Edgar Filing: PennyMac Mortgage Investment Trust

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Form 10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

Form 10-Q

(Mark One)

x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2012

¨	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission file number: 001-34416

PennyMac Mortgage Investment Trust

(Exact name of registrant as specified in its charter)


Maryland		27-0186273
(State or other jurisdiction of incorporation or organization)		(IRS Employer Identification No.)

6101 Condor Drive, Moorpark, California		93021
(Address of principal executive offices)		(Zip Code)

(818) 224-7442

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act (Check one):

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act): Yes ¨ No x

Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date.


Class		Outstanding at August 2, 2012
Common Shares of Beneficial Interest, $0.01 par value		41,466,369

PENNYMAC MORTGAGE INVESTMENT TRUST

FORM 10-Q

June 30, 2012

TABLE OF CONTENTS


		Page
PART I. FINANCIAL INFORMATION
Item 1.	Financial Statements (Unaudited):		1
	Consolidated Balance Sheets		1
	Consolidated Statements of Income		2
	Consolidated Statements of Changes in Shareholders’ Equity		3
	Consolidated Statements of Cash Flows		4
	Notes to Consolidated Financial Statements		5
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		47
	Observations on Current Market Opportunities		48
	Results of Operations		50
	Net Investment Income		51
	Expenses		63
	Balance Sheet Analysis		66
	Asset Acquisitions		67
	Investment Portfolio Composition		67
	Cash Flows		72
	Liquidity and Capital Resources		73
	Off-Balance Sheet Arrangements and Aggregate Contractual Obligations		77
	Quantitative and Qualitative Disclosures About Market Risk		79
	Accounting Developments
	Factors That May Affect Our Future Results		81
Item 3.	Quantitative and Qualitative Disclosures About Market Risk		84
Item 4.	Controls and Procedures		84
PART II. OTHER INFORMATION
Item 1.	Legal Proceedings		85
Item 1A.	Risk Factors		85
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		85
Item 3.	Defaults Upon Senior Securities		85
Item 4.	Mine Safety Disclosures		85
Item 5.	Other Information		85
Item 6.	Exhibits		86

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

PENNYMAC MORTGAGE INVESTMENT TRUST AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(In thousands, except share data)


	June 30, 2012		December 31, 2011
	(unaudited)
ASSETS
Cash	$	27,970	$	14,589
Short-term investments		32,340		30,319
United States Treasury security		—		50,000
Mortgage-backed securities at fair value		167,446		72,813
Mortgage loans acquired for sale at fair value		460,419		232,016
Mortgage loans at fair value		969,954		696,266
Mortgage loans under forward purchase agreements at fair value		16,881		129,310
Real estate acquired in settlement of loans		89,121		80,570
Real estate acquired in settlement of loans under forward purchase agreements		797		22,979
Mortgage servicing rights:
at lower of amortized cost or fair value		31,547		5,282
at fair value		1,285		749
Principal and interest collections receivable		21,911		8,664
Principal and interest collections receivable under forward purchase agreements		3,004		5,299
Interest receivable		3,610		2,099
Due from affiliates		8,314		347
Other assets		56,146		34,760

Total assets	$	1,890,745	$	1,386,062

LIABILITIES
Assets sold under agreements to repurchase:
Securities	$	157,289	$	115,493
Mortgage loans acquired for sale at fair value		418,019		212,677
Mortgage loans at fair value		412,495		275,649
Real estate acquired in settlement of loans		19,909		27,494
Note payable secured by mortgage loans at fair value		—		28,617
Borrowings under forward purchase agreements		16,693		152,427
Accounts payable and accrued liabilities		24,174		9,198
Contingent underwriting fees payable		5,883		5,883
Payable to affiliates		21,591		12,166
Income taxes payable		9,019		441

Total liabilities		1,085,072		840,045

Commitments and contingencies
SHAREHOLDERS’ EQUITY
Common shares of beneficial interest—authorized, 500,000,000 common shares of $0.01 par value; issued and outstanding, 41,466,369 and 28,404,554 common shares, respectively		415		284
Additional paid-in capital		767,506		518,272
Retained earnings		37,752		27,461

Total shareholders’ equity		805,673		546,017

Total liabilities and shareholders’ equity	$	1,890,745	$	1,386,062

The accompanying notes are an integral part of these consolidated financial statements.

PENNYMAC MORTGAGE INVESTMENT TRUST AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

(In thousands, except per share data)


	Quarter ended June 30,						Six months ended June 30,
	2012			2011			2012			2011
Investment Income
Net gain (loss) on investments:
Mortgage-backed securities	$	706		$	(873	)	$	1,063		$	(1,315	)
Mortgage loans		27,286			22,951			38,417			33,283

		27,992			22,078			39,480			31,968

Interest income:
Short-term investments		47			27			78			58
Mortgage-backed securities		1,011			982			1,585			2,068
Mortgage loans		14,944			6,961			30,764			12,047

		16,002			7,970			32,427			14,173

Net gain on mortgage loans acquired for sale		18,046			40			31,416			123
Results of real estate acquired in settlement of loans		2,571			86			6,288			1,175
Net loan servicing fees		(855	)		6			(658	)		3
Other		650			43			2,102			64

Net investment income		64,406			30,223			111,055			47,506

Expenses
Loan fulfillment fees		7,715			61			13,839			73
Interest		6,703			2,970			13,377			5,248
Loan servicing		5,036			3,483			9,972			5,786
Management fees		2,488			1,913			4,292			3,462
Compensation		1,744			1,250			3,045			2,264
Professional services		1,186			1,115			1,628			1,992
Other		1,559			1,429			2,352			2,393

Total expenses		26,431			12,221			48,505			21,218

Income before provision for income taxes		37,975			18,002			62,550			26,288
Provision for income taxes		8,406			1,385			13,923			2,026

Net income	$	29,569		$	16,617		$	48,627		$	24,262

Earnings per share
Basic	$	0.80		$	0.59		$	1.46		$	0.96
Diluted	$	0.79		$	0.59		$	1.46		$	0.96
Weighted-average shares outstanding
Basic		36,922			27,778			32,999			24,874
Diluted		37,208			28,096			33,253			25,142
Dividends declared per share	$	0.55		$	0.42		$	1.10		$	0.42

The accompanying notes are an integral part of these consolidated financial statements.

PENNYMAC MORTGAGE INVESTMENT TRUST AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

(Unaudited)

(In thousands, except share data)


	Number of shares		Par value		Additional paid-in capital			Retained earnings			Total
Balance at December 31, 2010		16,832,343	$	168	$	317,175		$	2,570		$	319,913
Net income		—		—		—			24,262			24,262
Share-based compensation		5,900		—		1,664			—			1,664
Cash dividends declared, $0.42 per share		—		—		—			(11,673	)		(11,673	)
Proceeds from offerings of common shares		10,953,500		110		197,052			—			197,162
Underwriting and offering costs		—		—		(8,404	)		—			(8,404	)

Balance at June 30, 2011		27,791,743	$	278	$	507,487		$	15,159		$	522,924

Balance at December 31, 2011		28,404,554	$	284	$	518,272		$	27,461		$	546,017
Net income		—		—		—			48,627			48,627
Share-based compensation		88,399		—		2,192			—			2,192
Cash dividends declared, $1.10 per share		—		—		—			(38,336	)		(38,336	)
Proceeds from offerings of common shares		12,973,416		131		248,266			—			248,397
Underwriting and offering costs		—		—		(1,224	)		—			(1,224	)

Balance at June 30, 2012		41,466,369	$	415	$	767,506		$	37,752		$	805,673

The accompanying notes are an integral part of these consolidated financial statements.

PENNYMAC MORTGAGE INVESTMENT TRUST AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(In thousands)


	Six months ended June 30,
	2012			2011
Cash flows from operating activities
Net income	$	48,627		$	24,262
Adjustments to reconcile net income to net cash used by operating activities:
Net (gain) loss on mortgage-backed securities at fair value		(1,063	)		1,315
Net gain on mortgage loans at fair value		(38,417	)		(33,283	)
Accrual of unearned discounts on mortgage-backed securities at fair value and capitalization of interest on mortgage loans at fair value		(13,249	)		(1,374	)
Net gain on mortgage loans acquired for sale at fair value		(31,417	)		(123	)
Results of real estate acquired in settlement of loans		(6,288	)		(1,175	)
Change in fair value and amortization of mortgage servicing rights		3,011			(3	)
Amortization of credit facility commitment fees		1,268			681
Accrual of costs related to forward purchase agreements		3,255			—
Share-based compensation expense		2,192			1,664
Purchases of mortgage loans acquired for sale at fair value		(5,370,540	)		(74,370	)
Sales of mortgage loans acquired for sale at fair value		5,138,892			59,488
Increase in principal and interest collections receivable		(13,247	)		(6,384	)
Decrease in principal and interest collections receivable under forward purchase agreements		2,295			—
Increase in interest receivable		(1,511	)		(1,361	)
Increase in due from affiliates		(7,967	)		(5,093	)
Increase in other assets		(6,112	)		(1,991	)
Increase (decrease) in accounts payable and accrued liabilities		4,698			(10,019	)
Increase in payable to affiliates		9,425			5,787
Increase in income taxes payable		8,578			662

Net cash used by operating activities		(267,570	)		(41,317	)

Cash flows from investing activities
Net increase in short-term investments		(2,021	)		(38,633	)
Maturity of United States Treasury security		50,000			—
Purchases of mortgage-backed securities at fair value		(112,211	)		—
Repayments of mortgage-backed securities at fair value		21,257			34,165
Sales of mortgage-backed securities at fair value		—			3,345
Purchases of mortgage loans at fair value		(260,595	)		(360,403	)
Repayments of mortgage loans at fair value		84,564			55,203
Sales of mortgage loans at fair value		—			2,518
Repayments of mortgage loans under forward purchase agreements at fair value		14,040			—
Purchases of real estate acquired in settlement of loans		(48	)		(1,510	)
Sales of real estate acquired in settlement of loans		65,386			29,321
Sales of real estate acquired in settlement of loans under forward purchase agreements		9,914			—
Purchases of mortgage servicing rights		(29	)		—
Sales of mortgage servicing rights		104			—
Decrease (increase) in margin deposits and restricted cash		(5,721	)		4,758

Net cash used by investing activities		(135,360	)		(271,236	)

Cash flows from financing activities
Sales of securities under agreements to repurchase		706,966			822,934
Repurchases of securities sold under agreements to repurchase		(665,170	)		(853,158	)
Sales of loans under agreements to repurchase		5,125,421			218,737
Repurchases of loans sold under agreements to repurchase		(4,809,806	)		(103,956	)
Sales of real estate acquired in settlement of loans financed under agreement to repurchase		10,753			7,808
Repurchases of real estate acquired in settlement of loans financed under agreements to repurchase		(18,338	)		—
Repayments of note payable secured by mortgage loans at fair value		(2,044	)		—
Repayments of borrowings under forward purchase agreements		(140,307	)		—
Proceeds from issuance of common shares		248,397			197,162
Payment of underwriting and offering costs relating to issuance of common shares		(1,224	)		(8,404	)
Payment of dividends		(38,337	)		(11,673	)

Net cash provided by financing activities		416,311			269,450

Net increase in cash		13,381			(43,103	)
Cash at beginning of period		14,589			45,447

Cash at end of period	$	27,970		$	2,344

The accompanying notes are an integral part of these consolidated financial statements.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 1—Organization and Basis of Presentation

PennyMac Mortgage Investment Trust (“PMT” or the “Company”) was organized in Maryland on May 18, 2009, and began operations on August 4, 2009, when it completed its initial offerings of common shares of beneficial interest (“shares”). The Company is a specialty finance company, which, through its subsidiaries (all of which are wholly-owned), invests primarily in residential mortgage loans and mortgage-related assets.

