KBRA Assigns Ratings to PMT ISSUER TRUST – FMSR and PMT CO-ISSUER TRUST I - FSMR, MSR Collateralized Notes, Series 2024-VF2 Notes

KBRA assigns a rating of ‘BBB- (sf)’ to the Series 2024-VF2 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 report for the Series 2024-FT1 term notes describes 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-VF2

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-VF2 notes is 85.0%, 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

Positive rating momentum at PMT is unlikely in the intermediate term. A net increase in fixed obligations – debt or preferred – would generally be viewed negatively in the context of the earnings backdrop noted at the time of KBRA’s April 2024 affirmation of the PMT Issuer rating. The interest and fixed charge coverage ratios are adequate for the rating category, but toward the lower end of the range.

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, banks and other 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.

KBRA analyzes many sector- and issuer-specific ESG issues but our analysis is often anchored around three core topics: climate change, with particular focus on greenhouse gas emissions; stakeholder preferences; and cybersecurity. Under environmental, as the effects of climate change evolve and become more severe, issuers are increasingly facing an emerging array of challenges and potential opportunities that can influence financial assets, operations, and capital planning. Under social, the effects of stakeholder preferences on ESG issues can impact the demand for an issuer’s product and services, the strength of its global reputation and branding, its relationship with employees, consumers, regulators, and lawmakers, and, importantly, its cost of and access to capital. Under governance, as issuers continue to become more reliant on technology, cybersecurity planning and information management are necessary for most issuers, regardless of size and industry.

Environmental Factors

Environmental considerations including climate-related risks are embedded in the company’s management practices. The company supports home ownership across the U.S., predominately 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., predominately 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 management team is well regarded within the industry and its track record of supporting homeownership is well documented.

Governance Factors

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Methodologies