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 June 30, 2015

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

For the transition period from to

Commission file number: 001-34416

PennyMac Mortgage Investment Trust

(Exact name of registrant as specified in its charter)


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

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

(818) 224-7442

(Registrant’s telephone number, including area code)

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

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

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

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

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


Class		Outstanding at August 5, 2015
Common Shares of Beneficial Interest, $0.01 par value		74,811,922

PENNYMAC MORTGAGE INVESTMENT TRUST

FORM 10-Q

June 30, 2015

TABLE OF CONTENTS


		Page
Special Note Regarding Forward-Looking Statements			1
PART I. FINANCIAL INFORMATION			4
Item 1.	Financial Statements (Unaudited):		4
	Consolidated Balance Sheets		4
	Consolidated Statements of Income		6
	Consolidated Statements of Changes in Shareholders’ Equity		7
	Consolidated Statements of Cash Flows		8
	Notes to Consolidated Financial Statements		10
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		58
	Observations on Current Market Conditions		59
	Results of Operations		61
	Net Investment Income		62
	Expenses		78
	Balance Sheet Analysis		82
	Asset Acquisitions		83
	Investment Portfolio Composition		84
	Cash Flows		90
	Liquidity and Capital Resources		91
	Off-Balance Sheet Arrangements and Aggregate Contractual Obligations		94
	Quantitative and Qualitative Disclosures About Market Risk		99
Item 3.	Quantitative and Qualitative Disclosures About Market Risk		101
Item 4.	Controls and Procedures		101
PART II. OTHER INFORMATION			101
Item 1.	Legal Proceedings		101
Item 1A.	Risk Factors		102
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		102
Item 3.	Defaults Upon Senior Securities		102
Item 4.	Mine Safety Disclosures		102
Item 5.	Other Information		102
Item 6.	Exhibits		103

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q (“Report”) contains certain forward-looking statements that are subject to various risks and uncertainties. Forward-looking statements are generally identifiable by use of forward-looking terminology such as “may,” “will,” “should,” “potential,” “intend,” “expect,” “seek,” “anticipate,” “estimate,” “approximately,” “believe,” “could,” “project,” “predict,” “continue,” “plan” or other similar words or expressions.

Forward-looking statements are based on certain assumptions, discuss future expectations, describe future plans and strategies, contain financial and operating projections or state other forward-looking information. Examples of forward-looking statements include the following:

•

projections of our revenues, income, earnings per share, capital structure or other financial items;

•

descriptions of our plans or objectives for future operations, products or services;

•

forecasts of our future economic performance, interest rates, profit margins and our share of future markets; and

•

descriptions of assumptions underlying or relating to any of the foregoing expectations regarding the timing of generating any revenues.

Our ability to predict results or the actual effect of future events, actions, plans or strategies is inherently uncertain. Although we believe that the expectations reflected in such forward-looking statements are based on reasonable assumptions, our actual results and performance could differ materially from those set forth in the forward-looking statements. There are a number of factors, many of which are beyond our control that could cause actual results to differ significantly from management’s expectations. Some of these factors are discussed below.

You should not place undue reliance on any forward-looking statement and should consider the following uncertainties and risks, as well as the risks and uncertainties discussed elsewhere in this Report and the section entitled “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2014, filed with the SEC on March 2, 2015.

Factors that could cause actual results to differ materially from historical results or those anticipated include, but are not limited to:

•

changes in our investment objectives or investment or operational strategies, including any new lines of business or new products and services that may subject us to additional risks;

•

volatility in our industry, the debt or equity markets, the general economy or the real estate finance and real estate markets specifically, whether the result of market events or otherwise;

•

events or circumstances which undermine confidence in the financial markets or otherwise have a broad impact on financial markets, such as the sudden instability or collapse of large depository institutions or other significant corporations, terrorist attacks, natural or man-made disasters, or threatened or actual armed conflicts;

•

changes in general business, economic, market, employment and political conditions, or in consumer confidence and spending habits from those expected;

•

declines in real estate or significant changes in U.S. housing prices or activity in the U.S. housing market;

•

the availability of, and level of competition for, attractive risk-adjusted investment opportunities in mortgage loans and mortgage-related assets that satisfy our investment objectives;

•

the inherent difficulty in winning bids to acquire distressed loans or correspondent loans, and our success in doing so;

•

the concentration of credit risks to which we are exposed;

•

the degree and nature of our competition;

•

our dependence on our manager and servicer, potential conflicts of interest with such entities and their affiliates, and the performance of such entities;

•

changes in personnel and lack of availability of qualified personnel at our manager, servicer or their affiliates;

•

the availability, terms and deployment of short-term and long-term capital;

•

the adequacy of our cash reserves and working capital;

•

our ability to maintain the desired relationship between our financing and the interest rates and maturities of our assets;

•

the timing and amount of cash flows, if any, from our investments;

•

unanticipated increases or volatility in financing and other costs, including a rise in interest rates;

•

the performance, financial condition and liquidity of borrowers;

•

the ability of our servicer, which also provides us with fulfillment services, to approve and monitor correspondent sellers and underwrite loans to investor standards;

•

incomplete or inaccurate information or documentation provided by customers or counterparties, or adverse changes in the financial condition of our customers and counterparties;

•

changes in the number of investor repurchases or indemnifications and our ability to obtain indemnification or demand repurchase from our correspondent sellers;

•

the quality and enforceability of the collateral documentation evidencing our ownership and rights in the assets in which we invest;

•

increased rates of delinquency, default and/or decreased recovery rates on our investments;

•

our ability to foreclose on our investments in a timely manner or at all;

•

increased prepayments of the mortgages and other loans underlying our mortgage-backed securities (“MBS”) or relating to our mortgage servicing rights (“MSRs”), excess servicing spread (“ESS”) and other investments;

•

the degree to which our hedging strategies may or may not protect us from interest rate volatility;

•

the effect of the accuracy of or changes in the estimates we make about uncertainties, contingencies and asset and liability valuations when measuring and reporting upon our financial condition and results of operations;

•

our failure to maintain appropriate internal controls over financial reporting;

•

technologies for loans and our ability to mitigate security risks and cyber intrusions;

•

our ability to obtain and/or maintain licenses and other approvals in those jurisdictions where required to conduct our business;

•

our ability to detect misconduct and fraud;

•

our ability to comply with various federal, state and local laws and regulations that govern our business;

•

developments in the secondary markets for our mortgage loan products;

•

legislative and regulatory changes that impact the mortgage loan industry or housing market;

•

changes in regulations or the occurrence of other events that impact the business, operations or prospects of government agencies such as the Government National Mortgage Association (“Ginnie Mae”), the Federal Housing Administration (the “FHA”), the Veterans Administration (the “VA”) or the U.S. Department of Agriculture (“USDA”), or government-sponsored entities such as the Federal National Mortgage Association (“Fannie Mae”) or the Federal Home Loan Mortgage Corporation (“Freddie Mac”) (Fannie Mae, Freddie Mac and Ginnie Mae are each referred to as an “Agency” and, collectively, as the “Agencies”), or such changes that increase the cost of doing business with such entities;

•

the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) and its implementing regulations and regulatory agencies, and any other legislative and regulatory changes that impact the business, operations or governance of mortgage lenders and/or publicly-traded companies;

•

the mortgage lending and servicing-related regulations promulgated by the Consumer Financial Protection Bureau and its enforcement of the regulations;

•

changes in government support of homeownership;

•

changes in government or government-sponsored home affordability programs;

•

limitations imposed on our business and our ability to satisfy complex rules for us to qualify as a real estate investment trust (“REIT”) for U.S. federal income tax purposes and qualify for an exemption from registering as an investment company under the Investment Company Act of 1940 and the ability of certain of our subsidiaries

to qualify as REITs or as taxable REIT subsidiaries (“TRSs”) for U.S. federal income tax purposes, as applicable, and our ability and the ability of our subsidiaries to operate effectively within the limitations imposed by these rules;

•

changes in governmental regulations, accounting treatment, tax rates and similar matters (including changes to laws governing the taxation of REITs, or the exclusions from registration as an investment company);

•

our ability to make distributions to our shareholders in the future;

•

the effect of public opinion on our reputation;

•

the occurrence of natural disasters or other events or circumstances that could impact our operations; and

•

our organizational structure and certain requirements in our charter documents.

Other factors that could also cause results to differ from our expectations may not be described in this Report or any other document. Each of these factors could by itself, or together with one or more other factors, adversely affect our business, results of operations and/or financial condition.

Forward-looking statements speak only as of the date they are made, and we undertake no obligation to update any forward-looking statement to reflect the impact of circumstances or events that arise after the date the forward-looking statement was made.