The Company is externally managed by an affiliate, PNMAC Capital Management, LLC (“PCM” or the “Manager”), an investment adviser registered with the Securities and Exchange Commission (the “SEC”) that specializes in and focuses on residential mortgage loans. Under the terms of a management agreement, PCM is paid a management fee with a base component and a performance incentive component. Determination of the amount of management fees is discussed in Note 3—Transactions with Related Parties.

The Company’s objective is to provide attractive risk-adjusted returns to its investors over the long-term, principally through dividends and secondarily through capital appreciation. The Company intends to achieve this objective largely by investing in distressed mortgage assets and acquiring, pooling, securitizing or selling newly originated prime credit quality residential mortgage loans (“correspondent lending”).

The Company operates two segments: investment activities and correspondent lending. The investment activities segment focuses on mortgage assets that are acquired and held for investment purposes and the correspondent lending segment focuses on the purchase for resale of newly originated mortgage loans.

The investment activities segment represents the Company’s investments in distressed mortgage loans, real estate acquired in settlement of loans (“REO”), mortgage-backed securities (“MBS”) and mortgage servicing rights (“MSRs”). Management seeks to maximize the value of the distressed mortgage loans acquired by the Company through proprietary loan modification programs, special servicing and other initiatives focused on keeping borrowers in their homes. Where this is not possible, such as in the case of many nonperforming mortgage loans, the Company seeks to effect property resolution in a timely, orderly and economically efficient manner, including through the use of resolution alternatives to foreclosure.

The correspondent lending segment represents the Company’s operations aimed at serving as an intermediary between mortgage lenders and the capital markets by purchasing, pooling and reselling newly originated prime credit quality mortgage loans either directly or in the form of MBS, using the services of the Manager.

The Company believes that it qualifies, and has elected to be taxed, as a real estate investment trust (“REIT”) under the Internal Revenue Code of 1986, as amended (the “Internal Revenue Code”), beginning with its taxable period ended on December 31, 2009. To maintain its tax status as a REIT, the Company plans to distribute at least 90% of its taxable income in the form of qualifying distributions to shareholders.

The Company conducts substantially all of its operations and makes substantially all of its investments through its subsidiary, PennyMac Operating Partnership, L.P. (the “Operating Partnership”), and the Operating Partnership’s subsidiaries. A subsidiary of the Company is the sole general partner, and the Company is the sole limited partner, of the Operating Partnership.

The accompanying consolidated financial statements have been prepared in compliance with accounting principles generally accepted in the United States (“U.S. GAAP”) for interim financial information and with the SEC’s instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, these financial statements and notes do not include all of the information required by U.S. GAAP for complete financial statements. The interim consolidated information should be read together with the Company’s Annual Report on Form 10-K for the year ended December 31, 2011 (the “Annual Report”).

Preparation of financial statements in compliance with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements, and revenues and expenses during the reporting period. Actual results will likely differ from those estimates.

In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included. Operating results for the periods ended June 30, 2012 are not necessarily indicative of the results for the year ending December 31, 2012.

Note 2—Concentration of Risks

As discussed in Note 1—Organization and Basis of Presentation above, PMT’s investing activities are centered in real estate-related assets, a substantial portion of which are distressed at acquisition. Because of the Company’s investment strategy, many of the mortgage loans in its targeted asset class are purchased at discounts reflecting their distressed state or perceived higher risk of default, as well as a greater likelihood of collateral documentation deficiencies. Before the Company buys loans or other assets, PCM validates key information provided by the sellers that is necessary to determine the value of the acquired asset. A substantial portion of the distressed mortgage loans purchased by the Company has been acquired from or through one or more subsidiaries of Citigroup, Inc.

Through its management agreement with PCM and its loan servicing agreement with an affiliated company, PennyMac Loan Services, LLC (“PLS”), PMT works with borrowers to perform loss mitigation activities. Such activities include the use of loan modification programs (such as the U.S. Department of the Treasury and Housing and Urban Development’s Home Affordable Modification Program (“HAMP”)) and workout options that PCM believes have the highest probability of successful resolution for both borrowers and PMT. Loan modification or resolution may include PMT accepting a reduction of the principal balances of certain mortgage loans in its investment portfolio. When loan modifications and other efforts are unable to cure distressed loans, the Company’s objective is to effect timely acquisition and liquidation of the property securing the mortgage loan.

Because of the Company’s investment focus, PMT is exposed, to a greater extent than traditional mortgage investors, to the risks that borrowers may be in economic distress and/or may have become unemployed, bankrupt or otherwise unable or unwilling to make payments when due, and to the effects of fluctuations in the residential real estate market on the performance of its investments. Factors influencing these risks include, but are not limited to:

•

changes in the overall economy, unemployment and residential real estate values in the markets where the properties securing the Company’s mortgage loans are located;

•

PCM’s ability to identify and the Company’s loan servicers’ ability to execute optimal resolutions of problem mortgage loans;

•

the accuracy of valuation information obtained during the Company’s due diligence activities;

•

PCM’s ability to effectively model, and to develop appropriate model assumptions that properly anticipate, future outcomes;

•

the level of government support for problem loan resolution and the effect of current and future proposed and enacted legislative and regulatory changes on the Company’s ability to service and effect cures or resolutions to distressed loans; and

•

regulatory, judicial and legislative support of the foreclosure process, and the resulting impact on the Company’s ability to acquire and liquidate the real estate securing its portfolio of distressed mortgage loans in a timely manner or at all.

Due to these uncertainties, there can be no assurance that risk management activities identified and executed on PMT’s behalf will prevent significant losses arising from the Company’s investments in real estate-related assets.

On July 12, 2011 and December 20, 2011, the Company entered into forward purchase agreements with Citigroup Global Markets Realty Corp. (“CGM”), a subsidiary of Citigroup Inc., to purchase certain nonperforming residential mortgage loans and residential real property acquired in settlement of loans (collectively, the “CGM Assets”). The CGM Assets were acquired by CGM from unaffiliated money center banks. The commitment under the forward purchase commitment dated July 12, 2011 was settled during the quarter ended June 30, 2012. The initial purchase price under the forward commitment dated December 20, 2011 was $22.1 million. The remaining purchase price as of June 30, 2012 is $16.1 million. Remaining subsequent adjustments may increase the purchase price to $16.3 million based on the date the purchase is settled.

The Company also pays CGM a cost of carry on the CGM Assets pending purchase through the date such CGM Assets are ultimately acquired. The Company recognized the assets subject to the transactions and the related liabilities. The CGM Assets are serviced by PLS.

The CGM Assets are included on the Company’s consolidated balance sheet as Mortgage loans under forward purchase agreements at fair value and Real estate acquired in settlement of loans under forward purchase agreements and the related liabilities are included as Borrowings under forward purchase agreements. The CGM Assets are being held by CGM within a separate trust entity deemed a variable interest entity. The Company’s interest in the CGM Assets is deemed to be contractually segregated from all other interests in the trust. When assets are contractually segregated, they are often referred to as a “silo.” The silo consists of the CGM Assets and its related liability. The Company directs all of the activities that drive the economic results of the CGM Assets. All of the changes in the fair value and cash flows of the CGM Assets are attributable solely to the Company, and such cash flows can only be used to settle the related liability.

As a result of consolidating the silo, the Company’s consolidated statement of income for the three and six months ended June 30, 2012 includes net gain on mortgage loans of $2.5 million and $9.2 million, interest income on mortgage loans of $348,000 and $0.8 million, interest expense of $0.8 million and $2.3 million and loan servicing fees of $460,000 and $1.0 million in each case attributable to the CGM Assets. The Company received repayments of mortgage loans totaling $5.3 million and $14.0 million and repaid borrowings under the forward purchase agreements totaling $113.2 million during the three and six months ended June 30, 2012. The Company has no other variable interests in the trust entity, or other exposure to the creditors of the trust entity which could expose the Company to loss.

During the six months ended June 30, 2011, the Company purchased $260.6 million of mortgage loans at fair value and real estate acquired in settlement of loans for its investment portfolio. All of the $260.6 million was purchased from or through one or more subsidiaries of Citigroup, Inc.

Beginning in the fourth quarter of 2011, the Company’s correspondent lending activities have been experiencing substantial growth. As a result of such growth, the Company’s correspondent lending segment contributed approximately 32% of PMT’s pre-tax income during the six months ended June 30, 2012 and the inventory of mortgage loans acquired for sale at fair value represented approximately 25% of the Company’s investments at June 30, 2012.

Correspondent lending activities introduce different risks from those posed by investments in distressed assets. The Company’s correspondent lending activities and the MSRs that are held in the Company’s investment segment that the Company receives as proceeds from such correspondent lending sales are more sensitive to the level and volatility of interest rates. For example, a decline in mortgage rates generally increases the demand for home loans as borrowers refinance, but also generally leads to accelerated payoffs in the Company’s mortgage servicing portfolio, which have a negative effect on the value of MSRs.

