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June 21, 2019  

PennyMac Favoring Term CRT-Backed Bonds

PennyMac is changing the way it finances its investments in agency risk-transfer securities.

The Westlake Village, Calif., REIT historically funded those exposures mainly through short-term repurchase contracts. But it eventually plans to phase out that tactic and rely entirely on a bond-issuing vehicle called PMT Credit Risk Transfer Trust that gives it a longer-term source of capital.

The so-called PMTCR program has produced two offerings so far, both backed by repurchase contracts on risk-transfer bonds that PennyMac bought from Fannie Mae under the agency’s L Street Securities banner. Most recently, PennyMac privately placed $638 million of the notes on June 11 with Credit Suisse as underwriter.

Those securities carry an initial term of four years that can be extended by two years. They priced at a spread of 275 bp over Libor.

The first PMTCR deal took place March 29. The $300 million transaction priced at 200 bp over Libor but came with a shorter term, at three years. Even at the second issue’s wider spread, the longer-term nature of the program makes it a more attractive source of funding than the former repo-driven approach, sources said.

To date, PennyMac has bought some $2 billion of L Street securities referencing $50 billion of mortgages. The PMTCR transactions took place some months or years after those purchases.

For its future deals, however, PennyMac hopes to time its purchases of L Street bonds and its sales of PMTCR notes more closely together. That would cut the company’s need for temporary funding — hence, the move away from repo lines — while resulting in a term deal every 6-12 months. “Optimally, [PennyMac] aggregates loans into CRT, Fannie issues the bonds and that same day or the next day [PennyMac] issues term debt against it,” one source said. “We’re not there quite yet, but that’s the goal.”

L Street represents PennyMac’s primary avenue of investing in risk-transfer bonds and, in a twist, gives the REIT exposures to its own loans. The program is modeled on Fannie’s flagship Connecticut Avenue Securities series, which enables the agency to shed the risk associated with pools of recently securitized loans. Where Connecticut Avenue references mortgages from multiple originators, however, L Street is tied exclusively to loans from PennyMac.

In fact, L Street reinsures some 80% of the loans that PennyMac sells to Fannie — encompassing virtually all of the REIT’s 30-year, fixed-rate mortgages with loan-to-value ratios of 97% or less.

PMTCR follows a similar format to a program that PennyMac uses to finance investments in mortgage-servicing rights. The company’s most recent risk-transfer investment encompassed $933 million of L Street securities that priced on June 13 with Credit Suisse as underwriter.