Edgar Filing: PennyMac Mortgage Investment Trust

Large accelerated filer

Accelerated filer

Non-accelerated filer

¨ (Do not check if a smaller reporting company)

Smaller reporting company

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 September 30, 2014

¨	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 November 5, 2014
Common Shares of Beneficial Interest, $0.01 par value		74,139,570

PENNYMAC MORTGAGE INVESTMENT TRUST

FORM 10-Q

September 30, 2014

TABLE OF CONTENTS


		Page
PART I. FINANCIAL INFORMATION			1
Item 1.	Financial Statements (Unaudited):		1
	Consolidated Balance Sheets		1
	Consolidated Statements of Income		3
	Consolidated Statements of Changes in Shareholders’ Equity		4
	Consolidated Statements of Cash Flows		5
	Notes to Consolidated Financial Statements		7
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		56
	Observations on Current Market Opportunities		57
	Results of Operations		58
	Net Investment Income		59
	Expenses		77
	Balance Sheet Analysis		80
	Asset Acquisitions		81
	Investment Portfolio Composition		82
	Cash Flows		87
	Liquidity and Capital Resources		89
	Off-Balance Sheet Arrangements and Aggregate Contractual Obligations		91
	Quantitative and Qualitative Disclosures About Market Risk		97
	Factors That May Affect Our Future Results		99
Item 3.	Quantitative and Qualitative Disclosures About Market Risk		101
Item 4.	Controls and Procedures		102
PART II. OTHER INFORMATION			102
Item 1.	Legal Proceedings		102
Item 1A.	Risk Factors		103
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		103
Item 3.	Defaults Upon Senior Securities		103
Item 4.	Mine Safety Disclosures		103
Item 5.	Other Information		103
Item 6.	Exhibits and Financial Statement Schedules		104

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

PENNYMAC MORTGAGE INVESTMENT TRUST AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS (UNAUDITED)


	September 30, 2014		December 31, 2013
	(in thousands, except share data)
ASSETS
Cash	$	46,487	$	27,411

Short-term investments		37,452		92,398
Mortgage-backed securities at fair value pledged to secure assets sold under agreements to repurchase		267,885		197,401
Mortgage loans acquired for sale at fair value (includes $675,659 and $454,210 pledged to secure assets sold under agreements to repurchase)		688,850		458,137
Mortgage loans at fair value (includes $2,273,768 and $2,315,313 pledged to secure assets sold under agreements to repurchase)		2,561,911		2,600,317
Mortgage loans under forward purchase agreements at fair value pledged to secure borrowings under forward purchase agreements		—		218,128
Excess servicing spread purchased from PennyMac Financial Services, Inc. at fair value		187,368		138,723
Derivative assets		10,344		7,976
Real estate acquired in settlement of loans (includes $76,561 and $89,404 pledged to secure assets sold under agreements to repurchase)		275,185		138,942
Real estate acquired in settlement of loans under forward purchase agreements pledged to secure forward purchase agreements		—		9,138
Mortgage servicing rights (includes $57,871 and $26,452 carried at fair value)		345,848		290,572
Servicing advances		59,325		59,573
Due from PennyMac Financial Services, Inc.		4,311		6,009
Other assets		119,847		66,192

Total assets	$	4,604,813	$	4,310,917


LIABILITIES
Assets sold under agreements to repurchase	$	2,416,686	$	2,039,605
Borrowings under forward purchase agreements		—		226,580
Asset-backed secured financing of the variable interest entity at fair value		166,841		165,415
Exchangeable senior notes		250,000		250,000
Derivative liabilities		1,889		1,961
Accounts payable and accrued liabilities		80,493		71,561
Due to PennyMac Financial Services, Inc.		21,420		18,636
Income taxes payable		66,208		59,935
Liability for losses under representations and warranties		13,235		10,110

Total liabilities		3,016,772		2,843,803


Commitments and contingencies

SHAREHOLDERS’ EQUITY
Common shares of beneficial interest—authorized, 500,000,000 common shares of $0.01 par value; issued and outstanding, 74,139,570 and 70,458,082 common shares, respectively		741		705
Additional paid-in capital		1,470,189		1,384,468
Retained earnings		117,111		81,941

Total shareholders’ equity		1,588,041		1,467,114

Total liabilities and shareholders’ equity	$	4,604,813	$	4,310,917

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

PENNYMAC MORTGAGE INVESTMENT TRUST AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS (UNAUDITED)

Assets and liabilities of consolidated variable interest entity (“VIE”) included in total assets and liabilities (the assets of the VIE can only be used to settle liabilities of the VIE):


	September 30, 2014		December 31, 2013
	(in thousands)
ASSETS
Mortgage loans at fair value	$	530,809	$	523,652
Other assets - interest receivable		1,675		1,584

	$	532,484	$	525,236

LIABILITIES
Asset-backed secured financing at fair value	$	166,841	$	165,415
Accounts payable and accrued expenses - interest payable		484		497

	$	167,325	$	165,912

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

PENNYMAC MORTGAGE INVESTMENT TRUST AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)


	Quarter ended September 30,						Nine months ended September 30,
	2014			2013			2014			2013
	(in thousands, except per share data)
Net investment income
Net gain on mortgage loans acquired for sale	$	9,509		$	11,031		$	29,702		$	84,748
Loan origination fees		6,447			4,559			13,288			14,784
Net interest income:
Interest income:
From nonaffiliates		37,659			35,278			119,522			78,950
From PennyMac Financial Services, Inc.		3,577			—			9,578			—

		41,236			35,278			129,100			78,950
Interest expense		22,020			19,497			63,660			44,877

		19,216			15,781			65,440			34,073

Net gain on investments:
From nonaffiliates		77,786			49,057			203,943			159,871
From PennyMac Financial Services, Inc.		(7,396	)		29			(17,834	)		29

		70,390			49,086			186,109			159,900
Net loan servicing fees		10,533			6,659			26,712			20,562
Results of real estate acquired in settlement of loans		(11,926	)		(2,295	)		(23,900	)		(7,477	)
Other		2,361			1,241			6,330			2,841

Net investment income		106,530			86,062			303,681			309,431

Expenses
Expenses payable to PennyMac Financial Services, Inc.:
Loan fulfillment fees		15,497			18,327			36,832			68,625
Loan servicing fees		12,325			10,738			41,096			27,251
Management fees		9,623			8,539			26,609			23,486
Professional services		1,927			2,149			6,348			5,872
Compensation		1,843			2,292			6,668			5,819
Other		7,384			7,955			18,604			18,472

Total expenses		48,599			50,000			136,157			149,525

Income before provision for income taxes		57,931			36,062			167,524			159,906
Provision for (benefit from) income taxes		2,982			(3,639	)		(509	)		12,412

Net income	$	54,949		$	39,701		$	168,033		$	147,494


Earnings per share
Basic	$	0.74		$	0.61		$	2.28		$	2.40
Diluted	$	0.69		$	0.57		$	2.13		$	2.29
Weighted-average shares outstanding
Basic		74,140			64,405			73,254			60,809
Diluted		82,832			73,121			81,978			65,898
Dividends declared per share	$	0.61		$	0.57		$	1.79		$	1.71

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)


	Number of shares		Par value		Additional paid-in capital			Retained earnings			Total
	(in thousands)
Balance at December 31, 2012		58,904	$	589	$	1,129,858		$	70,889		$	1,201,336
Net income		—		—		—			147,494			147,494
Share-based compensation		249		3		4,063			—			4,066
Dividends, $1.71 per share		—		—		—			(107,405	)		(107,405	)
Proceeds from offerings of common shares		11,300		113		261,482			—			261,595
Underwriting and offering costs		—		—		(12,321	)		—			(12,321	)

Balance at September 30, 2013		70,453	$	705	$	1,383,082		$	110,978		$	1,494,765

Balance at December 31, 2013		70,458	$	705	$	1,384,468		$	81,941		$	1,467,114
Net income		—		—		—			168,033			168,033
Share-based compensation		235		2		4,354			—			4,356
Dividends, $1.79 per share		—		—		—			(132,863	)		(132,863	)
Proceeds from offerings of common shares		3,447		34		82,419			—			82,453
Underwriting and offering costs		—		—		(1,052	)		—			(1,052	)

Balance at September 30, 2014		74,140	$	741	$	1,470,189		$	117,111		$	1,588,041

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

PENNYMAC MORTGAGE INVESTMENT TRUST AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)


	Nine months ended September 30,
	2014			2013
	(in thousands)
Cash flows from operating activities
Net income	$	168,033		$	147,494
Adjustments to reconcile net income to net cash used by operating activities:
Net gain on mortgage loans acquired for sale at fair value		(29,702	)		(84,748	)
Accrual of unearned discounts and amortization of premiums on mortgage-backed securities, mortgage loans at fair value, and asset-backed secured financing		(905	)		—
Capitalization of interest on mortgage loans at fair value		(40,805	)		(25,017	)
Accrual of interest on excess servicing spread		(9,578	)		—
Amortization of credit facility commitment fees and debt issuance costs		7,298			6,280
(Reversal) accrual of costs related to forward purchase agreements		(168	)		3,420
Net gain on investments		(186,109	)		(164,763	)
Change in fair value, amortization and impairment of mortgage servicing rights		30,285			17,200
Results of real estate acquired in settlement of loans		23,900			7,477
Share-based compensation expense		4,356			4,066
Purchases of mortgage loans acquired for sale at fair value		(20,759,885	)		(25,984,356	)
Purchases of mortgage loans acquired for sale at fair value from PennyMac Financial Services, Inc.		(4,955	)		(12,339	)
Sales of mortgage loans acquired for sale at fair value to nonaffiliates		8,534,637			13,229,726
Sales of mortgage loans acquired for sale to PennyMac Financial Services, Inc.		11,947,251			12,429,698
Increase in servicing advances		(14,347	)		(13,051	)
Decrease in due from PennyMac Financial Services, Inc.		2,163			4,716
Increase in other assets		(70,252	)		(12,472	)
Increase (decrease) in accounts payable and accrued liabilities		6,038			(12,434	)
Increase in payable to PennyMac Financial Services, Inc.		3,076			8,414
Increase in income taxes payable		6,273			18,524

Net cash used by operating activities		(383,396	)		(432,165	)