Management attempts to manage the sensitivity of earnings to the changes in market interest rates through the use of derivative financial instruments to moderate the effects of changes in the level and volatility of interest rates on the fair value of the Company’s inventory of mortgage loans acquired for sale at fair value and commitments to purchase mortgage loans for sale. The Company does not presently use derivative financial instruments to moderate the effects on PMT’s earnings of changes in the fair value of its investment in MSRs.

The success of the Company’s interest rate risk management strategies depends in part on management’s ability to predict the earnings sensitivity of its loan servicing and loan production operations in various interest rate environments. There are many market factors that affect the performance of the Company’s interest rate risk management activities including interest rate volatility, the shape of the yield curve and the spread between mortgage interest rates and United States Treasury or swap rates. The success of this strategy affects PMT’s net income and the effect can be either positive or negative, and can be material to the Company.

The correspondent lending segment’s ability to sell loans profitably is affected by many factors, including the relative demands for such loans and MBS evidencing interests in such loans, the cost of credit enhancements and interest rate risk management, investor perceptions of such loans and MBS and the risks posed by such products.

Note 3—Transactions with Related Parties

The Company is managed externally by PCM under the terms of a management agreement that expires on August 4, 2012 and will be automatically renewed for a one-year term on the date thereof and each anniversary date thereafter unless previously terminated. The management agreement provides for an annual review of PCM’s performance under the management agreement by the Company’s independent trustees. PMT’s board of trustees reviews the Company’s financial results, policy compliance and strategic direction.

As more fully described in the Company’s Annual Report, certain of the underwriting costs incurred in the Company’s initial public offering (“IPO”) were paid on PMT’s behalf by PCM and a portion of the underwriting discount was deferred by agreement with the underwriters of the offering. PMT will reimburse PCM the underwriting costs as discussed in Note 25—Shareholders’ Equity.

PMT pays PCM a base management fee and may pay a performance incentive fee, both payable quarterly and in arrears.

Following is a summary of management fee expense and the related liability recorded by the Company for the periods presented:


	Quarter ended June 30,						Six months ended June 30,
	2012			2011			2012			2011
	(in thousands)
Base management fee	$	2,488		$	1,913		$	4,292		$	3,462
Performance incentive fee		—			—			—			—

Total management fee incurred during the period		2,488			1,913			4,292			3,462
Fee paid during the period		(1,777	)		(1,549	)		(2,872	)		(2,777	)
Fee outstanding at beginning of period		1,804			1,549			1,095			1,228

Fee outstanding at period end	$	2,515		$	1,913		$	2,515		$	1,913

The management fees are more fully described in Note 4—Transactions with Related Parties to the Company’s Annual Report. Effective May 16, 2012, the Company amended its management agreement with PCM to change the way shareholders’ equity is measured for purposes of calculating the base component of its management fee. Previously, the measure of shareholders’ equity excluded unrealized gains, losses or other non-cash items reflected in the Company’s financial statements. The management agreement was amended to

base the management fee on shareholders’ equity computed using US GAAP. The method of measuring the performance incentive fee was not changed. The purpose of the amendment was to better align the Manager’s base management fee with the Company’s investment strategy, which, in the pursuit of attractive investment opportunities, has evolved to include nonperforming mortgage loans that generate unrealized gains and correspondent lending activity that produces non-cash income through the retention of mortgage servicing rights created in the sales transactions. The amendment is expected to increase the amount of the base management fee payable by the Company to the Manager.

The Company, through its Operating Partnership, also has a loan servicing agreement with PLS. Servicing fee rates are based on the risk characteristics of the mortgage loans serviced and total servicing compensation is established at levels that management believes are competitive with those charged by other servicers or specialty servicers, as applicable.

Servicing fee rates for nonperforming loans are expected to range between 30 and 100 basis points per year on the unpaid principal balance of the mortgage loans serviced on the Company’s behalf. PLS is also entitled to certain customary market-based fees and charges, including boarding and deboarding fees, liquidation and disposition fees, assumption, modification and origination fees and late charges, as well as interest on funds on deposit in custodial accounts. In the event PLS either effects a refinancing of a loan on the Company’s behalf and not through a third party lender and the resulting loan is readily saleable, or originates a loan to facilitate the disposition of real estate that the Company has acquired in settlement of a loan, PLS is entitled to receive market-based fees and compensation from the Company.

PLS, on behalf of the Company, currently participates in HAMP (and other similar mortgage loan modification programs), which establishes standard loan modification guidelines for “at risk” homeowners and provides incentive payments to certain participants, including loan servicers, for achieving modifications and successfully remaining in the program. The loan servicing agreement entitles PLS to retain any incentive payments made to it and to which it is entitled under HAMP; provided, however, that with respect to any such incentive payments paid to PLS under HAMP in connection with a mortgage loan modification for which the Company previously paid PLS a modification fee, PLS shall reimburse the Company an amount equal to the lesser of such modification fee or such incentive payments.

In connection with the mortgage servicing rights acquired in the Company’s correspondent lending business, through which the Company acquires mortgage loans originated by correspondent lenders for resale to the government-sponsored agencies such as the Federal National Mortgage Association (“Fannie Mae”) or securitization through Government National Mortgage Association (“Ginnie Mae”) (Fannie Mae and Ginnie Mae are each referred to as an “Agency” and, collectively, as the “Agencies”) and other investors, PLS is entitled to base subservicing fees, which range from 5 to 20 basis points per year of the unpaid principal balance of such loans, and other customary market-based fees and charges as described above.

Pursuant to the terms of a mortgage banking services agreement, PLS also provides certain mortgage banking services, including fulfillment and disposition-related services, to the Company for a fulfillment fee based on a percentage of the unpaid principal balance of the mortgage loans to be sold to non-affiliates where the Company is approved or licensed to sell to such non-affiliate. The fulfillment fee for such services is currently 50 basis points. During the quarter and six months ended June 30, 2012, the Company recorded fulfillment fees totaling $7.7 million and $13.8 million, respectively. During the quarter and six months ended June 30, 2011, the Company recorded fulfillment fees totaling $61,000 and $73,000, respectively.

The Company collects interest income and a sourcing fee of three basis points for each mortgage loan it purchases from a correspondent and sells to PLS for ultimate disposition to a third party where the Company is not approved or licensed to sell to such third party. During the six months ended June 30, 2012 and 2011, the Company sold loans to PLS with unpaid balances totaling approximately $2.4 billion and $38.3 million and received sourcing fees totaling approximately $701,000 and $12,000, respectively. The Company held mortgage loans pending sale to PLS with unpaid balances totaling approximately $95.9 million and $44.2 million at June 30, 2012 and December 31, 2011, respectively.

The Company paid servicing and other fees to PLS as described above and as provided in its loan servicing agreement and recorded other expenses, including common overhead expenses incurred on its behalf by PCM and its affiliates, in accordance with the terms of its management agreement. Following is a summary of those expenses for the periods presented:


	Quarter ended June 30,				Six months ended June 30,
	2012		2011		2012		2011
	(in thousands)
Loan servicing fees payable to PLS	$	5,036	$	3,313	$	9,972	$	5,519
Fulfillment fees payable to PLS		7,715		61		13,839		73
Reimbursement of expenses incurred on PMT’s behalf		2,055		911		3,261		1,170
Reimbursement of common overhead incurred by PCM and its affiliates		882		942		1,268		1,529

	$	15,688	$	5,227	$	28,340	$	8,291

Payments during the period	$	11,014	$	4,997	$	16,859	$	6,203

Amounts due to affiliates are summarized below as of the dates presented:


	June 30, 2012		December 31, 2011
	(in thousands)
Contingent offering costs	$	2,941	$	2,941
Management fee		2,515		1,096
Other expenses		13,450		8,129
Correspondent lending pass-through items		2,685		—

	$	21,591	$	12,166

Amounts due from affiliates totaled $8.3 million and $347,000 at June 30, 2012 and December 31, 2011, respectively, and represent amounts receivable pursuant to loan sales to PLS and reimbursable expenses paid on the affiliates’ behalf by the Company.

PCM’s parent company, Private National Mortgage Acceptance Company, LLC, held 75,000 of the Company’s common shares of beneficial interest at both June 30, 2012 and December 31, 2011.

Note 4—Earnings Per Share

Basic earnings per share is determined using net income divided by the weighted-average common shares outstanding during the period. Diluted earnings per share is computed by dividing net income attributable to common shareholders by the weighted-average common shares outstanding, assuming all potentially dilutive common shares were issued. In periods in which the Company records a loss, potentially dilutive common shares are excluded from the diluted loss per share calculation, as their effect on loss per share is anti-dilutive.

The Company makes grants of restricted share units which entitle the recipients to receive dividend equivalents during the vesting period on a basis equivalent to the dividends paid to holders of common shares. For purposes of calculating earnings per share, unvested share-based compensation awards containing non-forfeitable rights to dividends or dividend equivalents (collectively, “dividends”) are classified as “participating securities” and are included in the basic earnings per share calculation using the two-class method. Under the two-class method, all earnings (distributed and undistributed) are allocated to each class of common shares and participating securities, based on their respective rights to receive dividends.

The following table summarizes the basic and diluted earnings per share calculations for the periods presented:


	Quarter ended June 30,						Six months ended June 30,
	2012			2011			2012			2011
	(in thousands, except per share amounts)
Basic earnings per share:
Net income	$	29,569		$	16,617		$	48,627		$	24,262
Effect of participating securities—share-based compensation instruments		(213	)		(224	)		(424	)		(274	)

Net income attributable to common shareholders	$	29,356		$	16,393		$	48,203		$	23,988

Weighted-average shares outstanding		36,922			27,778			32,999			24,874

Basic earnings per share	$	0.80		$	0.59		$	1.46		$	0.96

Diluted earnings per share:
Net income	$	29,569		$	16,617		$	48,627		$	24,262

Weighted-average shares outstanding		36,922			27,778			32,999			24,874
Dilutive potential common shares—shares issuable undershare-based compensation plan		286			318			254			268

Diluted weighted-average number of common shares outstanding		37,208			28,096			33,253			25,142

Diluted earnings per common share	$	0.79		$	0.59		$	1.46		$	0.96

Note 5—Loan Sales

The Company purchases and sells mortgage loans into the secondary mortgage market without recourse for credit losses. However the Company maintains continuing involvement with the loans in the form of servicing or subservicing arrangements and the potential liability under representations and warranties it makes to purchasers and insurers of the loans.