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

PENNYMAC MORTGAGE INVESTMENT TRUST AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS (UNAUDITED)


	June 30, 2015		December 31, 2014
	(in thousands, except share data)
ASSETS
Cash	$	114,698	$	76,386
Short-term investments		32,417		139,900
Mortgage-backed securities at fair value (includes $278,305 and $307,363 pledged to secure assets sold under agreements to repurchase and $9,321 and $0 pledged to secure Federal Home Loan Bank advances)		287,626		307,363
Mortgage loans acquired for sale at fair value (includes $1,422,166 and $609,608 pledged to secure assets sold under agreements to repurchase, $72,819 and $20,862 pledged to secure mortgage loan participation and sale agreement, $48,627 and $0 pledged to secure Federal Home Loan Bank advances and $656,377 and $0 pledged to secure credit risk transfer financing)		2,213,874		637,722
Mortgage loans at fair value (includes $2,612,167 and $2,709,161 pledged to secure assets sold under agreements to repurchase and asset-backed secured financing of the variable interest entity at fair value and $106,303 and $0 pledged to secure Federal Home Loan Bank advances)		2,730,820		2,726,952
Excess servicing spread purchased from PennyMac Financial Services, Inc. at fair value pledged to secure borrowings under note payable to PennyMac Financial Services, Inc.		359,102		191,166
Derivative assets		13,950		11,107
Real estate acquired in settlement of loans (includes $203,051 and $150,649 pledged to secure assets sold under agreements to repurchase)		324,278		303,228
Real estate held for investment		1,544		—
Mortgage servicing rights pledged to secure borrowings under note payable (includes $57,343 and $57,358 carried at fair value)		394,737		357,780
Servicing advances		78,347		79,878
Due from PennyMac Financial Services, Inc.		9,342		6,621
Other assets		116,639		59,155

Total assets	$	6,677,374	$	4,897,258

LIABILITIES
Assets sold under agreements to repurchase	$	3,500,569	$	2,729,027
Federal Home Loan Bank advances		138,400		—
Mortgage loan participation and sale agreement		70,612		20,222
Credit risk transfer financing at fair value		649,120		—
Note payable		192,352		—
Note payable to PennyMac Financial Services, Inc.		52,526		—
Asset-backed secured financing of the variable interest entity at fair value		151,489		165,920
Exchangeable senior notes		244,559		244,079
Derivative liabilities		6,818		2,430
Accounts payable and accrued liabilities		75,967		67,806
Due to PennyMac Financial Services, Inc.		16,245		23,943
Income taxes payable		36,706		51,417
Liability for losses under representations and warranties		16,714		14,242

Total liabilities		5,152,077		3,319,086

Commitments and contingencies

SHAREHOLDERS’ EQUITY
Common shares of beneficial interest—authorized, 500,000,000 common shares of $0.01 par value; issued and outstanding, 74,811,922 and 74,510,159 common shares, respectively		748		745
Additional paid-in capital		1,483,389		1,479,699
Retained earnings		41,160		97,728

Total shareholders’ equity		1,525,297		1,578,172

Total liabilities and shareholders’ equity	$	6,677,374	$	4,897,258

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):


	June 30, 2015		December 31, 2014
	(in thousands)
ASSETS
Mortgage loans at fair value	$	483,876	$	527,369
Other assets - interest receivable		1,543		1,651

	$	485,419	$	529,020

LIABILITIES
Asset-backed secured financing at fair value	$	151,489	$	165,920
Accounts payable and accrued expenses - interest payable		444		477

	$	151,933	$	166,397

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 June 30,						Six months ended June 30,
	2015			2014			2015			2014
	(in thousands, except per share data)
Net investment income
Interest income
From nonaffiliates	$	39,515		$	45,380		$	76,448		$	81,863
From PennyMac Financial Services, Inc.		5,818			3,138			9,570			6,001

		45,333			48,518			86,018			87,864

Interest expense
From nonaffiliates		29,206			21,865			54,952			41,640
From PennyMac Financial Services, Inc.		533			—			533			—

		29,739			21,865			55,485			41,640

Net interest income		15,594			26,653			30,533			46,224
Net gain on mortgage loans acquired for sale		11,175			10,222			21,335			20,193
Loan origination fees		7,279			4,485			12,566			6,841
Net gain on investments:
From nonaffiliates		14,025			80,671			23,719			126,157
From PennyMac Financial Services, Inc.		8,589			(7,537	)		2,342			(10,438	)

		22,614			73,134			26,061			115,719
Net loan servicing fees		13,017			8,758			21,019			16,179
Results of real estate acquired in settlement of loans		(1,806	)		(5,348	)		(7,638	)		(11,974	)
Other		1,892			2,652			3,546			3,969

Net investment income		69,765			120,556			107,422			197,151

Expenses
Expenses earned by PennyMac Financial Services, Inc.:
Loan fulfillment fees		15,333			12,433			28,199			21,335
Loan servicing fees		12,136			14,180			22,806			28,771
Management fees		5,779			8,912			12,782			16,986
Compensation		1,389			1,883			4,198			4,825
Professional services		1,662			2,690			3,490			4,421
Other		8,378			7,154			14,679			11,221

Total expenses		44,677			47,252			86,154			87,559

Income before benefit from income taxes		25,088			73,304			21,268			109,592
Benefit from income taxes		(2,983	)		(1,907	)		(14,311	)		(3,492	)

Net income	$	28,071		$	75,211		$	35,579		$	113,084

Earnings per share
Basic	$	0.37		$	1.01		$	0.46		$	1.54
Diluted	$	0.36		$	0.93		$	0.46		$	1.44
Weighted-average shares outstanding
Basic		74,683			74,065			74,618			72,803
Diluted		83,480			82,750			74,997			81,535
Dividends declared per share	$	0.61		$	0.59		$	1.22		$	1.18

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)


	Common shares
	Number of shares		Par value		Additional paid-in capital			Retained earnings			Total
	(in thousands)
Balance at December, 2013		70,458	$	705	$	1,384,468		$	81,941		$	1,467,114
Net income		—		—		—			113,084			113,084
Share-based compensation		234		2		2,956			—			2,958
Dividends, $1.18 per share		—		—		—			(87,397	)		(87,397	)
Issuance of common shares		3,447		34		82,419			—			82,453
Underwriting and offering costs		—		—		(1,052	)		—			(1,052	)

Balance at June 30, 2014		74,139	$	741	$	1,468,791		$	107,628		$	1,577,160

Balance at December 31, 2014		74,510	$	745	$	1,479,699		$	97,728		$	1,578,172
Net income		—		—		—			35,579			35,579
Share-based compensation		302		3		3,682			—			3,685
Dividends, $1.22 per share		—		—		—			(92,147	)		(92,147	)
Issuance of common shares		—		—		8			—			8

Balance at June 30, 2015		74,812	$	748	$	1,483,389		$	41,160		$	1,525,297

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

PENNYMAC MORTGAGE INVESTMENT TRUST AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)


	Six months ended June 30
	2015			2014
	(in thousands)
Cash flows from operating activities
Net income	$	35,579		$	113,084
Adjustments to reconcile net income to net cash used by operating activities:
Accrual of unearned discounts and amortization of premiums on mortgage-backed securities, mortgage loans at fair value, and asset-backed secured financing		(119	)		(537	)
Capitalization of interest on mortgage loans at fair value		(20,130	)		(30,353	)
Accrual of interest on excess servicing spread		(9,570	)		(6,001	)
Amortization of credit facility commitment fees and debt issuance costs		5,401			4,879
Net gain on mortgage loans acquired for sale		(21,335	)		(20,193	)
Accrual of costs related to forward purchase agreements		—			(168	)
Net gain on investments		(26,061	)		(115,719	)
Change in fair value, amortization and impairment of mortgage servicing rights		27,497			20,518
Results of real estate acquired in settlement of loans		7,638			11,974
Share-based compensation expense		3,685			2,958
Purchases of mortgage loans acquired for sale at fair value from nonaffiliates		(20,820,811	)		(12,345,380	)
Purchases of mortgage loans acquired for sale at fair value from PennyMac Financial Services, Inc.		(10,828	)		(1,985	)
Repurchases of mortgage loans subject to representation and warranties		(12,972	)		(6,621	)
Sales and repayments of mortgage loans acquired for sale at fair value to nonaffiliates		5,707,641			4,796,065
Sales of mortgage loans acquired for sale to PennyMac Financial Services, Inc.		13,523,345			7,085,859
Increase in servicing advances		(8,870	)		(15,218	)
(Increase) decrease in due from PennyMac Financial Services, Inc.		(2,541	)		2,812
Increase in other assets		(24,223	)		(20,716	)
Increase (decrease) in accounts payable and accrued liabilities		8,440			(45,366	)
(Decrease) increase in payable to PennyMac Financial Services, Inc.		(7,469	)		1,036
(Decrease) increase in income taxes payable		(14,710	)		3,283

Net cash used in operating activities		(1,660,413	)		(565,789	)

Cash flows from investing activities
Net decrease in short-term investments		107,483			(12,055	)
Purchases of mortgage-backed securities at fair value		(25,129	)		(19,638	)
Repayments of mortgage-backed securities at fair value		39,744			5,419
Purchases of mortgage loans at fair value		(241,981	)		(283,017	)
Sales and repayments of mortgage loans at fair value		147,465			397,643
Repayments of mortgage loans under forward purchase agreements at fair value		—			6,413
Purchase of excess servicing spread from PennyMac Financial Services, Inc.		(187,287	)		(73,393	)
Repayment of excess servicing spread by PennyMac Financial Services, Inc.		31,083			16,494
Settlements of derivative financial instruments		(10,554	)		(9,785	)
Purchase of real estate acquired in settlement of loans		—			(3,049	)
Sales of real estate acquired in settlement of loans		128,097			76,903
Sales of real estate acquired in settlement of loans under forward purchase agreements		—			5,365
Sale of mortgage servicing rights		376			—
(Increase) decrease in margin deposits and restricted cash		(36,003	)		5,454