Cash flows from investing activities
Net decrease (increase) in short-term investments		54,946			(41,919	)
Purchases of mortgage-backed securities at fair value		(73,922	)		(199,558	)
Repayments of mortgage-backed securities at fair value		9,830			—
Purchase of Agency debt security		—			(12,000	)
Purchases of mortgage loans at fair value		(283,017	)		(779,015	)
Sales and repayments of mortgage loans at fair value		532,375			193,914
Repayments of mortgage loans under forward purchase agreements at fair value		6,413			8,000
Purchase of excess servicing spread from PennyMac Financial Services, Inc.		(82,646	)		(2,828	)
Repayment of excess servicing spread by PennyMac Financial Services, Inc.		25,280			—
Settlements of derivative financial instruments		(7,879	)		—
Purchase of real estate acquired in settlement of loans		(3,049	)		(82	)
Sales of real estate acquired in settlement of loans		124,794			98,103
Sales of real estate acquired in settlement of loans under forward purchase agreements		5,365			65
Purchase of mortgage servicing rights		—			(1,881	)
Sale of mortgage servicing rights		137			—
Increase in margin deposits and restricted cash		(350	)		(22,314	)

Net cash provided (used) by investing activities		308,277			(759,515	)

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

PENNYMAC MORTGAGE INVESTMENT TRUST AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)


	Nine months ended September 30,
	2014			2013
	(in thousands)
Cash flows from financing activities
Sales of assets under agreement to repurchase		26,109,117			25,827,489
Repurchases of assets sold under agreements to repurchase		(25,732,035	)		(25,103,532	)
Repayments of borrowings under forward purchase agreements		(227,866	)		(18,618	)
Issuance of asset-backed secured financing at fair value		—			170,008
Payment of asset-backed secured financing at fair value		(6,161	)		—
Issuance of exchangeable senior notes		—			250,000
Payment of exchangeable senior notes issuance costs		—			(7,425	)
Issuance of common shares		82,453			261,595
Payment of common share underwriting and offering costs		(1,052	)		(12,321	)
Payment of contingent underwriting fees payable		(1,295	)		(1,803	)
Payment of dividends		(128,966	)		(107,405	)

Net cash provided by financing activities		94,195			1,257,988

Net increase in cash		19,076			66,308
Cash at beginning of period		27,411			33,756

Cash at end of period	$	46,487		$	100,064

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

PENNYMAC MORTGAGE INVESTMENT TRUST AND SUBSIDIARIES

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 commenced operations on August 4, 2009, when it completed its initial offerings of common shares of beneficial interest (“common 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 operates in two segments: correspondent production and investment activities:

•

The correspondent production 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 mortgage-backed securities (“MBS”), using the services of PNMAC Capital Management, LLC (“PCM” or the “Manager”) and PennyMac Loan Services, LLC (“PLS” or the “Servicer”), both indirect subsidiaries of PennyMac Financial Services, Inc. (“PFSI”).

Most of the loans the Company has acquired in its correspondent production activities have been eligible for sale to government-sponsored entities such as the Federal National Mortgage Association (“Fannie Mae”) and Federal Home Loan Mortgage Corporation (“Freddie Mac”) or through government agencies such as the Government National Mortgage Association (“Ginnie Mae”). Fannie Mae, Freddie Mac and Ginnie Mae are each referred to as an “Agency” and, collectively, as the “Agencies.”

•

The investment activities segment represents the Company’s investments in mortgage-related assets, which include distressed mortgage loans, real estate acquired in settlement of loans (“REO”), MBS, mortgage servicing rights (“MSRs”) and excess servicing spread (“ESS”). The Company seeks to maximize the value of its acquired distressed mortgage loans through proprietary loan modification programs, special servicing or 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 Company is externally managed by PCM, 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, the Company pays PCM a management fee with a base component and a performance incentive component.

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 has 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 wholly-owned 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”) as codified in the Financial Accounting Standards Board’s (“FASB”) Accounting Standards Codification (the “ASC”) 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, 2013 (the “Annual Report”). Intercompany accounts and transactions have been eliminated.

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.

Note 2—Concentration of Risks

As discussed in Note 1—Organization and Basis of Presentation above, PMT’s operations and investing activities are centered in mortgage-related assets, a substantial portion of which are distressed at acquisition. 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.

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 and unemployment rates 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 Servicer’s 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 effect cures or resolutions to distressed loans; and

•

regulatory, judicial and legislative support of the foreclosure process, and the resulting effect 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.

A substantial portion of the distressed mortgage loans and REO purchased by the Company has been acquired from or through one or more subsidiaries of Citigroup Inc. The following tables present purchases for the Company’s investment portfolio of mortgage loans and REO (including purchases under forward purchase agreements), and the portion thereof representing assets purchased from or through one or more subsidiaries of Citigroup Inc.:


	Quarter ended September 30,				Nine months ended September 30,
	2014		2013		2014		2013
	(in thousands)
Investment portfolio purchases:
Mortgage loans	$	—	$	580,822	$	284,403	$	1,024,404
REO		—		3,597		3,117		3,686

	$	—	$	584,419	$	287,520	$	1,028,090

Investment portfolio purchases above through one or more subsidiaries of Citigroup Inc.:
Mortgage loans	$	—	$	—	$	26,737	$	443,183
REO		—		3,597		68		3,686

	$	—	$	3,597	$	26,805	$	446,869

Following is a summary of the Company’s holdings of assets purchased through one or more subsidiaries of Citigroup Inc.:


	September 30, 2014		December 31, 2013
	(in thousands)

Mortgage loans at fair value	$	974,402	$	1,138,131
Mortgage loans under forward purchase agreements at fair value		—		218,128
REO		114,195		84,726
REO under forward purchase agreements		—		8,705

	$	1,088,597	$	1,449,690


Total holdings of mortgage loans and REO	$	2,837,096	$	2,966,525

During the year ended December 31, 2013, the Company entered into forward purchase agreements with Citigroup Global Markets Realty Corp. (“CGM”), a subsidiary of Citigroup Inc., to purchase certain nonperforming mortgage loans and REO (collectively, the “CGM Assets”). The CGM Assets were acquired by CGM from unaffiliated money center banks and were held in a trust subsidiary by CGM pending settlement by the Company. The commitment under the forward purchase agreement was settled in full during the quarter ended June 30, 2014.

The Company recognized these assets and related obligations as of the dates of the agreements and recognizes all subsequent income and changes in value relating to such assets. As a result of recognizing these assets, the Company’s consolidated statements of income and cash flows include the following amounts related to the forward purchase agreements:


	Quarter ended September 30,					Nine months ended September 30,
	2014		2013			2014			2013
	(in thousands)
Statements of income:
Interest income	$	—	$	1,197		$	3,584		$	1,457
Interest expense	$	—	$	1,763		$	2,364		$	2,013
Net gain on investments	$	—	$	8,378		$	803		$	7,688
Net loan servicing fees	$	—	$	—		$	517		$	—
Results of REO	$	—	$	(41	)	$	(473	)	$	(41	)
Statements of cash flows:
Repayments of mortgage loans	$	—	$	8,000		$	6,413		$	8,000
Sales of REO	$	—	$	65		$	5,365		$	65
Repayments of borrowings under forward purchase agreements	$	—	$	(18,618	)	$	(227,866	)	$	(18,618	)

The Company has no other variable interests in the trust entity or other exposure to the creditors of the trust entity that could expose the Company to loss.

Note 3—Transactions with Related Parties

Following is a summary of correspondent production activity between the Company and PFSI:


	Quarter ended September 30,				Nine months ended September 30,
	2014		2013		2014		2013
	(in thousands)

Loan fulfillment fees payable to PFSI	$	15,497	$	18,327	$	36,832	$	68,625
Unpaid principal balance of loans fulfilled by PFSI	$	3,677,613	$	3,681,771	$	8,588,955	$	12,792,482

Sourcing fees received from PFSI	$	1,384	$	1,204	$	3,401	$	3,563
Fair value of loans sold to PFSI	$	4,861,392	$	4,147,535	$	11,947,251	$	12,429,698

At period end:
Mortgage loans included in mortgage loans acquired for sale pending sale to PFSI	$	59,719	$	273,007

Following is a summary of mortgage loan servicing fees payable to PFSI:


	Quarter ended September 30,				Nine months ended September 30,
	2014		2013		2014		2013
	(in thousands)
Mortgage loans acquired for sale at fair value:
Base	$	28	$	62	$	74	$	231
Activity-based		35		77		112		260

		63		139		186		491

Distressed mortgage loans:
Base		4,679		4,166		14,620		11,737
Activity-based		4,076		3,414		16,208		7,739

		8,755		7,580		30,828		19,476

MSRs:
Base		3,459		2,911		9,930		7,037
Activity-based		48		108		152		247

		3,507		3,019		10,082		7,284

	$	12,325	$	10,738	$	41,096	$	27,251

Following is a summary of the base management and performance incentive fees payable to PFSI recorded by the Company:


	Quarter ended September 30,				Nine months ended September 30,
	2014		2013		2014		2013
	(in thousands)
Management fee:
Base	$	6,033	$	5,104	$	17,392	$	14,043
Performance incentive		3,590		3,435		9,217		9,443

	$	9,623	$	8,539	$	26,609	$	23,486

In the event of termination of the management agreement between the Company and PFSI, PFSI may be entitled to a termination fee in certain circumstances. The termination fee is equal to three times the sum of (a) the average annual base management fee, and (b) the average annual performance incentive fee earned by PFSI, in each case during the 24-month period before termination.

Following is a summary of investment activity between the Company and PFSI:


	Quarter ended September 30,					Nine months ended September 30,
	2014			2013		2014			2013
	(in thousands)
Purchases of excess servicing spread	$	9,253		$	2,828	$	82,646		$	2,828
Interest income from excess servicing spread	$	3,577		$	—	$	9,578		$	—
Net (loss) gain on excess servicing spread purchased from PFSI at fair value	($	7,396	)	$	29	($	17,834	)		29
Excess servicing spread recapture recognized	$	2,143		$	—	$	6,558		$	—
MSR recapture recognized	$	—		$	86	$	9		$	586

Other Transactions

In connection with the initial public offering of PMT’s common shares (“IPO”) on August 4, 2009, the Company entered into an agreement with PCM pursuant to which the Company agreed to reimburse PCM for the $2.9 million payment that it made to the IPO underwriters if the Company satisfied certain performance measures over a specified period (the “Conditional Reimbursement”). Effective February 1, 2013, the Company amended the terms of the reimbursement agreement to provide for the reimbursement of PCM of the Conditional Reimbursement if the Company is required to pay PCM performance incentive fees under the management agreement at a rate of $10 in reimbursement for every $100 of performance incentive fees earned. The reimbursement of the Conditional Reimbursement is subject to a maximum reimbursement in any particular 12-month period of $1.0 million and the maximum amount that may be reimbursed under the agreement is $2.9 million. During the quarter and nine months ended September 30, 2014, the Company paid $256,000 and $292,000 to PCM.