The following table summarizes cash flows between the Company and transferees upon sale of loans in transactions whereby the Company maintains continuing involvement with the mortgage loan and period-end information relating to such loans:


	Quarter ended June 30, 2012		Six months ended June 30, 2012
	(in thousands)
Cash flows:
Proceeds from sales	$	1,819,393	$	2,912,297
Service fees received	$	1,757	$	2,409
Period-end information:
Unpaid principal balance of loans outstanding at period-end	$	2,932,967
Loans delinquent 30-89 days	$	3,897
Loans delinquent 90 or more days or in foreclosure or bankruptcy	$	175

Note 6—Fair Value

The Company’s financial statements include assets and liabilities that are measured based on their estimated fair values. The application of fair value estimates may be on a recurring or nonrecurring basis depending on the accounting principles applicable to the specific asset or liability and whether management has elected to carry the item at its estimated fair value as discussed in the following paragraphs.

Fair Value Accounting Elections

Management identified all of its financial assets, including short-term investments, United States Treasury security, MBS, and mortgage loans as well as its securities sold under agreements to repurchase and its MSRs relating to loans with initial interest rates of more than 4.5% that were acquired as a result of its correspondent lending operations to be accounted for at estimated fair value so such changes in fair value will be reflected in income as they occur and more timely reflect the results of the Company’s investment performance.

For MSRs relating to mortgage loans with initial interest rates of less than or equal to 4.5% that were acquired as a result of the Company’s correspondent lending operations, management has concluded that such assets present different risks to the Company than MSRs relating to mortgage loans with initial interest rates of more than 4.5% and therefore require a different risk management approach. Management’s risk management efforts relating to these assets are aimed at moderating the effects of non-interest rate risks on fair value, such as the effect of changes in home prices on the assets’ values. Management has identified these assets for accounting using the amortization method. Management’s risk management efforts in connection with MSRs relating to mortgage loans with initial interest rates of more than 4.5% are aimed at moderating the effects of changes in interest rates on the assets’ values.

For loans sold under agreements to repurchase subject to agreements made beginning in December 2010, REO financed through agreements to repurchase beginning in June 2011 and borrowings under forward purchase agreements beginning in July 2011, management has determined that historical cost accounting is more appropriate because under this method debt issuance costs are spread over the term of the debt, thereby matching the debt issuance expense to the periods benefiting from the usage of the debt.

Financial Statement Items Measured at Fair Value on a Recurring Basis

Following is a summary of financial statement items that are measured at estimated fair value on a recurring basis as of the dates presented:


	June 30, 2012
	Level 1		Level 2		Level 3		Total
	(in thousands)
Assets:
Short-term investments	$	32,340	$	—	$	—	$	32,340
Mortgage-backed securities at fair value		—		114,285		53,161		167,446
Mortgage loans acquired for sale at fair value		—		460,419		—		460,419
Mortgage loans at fair value		—		—		969,954		969,954
Mortgage loans under forward purchase agreements at fair value		—		—		16,881		16,881
MSRs at fair value		—		—		1,285		1,285
Derivative financial instruments		—		14,682		—		14,682

	$	32,340	$	589,386	$	1,041,281	$	1,663,007

Liabilities:
Securities sold under agreements to repurchase	$	—	$	—	$	157,289	$	157,289
Derivative financial instruments		—		9,030		—		9,030

	$	—	$	9,030	$	157,289	$	166,319


	December 31, 2011
	Level 1		Level 2		Level 3		Total
	(in thousands)
Assets:
Short-term investments	$	30,319	$	—	$	—	$	30,319
United States Treasury security		50,000		—		—		50,000
Mortgage-backed securities at fair value		—		—		72,813		72,813
Mortgage loans acquired for sale at fair value				232,016		—		232,016
Mortgage loans at fair value		—		—		696,266		696,266
Mortgage loans under forward purchase agreements at fair value		—		—		129,310		129,310
MSRs at fair value		—		—		749		749
Derivative financial instruments		—		1,938		—		1,938

	$	80,319	$	233,954	$	899,138	$	1,213,411

Liabilities:
Securities sold under agreements to repurchase	$	—	$	—	$	115,493	$	115,493

	$	—	$	—	$	115,493	$	115,493

The Company’s short-term investments, including United States Treasury securities and cash balances were measured using Level 1 inputs. The Company’s non-Agency MBS, mortgage loans at fair value, mortgage loans under forward purchase agreements at fair value, MSRs and securities sold under agreements to repurchase were measured using Level 3 inputs on a recurring basis. The following is a summary of changes in those items for the periods presented:


	Quarter ended June 30, 2012
	Mortgage- backed securities			Mortgage loans at fair value			Mortgage loans under forward purchase agreements			Mortgage servicing rights			Total
	(in thousands)
Assets:
Balance, March 31, 2012	$	62,425		$	667,542		$	105,030		$	1,188		$	836,185
Purchases		—			260,683			784			—			261,467
Repayments		(9,804	)		(49,865	)		(5,340	)		—			(65,009	)
Sales		—			—			—			(30	)		(30	)
Addition of unpaid interest, impound advances and fees to unpaid balance of mortgage loans		—			4,416			—			—			4,416
Accrual of unearned discounts		29			—			—			—			29
MSRs received as proceeds from sales of mortgage loans		—			—			—			568			568
Changes in fair value included in income arising from:
Changes in instrument-specific credit risk		—			8,227			312			—			8,539
Other factors		511			16,571			2,177			(441	)		18,818

		511			24,798			2,489			(441	)		27,357

Transfer of mortgage loans to REO		—			(21,485	)		—			—			(21,485	)
Transfer of mortgage loans under forward purchase agreements
Transfer of mortgage loans under forward purchase agreements to REO under forward purchase agreements		—			—			(2,217	)		—			(2,217	)
Transfer of mortgage loans under forward purchase agreements to mortgage loans		—			83,865			(83,865	)		—			—

Balance, June 30, 2012	$	53,161		$	969,954		$	16,881		$	1,285		$	1,041,281

Changes in fair value recognized during the period relating to assets still held at June 30, 2012	$	511		$	15,845		$	1,044		$	(441	)	$	16,959

Accumulated changes in fair value relating to assets still held at June 30, 2012	$	(1,777	)	$	75,797		$	1,523


	Securities sold under agreements to repurchase
	(in thousands)
Liabilities:
Balance, March 31, 2012	$	53,068
Changes in fair value included in income		—
Sales		415,052
Repurchases		(310,831	)

Balance, June 30, 2012	$	157,289

Changes in fair value recognized during the period relating to liabilities still outstanding at June 30, 2012	$	—


	Quarter ended June 30, 2011
	Mortgage- backed securities			Mortgage loans at fair value			Mortgage servicing rights		Total
	(in thousands)
Assets:
Balance, March 31, 2011	$	102,195		$	588,036		$	37	$	690,268
Purchases		—			117,275			—		117,275
Repayments		(16,216	)		(39,634	)		—		(55,850	)
Accrual of unearned discounts		660			—					660
Addition of unpaid interest, impound advances and fees to unpaid balance of mortgage loans		—			271			—		271
Sales		(3,345	)		47			—		(3,298	)
MSRs received as proceeds from sales of mortgage loans		—			—			137		137
Changes in fair value included in income arising from:
Changes in instrument-specific credit risk		—			8,047			—		8,047
Other factors		(873	)		14,829			6		13,962

		(873	)		22,876			6		22,009

Transfer of mortgage loans to REO		—			(31,648	)		—		(31,648	)

Balance, June 30, 2011	$	82,421		$	657,223		$	180	$	739,824

Changes in fair value recognized during the period relating to assets still held at June 30, 2011	$	(873	)	$	19,720		$	6	$	18,853

Accumulated changes in fair value relating to assets still held at June 30, 2011	$	(1,033	)	$	39,818


	Securities sold under agreements to repurchase
	(in thousands)
Liabilities:
Balance, March 31, 2011	$	88,065
Changes in fair value included in income		—
Sales		564,982
Repurchases		(582,069	)

Balance, June 30, 2011	$	70,978

Changes in fair value recognized during the period relating to liabilities still outstanding at June 30, 2011	$	—


	Six months June 30, 2012
	Mortgage- backed securities			Mortgage loans at fair value			Mortgage loans under forward purchase agreements			Mortgage servicing rights			Total
	(in thousands)
Assets:
Balance, December 31, 2011	$	72,813		$	696,266		$	129,310		$	749		$	899,138
Purchases		—			260,595			1,070			20			261,685
Repayments		(20,890	)		(84,564	)		(14,040	)		—			(119,494	)
Sales		—			—			—			(30	)		(30	)
Accrual of unearned discounts		363			—			—			—			363
Addition of unpaid interest, impound advances and fees to unpaid balance of mortgage loans		—			13,016			—			—			13,016
Sales		—			—			—			—			—
MSRs received as proceeds from sales of mortgage loans		—			—			—			1,088			1,088
Changes in fair value included in income arising from:
Changes in instrument-specific credit risk		—			17,307			705			—			18,012
Other factors		875			11,828			8,483			(542	)		20,644

		875			29,135			9,188			(542	)		38,656

Transfer of mortgage loans to REO		—			(45,686	)		—			—			(45,686	)
Transfer from mortgage loans acquired for sale		—			18			—			—			18
Transfer of mortgage loans under forward purchase agreements to REO under forward purchase agreements		—			—			(7,473	)		—			(7,473	)
Transfer of mortgage loans under forward purchase agreements to mortgage loans		—			101,174			(101,174	)		—			—

Balance, June 30, 2012	$	53,161		$	969,954		$	16,881		$	1,285		$	1,041,281

Changes in fair value recognized during the period relating to assets still held at June 30, 2012	$	838		$	17,888		$	1,635		$	(542	)	$	19,819

Accumulated changes in fair value relating to assets still held at June 30, 2012	$	(1,777	)	$	75,797		$	1,523


	Securities sold under agreements to repurchase
	(in thousands)
Liabilities:
Balance, December 31, 2011	$	115,493
Changes in fair value included in income		—
Sales		706,966
Repurchases		(665,170	)

Balance, June 30, 2012	$	157,289

Changes in fair value recognized during the period relating to liabilities still outstanding at June 30, 2012	$	—