Net cash (used) provided by investing activities		(46,706	)		112,754

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

PENNYMAC MORTGAGE INVESTMENT TRUST AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)


	Six months ended June 30,
	2015			2014
	(in thousands)
Cash flows from financing activities
Sales of assets under agreement to repurchase		22,834,050			15,938,914
Repurchases of assets sold under agreements to repurchase		(22,062,255	)		(15,276,762	)
Sales of mortgage loan participation certificates		2,440,045			—
Repayments of mortgage loan participation certificates		(2,389,653	)		—
Issuance of credit risk transfer financing		649,120			—
Federal Home Loan Bank advances		138,400			—
Advances under note payable		192,352			—
Advances under note payable to PennyMac Financial Services, Inc.		71,072			—
Repayments under note payable to PennyMac Financial Services, Inc.		(18,546	)		—
Repayments of borrowings under forward purchase agreements		—			(227,866	)
Repayments of asset-backed secured financing at fair value		(11,331	)		(3,372	)
Payments of debt issuance cost and commitment fees		(5,176	)		(4,711	)
Issuances of common shares		8			82,453
Payments of common share underwriting and offering costs		—			(1,052	)
Payments of contingent underwriting fees payable		(688	)		(424	)
Payments of dividends		(91,967	)		(43,654	)

Net cash provided financing activities		1,745,431			463,526

Net decrease in cash		38,312			10,491
Cash at beginning of period		76,386			27,411

Cash at end of period	$	114,698		$	37,902

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 (“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 mortgage 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 fair 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 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 (“GAAP”) as codified in the Financial Accounting Standards Board’s (“FASB”) Accounting Standards Codification for interim financial information and with the Securities and Exchange Commission’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 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, 2014.

The accompanying unaudited consolidated financial statements reflect all normal recurring adjustments necessary to present fairly the financial position, income, and cash flows for the interim periods, but are not necessarily indicative of the results of operations to be anticipated for the full year ending December 31, 2015. Intercompany accounts and transactions have been eliminated.

Preparation of financial statements in compliance with 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.

Reclassification of previously presented balances

In April of 2015, the FASB issued Accounting Standards Update (“ASU”) No. 2015-03, Interest—Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs (“ASU 2015-03”). The amendments in this ASU require that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability. ASU 2015-03 specifies that its adoption be made on a retrospective basis. Accordingly, the Company has reclassified its debt issuance costs from Other assets as previously presented to Mortgage loans sold under agreements to repurchase to conform its December 31, 2014 balance sheet to the current presentation. The adoption of ASU 2015-03 did not result in changes to the Company’s previously presented consolidated statements of income or consolidated statements of cash flows.

Following is a summary of the balance sheet reclassifications:


	December 31, 2014
	As reported		As previously reported		Reclassification
	(in thousands)
ASSETS
Other assets	$	59,155	$	66,193	$	(7,038	)
Total assets	$	4,897,258	$	4,904,296	$	(7,038	)
LIABILITIES
Assets sold under agreements to repurchase	$	2,729,027	$	2,730,130	$	(1,103	)
Mortgage loan participation and sale agreement		20,222		20,236		(14	)
Exchangeable senior notes		244,079		250,000		(5,921	)

Total liabilities		3,319,086		3,326,124		(7,038	)
Total liabilities and shareholders’ equity	$	4,897,258	$	4,904,296	$	(7,038	)

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 mortgage 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 mortgage 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 in prior years 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 June 30,				Six months ended June 30,
	2015		2014		2015		2014
	(in thousands)
Investment portfolio purchases:
Mortgage loans	$	—	$	27,203	$	241,981	$	284,403
REO		—		30		—		3,117

	$	—	$	27,233	$	241,981	$	287,520

Investment portfolio purchases above through one or more subsidiaries of Citigroup Inc.:
Mortgage loans	$	—	$	26,737	$	—	$	26,737
REO		—		30		—		68

	$	—	$	26,767	$	—	$	26,805

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


	June 30, 2015		December 31, 2014
	(in thousands)
Mortgage loans at fair value	$	882,881	$	943,163
REO		93,171		108,302

	$	976,052	$	1,051,465

Total holdings of mortgage loans and REO	$	3,055,098	$	3,030,180

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 forward purchase agreements and recognized 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 for the periods presented include the following amounts related to the forward purchase agreements:


	Quarter ended June 30, 2014			Six months ended June 30, 2014
	(in thousands)
Statements of income:
Interest income	$	1,430		$	3,584
Interest expense	$	783		$	2,364
Net gain on investments	$	1,743		$	803
Net loan servicing fees	$	201		$	517
Results of REO	$	(72	)	$	(473	)
Statements of cash flows:
Repayments of mortgage loans	$	1,084		$	6,413
Sales of REO	$	3,743		$	5,365
Repayments of borrowings under forward purchase agreements	$	(214,742	)	$	(227,866	)

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

Correspondent Production Activities

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


	Quarter ended June 30,				Six months ended June 30,
	2015		2014		2015		2014
	(in thousands)
Fulfillment fee expense earned by PLS	$	15,333	$	12,433	$	28,199	$	21,335
Unpaid principal balance of loans fulfilled by PLS	$	3,579,078	$	2,991,764	$	6,469,210	$	4,911,342
Sourcing fees received from PLS	$	2,427	$	1,125	$	3,848	$	2,017
Unpaid principal balance of loans sold to PLS	$	8,082,764	$	3,748,874	$	12,818,138	$	6,722,951
Purchases of mortgage loans acquired for sale at fair value from PLS	$	2,423	$	1,985	$	10,828	$	1,985
Tax service fees paid to PLS	$	1,113	$	684	$	2,002	$	1,050

At period end:
Mortgage loans included in mortgage loans acquired for sale pending sale to PLS	$	830,330	$	304,707

Mortgage Loan Servicing Activities

Following is a summary of mortgage loan servicing fees earned by PLS:


	Quarter ended June 30,				Six months ended June 30,
	2015		2014		2015		2014
	(in thousands)
Mortgage loans acquired for sale at fair value:
Base	$	42	$	29	$	68	$	46
Activity-based		59		51		90		77

		101		80		158		123

Distressed mortgage loans:
Base		4,183		4,975		8,215		9,941
Activity-based		3,093		5,746		5,987		12,132

		7,276		10,721		14,202		22,073

MSRs:
Base		4,654		3,323		8,310		6,471
Activity-based		105		56		136		104

		4,759		3,379		8,446		6,575

	$	12,136	$	14,180	$	22,806	$	28,771

Average investment in:
Mortgage loans acquired for sale at fair value	$	1,014,883	$	519,357	$	887,660	$	428,941

Distressed mortgage loans	$	2,295,807	$	2,133,587	$	2,303,080	$	2,042,362

Average mortgage loans servicing portfolio	$	35,742,835	$	28,230,295	$	35,215,677	$	27,417,841

Investing and Financing Activities

Following is a summary of investing and financing activities between the Company and PFSI:


	Quarter ended June 30,					Six months ended June 30,
	2015		2014			2015			2014
	(in thousands)
Purchases of ESS	$	140,875	$	52,867		$	187,287		$	73,393
Interest income from ESS	$	5,818	$	3,138		$	9,570		$	6,001
Net gain (loss) on ESS	$	7,133	$	(10,062	)	$	(403	)	$	(14,854	)
ESS recapture recognized	$	1,456	$	2,525		$	2,745		$	4,415
Repayment of ESS	$	18,352	$	9,081		$	31,083		$	16,494
MSR recapture recognized	$	—	$	1		$	—		$	9
Advances under note payable to PLS	$	71,072	$	—		$	71,072		$	—
Repayment of note payable to PLS	$	18,546	$	—		$	18,546		$	—
Interest income from note payable to PLS	$	535	$	—		$	535		$	—

On April 30, 2015, PFSI entered into an amendment to a lending facility pursuant to which it may finance certain of its MSRs and servicing advance receivables. Under the terms of the amendment, the maximum loan amount increased from $257 million to $407 million. The $150 million increase was implemented for the purpose of facilitating the financing of excess servicing spread (“ESS”) by the Company. The aggregate loan amount outstanding under the lending facility and relating to advances outstanding with the Company is guaranteed in full by PMT.

In connection with the amendment to the lending facility, the Company and PFSI entered into an underlying loan and security agreement, dated as of April 30, 2015, pursuant to which the Company may borrow up to $150 million from PFSI for the purpose of financing ESS.

The principal amount of the borrowings under the Loan and Security Agreement is based upon a percentage of the market value of the ESS pledged by the Company, subject to the maximum loan amount described above. Pursuant to the underlying loan and security agreement, the Company granted to PFSI a security interest in all of its right, title and interest in, to and under the ESS pledged to secure loans.

The Company and PFSI have agreed that the Company is required to repay PFSI the principal amount of such borrowings plus accrued interest to the date of such repayment, and PFSI is required to repay their lender the corresponding amount under the lending facility. The Company is also required to pay PFSI a fee for the structuring of the lending facility in an amount equal to the portion of the corresponding fee paid by PFSI to their lender under the lending facility and allocable to the increase in the maximum loan amount resulting from the ESS financing. The note matures on October 30, 2015 and interest accrues at a rate based on the lender’s cost of funds.