The Company has also agreed to pay the IPO underwriters an amount to which it agreed at the time of the offering if the Company satisfies certain performance measures over a specified period. As PCM earns performance incentive fees under the management agreement, such underwriters will be paid at a rate of $20 of payments for every $100 of performance incentive fees earned by PCM. The payment to the underwriters is subject to a maximum reimbursement in any particular 12-month period of $2.0 million and the maximum amount that may be paid under the agreement is $5.9 million. During the quarter and nine months ended September 30, 2014, the Company paid $615,000 and $1.0 million to the underwriters, respectively.

In the event the termination fee is payable to PCM under the management agreement and PCM and the underwriters have not received the full amount of the reimbursements and payments under the reimbursement agreement, such amounts will be paid in full. The term of the reimbursement agreement expires on February 1, 2019.

The Company reimburses PFSI and its affiliates for other expenses, including common overhead expenses and other expenses incurred on its behalf by PFSI, in accordance with the terms of its management agreement as summarized below:


	Quarter ended September 30,				Nine months ended September 30,
	2014		2013		2014		2013
	(in thousands)
Reimbursement of:
Common overhead incurred by PFSI	$	2,912	$	2,552	$	8,181	$	8,359
Expenses incurred on the Company’s behalf		122		1,934		671		3,767

	$	3,034	$	4,486	$	8,852	$	12,126


Payments and settlements during the period (1)	$	31,621	$	29,315	$	72,975	$	94,606

(1)	Payments and settlements include payments for management fees and correspondent production activities itemized in the preceding tables and netting settlements made pursuant to master netting agreements between the Company and PFSI.

Amounts due to PFSI are summarized below:


	September 30, 2014		December 31, 2013
	(in thousands)
Management fees	$	9,623	$	8,924
Servicing fees		6,942		5,915
Allocated expenses		3,360		2,009
Contingent underwriting fees		1,495		1,788

	$	21,420	$	18,636

Amounts due from PFSI totaled $4.3 million and $6.0 million at September 30, 2014 and December 31, 2013, respectively. At September 30, 2014, the balance represents payments receivable relating to cash flows from the Company’s investment in ESS and amounts receivable relating to unsettled MSR and ESS recaptures.

PFSI held 75,000 of the Company’s common shares at both September 30, 2014 and December 31, 2013.

Note 4—Earnings Per Share

Basic earnings per share is determined using the two-class method. Under the two-class method, all earnings (distributed and undistributed) are allocated to common shares and participating securities, based on their respective rights to receive dividends. Basic earnings per share is determined using net income reduced by income attributable to the participating securities and divided by the weighted-average common shares outstanding during the period. The Company grants 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. Unvested share-based compensation awards containing non-forfeitable rights to receive 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 common shares and participating securities, based on their respective rights to receive dividends. Basic earnings per share is determined using net income reduced by income attributable to the participating securities and divided by the weighted-average common shares outstanding during the period.

Diluted earnings per share is determined by dividing net income attributable to diluted shareholders, which adds back to net income the interest expense, net of applicable income taxes, on the Company’s exchangeable senior notes (the “Notes”), by the weighted-average common shares outstanding, assuming all potentially dilutive securities were issued. In periods in which the Company records a loss, potentially dilutive securities are excluded from the diluted loss per share calculation, as their effect on loss per share is anti-dilutive.

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


	Quarter ended September 30,						Nine months ended September 30,
	2014			2013			2014			2013
	(in thousands except per share amounts)
Basic earnings per share:
Net income	$	54,949		$	39,701		$	168,033		$	147,494
Effect of participating securities—share-based compensation awards		(305	)		(374	)		(1,360	)		(1,656	)

Net income attributable to common shareholders	$	54,644		$	39,327		$	166,673		$	145,838

Weighted-average shares outstanding		74,140			64,405			73,254			60,809

Basic earnings per share	$	0.74		$	0.61		$	2.28		$	2.40

Diluted earnings per share:
Net income	$	54,949		$	39,701		$	168,033		$	147,494
Interest on Notes, net of income taxes		2,081			2,075			6,237			3,457

Net income attributable to diluted shareholders	$	57,030		$	41,776		$	174,270		$	150,951

Weighted-average shares outstanding		74,140			64,405			73,254			60,809
Potentially dilutive securities:
Shares issuable pursuant exchange of the Notes		8,401			8,379			8,401			4,726
Shares issuable under share-based compensation plan		291			337			323			363

Diluted weighted-average number of shares outstanding		82,832			73,121			81,978			65,898

Diluted earnings per share	$	0.69		$	0.57		$	2.13		$	2.29

Note 5—Loan Sales and Variable Interest Entities

The Company is a variable interest holder in various special purpose entities that relate to its loan transfer and financing activities. These entities are classified as variable interest entities (“VIEs”) for accounting. The Company has segregated its involvement with VIEs between those VIEs which the Company does not consolidate and those VIEs which the Company consolidates.

Unconsolidated VIEs with Continuing Involvement

The following table summarizes cash flows between the Company and transferees in transfers that are accounted for as sales where PMT maintains continuing involvement with the mortgage loans as well as unpaid principal balance information at period end:


	Quarter ended September 30,				Nine months ended September 30,
	2014		2013		2014		2013
	(in thousands)
Cash flows:
Proceeds from sales	$	3,745,193	$	4,185,246	$	8,534,637		13,229,726
Servicing fees received (1)	$	17,797	$	14,107	$	52,704	$	35,015
Period end information:
Unpaid principal balance of mortgage loans outstanding	$	32,134,609	$	23,717,643
Unpaid principal balance of delinquent mortgage loans:
30-89 days delinquent	$	87,374	$	50,746
90 or more days delinquent
Not in foreclosure		20,708		4,812
In foreclosure or bankruptcy		11,583		3,292

		32,291		8,104

	$	119,665	$	58,850

(1)	Net of guarantee fees.

Consolidated VIE

On September 30, 2013, the Company completed a securitization transaction in which a wholly-owned VIE issued $537.0 million in certificates backed by fixed-rate prime jumbo mortgage loans of PMT Loan Trust 2013-J1, at a 3.9% weighted yield. The Company retained $366.8 million of those certificates. Management concluded that the Company is the primary beneficiary of the VIE and, as a result, the Company consolidates the VIE. Consolidation of the VIE results in the securitized mortgage loans remaining on the consolidated balance sheets of the Company and the certificates issued by the VIE to nonaffiliates being accounted for as secured financing. The certificates are secured solely by the assets of the VIE and not by any other assets of the Company. The assets of the VIE are the only source of repayment of the certificates.

Note 6—Netting of Financial Instruments

The Company uses derivative financial instruments to manage exposure to interest rate risk created by its MBS, interest rate lock commitments (“IRLC”), mortgage loans acquired for sale at fair value, mortgage loans at fair value, ESS and MSRs. All derivative financial instruments are recorded on the balance sheet at fair value. The Company has elected to net derivative asset and liability positions, and cash collateral obtained (or posted) by (or to) its counterparties when subject to a legally enforceable master netting arrangement. The derivative financial instruments that are not subject to master netting arrangements are IRLCs.

Offsetting of Derivative Assets

Following is a summary of net derivative assets. As discussed above, all derivatives with the exception of IRLCs are subject to master netting arrangements.


	September 30, 2014								December 31, 2013
	Gross amounts of recognized assets		Gross amounts offset in the consolidated balance sheet			Net amounts of assets presented in the consolidated balance sheet			Gross amounts of recognized assets		Gross amounts offset in the consolidated balance sheet			Net amounts of assets presented in the consolidated balance sheet
	(in thousands)
Derivatives subject to master netting arrangements:
MBS put options	$	830	$	—		$	830		$	272	$	—		$	272
MBS call options		239		—			239			—		—			—
Forward purchase contracts		4,614		—			4,614			1,229		—			1,229
Forward sale contracts		1,142		—			1,142			16,385		—			16,385
Treasury future sale contracts		857		—			857			—		—			—
Put options on Eurodollar futures		422		—			422			566		—			566
Call options on Eurodollar futures		666		—			666			—		—			—
Netting		—		(3,938	)		(3,938	)		—		(12,986	)		(12,986	)


		8,770		(3,938	)		4,832			18,452		(12,986	)		5,466
Derivatives not subject to master netting arrangements:
Interest rate lock commitments		5,512		—			5,512			2,510		—			2,510

	$	14,282	$	(3,938	)	$	10,344		$	20,962	$	(12,986	)	$	7,976

Derivative Assets and Collateral Held by Counterparty

The following table summarizes by significant counterparty the amount of derivative asset positions after considering master netting arrangements and financial instruments or cash pledged that do not meet the accounting guidance to qualify for netting.


	September 30, 2014								December 31, 2013
			Gross amounts not offset in the consolidated balance sheet								Gross amounts not offset in the consolidated balance sheet
	Net amount of assets presented in the consolidated balance sheet		Financial instruments		Cash collateral received		Net amount		Net amount of assets presented in the consolidated balance sheet		Financial instruments		Cash collateral received		Net amount
	(in thousands)
Interest rate lock commitments	$	5,512	$	—	$	—	$	5,512	$	2,510	$	—	$	—	$	2,510
RJ O’Brien		1,664		—		—		1,664		566		—		—		566
Bank of America, N.A.		1,170		—		—		1,170		1,024		—		—		1,024
JP Morgan		617		—		—		617		—						—
Credit Suisse First Boston Mortgage Capital LLC		370		—		—		370		196		—		—		196
Nomura		266		—		—		266		273						273
Other		745		—		—		745		3,407		—		—		3,407

Total	$	10,344	$	—	$	—	$	10,344	$	7,976	$	—	$	—	$	7,976

Offsetting of Derivative Liabilities and Financial Liabilities

Following is a summary of net derivative liabilities and assets sold under agreements to repurchase. As discussed above, all derivatives with the exception of IRLCs are subject to master netting arrangements. Assets sold under agreements to repurchase do not qualify for netting.


