the prospect for home prices as we move into the latter half of 2012.

The recent indications of stabilization in home prices, coupled with low mortgage rates, high levels of affordability and rising rents, all appear to be motivating more people to consider purchasing a home.

Homebuilder sentiment recently reached a four-year high, and pending home sales are picking up, particularly in the Western states.

In fact, 40% of PMTs newly originated correspondent conventional mortgages in the second quarter were for the purpose of purchasing a home, up from 30% in the first quarter.

Also, inventories of new and existing homes for sale are near recent low levels, and anecdotal evidence suggests that reasonably priced homes are well bid, and demand for REOs and foreclosure properties is particularly robust.

An example of this demand is evident in the fact that PMT's third-party foreclosure sales doubled this quarter.

Third-party foreclosure sales are those where the reserve price is met at the foreclosure sale and immediately sold to a third party.

This quarter we saw these types of properties selling at a premium to our current estimated market value with multiple bids.

As I mentioned, the competitive environment in the mortgage market is evolving, and PMT competes with a variety of companies for our Correspondent business, equity capital and investment opportunities.

PMT's competitors range from regional banks to mortgage banking companies and specialty servicers to traditional MBS REITs.

Across this spectrum, we see PMT as uniquely well-positioned to compete effectively and grow.

PMT's distinctive relationship with PCM and PLS provides PMT an advantage in its ability to capitalize on a breadth of market opportunities, while our primary focus on residential mortgage market benefits our ability to more readily identify emerging trends.

PMT's servicer has developed leading specialty servicing capabilities that have delivered PMT a solid track record of attracting investment returns.

PLS's legacy free platform has been developed to focus exclusively on the opportunities in residential mortgage markets as it transitions to what will eventually be the new normal.

Additionally our Correspondent Lending business has become very successful and has positioned PMT to become a top 10 correspondent lender.

The ability to organically grow and replenish our mortgage servicing portfolio with MSRs generated in the slow interest rate environment speaks to PMT's ability through PCM and PLS to capitalize on opportunities in today's market.

Also, we are actively pursuing opportunities in the market for bulk MSR purchases, which would leverage PLS's servicing capabilities and enhance the value to PMT's shareholders.

The residential mortgage business is one that our highly experienced leadership team knows very well, and it is our primary focus.

We see many opportunities in the current mortgage market and believe that we have the ideal business model, knowledgeable and experienced people and the right capabilities through PLS and PCM to profitability compete and grow.

I would now like to turn it over to Anne McCallion, PMT's Chief Financial Officer, to discuss the Company's second-quarter results in more detail.

Anne?

Thank you, Stan.

Turning to slide eight, we take a deeper look at the composition of PMT's second-quarter earnings.

PMT recorded net income of $29.6 million or $0.79 per diluted share on net investment income of $64.4 million.

Net income increased 55% from the first quarter of 2012, driven by strong results from PMT's two operating segments, Investment Activities and Correspondent Lending, which delivered pretax income growth of 82% and 17% respectively from the first quarter.

Net gain on investments in the second quarter doubled from the prior period, and the net gain on mortgage loans acquired for sale rose 35% quarter over quarter.

This strong performance was due to continued strong liquidation activity and net improvements in the home price performance in PMT's distressed loan investments portfolio, in addition to significantly higher mortgage lock and purchase volumes in PMT's Correspondent Lending segment.

Negative net servicing fees of $855,000 resulted from a $1.9 million valuation charge on our MSRs due to higher prepayment expectations from a decline in mortgage rates throughout the quarter.

Interest income fell 3% compared to the first quarter of 2012, mostly due to a decline in distressed loan modification activity.

As modifications and nonperforming loans are completed, capitalized interest is recognized.

Since the second quarter had fewer modifications, the interest recognized in the period declined.

Expenses in the second quarter increased primarily as the result of increased Correspondent Lending activities and higher liquidation and loss mitigation activities.

PMT's incurs volume- and activity-based expenses for the services performed on its behalf by its manager and servicing and fulfillment providers, PCM and PLS.

The provision for income tax expense rose, reflecting the solid growth of the Correspondent business; however, the effective tax rate for the quarter was unchanged at 22%.