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 six months ended June 30, 2015, the Company paid $230,000 and $387,000 to PCM, respectively, compared to $36,000 for the quarter and six months ended June 30, 2014.

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 six months ended June 30, 2015, the Company paid $459,000 and 772,000 to the underwriters, respectively, compared to $315,000 and $387,000 for the same periods in 2014.

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 amount will be paid in full. The term of the reimbursement agreement expires on February 1, 2019.

Other Transactions

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


	Quarter ended June 30,				Six months ended June 30,
	2015		2014		2015		2014
	(in thousands)
Base	$	5,709	$	5,838	$	11,439	$	11,359
Performance incentive		70		3,074		1,343		5,627

Total management fee incurred during the period	$	5,779	$	8,912	$	12,782	$	16,986

In the event of termination of the management agreement between the Company and PCM, PCM 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.

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


	Quarter ended June 30,				Six months ended June 30,
	2015		2014		2015		2014
	(in thousands)
Reimbursement of:
Common overhead incurred by PCM and its affiliates (1)	$	2,702	$	2,691	$	5,431	$	5,269
Expenses incurred on the Company’s behalf		83		104		462		549

	$	2,785	$	2,795	$	5,893	$	5,818

Payments and settlements during the period (2)	$	24,114	$	14,894	$	46,866	$	33,280

(1)	For the quarter ended June 30, 2015, in accordance with the terms of the management agreement, PCM provided the Company a discretionary waiver of $700,000 of overhead expenses that otherwise would have been allocable to the Company.

(2)	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 PCM and its affiliates are summarized below:


	June 30,		December 31,
	2015		2014
	(in thousands)
Allocated expenses	$	5,893	$	6,582
Management fees		5,779		8,426
Servicing fees		3,667		3,457
Conditional Reimbursement		906		1,136
Unsettled ESS investment		—		3,836
Fulfillment fees		—		506

	$	16,245	$	23,943

Amounts due from PCM and its affiliates totaled $9.3 million and $6.6 million at June 30, 2015 and December 31, 2014, respectively. At June 30, 2015, the balance represents payments receivable relating to cash flows from the Company’s investment in ESS and amounts receivable relating to unsettled ESS recaptures.

PFSI held 75,000 of the Company’s common shares at both June 30, 2015 and December 31, 2014.

Note 4—Earnings Per Share

Basic earnings per share is determined using the two-class method, under which 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 by dividing net income, reduced by income attributable to the participating securities, 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.

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 “Exchangeable 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 June 30,						Six months ended June 30,
	2015			2014			2015			2014
	(in thousands except per share amounts)
Basic earnings per share:
Net income	$	28,071		$	75,211		$	35,579		$	113,084
Effect of participating securities—share-based compensation awards		(438	)		(433	)		(1,015	)		(841	)

Net income attributable to common shareholders	$	27,633		$	74,778		$	34,564		$	112,243

Weighted-average shares outstanding		74,683			74,065			74,618			72,803

Basic earnings per share	$	0.37		$	1.01		$	0.46		$	1.54

Diluted earnings per share:
Net income	$	27,633		$	75,211		$	34,564		$	113,084
Interest on Exchangeable Notes, net of income taxes		2,121			2,079			—			4,156

Net income attributable to diluted shareholders	$	29,754		$	77,290		$	34,564		$	117,240

Weighted-average shares outstanding		74,683			74,065			74,618			72,803

Potentially dilutive securities:
Shares issuable pursuant to exchange of the Exchangeable Notes		8,467			8,393			—			8,393
Shares issuable under share-based compensation plan		330			292			379			338

Diluted weighted-average number of shares outstanding		83,480			82,750			74,997			81,535

Diluted earnings per share	$	0.36		$	0.93		$	0.46		$	1.44

Dividends and undistributed earnings allocated to participating securities under the basic and diluted earnings per share calculations require specific shares to be included or excluded that may differ in certain circumstances.

For the six months ended June 30, 2015, approximately 8,467,000 shares issuable pursuant to the exchange feature embedded in the Exchangeable Notes were excluded from the diluted earnings per share calculation as inclusion of the exchange of such shares would have been antidilutive.

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 purposes. 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 June 30,				Six months ended June 30,
	2015		2014		2015		2014
	(in thousands)
Cash flows:
Proceeds from sales	$	3,063,397	$	2,763,138	$	5,707,641	$	4,789,444
Servicing fees received (1)	$	22,738	$	19,019	$	44,641	$	34,907
Period end information:
Unpaid principal balance of mortgage loans outstanding	$	36,448,945	$	29,268,039
Unpaid principal balance of delinquent mortgage loans:
30-89 days delinquent	$	129,316	$	90,091
90 or more days delinquent
Not in foreclosure		28,805		13,325
In foreclosure or bankruptcy		20,063		11,306

		48,868		24,631

	$	178,184	$	114,722

(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. The Manager 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 a 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 (“IRLCs”), 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. As of June 30, 2015 and December 31, 2014, the Company did not enter into reverse repurchase agreements or securities lending transactions that are required to be disclosed in the following tables.

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.


	June 30, 2015								December 31, 2014
						Net								Net
			Gross			amounts					Gross			amounts
			amounts			of assets					amounts			of assets
	Gross		offset			presented			Gross		offset			presented
	amounts		in the			in the			amounts		in the			in the
	of		consolidated			consolidated			of		consolidated			consolidated
	recognized		balance			balance			recognized		balance			balance
	assets		sheet			sheet			assets		sheet			sheet
	(in thousands)
Derivatives subject to master netting arrangements:
MBS put options	$	1,426	$	—		$	1,426		$	374	$	—		$	374
MBS call options		169		—			169			—		—			—
Forward purchase contracts		2,415		—			2,415			3,775		—			3,775
Forward sale contracts		10,844		—			10,844			52		—			52
Put options on interest rate futures		1,659		—			1,659			193		—			193
Call options on interest rate futures		3,557		—			3,557			3,319		—			3,319
Treasury futures contracts		1,210		—			1,210			—		—			—
Netting		—		(11,541	)		(11,541	)		—		(2,284	)		(2,284	)

		21,280		(11,541	)		9,739			7,713		(2,284	)		5,429
Derivatives not subject to master netting arrangements:
Interest rate lock commitments		4,211		—			4,211			5,678		—			5,678

	$	25,491	$	(11,541	)	$	13,950		$	13,391	$	(2,284	)	$	11,107

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 qualifying for netting.


	June 30, 2015								December 31, 2014
			Gross amounts								Gross amounts
			not offset in the								not offset in the
			consolidated								consolidated
			balance sheet								balance sheet
	Net amount								Net amount
	of assets								of assets
	presented								presented
	in the				Cash				in the				Cash
	consolidated		Financial		collateral		Net		consolidated		Financial		collateral		Net
	balance sheet		instruments		received		amount		balance sheet		instruments		received		amount
	(in thousands)
Interest rate lock commitments	$	4,211	$	—	$	—	$	4,211	$	5,678	$	—	$	—	$	5,678
RJ O’Brien & Associates, LLC		4,924		—		—		4,924		3,034		—		—		3,034
Jefferies Group, LLC		1,438						1,438		133		—		—		133
JP Morgan Chase & Co.		973		—		—		973		—		—		—		—
Fannie Mae Capital Markets		712		—		—		712		—		—		—		—
Daiwa Capital Markets		78		—		—		78		29		—		—		29
Credit Suisse First Boston Mortgage Capital LLC		4		—		—		4		253		—		—		253
Bank of America, N.A.		—		—		—		—		738		—		—		738
Morgan Stanley Bank, N.A.		—		—		—		—		104		—		—		104
Other		1,610		—		—		1,610		1,138		—		—		1,138

Total	$	13,950	$	—	$	—	$	13,950	$	11,107	$	—	$	—	$	11,107

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 setoff accounting.


	June 30, 2015									December 31, 2014
							Net									Net
							amounts									amounts
				Gross amounts			of liabilities						Gross			of liabilities
	Gross			offset			presented			Gross			amounts offset			presented
	amounts			in the			in the			amounts			in the			in the
	of			consolidated			consolidated			of			consolidated			consolidated
	recognized			balance			balance			recognized			balance			balance
	liabilities			sheet			sheet			liabilities			sheet			sheet
	(in thousands)
Derivatives subject to master netting arrangements:
Forward purchase contracts	$	7,912		$	—		$	7,912		$	34		$	—		$	34
Forward sales contracts		4,002			—			4,002			6,649			—			6,649
Treasury futures contracts		164			—			164			478			—			478
Netting		—			(9,738	)		(9,738	)		—			(4,748	)		(4,748	)

		12,078			(9,738	)		2,340			7,161			(4,748	)		2,413

Derivatives not subject to master netting arrangements:
Interest rate lock commitments		4,478			—			4,478			17			—			17

		16,556			(9,738	)		6,818			7,178			(4,748	)		2,430
Assets sold under agreements to repurchase
Amount outstanding		3,501,925			—			3,501,925			2,729,027			—			2,729,027
Unamortized issuance costs		(1,356	)		—			(1,356	)		(1,117	)		—			(1,117	)

		3,500,569			—			3,500,569			2,730,144			—			2,730,144

	$	3,517,125		$	(9,738	)	$	3,507,387		$	2,737,322		$	(4,748	)	$	2,732,575

Derivative Liabilities, Financial Liabilities and Collateral Pledged 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 qualifying for netting. All assets sold under agreements to repurchase represent sufficient collateral or exceed the liability amount recorded on the consolidated balance sheet.