	September 30, 2014								December 31, 2013
	Gross amounts of recognized liabilities		Gross amounts offset in the consolidated balance sheet			Net amounts of liabilities presented in the consolidated balance sheet			Gross amounts of recognized liabilities		Gross amounts offset in the consolidated balance sheet			Net amounts of liabilities presented in the consolidated balance sheet
	(in thousands)

Derivatives subject to master netting arrangements:
Forward purchase contracts	$	478	$	—		$	478		$	7,420	$	—		$	7,420
Forward sales contracts		5,272		—			5,272			1,295		—			1,295
Netting		—		(3,982	)		(3,982	)		—		(8,015	)		(8,015	)

		5,750		(3,982	)		1,768			8,715		(8,015	)		700


Derivatives not subject to master netting arrangements:
Interest rate lock commitments		121		—			121			1,261		—			1,261

		5,871		(3,982	)		1,889			9,976		(8,015	)		1,961

Assets sold under agreements to repurchase		2,416,686		—			2,416,686			2,039,605		—			2,039,605

	$	2,422,557	$	(3,982	)	$	2,418,575		$	2,049,581	$	(8,015	)	$	2,041,566

Derivative Liabilities, Financial Liabilities and Collateral Held by Counterparty

The following table summarizes by significant counterparty the amount of derivative liabilities and assets sold under agreements to repurchase after considering master netting arrangements and financial instruments or cash pledged that do not meet the accounting guidance to qualify for netting. All assets sold under agreements to repurchase represent sufficient collateral or exceed the liability amount recorded on the consolidated balance sheet.


	September 30, 2014									December 31, 2013
			Gross amounts not offset in the consolidated balance sheet									Gross amounts not offset in the consolidated balance sheet
	Net amount of liabilities presented in the consolidated balance sheet		Financial instruments			Cash collateral pledged		Net amount		Net amount of liabilities presented in the consolidated balance sheet		Financial instruments			Cash collateral pledged		Net amount
	(in thousands)
Interest rate lock commitments	$	121	$	—		$	—	$	121	$	1,261	$	—		$	—	$	1,261
Morgan Stanley Bank, N.A.		156,702		(156,157	)		—		545		30,226		(30,226	)		—		—
Bank of Oklahoma		244		—			—		244		—		—			—		—
Daiwa Capital Markets		129,887		(129,682	)		—		205		132,525		(132,525	)		—		—
Fannie Mae Capital Markets		196		—					196		—		—					—
Citibank		766,578		(766,476	)		—		102		945,015		(944,856	)		—		159
Credit Suisse First Boston Mortgage Capital LLC		685,521		(685,521	)		—		—		523,546		(523,546	)		—		—
Bank of America, N.A.		459,728		(459,728	)		—		—		408,452		(408,452	)		—		—
RBS Securities Inc.		219,122		(219,122	)		—		—		—		—			—		—
Other		476		—			—		476		541		—			—		541

Total	$	2,418,575	$	(2,416,686	)	$	—	$	1,889	$	2,041,566	$	(2,039,605	)	$	—	$	1,961

Note 7—Fair Value

The Company’s consolidated financial statements include assets and liabilities that are measured based on their fair values. Measurement at fair value 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 fair value as discussed in the following paragraphs.

Fair Value Accounting Elections

Management identified all of its non-cash financial assets and MSRs relating to loans with initial interest rates of more than 4.5% to be accounted for at fair value. Management has elected to account for these financial statement items at 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 performance. Management has also identified its asset-backed secured financing of the VIE to be accounted for at fair value to reflect the generally offsetting changes in fair value of these borrowings to changes in fair value of the mortgage loans at fair value collateralizing this financing.

For MSRs relating to mortgage loans with initial interest rates of less than or equal to 4.5%, management 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 MSRs relating to mortgage loans with initial interest rates of less than or equal to 4.5% 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’ fair values. Management has identified these assets to be accounted for 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 generally aimed at moderating the effects of changes in interest rates on the assets’ fair values.

For assets sold under agreements to repurchase, borrowings under forward purchase agreements and the Notes, management has determined that historical cost accounting is more appropriate because under this method debt issuance costs are amortized over the term of the debt, thereby matching the debt issuance cost 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 fair value on a recurring basis:


	September 30, 2014
	Level 1		Level 2			Level 3		Total
	(in thousands)
Assets:
Short-term investments	$	37,452	$	—		$	—	$	37,452
Mortgage-backed securities at fair value		—		267,885			—		267,885
Mortgage loans acquired for sale at fair value		—		688,850			—		688,850
Mortgage loans at fair value		—		530,809			2,031,102		2,561,911
Excess servicing spread purchased from PFSI		—		—			187,368		187,368
Derivative assets:
Interest rate lock commitments		—		—			5,512		5,512
MBS put options		—		830			—		830
MBS call options		—		239			—		239
Forward purchase contracts		—		4,614			—		4,614
Forward sales contracts		—		1,142			—		1,142
Treasury futures		—		857			—		857
Put options on Eurodollar futures		—		422			—		422
Call options on Eurodollar futures		—		666			—		666

Total derivative assets before netting before netting		—		8,770			5,512		14,282
Netting (1)		—		(3,938	)		—		(3,938	)

Total derivative assets after netting		—		4,832			5,512		10,344

Mortgage servicing rights at fair value		—		—			57,871		57,871

	$	37,452	$	1,492,376		$	2,281,853	$	3,811,681

Liabilities:
Asset-backed secured financing of the variable interest entity at fair value	$	—	$	166,841		$	—	$	166,841
Derivative liabilities:
Interest rate lock commitments		—		—			121		121
Forward purchase contracts		—		478			—		478
Forward sales contracts		—		5,272			—		5,272

Total derivative liabilities before netting		—		5,750			121		5,871
Netting (1)		—		(3,982	)		—		(3,982	)

Total derivative liabilities after netting		—		1,768			121		1,889

Total liabilities	$	—	$	168,609		$	121	$	168,730

(1)

Derivatives are reported net of cash collateral received and paid and, to the extent that the criteria of the accounting guidance covering the offsetting of amounts related to certain contracts are met, positions with the same counterparty are netted as part of a legally enforceable master netting agreement.


	December 31, 2013
	Level 1		Level 2			Level 3		Total
	(in thousands)
Assets:
Short-term investments	$	92,398	$	—		$	—	$	92,398
Mortgage-backed securities at fair value		—		197,401			—		197,401
Mortgage loans acquired for sale at fair value		—		458,137			—		458,137
Mortgage loans at fair value		—		523,652			2,076,665		2,600,317
Mortgage loans under forward purchase agreements at fair value		—		—			218,128		218,128
Excess servicing spread purchased from PFSI		—		—			138,723		138,723
Derivative assets:
Interest rate lock commitments		—		—			2,510		2,510
MBS put options		—		272			—		272

Forward purchase contracts		—		1,229			—		1,229
Forward sales contracts		—		16,385			—		16,385
Options on Eurodollar futures		—		566			—		566

Total derivative assets		—		18,452			2,510		20,962
Netting (1)		—		(12,986	)		—		(12,986	)

Total derivative assets after netting		—		5,466			2,510		7,976

Mortgage servicing rights at fair value		—		—			26,452		26,452

	$	92,398	$	1,184,656		$	2,462,478	$	3,739,532

Liabilities:
Asset-backed secured financing of the variable interest entity at fair value	$	—	$	165,415		$	—	$	165,415
Derivative liabilities:
Interest rate lock commitments		—		—			1,261		1,261

Forward purchase contracts		—		7,420			—		7,420
Forward sales contracts		—		1,295			—		1,295

Total derivative liabilities		—		8,715			1,261		9,976
Netting (1)		—		(8,015	)		—		(8,015	)

Total derivative liabilities		—		700			1,261		1,961

Total liabilities	$	—	$	166,115		$	1,261	$	167,376

(1)

The following is a summary of changes in items measured using Level 3 inputs on a recurring basis:


	Quarter ended September 30, 2014
	Mortgage loans at fair value			Excess servicing spread			Interest rate lock commitments(1)			Mortgage servicing rights			Total
	(in thousands)
Assets:
Balance, June 30, 2014	$	2,156,501		$	190,244		$	11,087		$	46,802		$	2,404,634
Purchases		—			9,253			—			—			9,253
Repayments and sales		(126,413	)		(8,786	)		—			(137	)		(135,336	)
Accrual of interest		—			3,577			—			—			3,577
ESS received pursuant to a recapture agreement with PFSI		—			2,619			—			—			2,619
Interest rate lock commitments issued, net		—			—			14,046			—			14,046
Capitalization of interest		10,451			—			—			—			10,451
Servicing received as proceeds from sales of mortgage loans		—			—			—			12,812			12,812
Changes in fair value included in income arising from:
Changes in instrument-specific credit risk		13,850			—									13,850
Other factors		67,446			(9,539	)		843			(1,606	)		57,144

		81,296			(9,539	)		843			(1,606	)		70,994

Transfers of mortgage loans to REO		(90,733	)		—			—			—			(90,733	)
Transfers of interest rate lock commitments to mortgage loans acquired for sale at fair value		—			—			(20,585	)		—			(20,585	)

Balance, September 30, 2014	$	2,031,102		$	187,368		$	5,391		$	57,871		$	2,281,732

Changes in fair value recognized during the period relating to assets still held at September 30, 2014	$	70,713		$	(9,539	)	$	5,391		$	(1,606	)	$	64,959

(1)	For the purpose of this table, the interest rate lock asset and liability positions are shown net.


	Quarter ended September 30, 2013
	Mortgage loans at fair value			Agency Debt		Mortgage loans under forward purchase agreements			Excess servicing spread		Net interest rate lock commitments (1)			Mortgage servicing rights			Total
	(in thousands)
Assets:
Balance, June 30, 2013	$	1,309,765		$	—	$	242,531		$	—	$	(16,967	)	$	1,827		$	1,537,156
Purchases		579,260			12,000		1,710			2,828		—			1,696			597,494
Repayments		(59,404	)		—		(8,000	)		—		—			—			(67,404	)
Interest rate lock commitments issued, net		—			—		—			—		16,299			—			16,299
Capitalization of interest		13,203			—		—			—		—			—			13,203
Servicing received as proceeds from sales of mortgage loans		—			—		—			—		—			7,939			7,939
Changes in fair value included in income arising from:
Changes in instrument-specific credit risk		18,732			—		69			—								18,801
Other factors		20,876			578		8,309			29		4,841			(465	)		34,168

		39,608			578		8,378			29		4,841			(465	)		52,969

Transfers of mortgage loans under forward purchase agreements to mortgage loans		13,018			—		(13,018	)		—								—
Transfers of mortgage loans to REO		(46,794	)		—		—			—								(46,794	)
Transfers of mortgage loans under forward purchase agreements to REO under forward purchase agreements		—			—		(3,515	)		—								(3,515	)
Transfers of interest rate lock commitments to mortgage loans acquired for sale		—			—		—			—		7,273			—			7,273

Balance, September 30, 2013	$	1,848,656		$	12,578	$	228,086		$	2,857	$	11,446		$	10,997		$	2,114,620

Changes in fair value recognized during the period relating to assets still held at September 30, 2013	$	33,062		$	578	$	6,949		$	29	$	11,446		$	(465	)	$	51,599

(1)	For the purpose of this table, the interest rate lock asset and liability positions are shown net.