	Six months ended June 30, 2011
	Mortgage- backed securities			Mortgage loans at fair value			Mortgage servicing rights		Total
	(in thousands)
Assets:
Balance, December 31, 2010	$	119,872		$	364,250		$	—	$	484,122
Purchases		—			360,403			—		360,403
Repayments		(34,165	)		(55,203	)		—		(89,368	)
Accrual of unearned discounts		1,374			—					1,374
Addition of unpaid interest, impound advances and fees to unpaid balance of mortgage loans		—			311			—		311
Sales		(3,345	)		(2,518	)		—		(5,863	)
MSRs received as proceeds from sales of mortgage loans		—			—			177		177
Changes in fair value included in income arising from:
Changes in instrument-specific credit risk		—			14,295			—		14,295
Other factors		(1,315	)		21,508			3		20,196

		(1,315	)		35,803			3		34,491

Transfer of mortgage loans to REO		—			(45,823	)		—		(45,823	)

Balance, June 30, 2011	$	82,421		$	657,223		$	180	$	739,824

Changes in fair value recognized during the period relating to assets still held at June 30, 2011	$	(1,315	)	$	27,339		$	3	$	26,027

Accumulated changes in fair value relating to assets still held at June 30, 2011	$	(1,033	)	$	39,818


	Securities sold under agreements to repurchase
	(in thousands)
Liabilities:
Balance, December 31, 2010	$	101,202
Changes in fair value included in income		—
Sales		822,934
Repurchases		(853,158	)

Balance, June 30, 2011	$	70,978

Changes in fair value recognized during the period relating to liabilities still outstanding at June 30, 2011	$	—

Following are the fair values and related principal amounts due upon maturity of mortgage loans accounted for under the fair value option (including mortgage loans acquired for sale, mortgage loans at fair value and mortgage loans under forward purchase agreements at fair value) as of the dates presented:


	June 30, 2012
	Fair value		Principal amount due upon maturity		Difference
	(in thousands)
Mortgage loans acquired for sale:
Current through 89 days delinquent	$	460,419	$	436,383	$	24,036
90 or more days delinquent (1)		—		—		—

		460,419		436,383		24,036

Other mortgage loans at fair value (2):
Current through 89 days delinquent		404,789		640,472		(235,683	)
90 or more days delinquent (1)		582,046		1,060,478		(478,432	)

		986,835		1,700,950		(714,115	)

	$	1,447,254	$	2,137,333	$	(690,079	)


	December 31, 2011
	Fair value		Principal amount due upon maturity		Difference
	(in thousands)
Mortgage loans acquired for sale:
Current through 89 days delinquent	$	232,016	$	222,399	$	9,617
90 or more days delinquent (1)		—		—		—

		232,016		222,399		9,617

Other mortgage loans at fair value (2):
Current through 89 days delinquent		209,599		345,140		(135,541	)
90 or more days delinquent (1)		615,977		1,184,687		(568,710	)

		825,576		1,529,827		(704,251	)

	$	1,057,592	$	1,752,226	$	(694,634	)

(1)	Loans delinquent 90 or more days are placed on nonaccrual status and previously accrued interest is reversed.

(2)	Includes mortgage loans at fair value and mortgage loans value under forward purchase agreements at fair value.

Following are the changes in fair value included in current period income by consolidated statements of income line item for financial statement items accounted for under the fair value option:


	Changes in fair value included in current period income
	Quarter ended June 30, 2012
	Net gain on investments			Interest income			Net gain on mortgage loans acquired for sale		Net loan servicing fees			Total
	(in thousands)
Assets:
Short-term investments	$	—		$	—		$	—	$	—		$	—
Mortgage-backed securities at fair value		706			(101	)		—		—			605
Mortgage loans acquired for sale at fair value		—			—			18,046		—			18,046
Mortgage loans at fair value		24,798			—			—		—			24,798
Mortgage loans under forward purchase agreements at fair value		2,488			—			—		—			2,488
Mortgage servicing rights at fair value		—			—			—		(441	)		(441	)

	$	27,992		$	(101	)	$	18,046	$	(441	)	$	45,496

Liabilities:
Securities sold under agreements to repurchase at fair value	$	—		$	—		$	—	$	—		$	—

	$	—		$	—		$	—	$	—		$	—


	Changes in fair value included in current period income
	Quarter ended June 30, 2011
	Net gain (loss) on investments			Interest income			Net gain on mortgage loans acquired for sale		Net loan servicing fees			Total
	(in thousands)
Assets:
Short-term investments	$	—		$	—		$	—	$	—		$	—
Mortgage-backed securities at fair value		(873	)		660			—		—			(213	)
Mortgage loans acquired for sale at fair value		—			—			40		—			40
Mortgage loans at fair value		22,951			—			—		—			22,951
Mortgage servicing rights at fair value		—			—			—		6			6

	$	22,078		$	660		$	40	$	6		$	22,784

Liabilities:
Securities sold under agreements to repurchase at fair value	$	—		$	—		$	—	$	—		$	—

	$	—		$	—		$	—	$	—		$	—


	Changes in fair value included in current period income
	Six months ended June 30, 2012
	Net gain on investments		Interest income		Net gain on mortgage loans acquired for sale		Net loan servicing fees			Total
	(in thousands)
Assets:
Short-term investments	$	—	$	—	$	—	$	—		$	—
Mortgage-backed securities at fair value		1,063		233		—		—			1,296
Mortgage loans acquired for sale at fair value		—		—		31,416		—			31,416
Mortgage loans at fair value		29,229		—		—		—			29,229
Mortgage loans under forward purchase agreements at fair value		9,188		—		—		—			9,188
Mortgage servicing rights at fair value		—		—		—		(542	)		(542	)

	$	39,480	$	233	$	31,416	$	(542	)	$	70,587

Liabilities:
Securities sold under agreements to repurchase at fair value	$	—	$	—	$	—	$	—		$	—

	$	—	$	—	$	—	$	—		$	—


	Changes in fair value included in current period income
	Six months ended June 30, 2011
	Net gain (loss) on investments			Interest income		Net gain on mortgage loans acquired for sale		Net loan servicing fees		Total
	(in thousands)
Assets:
Short-term investments	$	—		$	—	$	—	$	—	$	—
Mortgage-backed securities at fair value		(1,315	)		1,374		—		—		59
Mortgage loans acquired for sale at fair value		—			—		123		—		123
Mortgage loans at fair value		33,283			—		—		—		33,283
Mortgage servicing rights at fair value		—			—		—		3		3

	$	31,968		$	1,374	$	123	$	3	$	33,468

Liabilities:
Securities sold under agreements to repurchase at fair value	$	—		$	—	$	—	$	—	$	—

	$	—		$	—	$	—	$	—	$	—

Financial Statement Items Measured at Fair Value on a Nonrecurring Basis

Following is a summary of financial statement items that are measured at estimated fair value on a nonrecurring basis as of the dates presented:


	June 30, 2012
	Level 1		Level 2		Level 3		Total
	(in thousands)
Assets:
Real estate asset acquired in settlement of loans	$	—	$	—	$	45,737	$	45,737
Real estate asset acquired in settlement of loans under forward purchase agreements		—		—		797		797
MSRs at lower of amortized cost or fair value		—		—		31,397		31,397

	$	—	$	—	$	77,931	$	77,931


	December 31, 2011
	Level 1		Level 2		Level 3		Total
	(in thousands)
Assets:
Real estate asset acquired in settlement of loans	$	—	$	—	$	32,356	$	32,356
Real estate asset acquired in settlement of loans under forward purchase agreements		—		—		19,836		19,836

	$	—	$	—	$	52,192	$	52,192

The following table summarizes the total gains (losses) on assets measured at estimated fair values on a nonrecurring basis for the periods indicated:


	Net gains (losses) recognized during the period
	Quarter ended June 30,						Six months ended June 30,
	2012			2011			2012			2011
	(in thousands)
Real estate asset acquired in settlement of loans	$	(2,963	)	$	(2,289	)	$	(5,273	)	$	(2,860	)
Mortgage servicing assets at lower of amortized cost or fair value		(1,518	)		—			(1,624	)		—

	$	(4,481	)	$	(2,289	)	$	(6,897	)	$	(2,860	)

Real Estate Acquired in Settlement of Loans

The Company measures its investment in REO at the respective properties’ estimated fair values less cost to sell on a nonrecurring basis. The value of the REO is initially established as the lesser of either (a) the fair value of the loan at the date of transfer, (b) the fair value of the real estate less estimated costs to sell as of the date of transfer or (c) the purchase price of the property. REO may be subsequently revalued due to the Company receiving greater access to the property, the property being held for an extended period or management receiving indications that the property’s value may not be supported by developing market conditions. Any subsequent change in fair value to a level that is less than or equal to the value at which the property was initially recorded is recognized in Results of real estate acquired in settlement of loans in the consolidated statements of income.

Mortgage Servicing Rights at Lower of Amortized Cost or Fair Value

The Company evaluates its MSRs at lower of amortized cost or fair value for impairment with reference to the assets’ fair value. For purposes of performing its MSR impairment evaluation, the Company stratifies its MSRs at lower of amortized cost or fair value based on the interest rates borne by the mortgage loans underlying

the MSRs. Mortgage loans are grouped into note rate pools of 50 basis points for fixed-rate mortgage loans with note rates between 3% and 4.5% and a single pool for mortgage loans with note rates below 3%. MSRs relating to adjustable rate mortgage loans with initial interest rates of 4.5% or less are evaluated in a single pool. If the fair value of MSRs in any of the note rate pools is below the carrying value of the MSRs for that pool reduced by any existing valuation allowance, those MSRs are impaired.

When MSRs are impaired, the impairment is recognized in current-period earnings and the carrying value of the MSRs is adjusted using a valuation allowance. If the value of the MSRs subsequently increases, the restoration of value is recognized in current period earnings only to the extent of the valuation allowance.

Management periodically reviews the various impairment strata to determine whether the value of the impaired MSRs in a given stratum is likely to recover. When management deems recovery of the value to be unlikely in the foreseeable future, a write-down of the cost of the MSRs for that stratum to its estimated fair value is charged to the valuation allowance.

Fair Value of Financial Instruments Carried at Amortized Cost

The Company has debt facilities to finance its investment in nonperforming loans and REO in the form of repurchase agreements and borrowings under forward purchase agreements. As discussed in Fair Value Accounting Elections above, management designated these agreements to be accounted for at amortized cost.