	June 30, 2015									December 31, 2014
			Gross amounts									Gross amounts
			not offset in the									not offset in the
			consolidated									consolidated
			balance sheet									balance sheet
	Net amount of									Net amount of
	liabilities									liabilities
	presented									presented
	in the									in the
	consolidated					Cash				consolidated					Cash
	balance		Financial			collateral		Net		balance		Financial			collateral		Net
	sheet		instruments			pledged		amount		sheet		instruments			pledged		amount
	(in thousands)
Interest rate lock commitments	$	4,478	$	—		$	—	$	4,478	$	17	$	—		$	—	$	17
Morgan Stanley Bank, N.A.		273,173		(273,125	)		—		48		121,975		(121,975	)		—		—
Credit Suisse First Boston Mortgage Capital LLC		858,824		(858,824	)		—		—		966,155		(966,155	)		—		—
Citibank		1,113,055		(1,113,055	)		—		—		797,851		(797,663	)		—		188
Bank of America, N.A.		696,438		(696,438	)		—		—		508,922		(508,922	)		—		—
RBS Securities		—		—			—		—		208,520		(208,520	)		—		—
Daiwa Capital Markets		120,436		(120,436	)		—		—		126,909		(126,909	)		—		—
JPMorgan Chase & Co.		440,047		(440,047	)		—		—		—		—			—		—
Other		2,292		—			—		2,292		2,225		—			—		2,225

Total	$	3,508,743	$	(3,501,925	)	$	—	$	6,818	$	2,732,574	$	(2,730,144	)	$	—	$	2,430

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 the Manager has elected to carry the item at its fair value as discussed in the following paragraphs.

Fair Value Accounting Elections

The Manager identified all of the Company’s 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. The Manager 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. The Manager has also identified the Company’s 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 mortgage loans at fair value collateralizing this financing.

The Company’s subsequent accounting for MSRs is based on the class of MSRs. Originated MSRs backed by mortgage loans with initial interest rates of less than or equal to 4.5% are accounted for using the amortization method. Originated MSRs backed by loans with initial interest rates of more than 4.5% are accounted for at fair value with changes in fair value recorded in current period income.

For assets sold under agreements to repurchase, borrowings under forward purchase agreements and the Exchangeable Notes, the Manager 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 availability 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:


	June 30, 2015
	Level 1		Level 2		Level 3		Total
	(in thousands)
Assets:
Short-term investments	$	32,417	$	—	$	—	$	32,417
Mortgage-backed securities at fair value		—		287,626		—		287,626
Mortgage loans acquired for sale at fair value		—		2,213,874		—		2,213,874
Mortgage loans at fair value		—		483,876		2,246,944		2,730,820
Excess servicing spread purchased from PFSI		—		—		359,102		359,102
Derivative assets:
Interest rate lock commitments		—		—		4,211		4,211
MBS put options		—		1,426		—		1,426
MBS call options		—		169		—		169
Forward purchase contracts		—		2,415		—		2,415
Forward sales contracts		—		10,844		—		10,844
Treasury futures contracts		1,210		—		—		1,210
Put options on interest rate futures		1,659		—		—		1,659
Call options on interest rate futures		3,557		—		—		3,557

Total derivative assets before netting		6,426		14,854		4,211		25,491
Netting (1)		—		—		—		(11,541	)

Total derivative assets after netting		6,426		14,854		4,211		13,950

Mortgage servicing rights at fair value		—		—		57,343		57,343

	$	38,843	$	3,000,230	$	2,667,600	$	5,695,132

Liabilities:
Credit risk transfer financing at fair value	$	—	$	649,120	$	—	$	649,120
Asset-backed secured financing of the variable interest entity at fair value		—		151,489		—		151,489
Derivative liabilities:
Interest rate lock commitments		—		—		4,478		4,478
Treasury futures		164		—		—		164
Forward purchase contracts		—		7,912		—		7,912
Forward sales contracts		—		4,002		—		4,002

Total derivative liabilities before netting		164		11,914		4,478		16,556
Netting (1)		—		—		—		(9,738	)

Total derivative liabilities after netting		164		11,914		4,478		6,818

Total liabilities	$	164	$	812,523	$	4,478	$	807,427

(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, 2014
	Level 1		Level 2		Level 3		Total
	(in thousands)
Assets:
Short-term investments	$	139,900	$	—	$	—	$	139,900
Mortgage-backed securities at fair value		—		307,363		—		307,363
Mortgage loans acquired for sale at fair value		—		637,722		—		637,722
Mortgage loans at fair value		—		527,369		2,199,583		2,726,952
Excess servicing spread purchased from PFSI		—		—		191,166		191,166
Derivative assets:
Interest rate lock commitments		—		—		5,678		5,678
MBS put options		—		374		—		374
Forward purchase contracts		—		3,775		—		3,775
Forward sales contracts		—		52		—		52
Put options on interest rate futures		193		—		—		193
Call options on interest rate futures		3,319		—		—		3,319

Total derivative assets		3,512		4,201		5,678		13,391
Netting (1)		—		—		—		(2,284	)

Total derivative assets after netting		3,512		4,201		5,678		11,107

Mortgage servicing rights at fair value		—		—		57,358		57,358

	$	143,412	$	1,476,655	$	2,453,785	$	4,071,568

Liabilities:
Asset-backed secured financing of the variable interest entity at fair value	$	—	$	165,920	$	—	$	165,920
Derivative liabilities:
Interest rate lock commitments		—		—		17		17
MBS call options		478		—		—		478
Forward purchase contracts		—		34		—		34
Forward sales contracts		—		6,649		—		6,649

Total derivative liabilities		478		6,683		17		7,178
Netting (1)		—		—		—		(4,748	)

Total derivative liabilities		478		6,683		17		2,430

Total liabilities	$	478	$	172,603	$	17	$	168,350

(1)

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


	Quarter ended June 30, 2015
	Mortgage			Excess			Interest			Mortgage
	loans			servicing			rate lock			servicing
	at fair value			spread			commitments (1)			rights		Total
	(in thousands)
Assets:
Balance, March 31, 2015	$	2,343,382		$	222,309		$	8,214		$	49,448	$	2,623,353
Purchases		—			140,874			—			—		140,874
Repayments and sales		(68,190	)		(18,352	)		—			—		(86,542	)
Capitalization of interest		9,922			—			—			—		9,922
Accrual of interest		—			5,819			—			—		5,819
ESS received pursuant to a recapture agreement with PFSI		—			1,319			—			—		1,319
Interest rate lock commitments issued, net		—			—			11,683			—		11,683
Servicing received as proceeds from sales of mortgage loans		—			—			—			1,588		1,588
Changes in instrument-specific credit risk		7,489			—			—					7,489
Other factors		22,579			7,133			(23,411	)		6,307		12,608

		30,068			7,133			(23,411	)		6,307		20,097

Transfers of mortgage loans to REO		(68,238	)		—			—			—		(68,238	)
Transfers of interest rate lock commitments to mortgage loans acquired for sale		—			—			3,247			—		3,247

Balance, June 30, 2015	$	2,246,944		$	359,102		$	(267	)	$	57,343	$	2,663,122

Changes in fair value recognized during the period relating to assets still held at June 30, 2015	$	32,807		$	7,133		$	(267	)	$	6,307	$	45,980

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


	Quarter ended June 30, 2014
	Mortgage			Mortgage loans under			Excess			Net interest			Mortgage
	loans			forward purchase			servicing			rate lock			servicing
	at fair value			agreements			spread			commitments (1)			rights			Total
	(in thousands)
Assets:
Balance, March 31, 2014	$	2,079,020		$	202,661		$	151,019		$	3,271		$	36,181		$	2,472,152
Purchases		26,737			466			52,867			—			—			80,070
Repayments and sales		(140,807	)		(1,084	)		(9,080	)		—			—			(150,971	)
Capitalization of interest		17,042			1,057			—			—			—			18,099
Accrual of interest		—			—			3,138			—			—			3,138
ESS received pursuant to a recapture agreement with PFSI		—			—			2,362			—			—			2,362
Interest rate lock commitments issued, net		—			—			—			19,158			—			19,158
Servicing received as proceeds from sales of mortgage loans		—			—			—			—			15,385			15,385
Changes in fair value included in income arising from:
Changes in instrument-specific credit risk		19,326			1,236			—			—			—			20,562
Other factors		52,525			507			(10,062	)		9,563			(4,764	)		47,769

		71,851			1,743			(10,062	)		9,563			(4,764	)		68,331

Transfers of mortgage loans under forward purchase agreements to mortgage loans		201,443			(201,443	)		—			—			—			—
Transfers of mortgage loans to REO		(98,785	)		—			—			—			—			(98,785	)
Transfers of mortgage loans under forward purchase agreements to REO under forward purchase agreements		—			(3,400	)		—			—			—			(3,400	)
Transfers of interest rate lock commitments to mortgage loans		—			—			—			(20,905	)		—			(20,905	)

Balance, June 30, 2014	$	2,156,501		$	—		$	190,244		$	11,087		$	46,802		$	2,404,634