	Nine months ended September 30, 2014
	Mortgage loans at fair value			Mortgage loans under forward purchase agreements			Excess servicing spread			Interest rate lock commitments (1)			Mortgage servicing rights			Total
	(in thousands)
Assets:
Balance, December 31, 2013	$	2,076,665		$	218,128		$	138,723		$	1,249		$	26,452		$	2,461,217
Purchases		283,017			1,386			82,646			—			—			367,049
Repayments and sales		(513,843	)		(6,413	)		(25,280	)		—			(137	)		(545,673	)
Accrual of interest		—			—			9,578			—			—			9,578
ESS received pursuant to a recapture agreement with PFSI		—			—			6,093			—			—			6,093
Interest rate lock commitments issued, net		—			—			—			45,800			—			45,800
Capitalization of interest		39,005			1,800			—			—			—			40,805
Servicing received as proceeds from sales of mortgage loans		—			—			—			—			39,954			39,954
Changes in fair value included in income arising from:
Changes in instrument-specific credit risk		54,612			2,269			—									56,881
Other factors		139,393			(1,466	)		(24,392	)		12,837			(8,398	)		117,974

		194,005			803			(24,392	)		12,837			(8,398	)		174,855

Transfers of mortgage loans under forward purchase agreements to mortgage loans		205,902			(205,902	)		—			—			—			—
Transfers of mortgage loans to REO		(253,649	)		—			—			—			—			(253,649	)
Transfers of mortgage loans under forward purchase agreements to REO under forward purchase agreements		—			(9,802	)		—			—			—			(9,802	)
Transfers of interest rate lock commitments to mortgage loans acquired for sale		—			—			—			(54,495	)		—			(54,495	)

Balance, September 30, 2014	$	2,031,102		$	—		$	187,368		$	5,391		$	57,871		$	2,281,732

Changes in fair value recognized during the period relating to assets still held at September 30, 2014	$	126,773		$	—		$	(24,392	)	$	5,391		$	(8,398	)	$	99,374

(1)	For the purpose of this table, the interest rate lock asset and liability positions are shown net.


	Nine months ended September 30, 2013
	Mortgage loans at fair value			Agency Debt		Mortgage loans under forward purchase agreements			Excess servicing spread		Net interest rate lock commitments (1)			Mortgage servicing rights			Total
	(in thousands)
Assets:
Balance, June 30, 2013	$	1,189,971		$	—	$	—		$	—	$	19,479		$	1,346		$	1,210,796
Purchases		779,746			12,000		245,020			2,828		—			1,881			1,041,475
Repayments		(194,645	)		—		(8,000	)		—		—			—			(202,645	)
Interest rate lock commitments issued, net		—			—		—			—		71,195			—			71,195
Capitalization of interest		25,017			—		—			—		—			—			25,017
Servicing received as proceeds from sales of mortgage loans		—			—		—			—		—			8,043			8,043
Changes in fair value included in income arising from:
Changes in instrument-specific credit risk		31,176			—		69			—								31,245
Other factors		119,935			578		7,619			29		(25,831	)		(273	)		102,057

		151,111			578		7,688			29		(25,831	)		(273	)		133,302

Transfers of mortgage loans under forward purchase agreements to mortgage loans		13,018			—		(13,018	)		—								—
Transfers of mortgage loans to REO		(115,562	)		—		—			—								(115,562	)
Transfers of mortgage loans under forward purchase agreements to REO under forward purchase agreements		—			—		(3,604	)		—								(3,604	)
Transfers of interest rate lock commitments to mortgage loans		—			—		—			—		(53,397	)		—			(53,397	)

Balance, September 30, 2013	$	1,848,656		$	12,578	$	228,086		$	2,857	$	11,446		$	10,997		$	2,114,620

Changes in fair value recognized during the period relating to assets still held at September 30, 2013	$	102,843		$	578	$	6,106		$	29	$	11,446		$	(273	)	$	120,729

(1)	For the purpose of this table, the interest rate lock asset and liability positions are shown net.

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):


	September 30, 2014
	Fair value		Principal amount due upon maturity		Difference
	(in thousands)
Mortgage loans acquired for sale:
Current through 89 days delinquent	$	688,850	$	664,540	$	24,310
90 or more days delinquent (1)
Not in foreclosure		—		—		—
In foreclosure		—		—		—

		—		—		—

		688,850		664,540		24,310

Mortgage loans at fair value:
Current through 89 days delinquent		1,122,391		1,371,396		(249,005	)
90 or more days delinquent (1)
Not in foreclosure		558,095		860,281		(302,186	)
In foreclosure		881,425		1,339,090		(457,665	)

		1,439,520		2,199,371		(759,851	)

		2,561,911		3,570,767		(1,008,856	)

	$	3,250,761	$	4,235,307	$	(984,546	)

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


	December 31, 2013
	Fair value		Principal amount due upon maturity		Difference
	(in thousands)
Mortgage loans acquired for sale:
Current through 89 days delinquent	$	457,968	$	447,224	$	10,744
90 or more days delinquent (1)
Not in foreclosure		169		162		7
In foreclosure		—		—		—

		169		162		7

		458,137		447,386		10,751

Mortgage loans and mortgage loans under forward purchase agreements at fair value:
Current through 89 days delinquent		1,170,918		1,506,175		(335,257	)
90 or more days delinquent (1)
Not in foreclosure		738,043		1,190,403		(452,360	)
In foreclosure		909,484		1,493,644		(584,160	)

		1,647,527		2,684,047		(1,036,520	)

		2,818,445		4,190,222		(1,371,777	)

	$	3,276,582	$	4,637,608	$	(1,361,026	)

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

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


	Quarter ended September 30, 2014
	Net gain on mortgage loans acquired for sale			Net interest income			Net gain on investments			Net loan servicing fees			Total
	(in thousands)
Assets:
Short-term investments	$	—		$	—		$	—		$	—		$	—
Mortgage-backed securities at fair value		—			108			(821	)		—			(713	)
Mortgage loans acquired for sale at fair value		19,977			—			—			—			19,977
Mortgage loans at fair value		—			385			78,717			—			79,102
Mortgage loans under forward purchase agreements at fair value		—			—			—			—			—
Excess servicing spread at fair value		—			—			(7,396	)		—			(7,396	)
Mortgage servicing rights at fair value		—			—			—			(1,606	)		(1,606	)

	$	19,977		$	493		$	70,500		$	(1,606	)	$	89,364

Liabilities:
Asset-backed secured financing at fair value	$	—		$	(124	)	$	696		$	—		$	572

	$	—		$	(124	)	$	696		$	—		$	572


	Quarter ended September 30, 2013
	Net loss on mortgage loans acquired for sale			Net interest income			Net gain on investments			Net loan servicing fees			Total
	(in thousands)
Assets:
Short-term investments	$	—		$	—		$	—		$	—		$	—
Mortgage-backed securities at fair value		—			—			5,356			—			5,356
Agency debt securities		—			—			578			—			578
Mortgage loans acquired for sale at fair value		(14,519	)		—			—			—			(14,519	)
Mortgage loans at fair value		—			—			39,608			—			39,608
Mortgage loans under forward purchase agreements at fair value		—			—			8,378			—			8,378
Excess servicing spread at fair value		—			—			29			—			29
Mortgage servicing rights at fair value		—			—			—			(465	)		(465	)

	$	(14,519	)	$	—		$	53,949		$	(465	)	$	38,965


	Nine months ended September 30, 2014
	Net gain on mortgage loans acquired for sale		Net interest income			Net gain on investments			Net loan servicing fees			Total
	(in thousands)
Assets:
Short-term investments	$	—	$	—		$	—		$	—		$	—
Mortgage-backed securities at fair value		—		296			6,096			—			6,392
Mortgage loans acquired for sale at fair value		69,812		—			—			—			69,812
Mortgage loans at fair value		—		938			218,912			—			219,850
Mortgage loans under forward purchase agreements at fair value		—		—			803			—			803
Excess servicing spread at fair value		—		—			(17,834	)		—			(17,834	)
Mortgage servicing rights at fair value		—		—			—			(8,398	)		(8,398	)

	$	69,812	$	1,234		$	207,977		$	(8,398	)	$	270,625

Liabilities:
Asset-backed secured financing at fair value	$	—	$	(328	)	$	(7,258	)	$	—		$	(7,586	)

	$	—	$	(328	)	$	(7,258	)	$	—		$	(7,586	)


	Nine months ended September 30, 2013
	Net gain on mortgage loans acquired for sale			Net interest income		Net gain on investments		Net loan servicing fees		Total
	(in thousands)
Assets:
Short-term investments	$	—		$	—	$	—	$	—	$	—
Mortgage-backed securities at fair value		—			—		5,356		—		5,356
Mortgage loans acquired for sale at fair value		(46,699	)		—		—		—		(46,699	)
Mortgage loans at fair value		—			—		151,111		—		151,111
Agency debt securities		—			—		578		—		578
Mortgage loans under forward purchase agreements at fair value		—			—		7,689		—		7,689
Excess servicing spread at fair value		—			—		29		—		29
Mortgage servicing rights at fair value		—			—		—		—		—

	$	(46,699	)	$	—	$	164,763	$	—	$	118,064

Financial Statement Items Measured at Fair Value on a Nonrecurring Basis

Following is a summary of financial statement items that are measured at fair value on a nonrecurring basis:


	September 30, 2014
	Level 1		Level 2		Level 3		Total
	(in thousands)

Real estate asset acquired in settlement of loans	$	—	$	—	$	138,558	$	138,558
Mortgage servicing rights at lower of amortized cost or fair value		—		—		78,176		78,176

	$	—	$	—	$	216,734	$	216,734


	December 31, 2013
	Level 1		Level 2		Level 3		Total
	(in thousands)

Real estate asset acquired in settlement of loans	$	—	$	—	$	63,043	$	63,043
Real estate asset acquired in settlement of loans under forward purchase agreements		—		—		7,760		7,760
Mortgage servicing rights at lower of amortized cost or fair value		—		—		184,067		184,067

	$	—	$	—	$	254,870	$	254,870

The following table summarizes the net losses recognized during the period on assets measured at estimated fair values on a nonrecurring basis:


	Quarter ended September 30,						Nine months ended September 30,
	2014			2013			2014			2013
	(in thousands)
Real estate asset acquired in settlement of loans	$	(14,242	)	$	(4,554	)	$	(24,027	)	$	(8,191	)
Real estate asset acquired in settlement of loans under forward purchase agreements	$	—		$	(29	)	$	—		$	(29	)
Mortgage servicing rights at lower of amortized cost or fair value		602			(212	)		(2,249	)		3,495

	$	(13,640	)	$	(4,795	)	$	(26,276	)	$	(4,725	)

Real Estate Acquired in Settlement of Loans

The Company measures its investment in REO at the respective properties’ fair values less cost to sell on a nonrecurring basis. The initial carrying value of the REO is measured by cost as indicated by the purchase price in the case of purchased REO or as measured by the fair value of the mortgage loan immediately before acquisition in the case of acquisition in settlement of a loan. 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 property’s cost 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 pools with 50 basis point interest rate ranges for fixed-rate mortgage loans with interest rates between 3% and 4.5% and a single pool for mortgage loans with interest 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 interest rate pools is below the amortized cost of the MSRs reduced by the existing valuation allowance for that pool, those MSRs are impaired.

