# Dear Fellow Shareholders

_Source: `DeepSeekOCR_Ardian_pruned_1k/real-estate-reit-mortgage/NYSE_PMT_2021/NYSE_PMT_2021.mmd` · pages 2-8_

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Dear Fellow Shareholders,

All-time low interest rates and all-time high home prices in 2021 resulted in differing performance across PMT's investment strategies. While the macro environment helped PMT deliver strong performance in its credit sensitive strategies and correspondent production business, historically-low rates combined with significant rate volatility led to fair value declines in its interest rate sensitive strategies. Accommodative policy from the Federal Reserve in response to COVID-19 drove a continuation of near-record low mortgage rates during the year, spurring the largest wave of mortgage refinance originations in history. Combined with strong demand for purchase mortgages, Inside Mortgage Finance estimated the origination market totaled a record \(4.8 trillion dollars in unpaid principal balance (UPB) in 2021. While beneficial for PMT's industry-leading correspondent production business, persistently low mortgage rates drove expectations for prolonged higher prepayment activity, contributing to declines in the fair value of PMT's mortgage servicing rights (MSRs). For the full year, PMT earned \)26.0 million in net income attributable to common shareholders, or \(0.26 per common share. While these results were down slightly from 2020, PMT's performance relative to peers remained strong. PMT declared and paid dividends of \)1.88 per share for the year, or \(0.47 per share each quarter making PMT one of the only mortgage REITs that has seen its quarterly dividend return to pre-COVID levels. Similarly, PMT's year-end book value of \)19.05 \( ^{1} \)  represented approximately 90 percent of its pre-COVID level, well-ahead of many in its peer group. I am even more proud of the total return PMT has delivered to shareholders over the long-term, which remains well-ahead of comparable mortgage REIT indices.

PMT is unique among mortgage REITs, using its position as a leading producer of conventional mortgage loans to organically create new investments. In the record mortgage origination market this past year, PMT acquired a total of \(175 billion in UPB of mortgage loans through its correspondent production business, more than double the volume of the next largest market participant. \)110 billion in UPB of our production in 2021 was conventional loans, from which PMT created nearly \(1.6 billion of new interest rate and credit sensitive investments. Notably, PMT began investing in the subordinate bonds from the securitizations of certain Agency-eligible loans secured by investment properties from its own correspondent production, adding investments to its credit sensitive strategies.

As we turn to 2022, rising inflation and changes in monetary policy are contributing to a meaningful and rapid increase in mortgage rates. Refinance volumes have declined significantly and leading economists are currently forecasting a total origination market of $3.0 trillion in 2022, approximately two-thirds of which is expected to be purchase money loans. While an origination market of this size would be above the historical average, the overall speed and size of the reduction in demand for mortgages has led to significant excess capacity in the industry, creating heightened competition among market participants, including the government-

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sponsored enterprises (GSEs). Further, the HFFA and other regulators have made it clear that regulatory requirements are increasing for non-bank mortgage lenders and servicers as their overall share has grown meaningfully over the last several years.

PMT, enabled by its synergistic partnership with its manager and services provider PennyMac Financial Services, Inc. (NYSE:PFSI), has a demonstrated track record of performance across different cycles and I believe we are well-positioned to address the evolving mortgage market. The investments made by PFSI in people, technology, process and risk management practices provide PMT with the most efficient correspondent platform. Additionally, PMT's nearly 800 correspondent sellers have historically over-indexed the purchase market, positioning us well to succeed in a smaller but more purchase-focused market.

This management team has a proven track record of successfully investing in and managing credit assets over the long term and we believe PMT remains well-positioned to continue organically creating new credit investments as the mortgage market evolves in 2022. The success of our credit investments is driven by PFSI's fulfillment operation which ensures the continued high quality of PMT's loan production, alongside the servicing relationship it has with borrowers underlying PMT's investments to positively influence outcomes that result from hardships or potential credit events. With respect to PMT's current investments in GSE credit risk transfer (CRT), this alignment of interests proved to be a strategic advantage as we leveraged PFSI's infrastructure and proprietary servicing system to successfully assist borrowers to emerge from COVID forbearance plans. These proactive loss mitigation efforts throughout the COVID crisis contributed to strong overall performance in PMT's credit sensitive strategies.

PMT had been a leader in unique, lender-risk share transactions where it invested directly in the credit risk associated with its own conventional loan production prior to the program being eliminated by the HFFA in 2020. With a new administration in place, the potential exists for the resumption of certain types of lender risk share transactions and we are encouraged by the active discussions in place with the HFFA, Fannie Mae and Freddie Mac. In addition, the newly issued CRT bonds by Fannie Mae and Freddie Mac have provided additional areas of opportunity for new investments at favorable projected returns.

As previously noted, we began investing in subordinate bonds from securitizations of loans secured by investment properties sourced from PMT's correspondent production business last year. As we look forward, we see that other Agency-eligible products such as second homes and high balance loans may expand this investment opportunity. The GSEs have begun to charge higher fees on these products so that they can focus on the loans that are more closely aligned with their core mission of affordable homeownership. As this evolves, we believe similar opportunities for investments from private label securitizations may result. We expect PMT to participate meaningfully, given its scale and leadership position in correspondent production.

Though PMT's interest rate strategies have underperformed in recent years, we remain steadfast in our expectations for returns from these investments over the long term. Because PMT's MSR portfolio is now largely composed of new, conventional, low note-rate mortgages, we expect strong performance in a higher rate environment as prepayments return to more normalized levels, leading to more stability in performance. In addition, delinquency levels for conventional loans have nearly returned to pre-COVID levels and we do not expect a meaningful

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increase due to the strength of the American economy and extraordinary home price appreciation seen across the country in recent years.

In closing, while we expect 2022 will be a year of transition, we believe PMT is well-positioned with expertise in correspondent loan acquisitions, private-label securitization and managing investments related to the U.S. housing market to provide strong risk-adjusted returns over the longer term. This management team remains disciplined in its investment focus and risk management activities. I thank you, our shareholders, for your continued trust and confidence in PMT.

Sincerely,

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David A. Spector
Chairman and Chief Executive Officer
April 13, 2022