Changes in fair value recognized during the period relating to assets still held at June 30, 2014	$	50,613		$	—		$	(10,062	)	$	11,088		$	(4,764	)	$	46,875

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


	Six months ended June 30, 2015
	Mortgage			Excess			Interest			Mortgage
	loans			servicing			rate lock			servicing
	at fair value			spread			commitments (1)			rights			Total
							(in thousands)
Assets:
Balance, December 31, 2014	$	2,199,583		$	191,166		$	5,661		$	57,358		$	2,453,768
Purchases		241,981			187,287			—			—			429,268
Repayments and sales		(114,070	)		(31,083	)		—			—			(145,153	)
Capitalization of interest		20,130			—			—			—			20,130
Accrual of interest		—			9,570			—			—			9,570
ESS received pursuant to a recapture agreement with PFSI		—			2,565			—			—			2,565
Interest rate lock commitments issued, net		—			—			31,083			—			31,083
Servicing received as proceeds from sales of mortgage loans		—			—			—			3,495			3,495
Changes in instrument-specific credit risk		19,057			—			—						19,057
Other factors		28,196			(403	)		(23,399	)		(3,510	)		884

		47,253			(403	)		(23,399	)		(3,510	)		19,941

Transfers of mortgage loans to REO		(147,933	)		—			—			—			(147,933	)
Transfers of interest rate lock commitments to mortgage loans acquired for sale		—			—			(13,612	)		—			(13,612	)

Balance, June 30, 2015	$	2,246,944		$	359,102		$	(267	)	$	57,343		$	2,663,122

Changes in fair value recognized during the period relating to assets still held at June 30, 2015	$	54,574		$	(403	)	$	(267	)	$	(3,510	)	$	50,394

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


	Six months ended June 30, 2014
	Mortgage loans at fair value			Mortgage loans under forward purchase agreements			Excess servicing spread			Net 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			73,393			—			—			357,796
Repayments and sales		(387,430	)		(6,413	)		(16,494	)		—			—			(410,337	)
Capitalization of interest		28,553			1,801			—			—			—			30,354
Accrual of interest		—			—			6,001			—			—			6,001
ESS received pursuant to a recapture agreement with PFSI		—			—			3,475			—			—			3,475
Interest rate lock commitments issued, net		—			—			—			31,754			—			31,754
Servicing received as proceeds from sales of mortgage loans		—			—			—			—			27,142			27,142
Changes in fair value included in income arising from:
Changes in instrument-specific credit risk		42,629			2,269			—			—						44,898
Other factors		70,080			(1,466	)		(14,854	)		11,993			(6,792	)		58,961

		112,709			803			(14,854	)		11,993			(6,792	)		103,859

Transfers of mortgage loans under forward purchase agreements to mortgage loans		205,902			(205,902	)		—			—			—			—
Transfers of mortgage loans to REO		(162,915	)		—			—			—			—			(162,915	)
Transfers of mortgage loans under forward purchase agreements to REO under forward purchase agreements		—			(9,803	)		—			—			—			(9,803	)
Transfers of interest rate lock commitments to mortgage loans acquired for sale		—			—			—			(33,909	)		—			(33,909	)

Balance, June 30, 2014	$	2,156,501		$	—		$	190,244		$	11,087		$	46,802		$	2,404,634

Changes in fair value recognized during the period relating to assets still held at June 30, 2014	$	73,951		$	—		$	(14,854	)	$	11,087		$	(6,792	)	$	63,392

(1)	For 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 held in a consolidated VIE):


	June 30, 2015
			Principal
			amount due
	Fair value		upon maturity		Difference
	(in thousands)
Mortgage loans acquired for sale at fair value:
Current through 89 days delinquent	$	2,212,726	$	2,123,424	$	89,302
90 or more days delinquent (1)
Not in foreclosure		554		547		7
In foreclosure		594		689		(95	)

		1,148		1,236		(88	)

		2,213,874		2,124,660		89,214

Other mortgage loans at fair value:
Current through 89 days delinquent		1,239,333		1,495,190		(255,857	)
90 or more days delinquent (1)
Not in foreclosure		597,859		839,463		(241,604	)
In foreclosure		893,628		1,264,333		(370,705	)

		1,491,487		2,103,796		(612,309	)

		2,730,820		3,598,986		(868,166	)

	$	4,944,694	$	5,723,646	$	(778,952	)

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


	December 31, 2014
			Principal
			amount due
	Fair value		upon maturity		Difference
			(in thousands)
Mortgage loans acquired for sale:
Current through 89 days delinquent	$	637,518	$	610,372	$	27,146
90 or more days delinquent (1)
Not in foreclosure		204		255		(51	)
In foreclosure		—		—		—

		204		255		(51	)

		637,722		610,627		27,095

Other mortgage loans at fair value:
Current through 89 days delinquent		1,191,635		1,452,885		(261,250	)
90 or more days delinquent (1)
Not in foreclosure		608,144		875,214		(267,070	)
In foreclosure		927,173		1,371,371		(444,198	)

		1,535,317		2,246,585		(711,268	)

		2,726,952		3,699,470		(972,518	)

	$	3,364,674	$	4,310,097	$	(945,423	)

(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 June 30, 2015
	Net gain on
	mortgage
	loans			Net			Net gain			Net loan
	acquired			interest			on			servicing
	for sale			income			investments			fees			Total
	(in thousands)
Assets:
Short-term investments	$	—		$	—		$	—		$	—		$	—
Mortgage-backed securities at fair value		—			(23	)		(6,702	)		—			(6,725	)
Mortgage loans acquired for sale at fair value		(5,017	)		—			—			—			(5,017	)
Mortgage loans at fair value		—			(310	)		17,990			—			17,680
Excess servicing spread at fair value		—			—			8,589			—			8,589
Mortgage servicing rights at fair value		—			—			—			6,307			6,307

	$	(5,017	)	$	(333	)	$	19,877		$	6,307		$	20,834

Liabilities:
Asset-backed secured financing at fair value	$	—		$	51		$	3,991		$	—		$	4,042

	$	—		$	51		$	3,991		$	—		$	4,042


	Quarter ended June 30, 2014
	Net gain on
	mortgage
	loans			Net			Net gain			Net loan
	acquired			interest			on			servicing
	for sale			income			investments			fees			Total
	(in thousands)
Assets:
Short-term investments	$	—		$	—		$	—		$	—		$	—
Mortgage-backed securities at fair value		—			155			4,081			—			4,236
Mortgage loans acquired for sale at fair value		31,202			—			—			—			31,202
Mortgage loans at fair value		—			223			88,029			—			88,252
Mortgage loans under forward purchase agreements at fair value		—			—			1,743			—			1,743
Excess servicing spread at fair value		—			—			(7,537	)		—			(7,537	)
Mortgage servicing rights at fair value		—			—			—			(4,764	)		(4,764	)

	$	31,202		$	378		$	86,316		$	(4,764	)	$	113,132

Liabilities:
Asset-backed secured financing at fair value	$	(5,175	)	$	(80	)	$	—		$	—		$	(5,255	)

	$	(5,175	)	$	(80	)	$	—		$	—		$	(5,255	)


	Six months ended June 30, 2015
	Net gain on mortgage loans			Net			Net gain			Net loan
	acquired			interest			on			servicing
	for sale			income			investments			fees			Total
	(in thousands)
Assets:
Short-term investments	$	—		$	—		$	—		$	—		$	—
Mortgage-backed securities at fair value		—			63			(5,186	)		—			(5,123	)
Mortgage loans acquired for sale at fair value		18,064			—			—			—			18,064
Mortgage loans at fair value		—			179			36,977			—			37,156
Mortgage loans under forward purchase agreements at fair value		—			—			—			—			—
Excess servicing spread at fair value		—			—			2,342			—			2,342
Mortgage servicing rights at fair value		—			—			—			(3,510	)		(3,510	)

	$	18,064		$	242		$	34,133		$	(3,510	)	$	48,929

Liabilities:
Asset-backed secured financing at fair value	$	—		$	(122	)	$	3,222		$	—		$	3,100

	$	—		$	(122	)	$	3,222		$	—		$	3,100


	Six months ended June 30, 2014
	Net gain on
	mortgage
	loans			Net			Net gain			Net loan
	acquired			interest			on			servicing
	for sale			income			investments			fees			Total
	(in thousands)
Assets:
Short-term investments	$	—		$	—		$	—		$	—		$	—
Mortgage-backed securities at fair value		—			188			6,734			—			6,922
Mortgage loans acquired for sale at fair value		49,834			—			—			—			49,834
Mortgage loans at fair value		—			553			140,194			—			140,747
Mortgage loans under forward purchase agreements at fair value		—			—			803			—			803
Excess servicing spread at fair value		—			—			(10,438	)		—			(10,438	)
Mortgage servicing rights at fair value		—			—			—			(6,792	)		(6,792	)

	$	49,834		$	741		$	137,293		$	(6,792	)	$	181,076

Liabilities:
Asset-backed secured financing at fair value	$	(7,954	)	$	(204	)	$	—		$	—		$	(8,158	)

	$	(7,954	)	$	(204	)	$	—		$	—		$	(8,158	)

Financial Statement Items Measured at Fair Value on a Nonrecurring Basis

Following is a summary of financial statement items that were re-measured at fair value on a nonrecurring basis during the periods presented:


	June 30, 2015
	Level 1		Level 2		Level 3		Total
	(in thousands)
Real estate asset acquired in settlement of loans	$	—	$	—	$	150,121	$	150,121
Mortgage servicing rights at lower of amortized cost or fair value		—		—		112,363		112,363

	$	—	$	—	$	262,484	$	262,484


	December 31, 2014
	Level 1		Level 2		Level 3		Total
	(in thousands)
Real estate asset acquired in settlement of loans	$	—	$	—	$	157,203	$	157,203
Mortgage servicing rights at lower of amortized cost or fair value		—		—		91,990		91,990

	$	—	$	—	$	249,193	$	249,193

The following table summarizes the fair value changes recognized during the period on assets held at period end that were measured at estimated fair values on a nonrecurring basis:


	Quarter ended June 30,						Six months ended June 30,
	2015			2014			2015			2014
	(in thousands)
Real estate asset acquired in settlement of loans	$	(6,491	)	$	(7,942	)	$	(13,800	)	$	(12,525	)
Mortgage servicing rights at lower of amortized cost or fair value		7,082			(2,224	)		703			(2,851	)

	$	591		$	(10,166	)	$	(13,097	)	$	(15,376	)

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 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 Company’s 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.