When MSRs are impaired, the impairment is recognized in current-period income and the carrying value of the MSRs is adjusted using a valuation allowance. If the fair value of the MSRs subsequently increases, the increase in fair value is recognized in current period income only to the extent of the valuation allowance for the respective impairment stratum.

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

Fair Value of Financial Instruments Carried at Amortized Cost

The Company’s cash balances as well as certain of its borrowings are carried at amortized cost. Management has concluded that the fair values of Cash, Assets sold under agreements to repurchase, and Borrowings under forward purchase agreements approximate the agreements’ carrying values due to the immediate realizability of Cash at its carrying amount and to the borrowing agreements’ short terms and variable interest rates.

Cash is measured using Level 1 inputs. The Company’s Assets sold under agreements to repurchase and Borrowings under forward purchase agreements are carried at amortized cost. The Company has classified these financial instruments as “Level 3” financial statement items as of September 30, 2014 due to the lack of current market activity and the Company’s reliance on unobservable inputs to estimate these instruments’ fair values.

The Notes are carried at amortized cost. The fair value of the Notes at September 30, 2014 and December 31, 2013 was $244.0 million and $238.4 million, respectively. The fair value of the Notes is estimated using a broker indication of value. The Company has classified the Notes as “Level 3” financial statement items as of September 30, 2014 due to the lack of current market activity and the use of broker’s indication of value to estimate the instrument’s fair values.

Valuation Techniques and Inputs

Most of the Company’s financial assets and a portion of its liabilities are carried at fair value with changes in fair value recognized in current period income. A substantial portion of those items are “Level 3” financial statement items which require the use of significant unobservable inputs in the estimation of the assets’ and liabilities’ fair 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.

Due to the difficulty in estimating the fair value of “Level 3” financial statement items, PFSI has assigned the estimating of fair value of these assets to PFSI’s specialized staff and subjects the valuation process to significant executive management oversight. PFSI’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, estimates the fair value of “Level 3” financial instruments and MSRs.

The FAV group reports to PFSI’s valuation committee, which oversees and approves the valuations. The valuation committee includes the chief executive, financial, operating, credit, and asset/liability management officers of PFSI. 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 PFSI’s 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 PFSI’s valuation committee on a monthly basis on the changes in the valuation of the Level 3 assets and liabilities it values, including major factors 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 valuation models.

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

Mortgage-Backed Securities

The Company’s MBS securities presently include Agency and senior non-agency MBS, Agency and senior non-Agency MBS are categorized as “Level 2” financial statement items. Fair value of Agency and senior non-Agency MBS is estimated based on quoted market prices for similar securities.

Mortgage Loans

Fair value of mortgage loans is estimated based on whether the mortgage loans are saleable into active markets:

•

Mortgage loans that are saleable into active markets, comprised of the Company’s mortgage loans acquired for sale at fair value and mortgage loans at fair value held in a VIE, are categorized as “Level 2” financial statement items. The fair values of mortgage loans acquired for sale at fair value are estimated using their quoted market or contracted price or market price equivalent. For the mortgage loans at fair value held in a VIE, the fair values of all of the individual securities issued by the securitization trust are used to derive a fair value for the mortgage loans.

•

Loans that are not saleable into active markets, comprised of the Company’s mortgage loans at fair value held outside the VIE 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, property type or contracted selling price, discount rates and forecasts of future interest rates, home prices, prepayment speeds, default speeds and loss severities.

The valuation process includes the computation by stratum of the fair values 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 PFSI’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 effect on fair value of 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 and mortgage loans under forward purchase agreements at fair value:


Key inputs	September 30, 2014	December 31, 2013
Mortgage loans at fair value
Discount rate
Range	5.4% – 15.0%	8.7% – 16.9%
Weighted average	8.9%	12.7%

Twelve-month projected housing price index change
Range	4.0% – 5.1%	2.5% – 4.3%
Weighted average	4.8%	3.7%

Prepayment speed (1)
Range	0.0% – 7.4%	0.0% – 3.9%
Weighted average	3.0%	2.0%

Total prepayment speed (2)
Range	0.0% – 27.5%	0.3% – 33.9%
Weighted average	21.6%	24.3%

Mortgage loans under forward purchase agreements
Discount rate
Range	—	9.5% – 13.5%
Weighted average	—	11.9%

Twelve-month projected housing price index change
Range	—	3.3% – 4.2%
Weighted average	—	3.8%

Prepayment speed (1)
Range	—	1.1% – 2.9%
Weighted average	—	2.2%

Total prepayment speed (2)
Range	—	13.4% – 27.9%
Weighted average	—	22.8%

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

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

Excess Servicing Spread Purchased from PennyMac Financial Services, Inc.

The Company categorizes ESS as a “Level 3” financial statement item. The Company uses a discounted cash flow approach to estimate the fair value of ESS. The key inputs used in the estimation of the fair value of ESS include prepayment speed and discount rate. Significant changes to those inputs in isolation may result in a significant change in the ESS fair value measurement. Changes in these key inputs are not necessarily directly related.

ESS is generally subject to loss in fair value when interest rates decrease. Decreasing mortgage rates normally encourage increased mortgage refinancing activity. Increased refinancing activity reduces the life of the loans underlying the ESS, thereby reducing the fair value of ESS. Reductions in the fair value of ESS affect income primarily through change in fair value.

Interest income for ESS is accrued using the interest method, based upon the expected interest yield from the ESS through the expected life of the underlying mortgages. Changes to expected interest yield result in a change in Interest income which is recorded in Interest income. Changes to expected cash flows result in a change to fair value that is recognized in Net gain (loss) on investments.

Following are the key inputs used in determining the fair value of ESS:


Key inputs	September 30, 2014	December 31, 2013
Unpaid principal balance of underlying mortgage loans (in thousands)	$27,702,102	$20,512,659
Average servicing fee rate (in basis points)	31	32
Average ESS rate (in basis points)	16	16
Pricing spread (1)
Range	1.7% - 11.8%	2.8% - 14.4%
Weighted average	5.0%	5.4%

Life (in years)
Range	0.4 - 7.3	0.9 - 8.0
Weighted average	5.8	6.1

Annual total prepayment speed (2)
Range	7.6% - 72.4%	7.7% - 48.6%
Weighted average	10.8%	9.7%

(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 London Interbank Offered Rate (“LIBOR”) curve for purposes of discounting cash flows relating to ESS.

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

Derivative Financial Instruments

The Company estimates the fair value of IRLCs based on quoted Agency MBS prices, its estimate of the fair value of the MSRs it expects to receive in the sale of the loans and the probability that the mortgage loan will be purchased as a percentage of the commitments it has made (the “pull-through rate”). The Company categorizes IRLCs as “Level 3” financial statement items.

The significant unobservable inputs used in the fair value measurement of the Company’s IRLCs are the pull-through rate and the MSR component of the Company’s estimate of the fair value of the mortgage loans it has committed to purchase. Significant changes in the pull-through rate and the MSR component of the IRLCs, in isolation, may result in a significant change in fair value. The financial effects of changes in these assumptions are generally inversely correlated as increasing interest rates have a positive effect on the fair value of the MSR component of IRLC value, but increase the pull-through rate for loans that have decreased in fair value.

Following is a quantitative summary of key unobservable inputs used in the valuation of IRLCs:


Key inputs	September 30, 2014	December 31, 2013
Pull-through rate
Range	49.8% - 98.0%	64.8% - 98.0%
Weighted average	83.5%	86.4%
MSR value expressed as:
Servicing fee multiple
Range	1.6 - 5.2	1.4 - 5.1
Weighted average	3.9	4.1

Percentage of unpaid principal balance
Range	0.4% - 2.5%	0.4% - 1.3%
Weighted average	1.0%	1.0%

The Company estimates the fair value of commitments to sell loans based on quoted MBS prices. The Company estimates the fair value of the interest rate options and futures it purchases and sells based on observed interest rate volatilities in the MBS market.

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 established 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 the Manager’s staff appraisers when the Company obtains multiple indications of value and there is a significant difference between the values received. PCM’s staff appraisers will attempt to resolve the difference between the indications of value. 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 determine the 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 inputs used in the Company’s discounted cash flow model are based on market factors which management believes are consistent with inputs and data used by market participants valuing similar MSRs. The key inputs used in the estimation of the fair value of MSRs include prepayment and default rates of the underlying loans, the applicable pricing spread or discount rate, and annual per-loan cost to service mortgage loans, all of which are unobservable. 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 inputs are not necessarily directly related. The results of the estimates of fair value of MSRs are reported to PFSI’s valuation committee as part of their review and approval of monthly valuation results.

MSRs are generally subject to loss in fair value when mortgage interest rates decrease. Decreasing mortgage interest rates normally encourage increased mortgage refinancing activity. Increased refinancing activity reduces the life of the loans underlying the MSRs, thereby reducing MSR fair value. Reductions in the fair value of MSRs affect income primarily through change in fair value and impairment charges. For MSRs backed by mortgage loans with historically low interest rates, factors other than interest rates (such as housing price changes) take on increasing influence on prepayment behavior of the underlying mortgage loans.