Management has concluded that the estimated fair values of Mortgage loans acquired for sale at fair value sold under agreements to repurchase, Mortgage loans at fair value sold under agreements to repurchase, Real estate acquired in settlement of loans financed under agreements to repurchase, Note payable secured by mortgage loans at fair value and Borrowings under forward purchase agreements approximate the agreements’ carrying values due to the agreements’ short terms and variable interest rates. These financial instruments do not have two-way markets and the fair value is measured using management’s best estimate of fair value, where the inputs into the determination of fair value require significant management judgment or estimation. We have classified these financial instrument as Level 3 as of June 30, 2012 due to the lack of current market activity and our reliance on unobservable inputs to estimate the fair value.

Valuation Process, Techniques and Assumptions

Most of the Company’s assets are carried at fair value with changes in fair value recognized in current period results of operations. A substantial portion of those assets are “Level 3” financial statement items which require the use of significant unobservable inputs in the estimation of the assets’ values. Unobservable inputs reflect the Company’s own assumptions about the factors that market participants use in pricing an asset or liability, and are based on the best information available under the circumstances.

The Manager has assigned the responsibility for estimating the fair values of “Level 3” financial statement items to a specialized valuation group and has developed procedures and controls governing the valuation process relating to these assets. The estimation of fair values of the Company’s financial assets are assigned to the Manager’s Financial Analysis and Valuation group (the “FAV group”), which is responsible for valuing and monitoring the Company’s investment portfolios and maintenance of its valuation policies and procedures.

The FAV group reports to the Manager’s senior management valuation committee, which oversees and approves the valuations. The valuation committee includes the chief executive, financial, investment and credit officers of the Manager. The FAV group monitors the models used for valuation of the Company’s “Level 3” financial statement items, including the models’ performance versus actual results and reports those results to the valuation committee. The results developed in the FAV group’s monitoring activities are used to calibrate subsequent projections used for valuation.

The FAV group is responsible for reporting to the valuation committee on a monthly basis on the changes in the valuation of the portfolio, including major drivers affecting the valuation and any changes in model methods

and assumptions. To assess the reasonableness of its valuations, the FAV group presents an analysis of the effect on the valuation of each of the changes to the significant inputs to the models.

The following describes the methods used in estimating the fair values of Level 2 and Level 3 financial statement items:

Mortgage-Backed Securities

MBS values are presently determined based on whether the securities are issued by one of the Agencies as discussed below:

•

Agency MBS are categorized as “Level 2” financial statement items. Fair value of Agency MBS is estimated based on quoted market prices for similar securities.

•

Non-Agency MBS are categorized as “Level 3” financial statement items. Fair value of non-Agency MBS is estimated using broker indications of value. For indications of value received, the FAV group and a separate Capital Markets group review the price indications provided by non-affiliate brokers for completeness, accuracy and consistency across all similar MBS managed by PCM. Bond-level analytics such as yield, weighted average life and projected prepayment and default speeds of the underlying collateral are computed. The reasonableness of the brokers’ indications of value and of changes in value from period to period is evaluated in light of the analytical review performed and considering market conditions. The review of the FAV group is reported to PCM’s valuation committee as part of its review and approval of monthly valuation results. PCM has not adjusted, and does not intend to adjust, its fair value estimates to amounts different than the brokers’ indications of value.

The significant unobservable inputs used in the fair value measurement of the Company’s non-Agency MBS are discount rates, prepayment speeds, default speeds and loss severities in the event of default (or “collateral remaining loss percentage”). Significant changes in any of those inputs in isolation could result in a significant change in fair value measurement. Changes in these assumptions are not directly correlated, as they may be separately affected by changes in collateral characteristics and performance, servicer behavior, legal and regulatory actions, economic and housing market data and market sentiment.

Following is a quantitative summary of key inputs used by the FAV group to evaluate the reasonableness of the fair value of Level 3MBS:


		Range (Weighted Average)
Security Class	Key Inputs(1)	June 30, 2012	December 31, 2011
Non-Agency subprime	Discount rate	3.1% - 11.4% (6.6)%	3.1% - 23.0% (8.0)%
	Prepayment speed(2)	0.1% - 6.8% (3.4)%	0.1% - 8.4% (4.4)%
	Default speed(3)	6.7% - 20.1% (11.3)%	3.6% - 19.8% (12.3)%
	Collateral remaining loss percentage(4)	26.0% - 65.7% (49.6)%	23.9% - 63.7% (47.0)%
Non-Agency Alt-A	Discount rate	3.8% - 6.9% (4.3)%	4.4% - 10.0% (6.2)%
	Prepayment speed(2)	2.0% - 5.6% (5.0)%	0.5% - 8.9% (5.4)%
	Default speed(3)	5.0% - 16.4% (9.6)%	3.0% - 11.5% (9.7)%
	Collateral remaining loss percentage(4)	15.8% - 38.1% (25.5)%	11.4% - 36.4% (26.0)%
Non-Agency prime jumbo	Discount rate	5.0% - 5.0% (5.0)%	6.5% - 6.5% (6.5)%
	Prepayment speed(2)	15.3% - 15.3% (15.3)%	14.3% - 14.3% (14.3)%
	Default speed(3)	2.2% - 2.2% (2.2)%	1.5% - 1.5% (1.5)%
	Collateral remaining loss percentage(4)	2.8% - 2.8% (2.8)%	0.4% - 0.4% (0.4)%

(1)	Key inputs are those used to evaluate broker indications of value.

(2)	Prepayment speed is measured using Life Voluntary Conditional Prepayment Rate (“CPR”).

(3)	Default speed is measured using Life Constant Default Rate (“CDR”).

(4)	The projected future losses on the loans in the collateral groups paying to each bond expressed as a percentage of the current balance of the loans.

Mortgage Loans

Fair value of mortgage loans is estimated based on whether the mortgage loans are saleable into active markets with established counterparties and transparent pricing:

•

Mortgage loans that are saleable into active markets, comprised of the Company’s mortgage loans acquired for sale at fair value, are categorized as “Level 2” financial statement items and their fair values are estimated using their quoted market or contracted price or market price equivalent.

•

Loans that are not saleable into active markets, comprised of the Company’s mortgage loans at fair value and mortgage loans under forward purchase agreements at fair value, are categorized as “Level 3” financial statement items, and their fair values are estimated using a discounted cash flow approach. Inputs to the discounted cash flow model include current interest rates, loan amount, payment status and property type, and forecasts of future interest rates, home prices, prepayment speeds, default and loss severities. The valuation process includes the computation by stratum of loan

population and a review for reasonableness of various measures such as weighted average life, projected prepayment and default speeds, and projected default and loss percentages. The FAV group computes the effect on the valuation of changes in input variables such as interest rates, home prices, and delinquency status to assess the reasonableness of changes in the loan valuation. The results of the estimates of fair value of “Level 3” mortgage loans are reported to PCM’s valuation committee as part of its review and approval of monthly valuation results.

Changes in fair value attributable to changes in instrument-specific credit risk are measured by the change in the respective loan’s delinquency status at period-end from the later of the beginning of the period or acquisition date.

The significant unobservable inputs used in the fair value measurement of the Company’s mortgage loans at fair value and mortgage loans under forward purchase agreements at fair value are discount rate, home price projections, voluntary prepayment speeds and default speeds. Significant changes in any of those inputs in isolation could result in a significant change to the loans’ fair value measurement. Increases in home price projections are generally accompanied by an increase in voluntary prepayment speeds.

Following is a quantitative summary of key inputs used in the valuation of mortgage loans at fair value:


	Range (Weighted Average)
Key Inputs	June 30, 2012	December 31, 2011
Mortgage loans at fair value
Discount rate	9.1% - 20.8% (14.2)%	9.1% - 20.7% (14.4)%
Twelve-month projected housing price index change	–1.7% - 0.7% (-0.4)%	–0.9% - 2.3% (-0.3)%
Prepayment speed(1)	0.3% - 6.7% (3.1)%	0.2% - 6.2% (2.1)%
Total prepayment speed (2)	0.9% - 31.9% (20.1)%	1.0% - 33.8% (25.4)%
Mortgage loans under forward purchase agreements
Discount rate	20.8% - 20.8% (20.8)%	16.3% - 20.8% (17.1)%
Twelve-month projected housing price index change	–0.5% - –0.5% (-0.5)%	–0.5% - –0.4% (0.5)%
Prepayment speed(1)	0.7% - 0.7% (0.7)%	0.7% - 0.8% (0.8)%
Total prepayment speed(2)	31.9% - 31.9% (31.9)%	30.1% - 33.3% (32.7)%

(1)	Prepayment speed is measured using Life Voluntary CPR.

(2)	Total prepayment speed is measured using Life Total CPR.

Derivative Financial Instruments

The Company estimates the fair value of an interest rate lock commitment based on quoted Agency MBS prices, its estimate of the fair value of the mortgage servicing rights it expects to receive in the sale of the loans and the probability that the mortgage loan will fund within the terms of the interest rate lock commitment. The Company estimates the fair value of commitments to sell loans based on quoted MBS prices. The Company estimates the fair value of the MBS options and futures it purchases and sells based on observed interest rate volatilities in the MBS market. The Company estimates the fair value of its MBS interest rate swaptions based on quoted market prices.

Real Estate Acquired in Settlement of Loans

REO is measured based on its fair value on a nonrecurring basis and is categorized as a “Level 3” financial statement item. Fair value of REO is determined by using a current estimate of value from a broker’s price opinion or a full appraisal, or the price given in a current contract of sale.

REO values are reviewed by PCM’s staff appraisers when the Company obtains multiple indications of value and there is a significant difference among the values received. PCM’s staff appraisers will attempt to resolve such difference. In circumstances where the appraisers are not able to generate adequate data to support a value conclusion, the staff appraisers will order an additional appraisal to resolve the property’s value.

Mortgage Servicing Rights

MSRs are categorized as “Level 3” financial statement items. The Company uses a discounted cash flow approach to estimate the fair value of MSRs. The key assumptions used in the estimation of the fair value of MSRs include prepayment and default rates of the underlying loans, the applicable discount rate, and cost to service loans. The key assumptions used in the Company’s discounted cash flow model are based on market factors which management believes are consistent with assumptions and data used by market participants valuing similar MSRs. The results of the estimates of fair value of MSRs are reported to PCM’s valuation committee as part of their review and approval of monthly valuation results.

The significant unobservable inputs used in the fair value measurement of the Company’s MSRs are pricing spreads, prepayment speeds (or life) and annual per-loan cost of servicing. Significant changes to any of those inputs in isolation could result in a significant change in the MSR fair value measurement. Changes in these key assumptions are not necessarily directly related.