The Manager 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 the Manager 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. Cash is measured using “Level 1” inputs. The Company’s assets sold under agreements to repurchase and mortgage loans participation and sale agreement are classified as “Level 3” financial statement instruments as of June 30, 2015 due to the lack of current market activity and the Company’s reliance on unobservable inputs to estimate these instruments’ fair values.

The Manager has concluded that the fair values of Cash, Assets sold under agreements to repurchase, Mortgage loan participation and sale agreement and Credit Risk Transfer financing at fair value 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.

The Exchangeable Notes are carried at amortized cost. The fair value of the Exchangeable Notes at June 30, 2015 and December 31, 2014 was $233.0 million and $239.0 million, respectively. The fair value of the Exchangeable Notes is estimated using a broker indication of value. The Company has classified the Exchangeable Notes as “Level 3” financial statement items as of June 30, 2015 due to the lack of current market activity and use of a broker’s indication of value to estimate the instrument’s fair value.

Valuation Techniques and Inputs

Most of the Company’s assets and asset-backed financing agreements are carried at fair value with changes in fair value recognized in current period income. A substantial portion of these items are “Level 3” financial statement items which require the use of unobservable inputs that are significant to the estimation of the items’ 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 values of “Level 3” financial statement items, the Manager has assigned the responsibility for estimating fair value of these items to specialized staff and subjects the valuation process to significant executive management oversight. The Manager’s Financial Analysis and Valuation group (the “FAV group”) is responsible for estimating the fair values of “Level 3” financial statement items other than IRLCs and maintaining its valuation policies and procedures.

With respect to the Level 3 valuations, the FAV group reports to the Manager’s senior management valuation committee, which oversees and approves the valuations. The FAV group monitors the models used for valuation of the Company’s “Level 3” financial statement items, including the models’ performance versus actual results, and reports those results to the Manager’s senior management valuation committee. The Manager’s senior management valuation committee includes PFSI’s chief executive, financial, operating, credit and asset/liability management officers.

The FAV group is responsible for reporting to the Manager’s senior management valuation committee on a monthly basis on the changes in the valuation of the portfolio, including major factors affecting the valuation and any changes in model methods and inputs. To assess the reasonableness of its valuations, the FAV group presents an analysis of the effect on the valuation of changes to the significant inputs to the models.

With respect to IRLCs, the Manager has assigned responsibility for developing fair values to its capital markets risk management staff. The fair values developed by the capital markets risk management staff are submitted to the Manager’s senior management secondary marketing working group. The Manager’s secondary marketing working group includes PFSI’s chief executive, operating, institutional mortgage banking, capital markets, asset/liability, portfolio risk, and capital markets operations officers.

The following is a description of the techniques and inputs used in estimating the fair values of “Level 2” and “Level 3” financial statement items:

Mortgage-Backed Securities

The Company’s MBS include Agency and senior non-agency MBS. The Company categorized its MBS as “Level 2” financial statement items. Fair value of Agency and senior non-Agency MBS is estimated based on quoted market prices for the Company’s MBS or 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. The Company obtains indications of fair value from nonaffiliated brokers based on comparable securities and validates brokers’ indications of fair value using pricing models and inputs the Manager believes are similar to the models and inputs used by other market participants.

•

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 mortgage loans’ 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 the Manager’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 and history 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 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:


Key inputs	June 30, 2015	December 31, 2014
Discount rate
Range	2.3% – 15.0%	2.3% – 15.0%
Weighted average	7.2%	7.7%
Twelve-month projected housing price index change
Range	1.9% – 5.2%	4.0% – 5.3%
Weighted average	3.9%	4.8%
Prepayment speed (1)
Range	0.1% – 5.1%	0.0% – 6.5%
Weighted average	3.6%	3.1%
Total prepayment speed (2)
Range	3.6% – 29.6%	0.0% – 27.9%
Weighted average	20.9%	21.6%

(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 mortgage 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 on the Company’s consolidated statements of income. Changes to other inputs result in a change to fair value that is recognized in Net gain (loss) on investments on the Company’s consolidated statements of income.

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


	Range
	(Weighted average)
Key inputs	June 30, 2015	December 31, 2014
Unpaid principal balance of underlying mortgage loans (in thousands)	$46,809,508	$28,227,340
Average servicing fee rate (in basis points)	32	31
Average ESS rate (in basis points)	16	16
Pricing spread (1)
Range	1.7% – 12.4%	1.7% – 12.0%
Weighted average	5.0%	5.3%

Life (in years)
Range	0.3 – 7.3	0.4 – 7.3
Weighted average	6.2	5.8

Annual total prepayment speed (2)
Range	7.6% – 74.3%	7.6% – 74.6%
Weighted average	9.7%	11.2%

(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 categorizes IRLCs as a “Level 3” financial statement item. 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 mortgage 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 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 inputs 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	June 30, 2015	December 31, 2014
Pull-through rate
Range	63.6% – 99.9%	65.0% – 98.0%
Weighted average	93.7%	94.9%
MSR value expressed as:
Servicing fee multiple
Range	1.4 – 5.2	0.7 – 5.2
Weighted average	4.4	4.3

Percentage of unpaid principal balance
Range	0.3% – 3.7%	0.2% – 1.3%
Weighted average	1.1%	1.1%

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. These derivative financial instruments are categorized by the Company as “Level 2” financial statement items.

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 fair value from a broker’s price opinion or a full appraisal, or the price given in a current contract of sale.

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

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 mortgage 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 June 30,
	2015				2014
	Amortized		Fair		Amortized		Fair
	cost		value		cost		value
	(MSR recognized and unpaid principal balance of underlying loan amounts in thousands)
MSR and pool characteristics:
MSR recognized	$	30,587	$	1,589	$	13,356	$	15,385
Unpaid principal balance of underlying mortgage loans	$	3,346,010	$	176,404	$	1,244,538	$	1,458,400
Weighted-average annual servicing fee rate (in basis points)		25		25		25		25

Key inputs:
Pricing spread (1)
Range		6.5% – 13.0%		9.0% – 16.3%		6.3% – 14.3%		8.5% – 10.3%
Weighted average		8.1%		10.1%		8.7%		9.1%

Life (in years)
Range		2.6 – 7.3		2.3 – 7.3		1.3 – 7.3		3.2 – 7.3
Weighted average		6.7		6.8		6.1		7.1

Annual total prepayment speed (2)
Range		7.6% – 28.6%		8.3% – 34.2%		7.6% – 50.9%		8.1% – 25.4%
Weighted average		8.3%		10.6%		10.4%		9.6%

Annual per-loan cost of servicing
Range		$62 – $62		$62 – $62		$68 – $100		$68 – $68
Weighted average		$62		$62		$68		$68

	Six months ended June 30,
	2015				2014
	Amortized		Fair		Amortized		Fair
	cost		value		cost		value
	(MSR recognized and unpaid principal balance of underlying loan amounts in thousands)
MSR and pool characteristics:
MSR recognized	$	56,141	$	3,495	$	22,474	$	27,142
Unpaid principal balance of underlying mortgage loans	$	5,628,766	$	400,057	$	2,095,087	$	2,550,114
Weighted-average annual servicing fee rate (in basis points)		26		26		25		25

Key inputs:
Pricing spread (1)
Range		6.5% – 17.5%		9.0% – 16.3%		6.3% – 14.3%		8.5% – 12.3%
Weighted average		8.3%		10.6%		8.6%		9.0%

Life (in years)
Range		1.3 – 7.7		2.3 – 7.3		1.1 – 7.3		2.8 – 7.3
Weighted average		6.6		6.3		6.0		7.1

Annual total prepayment speed (2)
Range		7.6% – 51.0%		8.3% – 34.2%		7.6% – 56.4%		8.0% – 25.4%
Weighted average		8.7%		12.3%		10.4%		9.5%

Annual per-loan cost of servicing
Range		$62 – $134		$62 – $62		$68 – $100		$68 – $68
Weighted average		$63		$62		$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 inputs:


	June 30, 2015						December 31, 2014
	Amortized			Fair			Amortized			Fair
	cost			value			cost			value
	(Carrying value, unpaid principal balance and effect on fair value amounts in thousands)
MSR and pool characteristics:
Carrying value	$	337,394		$	57,343		$	300,422		$	57,358