The Company's Correspondent activities are conducted in PMT's taxable REIT subsidiary where we expect PMT's income tax expense to increase on an absolute dollar basis as this segment's portfolio profits grow.

A significant portion of this tax expense relates to the value of the mortgage servicing rights received pursuant to sales of Correspondent loans and is deferred rather than payable currently.

Let's turn the page and look at PMT's balance sheet and earnings highlights from the quarter.

Mortgage assets increased 42% from the first quarter due to the addition of four distressed mortgage pools with unpaid principal balances totaling $402 million and higher levels of mortgage loans held for sale at quarter-end.

Additionally our MSR asset continues to grow.

While it remains a relatively small portion of total mortgage assets, we anticipate that its growth will continue, and it will become a more significant component of mortgage assets going forward.

A portion of the proceeds from the recent capital raised in May was deployed toward investments in MSRs created from an increasing volume of correspondent conventional mortgages sold, which we see as an attractive investment opportunity.

Next, I would like to discuss net investment income and its notable growth over the past year, resulting from the strong performance of PMT's mortgage investments.

This quarter's record net investment income reflects the solid performance of both business segments.

Liquidation activities rose 24% from the first quarter of 2012, which was largely the result of an increased level of REO sales and short sale activities.

We also saw a doubling of sales to third parties in foreclosure auction during the quarter.

This is notable because the increase in this liquidation path is a result of higher bid prices received at auction and a greater number of bids per property.

David will discuss this in greater detail later on in the presentation.

Turning to the Correspondent segment, total correspondent loan purchases were $3.4 billion in UPB of loans and interest rate lock commitments amounted to $4.6 billion compared to $1.8 billion and $2.3 billion respectively in the first quarter of 2012.

Our total Correspondent purchases conventional loans amounted to $1.8 billion, FHA loans were $1.6 billion and general jumbo loans were $2.6 million.

Pretax income attributable to the Correspondent Lending segment was $12 million for the quarter, primarily driven by an $18 million net gain on mortgage loans acquired for sale and $3.2 million of interest income.

On slide 10, we take a look at the pretax earnings breakdown for the Investment Activities segment.

Total pretax income for PMT was $38 million in the second quarter with $26 million coming from our Investment Activities.

Pretax income for this segment was driven by a significantly higher net investment income, which, as I mentioned earlier, was driven by higher liquidation activity, improved home price performance and better loan attributes.

Liquidation activity includes loan prepayments, REO sales and sales of foreclosed properties to third parties, which all rose during the quarter.

Home price and loan attributes are inputs resulting in valuation adjustments to the portfolio, which flowed through net gain on investments.

The general improvement of loan attributes occurs as loans in the portfolio move closer toward their ultimate resolution.

Home values performed better in the second quarter against earlier projections, which contrasts with the first quarter of 2012 performance when home values decreased more than projected.

Generally home price performance improved in the second quarter against our projections in the regions where PMT has the greatest exposure, primarily California and Florida.

However, the improvement in home price performance in the second quarter was partially offset by our projection of future home prices, which tempered values of our distressed loan portfolio by extending out the recovery period for home prices.

While we are encouraged by recent home price improvements in several areas of the nation, we recognize that volatility will be inherent in home prices for the foreseeable future.

Expenses in this segment rose 13%, primarily due to a rise in servicing expense attending to higher liquidation and loss mitigation activities and increases in due diligence and other fees resulting from portfolio acquisitions in the second quarter.

Turning to the Correspondent Lending segment on slide 11, pretax earnings for the second quarter totaled $12 million, a 17% quarter-over-quarter increase.

Correspondent earnings are driven predominantly by the volume of locks and purchases of conventional loans.

In the second quarter, the volume of loan purchases totaled $3.4 billion, of which $1.8 billion were purchases of conforming loans, a 78% increase from the first quarter of 2012.

Significantly increased Correspondent volume, partially offset by small declines in margins, drove the segment's net gain on mortgage loans acquired for sale to $18 million in the second quarter compared to $13.4 million in the first quarter of 2012.

Interest income from Correspondent Lending was $3.2 million for the second quarter as the growth in production increased the average balance of mortgage loans and inventory compared to the prior quarter.

Loan fulfillment fees paid to PLS reached $7.7 million in the second quarter and are recognized when the loans are sold.