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


	Quarter ended September 30,
	2014		2013
Key inputs	Amortized cost	Fair value	Amortized cost	Fair value
	(MSR recognized and unpaid principal balance of underlying loan amounts in thousands)
MSR recognized	$26,802	$12,812	$41,018	$7,939
Unpaid principal balance of underlying mortgage loans	$2,423,013	$1,234,028	$3,404,274	$707,891
Weighted-average annual servicing fee rate (in basis points)	25	25	25	25

Pricing spread (1)
Range	6.5% – 17.5%	8.8% – 13.5%	5.4% – 13.9%	7.4% - 9.6%
Weighted average	8.5%	9.1%	6.3%	8.0%

Life (in years)
Range	1.4 - 7.3	2.8 - 7.3	2.9 - 6.9	3.8 - 6.9
Weighted average	6.6	7.1	6.3	6.8

Annual total prepayment speed (2)
Range	7.6% – 48.8%	8.0% – 30.4%	8.5% – 15.6%	8.8% - 20.7%
Weighted average	9.2%	9.7%	8.9%	9.8%

Annual per-loan cost of servicing
Range	$68 – $140	$68 – $140	$68 – $68	$68 - $68
Weighted average	$70	$70	$68	$68


	Nine months ended September 30,
	2014		2013
Key inputs	Amortized cost	Fair value	Amortized cost	Fair value
	(MSR recognized and unpaid principal balance of underlying loan amounts in thousands)
MSR recognized	$49,276	$39,954	$148,186	$8,043
Unpaid principal balance of underlying mortgage loans	$4,518,100	$3,784,142	$12,247,940	$717,877
Weighted-average annual servicing fee rate (in basis points)	25	25	26	25

Pricing spread (1)
Range	6.3% – 17.5%	8.5% - 13.5%	5.4% – 14.4%	7.4% - 14.4%
Weighted average	8.5%	9.1%	6.6%	8.0%

Life (in years)
Range	1.1 - 7.3	2.8 - 7.3	2.6 - 6.9	2.8 - 6.9
Weighted average	6.3	7.1	6.4	6.8

Annual total prepayment speed (2)
Range	7.6% – 56.4%	8.0% - 30.4%	8.5% – 23.6%	8.8% - 27.0%
Weighted average	9.7%	9.5%	9.0%	10.0%

Annual per-loan cost of servicing
Range	$68 – $140	$68 - $140	$68 – $140	$68 - $68
Weighted average	$69	$69	$68	$68

(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)	Prepayment speed is measured using Life Total CPR.

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


	September 30, 2014		December 31, 2013
	Amortized cost	Fair value	Amortized cost	Fair value
	(Carrying value, unpaid principal balance and effect on fair value amounts in thousands)

Carrying value	$287,977	$57,871	$264,120	$26,452

Key inputs:
Unpaid principal balance of underlying mortgage loans	$26,459,404	$5,803,275	$23,399,612	$2,393,321
Weighted-average annual servicing fee rate (in basis points)	26	25	26	26
Weighted-average note interest rate	3.77%	4.78%	3.68%	4.78%

Pricing spread (1) (2)
Range	6.3% – 17.5%	7.6% – 15.3%	6.3% – 17.5%	7.3% – 15.3%
Weighted average	7.3%	9.1%	6.7%	8.6%
Effect on fair value of a:
5% adverse change	$(5,718)	$(1,024)	$(5,490)	$(488)
10% adverse change	$(11,245)	$(2,013)	$(10,791)	$(959)
20% adverse change	$(21,759)	$(3,897)	$(20,861)	$(1,855)

Weighted average life (in years)
Range	1.3 - 7.2	2.4 - 7.2	1.3 - 7.3	2.8 - 7.3
Weighted average	6.4	7.0	6.7	7.2
Prepayment speed (1) (3)
Range	7.7% - 52.7%	8.0% - 32.7%	7.7% - 51.9%	8.0% - 20.0%
Weighted average	8.6%	10.1%	8.2%	8.9%
Effect on fair value of a:
5% adverse change	$(5,886)	$(1,396)	$(5,467)	$(568)
10% adverse change	$(11,589)	$(2,742)	$(10,765)	$(1,117)
20% adverse change	$(22,480)	$(5,288)	$(20,886)	$(2,160)

Annual per-loan cost of servicing
Range	$68 – $140	$68 – $140	$68 – $140	$68 – $140
Weighted average	$68	$69	$68	$68
Effect on fair value of a:
5% adverse change	$(1,905)	$(364)	$(1,695)	$(158)
10% adverse change	$(3,809)	$(729)	$(3,390)	$(316)
20% adverse change	$(7,619)	$(1,457)	$(6,780)	$(633)

(1)	The effect on value of an adverse change in one of the above-mentioned key inputs may result in recognition of MSR impairment. The extent of impairment recognized will depend on the relationship of fair value to the carrying value of MSRs.

(2)

Pricing spread represents a margin that is added 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 and purchased MSRs not backed by pools of distressed mortgage loans.

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

The preceding sensitivity analyses are limited in that they were performed at a particular point in time; only contemplate the movements in the indicated inputs; do not incorporate changes in the inputs in relation to other inputs; are subject to

the accuracy of various models and assumptions used; and do not incorporate 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.

Note 8—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 summary of the distribution of the Company’s mortgage loans acquired for sale at fair value:


	September 30, 2014				December 31, 2013
	Fair value		Unpaid principal balance		Fair value		Unpaid principal balance
Loan type	(in thousands)
Conventional:
Agency-eligible	$	451,288	$	434,584	$	311,162	$	304,749
Jumbo		177,843		173,174		34,615		35,050
Government-insured or guaranteed		59,719		56,782		112,360		107,587

	$	688,850	$	664,540	$	458,137	$	447,386

Loans pledged to secure assets sold under agreements to repurchase	$	675,659			$	454,210

The Company is not approved by Ginnie Mae as an issuer of Ginnie Mae-guaranteed securities which are backed by government-insured or guaranteed mortgage loans. The Company transfers government-insured or guaranteed mortgage loans that it purchases from correspondent lenders to PLS, which is a Ginnie Mae-approved issuer, and earns a sourcing fee of three basis points on the unpaid principal balance plus interest earned during the period it holds each such loan.

Note 9—Derivative Financial Instruments

The Company engages in interest rate risk management activities in an effort to reduce the variability of earnings caused by changes in interest rates. To manage the 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 fair value of the Company’s MBS, IRLCs and inventory of mortgage loans acquired for sale. The Company records all derivative financial instruments at fair value and records changes in fair value in current period income.

The Company is exposed to price risk relative to its mortgage loans acquired for sale as well as to the IRLCs it issues to correspondent lenders. The Company bears price risk from the time an IRLC is issued to a correspondent lender to the time the purchased mortgage loan is sold. During this period, the Company is exposed to losses if mortgage interest rates increase because the value of the purchase commitment or mortgage loan acquired for sale decreases.

The Company is also exposed to risk relative to the fair value of its MSRs. The Company is exposed to loss in value of its MSRs when interest rates decrease. The Company periodically includes MSRs in its hedging activities.

Beginning in the third quarter of 2013, the Company entered into Eurodollar futures, which settle daily, to economically hedge net fair value changes of a portion of fixed-rate mortgage loans at fair value held in a VIE and MBS securities at fair value and the related variable rate repurchase agreement liabilities indexed to LIBOR. The Company uses the Eurodollar futures with the intention of moderating the risk of rising market interest rates that will result in unfavorable changes in the value of the Company’s fixed-rate assets and economic performance of its LIBOR-indexed variable interest rate repurchase agreement liabilities.

The Company does not use derivative financial instruments for purposes other than in support of its risk management activities other than IRLCs, which are generated in the normal course of business when the Company commits to purchase mortgage loans acquired for sale.

The Company had the following derivative assets and liabilities and related margin deposits recorded within Derivative assets and Derivative liabilities on the consolidated balance sheets:


	September 30, 2014								December 31, 2013
			Fair value								Fair value
	Notional		Derivative			Derivative			Notional		Derivative			Derivative
Instrument	amount		assets			liabilities			amount		assets			liabilities
	(in thousands)
Derivatives not designated as hedging instruments:
Free-standing derivatives:
Interest rate lock commitments		838,948	$	5,512		$	121			557,343	$	2,510		$	1,261
Forward sales contracts		2,776,249		1,142			5,272			3,588,027		16,385			1,295
Forward purchase contracts		1,910,139		4,614			478			2,781,066		1,229			7,420
MBS put options		565,000		830			—			55,000		272			—
MBS call options		50,000		239			—			110,000		—			—
Eurodollar future sale contracts		6,262,000		—			—			8,779,000		—			—
Treasury future sale contracts		85,000		857			—			105,000		—			—
Call options on Eurodollar futures		355,000		666			—			—		—			—
Put options on Eurodollar futures		220,000		422			—			52,500		566			—

Total derivative instruments before netting				14,282			5,871					20,962			9,976
Netting				(3,938	)		(3,982	)				(12,986	)		(8,015	)

			$	10,344		$	1,889				$	7,976		$	1,961

Margin deposits with (collateral received from) derivatives counterparties			$	44							$	(4,971	)

The following table summarizes the notional amount activity for derivative contracts used to hedge the Company’s IRLCs and inventory of mortgage loans acquired for sale:


	Quarter ended September 30, 2014
	Balance,							Balance,
	beginning				Dispositions/			end
Period/Instrument	of period		Additions		expirations			of period
	(in thousands)
Quarter ended September 30, 2014
Forward purchase contracts		3,058,604		8,191,022		(9,339,487	)		1,910,139
Forward sales contracts		4,185,633		11,620,826		(13,030,210	)		2,776,249
MBS put option		270,000		375,000		(345,000	)		300,000
MBS call option		25,000		55,000		(50,000	)		30,000


	Quarter ended September 30, 2013
	Balance,							Balance,
	beginning				Dispositions/			end
Period/Instrument	of period		Additions		expirations			of period
	(in thousands)
Quarter ended September 30, 2013
Forward purchase contracts		5,411,784		18,214,008		(21,291,203	)		2,334,589
Forward sales contracts		7,728,066		21,440,627		(25,844,850	)		3,323,843
MBS put options		460,000		180,000		(510,000	)		130,000
MBS call options		725,000		300,000		(1,025,000	)		—


	Nine months ended September 30, 2014
	Balance,							Balance,
	beginning				Dispositions/			end
Period/Instrument	of period		Additions		expirations			of period
	(in thousands)
Nine months ended September 30, 2014
Forward purchase contracts		2,781,066		26,555,921		(27,426,848	)		1,910,139
Forward sales contracts		3,463,027		35,672,348		(36,359,126	)		2,776,249
MBS put option		55,000		1,070,000		(825,000	)		300,000
MBS call option		110,000		80,000		(160,000	)		30,000


	Nine months ended September 30, 2013
	Balance,							Balance,
	beginning				Dispositions/			end
Period/Instrument	of period		Additions		expirations			of period
	(in thousands)
Nine months ended September 30, 2013
Forward purchase contracts		2,206,539		45,301,457		(45,173,407	)		2,334,589
Forward sales contracts		4,266,983		58,817,165		(59,760,305	)		3,323,843
MBS put options		495,000		3,205,000		(3,570,000	)		130,000
MBS call options		—		2,200,000		(2,200,000	)		—

The Company recorded net (losses) gains on derivative financial instruments used to hedge the Company’s IRLCs and inventory of mortgage loans totaling $(4.5) million and $3.1 million for the quarters ended September 30, 2014 and 2013, respectively, and $(44.0) million and $143.2 million for the nine months ended September 30, 2014 and 2013, respectively. Derivative gains and losses are included in Net gains on mortgage loans acquired for sale in the Company’s consolidated statements of income.