Unpaid principal balance of underlying mortgage loans	$	30,687,534		$	5,761,411		$	28,006,797		$	6,278,676
Weighted-average annual servicing fee rate (in basis points)		26			25			26			25
Weighted-average note interest rate		3.81	%		4.77	%		3.80	%		4.78	%

Key inputs:
Pricing spread (1) (2)
Range		6.3% – 17.5%			7.8% – 16.3%			6.3% – 17.5%			8.1% – 16.3%
Weighted average		7.6%			9.7%			7.9%			10.3%
Effect on fair value of a:
5% adverse change		$(6,593)			$(992)			$(5,801)			$(937)
10% adverse change		$(12,968)			$(1,951)			$(11,410)			$(1,845)
20% adverse change		$(25,098)			$(3,779)			$(22,086)			$(3,577)

Weighted average life (in years)
Range		1.7 – 7.3			2.2 – 7.3			1.8 – 7.2			1.8 – 7.2
Weighted average		6.4			6.9			6.4			6.7

Prepayment speed (1) (3)
Range		7.6% – 38.3%			8.0% – 31.4%			7.8% – 47.9%			8.0% – 39.6%
Weighted average		8.4%			10.1%			8.8%			11.4%
Effect on fair value of a:
5% adverse change		$(6,824)			$(1,350)			$(6,166)			$(1,430)
10% adverse change		$(13,437)			$(2,652)			$(12,138)			$(2,803)
20% adverse change		$(26,066)			$(5,116)			$(23,532)			$(5,394)

Annual per-loan cost of servicing
Range		$62 – $134			$62 – $134			$62 – $134			$62 – $134
Weighted average		$62			$62			$62			$62
Effect on fair value of a:
5% adverse change		$(2,063)			$(356)			$(1,807)			$(334)
10% adverse change		$(4,127)			$(711)			$(3,614)			$(668)
20% adverse change		$(8,253)			$(1,422)			$(7,228)			$(1,337)

(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.

(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 inputs used; and do not incorporate other factors that would affect the Company’s overall financial performance in such scenarios, including operational adjustments made by the Manager to account for changing circumstances. For these reasons, the preceding estimates should not be viewed as earnings forecasts.

Securities Sold Under Agreements to Repurchase

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

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:


	June 30, 2015				December 31, 2014
			Unpaid				Unpaid
	Fair		principal		Fair		principal
	value		balance		value		balance
Loan type	(in thousands)
Conventional:
Agency-eligible (1)	$	1,331,950	$	1,279,712	$	290,007	$	277,355
Jumbo		51,594		50,976		138,390		135,008
Acquired for sale to PennyMac Loan Services, LLC — Government insured or guaranteed		830,330		793,972		209,325		198,265

	$	2,213,874	$	2,124,660	$	637,722	$	610,628

Mortgage loans pledged to secure assets sold under agreements to repurchase	$	1,422,166			$	609,608

Mortgage loans pledged to secure mortgage loan participation and sale agreements	$	72,819			$	20,862

Mortgage loans pledged to secure credit risk transfer financing	$	656,377			$	—

Mortgage loans pledged to secure Federal Home Loan Bank (“FHLB”) advances	$	48,627			$	—

(1)	Includes mortgage loans pooled under credit risk transfer financing with a fair value of $656.4 million.

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 mortgage 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. The Company is exposed to loss 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 fair value of its MSRs when interest rates decrease. The Company includes MSRs in its hedging activities.

The Company enters into Eurodollar futures contracts, which settle daily, to economically hedge net fair value changes of MBS at fair value and the related variable rate repurchase agreement liabilities indexed to LIBOR and a portion of fixed-rate mortgage loans at fair value held by its consolidated VIE. The Company uses the Eurodollar futures with the intention of moderating the risk of changing 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:


	June 30, 2015								December 31, 2014
			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		1,503,814	$	4,211		$	4,478			695,488	$	5,678		$	17
Forward sales contracts		3,252,286		10,844			4,002			1,601,282		52			6,649
Forward purchase contracts		2,263,622		2,415			7,912			1,100,700		3,775			34
MBS put options		367,500		1,426			—			340,000		374			—
MBS call options		40,000		169			—			—		—			—
Eurodollar future sale contracts		5,984,000		—			—			7,426,000		—			—
Eurodollar future purchase contracts		—		—			—			800,000		—			—
Treasury future contracts		40,000		1,210			164			85,000		—			478
Call options on interest rate futures		1,135,000		3,557			—			1,030,000		3,319			—
Put options on interest rate futures		1,273,000		1,659			—			275,000		193			—

Total derivative instruments before netting				25,491			16,556					13,391			7,178
Netting				(11,541	)		(9,738	)				(2,284	)		(4,748	)

			$	13,950		$	6,818				$	11,107		$	2,430

Margin deposits with (collateral received from) derivatives counterparties			$	(1,803	)						$	2,465

The following tables summarize the notional amount activity for derivative contracts used to hedge the Company’s IRLCs, inventory of mortgage loans acquired for sale, MSRs, mortgage loans at fair value held in a VIE and MBS.


	Quarter ended June 30, 2015
	Balance,							Balance,
	beginning				Dispositions/			end
Instrument	of period		Additions		expirations			of period
	(in thousands)
Forward sales contracts		2,958,492		14,047,534		(13,753,740	)		3,252,286
Forward purchase contracts		2,132,616		9,885,504		(9,754,498	)		2,263,622
MBS put options		190,000		587,500		(410,000	)		367,500
MBS call options		—		140,000		(100,000	)		40,000
Eurodollar future sale contracts		6,355,000		185,000		(556,000	)		5,984,000
Treasury future contracts		85,000		65,000		(110,000	)		40,000
Call option on interest rate futures		1,165,000		1,635,000		(1,665,000	)		1,135,000
Put options on interest rate futures		1,020,000		1,548,000		(1,295,000	)		1,273,000

	Quarter ended June 30, 2014
	Balance,							Balance,
	beginning				Dispositions/			end
Instrument	of period		Additions		expirations			of period
	(in thousands)
Forward purchase contracts		1,777,353		12,037,081		(10,755,830	)		3,058,604
Forward sales contracts		2,497,960		15,317,583		(13,629,910	)		4,185,633
MBS put options		260,000		412,500		(280,000	)		392,500
MBS call options		35,000		95,000		(35,000	)		95,000
Eurodollar future sale contracts		6,084,000		336,000		(858,000	)		5,562,000
Eurodollar future purchase contracts		—		400,000		(400,000	)		—
Treasury future sale contracts		75,000		117,000		(107,000	)		85,000
Treasury future purchase contracts		380,000		125,000		(380,000	)		125,000
Put options on interest rate futures		90,000		230,000		(90,000	)		230,000

	Six months ended June 30, 2015
	Balance,							Balance,
	beginning				Dispositions/			end
Instrument	of period		Additions		expirations			of period
	(in thousands)
Forward sales contracts		1,601,283		23,877,061		(22,226,058	)		3,252,286
Forward purchase contracts		1,100,700		16,933,180		(15,770,258	)		2,263,622
MBS put options		340,000		992,500		(965,000	)		367,500
MBS call options		—		140,000		(100,000	)		40,000
Eurodollar future sale contracts		7,426,000		285,000		(1,727,000	)		5,984,000
Eurodollar future purchase contracts		800,000		—		(800,000	)		—
Treasury future contracts		85,000		161,500		(206,500	)		40,000
Call options on interest rate futures		1,030,000		2,275,000		(2,170,000	)		1,135,000
Put options on interest rate futures		275,000		2,668,000		(1,670,000	)		1,273,000


	Six months ended June 30, 2014
	Balance,							Balance,
	beginning				Dispositions/			end
Instrument	of period		Additions		expirations			of period
	(in thousands)
Forward purchase contracts		2,781,066		18,434,899		(18,157,361	)		3,058,604
Forward sales contracts		3,588,027		23,986,522		(23,388,917	)		4,185,633
MBS put option		55,000		842,500		(505,000	)		392,500
MBS call option		110,000		155,000		(170,000	)		95,000
Eurodollar future sale contracts		8,779,000		462,000		(3,679,000	)		5,562,000
Eurodollar future purchase contracts		—		2,997,000		(2,997,000	)		—
Treasury future sale contracts		105,000		220,800		(240,800	)		85,000
Treasury future purchase contracts		52,500		562,000		(489,500	)		125,000
Put options on interest rate futures		—		380,000		(150,000	)		230,000

Following are the net gains (losses) recognized by the Company on derivative financial instruments and the income statement line items where such gains and losses are included:


		Quarter ended June 30,						Six months ended June 30,
Hedged Item	Income statement line	2015			2014			2015			2014
		(in thousands)
Interest rate lock commitments and mortgage loans acquired for sale	Net gain on mortgage loans acquired for sale	$	25,566		$	(28,802	)	$	10,456		$	(39,501	)
Mortgage servicing rights	Net loan servicing fees	$	(16,272	)	$	4,286		$	(5,196	)	$	4,186
Fixed-rate assets and LIBOR-indexed repurchase agreements	Net gain on investments	$	(1,256	)	$	8,191		$	(11,294	)	$	(13,802	)

Note 10—Mortgage Loans at Fair Value

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