Following are the key inputs used in determining the fair value of MSRs at the time of initial recognition:


	Quarter ended June 30,		Six months ended June 30,
	2012		2012
	Range (Weighted Average)
Key Inputs	Amortized Cost	Fair Value	Amortized Cost	Fair Value
Pricing spread (1)	7.5% - 22.8% (8.2)%	7.5% - 14.3% (8.5)%	7.5% - 22.8% (7.9)%	7.5% - 14.6% (8.4)%
Life (in years)	2.5 - 6.4 (6.4)	2.5 - 6.4 (6.3)	2.5 - 6.7 (6.4)	2.5 - 6.7 (6.1)
Annual total prepayment speed(2)	7.9% - 36.9% (9.0)%	7.9% - 36.9% (9.7)%	7.8% - 36.9% (8.6)%	7.8% - 39.9% (10.8)%
Annual per-loan cost of servicing	$68 - $140 $(68)	$68 - $140 $(70)	$68 - $140 $(68)	$68 - $140 $(77)

(1)

Pricing spread represents a margin that is applied to a reference interest rate’s forward rate curve to develop periodic discount rates. The Company applies a pricing spread to the United States Dollar LIBOR curve for purposes of discounting cash flows relating to MSRs acquired as proceeds from the sale of mortgage loans.

(2)	Annual total prepayment speed is measured using Life Total CPR.

The Company’s amount of mortgage servicing rights as of June 30, 2011 was negligible.

Following is a quantitative summary of key assumptions used in the valuation of MSRs, and the effect on the estimated fair value from adverse changes in those assumptions as of the dates presented (weighted averages are based upon unpaid principal balance or fair value where applicable):


	June 30, 2012		December 31, 2011
	Range (Weighted Average)
Key Inputs	Amortized cost	Fair value	Amortized cost	Fair value
	(effect on value amounts in thousands)
Pricing spread(1)	7.5% - 14.1% (7.5)%	7.5% - 14.1% (7.8)%	7.5% - 16.5% (7.5)%	7.5% - 16.5% (8.6)%
Effect on value of 5% adverse change	$(513)	$(20)	$(89)	$(10)
Effect on value of 10% adverse change	$(1,010)	$(39)	$(176)	$(20)
Effect on value of 20% adverse change	$(1,961)	$(76)	$(341)	$(39)
Average life (in years)	2.3 - 6.9 (6.4)	2.3 - 6.9 (5.7)	3.0 - 6.9 (6.7)	1.7 - 6.9 (5.3)
Prepayment speed(2)	7.8% - 40.7% (9.4)%	9.2% - 40.7% (16.3)%	6.9% - 30.8% (8.2)%	8.4% - 59.0% (16.3)%
Effect on value of 5% adverse change	$(668)	$(40)	$(90)	$(16)
Effect on value of 10% adverse change	$(1,312)	$(76)	$(178)	$(31)
Effect on value of 20% adverse change	$(2,529)	$(145)	$(343)	$(60)
Annual per-loan cost of servicing	$68 - $140	$68 - $140	$68 - $140	$68 - $140
	$(68)	$(76)	$(69)	$(89)
Effect on value of 5% adverse change	$(194)	$(10)	$(30)	$(4)
Effect on value of 10% adverse change	$(388)	$(21)	$(61)	$(9)
Effect on value of 20% adverse change	$(777)	$(42)	$(122)	$(17)

(1)

(2)	Prepayment speed is measured using Life Total CPR.

The preceding sensitivity analyses are limited in that they were performed as of a particular point in time; only contemplate the movements in the indicated variables; do not incorporate changes in the variables in relation to other variables; are subject to the accuracy of various models and inputs used; and do not take into account other factors that would affect the Company’s overall financial performance in such scenarios, including operational adjustments made by management to account for changing circumstances. For these reasons, the preceding estimates should not be viewed as earnings forecasts.

Securities Sold Under Agreements to Repurchase

Fair value of securities sold under agreements to repurchase is based on the accrued cost of the agreements, which approximates the agreements’ fair values, due to the agreements’ short maturities and variable interest rates.

Note 7—Short-Term Investments

The Company’s short-term investments are comprised of money market accounts deposited with U.S. commercial banks.

Note 8—United States Treasury Security

The Company’s investment in a United States Treasury security of $50.0 million as of December 31, 2011 matured on January 19, 2012 and had a coupon interest rate of 0.00%.

Note 9—Mortgage-Backed Securities at Fair Value

Investments in MBS were as follows as of the dates presented:


	June 30, 2012
			Fair value
					Credit rating
Security collateral type	Unpaid Balance		Total		AAA		AA		BBB		Non- investment grade		Yield
	(in thousands)
Agency:
FNMA 30-year fixed	$	108,543	$	114,284	$	—	$	114,284	$	—	$	—		2.58	%
Non-Agency:
Non-Agency subprime		47,459		43,413		—		—		—		43,413		6.61	%
Non-Agency Alt-A		6,466		6,356		330		—		—		6,026		4.33	%
Non-Agency prime jumbo		3,431		3,393		—		3,393		—		—		4.98	%

	$	165,899	$	167,446	$	330	$	117,677	$	—	$	49,439		3.85	%


	December 31, 2011
	Unpaid Balance		Fair value
			Total		Credit rating
Security collateral type			Total		AAA		AA		BBB		Non- investment grade		Yield
	(in thousands)
Non-Agency:
Non-Agency subprime	$	63,712	$	58,634	$	—	$	—	$	920	$	57,714		8.01	%
Non-Agency Alt-A		8,910		8,710		440		—		5,362		2,908		6.23	%
Non-Agency prime jumbo		5,624		5,469		—		5,469		—		—		6.51	%

	$	78,246	$	72,813	$	440	$	5,469	$	6,282	$	60,622		7.70	%

All of the Company’s MBS had remaining contractual maturities of more than ten years at June 30, 2012 and at December 31, 2011. At June 30, 2012 and at December 31, 2011, the Company had pledged all of its MBS to secure agreements to repurchase.

After June 30, 2012, the Company sold all of its MBS backed by non-Agency mortgage loans and recorded a loss on sale of $30,000. Management intends to reinvest the proceeds on sale of these securities into REIT-eligible assets.

Note 10—Mortgage Loans Acquired for Sale at Fair Value

Mortgage loans acquired for sale at fair value is comprised of recently originated mortgage loans purchased by the Company for resale. Following is a distribution of the Company’s mortgage loans acquired for sale at fair value as of the dates presented:


	June 30, 2012				December 31, 2011
	Fair value		Unpaid principal balance		Fair value		Unpaid principal balance
Loan Type	(in thousands)
Government insured or guaranteed	$	102,176	$	95,920	$	46,266	$	44,229
Fixed-rate:
Agency-eligible		358,243		340,463		173,457		166,174
Jumbo loans		—		—		12,293		11,996

	$	460,419	$	436,383	$	232,016	$	222,399

The Company is not approved by Ginnie Mae as an issuer of securities backed by government insured or guaranteed loans. As discussed in Note 3 – Transactions with Related Parties, the Company transfers such government insured or guaranteed loans that it purchases from correspondent lenders to PLS, which is a Ginnie Mae-approved issuer, for a sourcing fee of three basis points on the unpaid principal balance of each such loan.

Mortgage loans acquired for sale at fair value totaling $459.6 million and $231.7 million were pledged to secure sales of loans under agreements to repurchase at June 30, 2012 and December 31, 2011, respectively.

Note 11—Derivative Financial Instruments

Following is a summary of the distribution of the Company’s derivative financial instruments which are included in Other assets on the consolidated balance sheets as of the dates presented:


	June 30, 2012				December 31, 2011
Instrument	Notional amount		Fair value		Notional amount		Fair value
	(in thousands)
Assets:
Interest rate lock commitments	$	1,081,755	$	12,934	$	563,487	$	5,772
Hedging derivatives:
MBS put options		245,000		405		28,000		26
MBS call options		35,000		337		5,000		57
MBS swaptions		170,000		1,006		—		—

		450,000		1,748		33,000		83

	$	1,531,755	$	14,682	$	596,487	$	5,855

Liability:
Forward sales contracts	$	1,304,565	$	9,030	$	358,291	$	(3,917	)

The Company is exposed to price risk arising from changes in market interest rates relative to its mortgage loans acquired for sale, to the commitments it makes to acquire loans from correspondent lenders and to the holding of Agency MBS. The Company bears price risk from the time a commitment to purchase a loan is made to a correspondent lender to the time the purchased mortgage loan is sold. During these periods, the Company is exposed to losses if mortgage interest rates rise, because the value of the purchase commitment or mortgage loan acquired for sale declines. Similarly, the Company bears price risk relative to its holdings of Agency MBS during the period it holds such securities.

The Company engages in interest rate risk management activities in an effort to reduce the variability of earnings caused by changes in market interest rates. To manage this price risk resulting from interest rate risk, the Company uses derivative financial instruments acquired with the intention of moderating the risk that changes in market interest rates will result in unfavorable changes in the value of the Company’s interest rate lock commitments, inventory of mortgage loans acquired for sale and Agency MBS. The Company does not use derivative financial instruments for purposes other than in support of its risk management activities.

The following table summarizes the notional amount activity for derivative contracts used to hedge the Company’s interest rate lock commitments, inventory of mortgage loans acquired for sale and Agency MBS at notional value:


	Balance,							Balance,
	Beginning				Dispositions/			End
	of Period		Additions		Expirations			of Period
	(in thousands)
Quarter ended June 30, 2012
MBS put options	$	75,000		320,000		(150,000	)	$	245,000
MBS call options	$	15,000		75,000		(55,000	)	$	35,000
MBS swaptions	$	95,000		75,000		—		$	170,000
Forward sales contracts	$	452,956		5,331,731		(4,480,122	)	$	1,304,565

Six months ended June 30, 2012
MBS put options	$	28,000		420,000		(203,000	)	$	245,000
MBS call options	$	5,000		90,000		(60,000	)	$	35,000
MBS swaptions	$	—		170,000		—		$	170,000
Forward sales contracts	$	358,291		6,901,494		(5,955,220	)	$	1,304,565

The Company did not have significant activity in derivative financial instruments during the quarter and six months ended June 30, 2011.

As of June 30, 2012 and December 31, 2011, the Company had $7.2 million and $1.5 million, respectively, on deposit with its derivatives counterparties. Margin deposits are included in Other assets on the consolidated balance sheets as of June 30, 2012 and December 31, 2011.