These fees cover a wide array of activities ranging from infrastructure and relationship development through to the processing, quality control, hedging, underwriting, funding, packaging and sale of the loans.

Let's turn to slide 12 for a discussion of the largest driver of the net gain on mortgage loans acquired for sale, the valuation of mortgage servicing rights.

The recognition of the mortgage servicing right asset drives the large portion of the gain on the mortgage loans that PMT acquires for sale.

The MSR value is included in the valuation of the interest rate lock commitments and the inventory of mortgage loans, and MSRs are recorded as a separate asset upon sale of the loan.

In basic terms, the MSRs represent a right to a stream of cash flows over the expected life of the mortgage discounted to present value.

The substantial variables within that calculation are market yield expectations, the estimated life of the loan -- that is how long the cash flows are expected to be received -- the amount of servicing fee retained and estimates of ancillary fee income and expenses.

Beyond the individual mechanics evaluations, average MSR capitalization rates will vary significantly based on variations in product mix.

For example, the characteristics of government and agency product can create significant valuation differences, as well as the mix of 30-year, 15-year and adjustable-rate products.

It is important that the nuances of valuations be considered in context of the underlying pool of loan production when looking at MSR capitalization rates across industry participants.

In the second quarter, PMT capitalized MSRs on conventional mortgage loans sold during the quarter at an average rate of 110 basis points.

The UPB of conventional loans sold during the quarter totaled $1.54 billion, and the weighted average note rate of the loans sold was 4.02%.

For government loan originations, PMT earns a sourcing fee of 3 basis points and interest income for the holding period prior to their sale to PLS.

Servicing originated in the current low rate environment is valuable due to the relatively lower risk of prepayments.

We view the opportunity to build an MSR portfolio in the current environment as a particularly attractive investment, and PMT through PLS and PCM has the capabilities, infrastructure and expertise necessary to prudently grow its Correspondent business while capitalizing on this opportunity.

Let's turn to slide 13 and take a look at PMT's growing portfolio of MSRs in more detail.

As our Correspondent Lending volume continues to grow, the size of PMT's investment in mortgage servicing rights will grow as well.

In the second quarter, the servicing portfolio grew 91% compared to the first quarter of 2012.

With today's rates near historical lows, prepayment risk on current production is also relatively low.

Given that the age of the PMT portfolio is relatively young with most of the purchases occurring in the last three quarters, the majority of the loans in the portfolio have a relatively low coupon.

However, rates on the 30-year fixed rate mortgage declined 33 basis points throughout the second quarter.

The drop in rates resulted in a $1.9 million valuation adjustments due to higher prepayment expectations, which in turn drove an $855,000 negative net loan servicing fees in the second quarter.

We have elected to record MSRs with no grades equal or less than 4.5% using the amortization method under which they are carried at the lower of their amortized cost or fair value or LOCOM.

Under LOCOM, the impairment charge taken in the second quarter is recorded in a valuation allowance account.

Provided that impairment is not deemed to be other than temporary, the amount of the allowance account can be recovered as servicing values increase, which should occur if rates rise.

We account for MSRs with note rates above 4.5% at fair value since we believe the risk profile of those loans differs.

MSRs accounted for at fair value comprise 4% of the total capitalized MSR at June 30, 2012.

Given the higher note rates, these MSRs have a greater potential to gain or lose value as interest rates fluctuate with the resulting gain or loss flowing through current period earnings.

The impact of changes in the value of MSRs carried at fair value can be volatile, and this volatility can be mitigated through the purchase of derivative instruments for hedging purposes.

At present, we are not hedging our MSR asset.

I would now like to turn it over to David Spector, PMT's President and Chief Operating Officer, to go over the operational activities of the second quarter.

Thank you, Anne.

During the second quarter, PCM reviewed approximately $2.5 billion in unpaid principal balance of distressed whole loans.

Overall the flow was strong and steady throughout the quarter with multiple sellers putting pools up for first sale.

We expect this flow to continue to be strong for at least the next 12 months, and it is probable that we see it the going beyond the 12-month horizon.

As we look forward over the next year, we see a pipeline of approximately $15 billion to $20 billion in distressed whole loans that have already been identified by market participants as likely to come up for sale.

This estimation includes both nonperforming and reperforming pools.