The following table summarizes the notional amount activity for derivative contracts used to hedge the Company’s MSRs:


	Quarter ended September 30, 2014
	Balance,							Balance,
	beginning				Dispositions/			end
Period/Instrument	of period		Additions		expirations			of period
	(in thousands)
Quarter ended September 30, 2014
Forward purchase contracts		—		25,000		(25,000	)		—
Forward sales contracts		—		50,000		(50,000	)		—
MBS put option		25,000		165,000		(25,000	)		165,000
MBS call option		70,000		20,000		(70,000	)		20,000
Treasury future sale contracts		—		43,900		(43,900	)		—
Treasury future purchase contracts		—		27,700		(27,700	)		—
Put option on Eurodollar futures		40,000		325,000		(265,000	)		100,000
Call option on Eurodollar futures		130,000		390,000		(275,000	)		245,000


	Nine months ended September 30, 2014
	Balance,							Balance,
	beginning				Dispositions/			end
Period/Instrument	of period		Additions		expirations			of period
	(in thousands)
Nine months ended September 30, 2014
Forward purchase contracts		—		95,000		(95,000	)		—
Forward sales contracts		—		110,000		(110,000	)		—
MBS put option		—		190,000		(25,000	)		165,000
MBS call option		—		150,000		(130,000	)		20,000
Treasury future sale contracts		—		76,700		(76,700	)		—
Treasury future purchase contracts		—		53,300		(53,300	)		—
Put option on Eurodollar futures		—		690,000		(590,000	)		100,000
Call option on Eurodollar futures		—		670,000		(425,000	)		245,000

The Company recorded net (losses) gains on derivative financial instruments used as economic hedges of MSRs totaling $(653,000) and $0 for the quarters ended September 30, 2014 and 2013, respectively, and $3.5 million and $(2.0) million for the nine months ended September 30, 2014 and 2013, respectively. The derivative net (losses) gains are included in Net loan servicing fees in the Company’s consolidated statements of income.

The following table summarizes the notional amount activity for derivative contracts used to hedge the Company’s net fair value changes of a portion of fixed-rate Mortgage loans at fair value held in a VIE and MBS securities at fair value and the related variable LIBOR rate repurchase agreement liabilities:


	Quarter ended September 30, 2014
	Balance,							Balance,
	beginning				Dispositions/			end
Period/Instrument	of period		Additions		expirations			of period
	(in thousands)
Quarter ended September 30, 2014
Eurodollar future sale contracts		5,562,000		990,000		(290,000	)		6,262,000
Eurodollar future purchase contracts		—		290,000		(290,000	)		—
Treasury future sale contracts		85,000		110,600		(110,600	)		85,000
Treasury future purchase contracts		—		110,600		(110,600	)		—
Put options on Eurodollar futures		85,000		165,500		(130,500	)		120,000
Call option on Eurodollar futures		100,000		190,000		(180,000	)		110,000
MBS put option purchase contracts		97,500		100,000		(97,500	)		100,000

	Quarter ended September 30, 2013
Period/Instrument	Balance, beginning of period		Additions		Dispositions/ expirations			Balance, end of period
	(in thousands)
Quarter ended September 30, 2013
Eurodollar futures		—		19,152,000		(9,188,000	)		9,964,000
Treasury futures		—		75,000		—			75,000
Options on Eurodollar futures		—		2,200,000		—			2,200,000


	Nine months ended September 30, 2014
	Balance,							Balance,
	beginning				Dispositions/			end
Period/Instrument	of period		Additions		expirations			of period
	(in thousands)
Nine months ended September 30, 2014
Eurodollar future sale contracts		8,779,000		1,452,000		(3,969,000	)		6,262,000
Eurodollar future purchase contracts		—		3,287,000		(3,287,000	)		—
Treasury future sale contracts		105,000		298,600		(318,600	)		85,000
Treasury future purchase contracts		—		278,600		(278,600	)		—
Put options on Eurodollar futures		52,500		362,500		(295,000	)		120,000
Call option on Eurodollar futures		—		290,000		(180,000	)		110,000
MBS put option purchase contracts		15,000		222,500		(137,500	)		100,000

	Nine months ended September 30, 2013
Period/Instrument	Balance, beginning of period		Additions		Dispositions/ expirations			Balance, end of period
	(in thousands)
Nine months ended September 30, 2013
Eurodollar futures		—		19,152,000		(9,188,000	)		9,964,000
Treasury futures		—		75,000		—			75,000
Options on Eurodollar futures		—		2,200,000		—			2,200,000

The Company recorded net losses on derivative financial instruments used to hedge the net change in fair value of fixed-rate assets and its variable LIBOR rate repurchase agreement liabilities of $807,000 for the quarter ended September 30, 2014 and $14.6 million for the nine months ended September 30, 2014. The Company recorded net losses on derivative financial instruments used to hedge the net change in fair value of fixed-rate assets and its variable LIBOR rate repurchase agreement liabilities of $12.1 million for the quarter and nine months ended September 30, 2013. The derivative losses are included in Net gain on investments in the Company’s consolidated statements of income.

Note 10—Mortgage Loans at Fair Value

Mortgage loans at fair value are comprised of mortgage loans that are not acquired for sale and, to the extent they are not held in a VIE securing an asset-backed financing, 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:


	September 30, 2014				December 31, 2013
Loan type	Fair value		Unpaid principal balance		Fair value		Unpaid principal balance
	(in thousands)
Nonperforming loans	$	1,439,520	$	2,199,371	$	1,469,686	$	2,415,446
Performing loans:
Fixed interest rate		303,569		432,358		310,607		475,568
Adjustable-rate mortgage (“ARM”)/hybrid		104,594		134,861		165,327		207,553
Interest rate step-up		183,263		279,244		130,906		215,702
Balloon		156		209		139		213

		591,582		846,672		606,979		899,036

Mortgage loans held in a VIE securing asset-backed financing
Fixed interest rate jumbo		530,809		524,725		523,652		543,257

	$	2,561,911	$	3,570,768	$	2,600,317	$	3,857,739

Mortgage loans at fair value pledged to secure borrowings at period end:
Assets sold under agreements to repurchase	$	2,272,089			$	2,314,324

Mortgage loans held in a consolidated subsidiary whose stock is pledged to secure financings of such loans	$	1,679			$	989

Mortgage loans held in a VIE securing an asset-backed financing	$	530,809			$	523,652

Following is a summary of certain concentrations of credit risk in the portfolio of mortgage loans at fair value, excluding mortgage loans held in a VIE securing asset-backed financing:


Concentration	September 30, 2014			December 31, 2013
Portion of mortgage loans originated between 2005 and 2007		72	%		72	%
Percentage of fair value of mortgage loans with unpaid-principal-balance-to-current-property-value in excess of 100%		55	%		61	%
Percentage of mortgage loans secured by California real estate		21	%		24	%
Additional states contributing 5% or more of mortgage loans		New York Florida New Jersey			New York Florida New Jersey

Note 11—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:


	September 30, 2014				December 31, 2013
Loan type	Fair value		Unpaid principal balance		Fair value		Unpaid principal balance
	(in thousands)
Nonperforming loans	$	—	$	—	$	177,841	$	268,600
Performing loans:
Fixed		—		—		19,292		29,496
ARM/hybrid		—		—		19,510		31,933
Interest rate step-up		—		—		1,485		2,455

		—		—		40,287		63,884

	$	—	$	—	$	218,128	$	332,484

Following is a summary of certain concentrations of credit risk in the portfolio of mortgage loans under forward purchase agreements at fair value:


	September 30, 2014		December 31, 2013
Portion of mortgage loans originated between 2005 and 2007		—		72	%
Percentage of mortgage loans secured by California real estate		—		25	%
Additional states contributing 5% or more of mortgage loans				New Jersey Washington New York Maryland

Note 12—Real Estate Acquired in Settlement of Loans

Following is a summary of financial information relating to REO:


	Quarter ended September 30,						Nine months ended September 30,
	2014			2013			2014			2013
	(in thousands)
Balance at beginning of period	$	240,471		$	88,682		$	138,942		$	88,078
Purchases		—			82			3,049			82
Transfers from mortgage loans at fair value and advances		94,530			48,154			268,677			116,957
Transfers from REO under forward purchase agreements		—			114			12,737			114
Results of REO:
Valuation adjustments, net		(15,639	)		(5,012	)		(32,912	)		(16,079	)
Gain on sale, net		3,713			2,759			9,485			8,644

		(11,926	)		(2,253	)		(23,427	)		(7,435	)
Proceeds from sales		(47,891	)		(35,086	)		(124,794	)		(98,103	)


Balance at end of period	$	275,185		$	99,693		$	275,185		$	99,693


At period end:

REO pledged to secure assets sold under agreements to repurchase	$	56,702		$	17,074

REO held in a consolidated subsidiary whose stock is pledged to secure financings of such properties	$	19,858		$	50,796

Note 13—Real Estate Acquired in Settlement of Loans Under Forward Purchase Agreements

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

Quarter ended
September 30,

Nine months ended
September 30,

2014

2013

2014

2013

(in thousands)

Balance at beginning of period

—