Note 12—Mortgage Loans at Fair Value

Mortgage loans at fair value are comprised of mortgage loans not acquired for resale. Such loans may be sold at a later date pursuant to a management determination that such a sale represents the most advantageous liquidation strategy for the identified loan.

Following is a summary of the distribution of the Company’s mortgage loans at fair value as of the dates presented:


	June 30, 2012				December 31, 2011
			Unpaid				Unpaid
	Fair		principal		Fair		principal
Loan Type	value		balance		value		balance
	(in thousands)
Nonperforming loans	$	565,478	$	1,025,179	$	494,711	$	952,473
Performing loans:
Fixed		205,073		319,824		97,582		162,145
ARM/hybrid		139,847		213,976		73,166		116,693
Interest rate step-up		59,357		105,598		30,621		52,507
Balloon		199		313		186		316

		404,476		639,711		201,555		331,661

	$	969,954	$	1,664,890	$	696,266	$	1,284,134

At June 30, 2012, approximately 68% of the mortgage loan portfolio consisted of mortgage loans that were originated between 2005 and 2007. Approximately 68% of the estimated fair value of the mortgage loans in this portfolio was comprised of loans with unpaid-principal-balance-to-current-property-value ratios in excess of 100% at June 30, 2012.

The mortgage loan portfolio consists of mortgage loans originated throughout the United States with loans secured by California real estate comprising approximately 22% of the loan portfolio’s estimated fair value at June 30, 2012. The mortgage loan portfolio contained loans from New York, Florida and New Jersey that each represented 5% or more of the portfolio’s estimated fair value at June 30, 2012.

At December 31, 2011, approximately 72% of the mortgage loan portfolio consisted of mortgage loans that were originated between 2005 and 2007. Approximately 72% of the estimated fair value of the mortgage loans in this portfolio was comprised of loans with unpaid-principal-balance-to-current-property-value ratios in excess of 100% at December 31, 2011.

The mortgage loan portfolio consisted of mortgage loans originated throughout the United States with loans secured by California real estate that comprised approximately 24% of the loan portfolio’s estimated fair value at December 31, 2011. The mortgage loan portfolio contained loans from New York, Florida and New Jersey that each represented 5% or more of the portfolio’s estimated fair value at December 31, 2011.

At June 30, 2012 and December 31, 2011, mortgage loans in the portfolio with fair values totaling $827.6 million and $656.4 million, respectively, were pledged to secure sales of loans under agreements to repurchase and mortgage loans with fair values totaling $1.1 million and $1.9 million, respectively, were held in a consolidated subsidiary of the Company whose stock was pledged to secure financing of the mortgage loans held in that subsidiary.

Note 13—Mortgage Loans Under Forward Purchase Agreements at Fair Value

Mortgage loans under forward purchase agreements at fair value are comprised of mortgage loans not acquired for resale. Such loans may be sold at a later date pursuant to a management determination that such a sale represents the most advantageous liquidation strategy for the identified loan.

Following is a summary of the distribution of the Company’s mortgage loans under forward purchase agreements at fair value as of the periods presented:


	June 30, 2012				December 31, 2011
			Unpaid				Unpaid
	Fair		principal		Fair		principal
Loan Type	value		balance		value		balance
	(in thousands)
Nonperforming loans	$	16,568	$	35,298	$	121,266	$	232,213
Performing loans:
Fixed		313		761		3,316		6,084
ARM/hybrid		—		—		3,965		6,002
Interest rate step-up		—		—		763		1,393

		313		761		8,044		13,479

	$	16,881	$	36,059	$	129,310	$	245,692

At June 30, 2012, approximately 87% of the estimated fair value of the mortgage loans under forward purchase agreements consisted of mortgage loans that were originated between 2005 and 2007. Approximately 85% of the estimated fair value of the mortgage loans in this portfolio was comprised of loans with unpaid-principal-balance-to-current-property-value ratios in excess of 100% at June 30, 2012.

Mortgage loans under forward purchase agreements consists of mortgage loans originated throughout the United States with loans secured by California real estate comprising approximately 29% of the loan portfolio’s estimated fair value at June 30, 2012. The mortgage loan portfolio contained loans from Florida, New York and New Jersey that each represented 5% or more of the portfolio’s estimated fair value at June 30, 2012.

At December 31, 2011, approximately 74% of the estimated fair value of the mortgage loans under forward purchase agreements consisted of mortgage loans that were originated between 2005 and 2007. Approximately 74% of the estimated fair value of the mortgage loans in this portfolio was comprised of loans with unpaid-principal-balance-to-current-property-value ratios in excess of 100% at December 31, 2011.

Mortgage loans under forward purchase agreements consists of mortgage loans originated throughout the United States with loans secured by California real estate that comprised approximately 33% of the loan portfolio’s estimated fair value at December 31, 2011. The mortgage loan portfolio contained loans from Florida, New York and New Jersey that each represented 5% or more of the portfolio’s estimated fair value at December 31, 2011.

At both June 30, 2012 and December 31, 2011, the entire balance of mortgage loans under forward purchase agreements was subject to borrowings under forward purchase agreements.

Note 14—Real Estate Acquired in Settlement of Loans

Following is a summary of the activity in REO for the periods presented:


	Quarter ended						Six months ended
	June 30,						June 30,
	2012			2011			2012			2011
	(in thousands)
Balance at beginning of period	$	81,209		$	31,285		$	80,570		$	29,685
Purchases		49			1,263			49			1,510
Transfers from mortgage loans at fair value and advances		23,023			31,648			48,442			45,823
Transfers from REO under forward purchase agreements		21,032			—			21,032
Results of REO:
Valuation adjustments, net		(3,021	)		(2,736	)		(5,622	)		(3,985	)
Gain on sale, net		5,438			2,822			10,036			5,160

		2,417			86			4,414			1,175
Sale proceeds		(38,609	)		(15,410	)		(65,386	)		(29,321	)

Balance at period end	$	89,121		$	48,872		$	89,121		$	48,872

At June 30, 2012, REO with carrying values totaling $3.5 million was financed under agreements to repurchase and $41.9 million was held in a consolidated subsidiary of the Company whose stock was pledged to secure financing of the real estate held in that subsidiary. At December 31, 2011, REO with carrying values totaling $5.8 million was financed under agreements to repurchase and $54.2 million was held in a consolidated subsidiary of the Company whose stock was pledged to secure financing of the real estate held in that subsidiary.

Note 15—Real Estate Acquired in Settlement of Loans Under Forward Purchase Agreements

Following is a summary of the activity in REO under forward purchase agreements for the periods presented:


	Quarter ended					Six months ended
	June 30,					June 30,
	2012			2011		2012			2011
	(in thousands)
Balance at beginning of period	$	23,661		$	—	$	22,979		$	—
Purchases		195			—		248			—
Transfers from mortgage loans under forward purchase agreements at fair value and advances		946			—		6,642			—
Transfers to REO		(21,032	)		—		(21,032	)		—
Results of REO under forward purchase agreements:
Valuation adjustments, net		(202	)		—		(583	)		—
Gain on sale, net		356			—		2,457			—

		154			—		1,874			—
Sale proceeds		(3,127	)		—		(9,914	)		—

Balance at period end	$	797		$	—	$	797		$	—

At June 30, 2012, REO under forward purchase agreements totaling $797,000 were subject to borrowings under forward purchase agreements. The Company did not have REO under forward purchase agreements during the periods ended June 30, 2011.

Note 16—Mortgage Servicing Rights

Carried at Fair Value:

The activity in MSRs carried at fair value is as follows:


	Quarter ended June 30,						Six months ended June 30,
	2012			2011			2012			2011
	(in thousands)
Balance at beginning of period	$	1,188		$	37		$	749		$	—
Additions:
Purchases		—			—			20			—
MSRs resulting from loan sales		568			137			1,088			177

Total additions		568			137			1,108			177

Change in fair value:
Due to changes in valuation inputs or assumptions used in valuation model(1)		(417	)		8			(481	)		5
Other changes in fair value(2)		25			(2	)		(12	)		(2	)

		(392	)		6			(493	)		3

Sales		(79	)		—			(79	)		—

Balance at period end	$	1,285		$	180		$	1,285		$	180

(1)	Principally reflects changes in discount rates and prepayment speed assumptions, primarily due to changes in interest rates.

(2)	Represents changes due to realization of expected cash flows.

Carried at Amortized Cost:

The activity in MSRs carried at amortized cost is summarized below for the periods presented:


	Quarter ended					Six months ended
	June 30,					June 30,
	2012			2011		2012			2011
	(in thousands)
Mortgage Servicing Rights:
Balance at beginning of period	$	17,452		$	—	$	5,282		$	—
MSRs resulting from loan sales		16,392			—		28,801			—
Purchases		—			—		9			—
Sales		(19	)				(19	)
Amortization		(654	)		—		(902	)		—
Application of valuation allowance to write down MSRs with other-than temporary impairment		—			—		—			—

Balance before valuation allowance at period end		33,171			—		33,171			—

Valuation Allowance for Impairment of Mortgage Servicing Rights:
Balance at beginning of period	$	(106	)	$	—	$	—		$	—
Additions		(1,518	)		—		(1,624	)		—
Application of valuation allowance to write down MSRs with other-than temporary impairment		—			—		—			—

Balance at period end		(1,624	)		—		(1,624	)		—

Mortgage Servicing Rights, net	$	31,547		$	—	$	31,547		$	—

Estimated Fair Value of MSRs at Period End	$	31,580		$	—	$	31,580		$	—

Gain on sale of MSRs carried at amortized cost is included in other income.

The following table summarizes the Company’s estimate of amortization of its existing MSRs carried at amortized cost. This projection was developed using the assumptions made by management in its June 30, 2012 valuation of MSRs, which will change as market conditions and portfolio composition and behavior vary. Therefore, both actual and projected amortization levels will differ from this projection. Therefore, the following estimates will change over time in a manner and amount not presently determinable by management.


	Estimated MSR
12-month period ended June 30,	Amortization
	(in thousands)
2013	$	3,910
2014		3,568
2015		3,175
2016		2,867
2017		2,618
Thereafter		17,033

Total	$	33,171

Note 17—Securities Sold Under Agreements to Repurchase at Fair Value

Following is a summary of financial information relating to securities sold under agreements to repurchase at fair value as of and for the periods presented:

Quarter ended
June 30,

Six months ended
June 30,

2012

2011

2012

2011

(dollar amounts in thousands)

Period end balance

157,289

70,978

$</

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