We are currently seeing a steady flow of $1 billion to $2 billion of whole loan pools come to market each month from problematic sellers and expect new sellers to enter the market incrementally over the next year.

Current whole loan pricing reflects the strong demand in the marketplace and increased optimism surrounding the stabilization of housing prices.

Sellers have reentered the market on a more consistent basis since the Attorney's General foreclosure settlement in the first quarter.

At present, there is a strong demand for whole loans, which is being met by healthy supply from sellers.

Let's now turn to slide 16 and take a look at PMT's acquisitions during the second quarter.

PMT completed acquisitions of distressed whole loans totaling $402 million in UPB in the second quarter.

Approximately 44% of our acquisitions were reperforming whole loans.

These are loans that were previously modified and have been current for some period of time.

Strategically these loans provide PMT with a cash flowing asset with the potential for greater upside through refinancing or securitization.

The potential for some of these loans to refinance into the FHA's negative equity program is just one example of how PMT through PLS has the potential to realize strong returns from these pools.

However, these loans have been acquired at levels which made calling the loan an attractive investment opportunity, even if a path event is not currently feasible.

As Stan and Anne have discussed, liquidation activity was strong during the quarter.

The next two slides will provide additional details surrounding liquidation of loans in the portfolio.

Let's turn to slide 17 to take a quick look at how the portfolio of whole loans progressed over the quarter.

The portfolio of liquidations rose 24% quarter over quarter and was supported by strong levels of REO and short sales.

REO sales comprised nearly half of the liquidation activity and increased 19% in the quarter.

Loan liquidations, which is comprised of short sales, payoffs and third-party foreclosure sales, totaled nearly $80 million UPB in the second quarter.

One of our preferred liquidation outcomes, the FHA negative equity refinance, improved for the third straight quarter.

PLS continues to dedicate resources towards this particular liquidation path as it provides a positive outcome for borrowers and solid returns for PMT.

As you can see from the chart on the right, with the addition of the four whole loans pools purchased in the second quarter, our portfolio now stands at approximately $1.9 billion in UPB.

Let's turn to slide 18 and to take a closer look at REO sales and third-party foreclosure sales.

Third-party foreclosure sales doubled in the second quarter, indicating strong demand for these properties.

Our evidence suggests that third-party foreclosure sales were up as investors looked to capitalize on the purchase to rental strategy that has become popular in the market today.

Our sales price and REO liquidation as a percent of the estimated market value was the highest that we have seen in some time.

One of the aspects we believe driving these higher values is the lower level of inventories of existing homes.

The months inventory of existing homes has fallen to 6.6 months, which was 9 months a year ago, helping to drive the multiple offer scenarios we are seeing on our listed properties and resulting in improved prices.

Housing inventory has consistently been at these loan levels since 2006, which helps explain the foreclosure sale pricing activity we saw this quarter.

Slide 19 contains a chart we have provided for a number of quarters now and believe that these investors are a quick snapshot of how the loans are progressing through the resolution process.

As you can see, 47% of the loans PMT acquired in the first quarter of 2010 remain in the portfolio, meaning that over half of the portfolio is liquidated over the past two years.

If you exclude the reperforming loans from this ratio, the pool factor for nonperforming loans would be 34%.

These reperforming loans also have the ability to enhance the Company's returns, which can be achieved through sale or securitization of reperforming loans to investors or through refinance.

Borrowers who remain current may eventually qualify for the FHA's negative equity refinance program, which would make the loan immediately salable.

Also, reperforming loans provide PMT with a steady cash flow.

For those loans that PLS is not able to modify or bring current, they will continue to work with the borrowers to progress them through a resolution path.

I would now like to turn it over to Doug Jones to go over our Correspondent operations.

Doug?

Thanks, David.

The Correspondent landscape is going through a transformation as most of the big banks who have been the market leaders in the channel for many years are exiting or materially reducing their volumes.

This market change is primarily due to pending implementation of Basel III capital requirements, operational complexities and reform claims.

Many of these banks have shifted their focus to the retail channels.

This is creating an opportunity for non-bank financial intermediaries such as PMT to fill the resulting void.

We are taking a differentiated approach to this opportunity and being very selective in our business partner approval.

Our client-focused model drives a mutually beneficial and meaningful relationship with each of our Correspondent customers.

We believe that most of our customer base will continue to take market share and increase our opportunity to grow within this selected customer base.

In response to increasing demand from business partners on the East Coast, PLS, which serves as PMT's perform provider and servicer and the entity where corresponding operations reside, has opened an operations facility in Tampa, Florida.

This facility will house fulfillment personnel and allow us to provide a more efficient level of service to our Eastern and Central time zone customers and thus expand our footprint with these new customers.

The Correspondent Lending group has delivered outstanding results to date, and that trend continued in the second quarter.

Loan purchased volumes during the quarter eclipsed $3.4 billion with conventional purchases comprising $1.8 billion of that amount.

Our jumbo production continues to be minimal; however, we have the full capabilities in place to purchase significant volumes of jumbo loans as market demand returns.

Our business partners continue to grow with over 117 customers across the country, and they continue to build operations with employee count of over 166 COG employees in our Moorpark headquarters facility and 40 in our new Tampa facility.

It is important to mention that we have maintained a high quality credit standard on our borrowers as we have scaled our volume.

This is evident from the credit profiles statistics we provide on the bottom right portion of slide 21.

Now let's turn to slide 22 and see how our volume has grown over the past year.

As I previously mentioned, Correspondent purchases were $3.4 billion in the second quarter and locks totaled $4.6 billion.

Conventional funding volume reached $1.8 billion with locks totaling $2.7 billion.

Solid growth of the Correspondent volume reflects the client-focused business model that I mentioned earlier.

This has been instrumental in allowing our business to grow at its current pace.

July results look to continue PMT's Correspondent growth with purchases coming in at approximately $1.7 billion and interest rate lock commitments to be at $2.4 billion.

The conventional loan numbers will be just under $1 billion in purchases and $1.4 billion in locks.

Now let's turn to slide 23 and see how we intend to continue growing our Correspondent business.

As we surpassed our target of $1 billion per month in purchases by the end of the second quarter -- and, in fact, we purchase $1.4 billion in the month of June -- we are currently targeting $2 billion per month by the end of the third quarter and prepared to continue to grow our volume in a prudent and measured fashion.

Our new operations facility in Tampa expands our geographic footprint and should enable us to expand our Correspondent customer base.

As we continue to grow the Correspondent business, PMT benefits from the variable cost structure that it is afforded due its affiliation with PLS.

With infrastructure growth to handle increasing volumes occurring, PLS/PMT is afforded greater flexibility and scale.

PLS continues to build out operations as it has over the past two years with ongoing enhancements to the workforce, workflows, systems, facilities and capabilities.

We continue to pursue additional business partners and to grow our share with existing customers, while also expanding our product menu.

We have also begun to do beta testing in our warehouse lending business and expect to continue building that business prudently and methodically much like we did our Correspondent Lending business.

In summary, PLS and PCM, we are pursuing an ongoing growth in our Correspondent business to support the growing demand for a non-bank mortgage intermediary with the operational capabilities and experience that PMT brings.

And now, Stan, I will turn it back to you for the wrapup.

Thanks, Doug.

I would like to briefly review the key takeaways from the quarter.

PMT's second-quarter results demonstrate the strength of its business model and strategy, as well as the solid operational execution of both PCM and PLS.

Both of our business segments delivered record pretax earnings as they continue to grow their asset bases.

Our Correspondent business continues to increase purchase volume and the servicing portfolio as it builds its business partner relationships.

As that segment moves ahead, the continued and growing relationships with our business partners will help to ensure steady and reliable growth.

Our Investment Activities continued to deliver solid returns with both their liquidation activities, as well as their modification activities.

We continue to remain opportunistic in this market for new pools.

And, as David described earlier, we see a healthy pipeline of $15 billion to $20 billion of UPB coming to the market over the next 12 months.

As we look ahead, there are significant opportunities in the market.

In fact, we are seeing more opportunities today than we have at any time over the past three years.

We believe that we are in the midst of a unique window of opportunity for the mortgage market and believe that PMT is well positioned to capitalize on those opportunities.

Thank you.

This concludes the PennyMac Mortgage Investment Trust second-quarter earnings conference call.

For any questions, please visit our Investor Relations website at www.pennymac-reit.com or contact our Investor Relations Department at 818-224-7028.

Thank you.