Edgar Filing: PennyMac Mortgage Investment Trust

Large accelerated filer

Accelerated filer

Non-accelerated filer

¨ (Do not check if a smaller reporting company)

Smaller reporting company

10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

Form 10-Q

(Mark One)

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

For the quarterly period ended September 30, 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 November 4 , 2015
Common Shares of Beneficial Interest, $0.01 par value		73,767,435

PENNYMAC MORTGAGE INVESTMENT TRUST

FORM 10-Q

September 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		59
	Observations on Current Market Conditions		60
	Results of Operations		62
	Net Investment Income		63
	Expenses		79
	Balance Sheet Analysis		83
	Asset Acquisitions		84
	Investment Portfolio Composition		85
	Cash Flows		91
	Liquidity and Capital Resources		92
	Off-Balance Sheet Arrangements and Aggregate Contractual Obligations		94
	Quantitative and Qualitative Disclosures About Market Risk		100
Item 3.	Quantitative and Qualitative Disclosures About Market Risk		102
Item 4.	Controls and Procedures		102
PART II. OTHER INFORMATION			102
Item 1.	Legal Proceedings		102
Item 1A.	Risk Factors		102
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		103
Item 3.	Defaults Upon Senior Securities		103
Item 4.	Mine Safety Disclosures		103
Item 5.	Other Information		103
Item 6.	Exhibits		104

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 the negative impacts of 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)


	September 30, 2015		December 31, 2014
	(in thousands, except share data)
ASSETS
Cash	$	89,303	$	76,386
Short-term investments		31,518		139,900
Mortgage-backed securities at fair value (includes $306,638 and $307,363 pledged to secure assets sold under agreements to repurchase and $8,961 and $0 pledged to secure Federal Home Loan Bank advances)		315,599		307,363
Mortgage loans acquired for sale at fair value (includes $903,806 and $609,608 pledged to secure assets sold under agreements to repurchase, $63,162 and $20,862 pledged to secure mortgage loan participation and sale agreement, and $68,937 and $0 pledged to secure Federal Home Loan Bank advances)		1,050,296		637,722
Mortgage loans at fair value (includes $2,485,046 and $2,709,161 pledged to secure assets sold under agreements to repurchase and asset-backed secured financing of a variable interest entity at fair value and $140,025 and $0 pledged to secure Federal Home Loan Bank advances)		2,637,730		2,726,952
Excess servicing spread purchased from PennyMac Financial Services, Inc. at fair value pledged to secure note payable to PennyMac Financial Services, Inc.		418,573		191,166
Derivative assets		16,806		11,107
Real estate acquired in settlement of loans (includes $280,045 and $150,649 pledged to secure assets sold under agreements to repurchase)		353,563		303,228
Real estate held for investment		4,448		—
Mortgage servicing rights (includes $57,751 and $57,358 carried at fair value and $423,095 and $0 pledged to secure borrowings under notes payable)		423,095		357,780
Servicing advances		79,528		79,878
Due from PennyMac Financial Services, Inc.		9,050		6,621
Other		162,722		59,155

Total assets	$	5,592,231	$	4,897,258

LIABILITIES
Assets sold under agreements to repurchase	$	2,864,032	$	2,729,027
Mortgage loan participation and sale agreement		61,078		20,222
Federal Home Loan Bank advances		183,000		—
Notes payable		192,332		—
Note payable to PennyMac Financial Services, Inc.		150,000		—
Asset-backed secured financing of a variable interest entity at fair value		234,287		165,920
Exchangeable senior notes		244,805		244,079
Derivative liabilities		2,786		2,430
Accounts payable and accrued liabilities		67,086		67,806
Due to PennyMac Financial Services, Inc.		17,220		23,943
Income taxes payable		42,702		51,417
Liability for losses under representations and warranties		18,473		14,242

Total liabilities		4,077,801		3,319,086

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

PENNYMAC MORTGAGE INVESTMENT TRUST AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS (UNAUDITED)


	September 30, 2015		December 31, 2014
	(in thousands, except share data)
SHAREHOLDERS’ EQUITY
Common shares of beneficial interest—authorized, 500,000,000 common shares of $0.01 par value; issued and outstanding, 73,792,435 and 74,510,159 common shares		738		745
Additional paid-in capital		1,468,739		1,479,699
Retained earnings		44,953		97,728

Total shareholders’ equity		1,514,430		1,578,172

Total liabilities and shareholders’ equity	$	5,592,231	$	4,897,258

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


	September 30, 2015		December 31, 2014
	(in thousands)
ASSETS
Mortgage loans at fair value	$	477,271	$	527,369
Derivative assets		626		—
Other assets
Interest receivable		1,502		1,651
Restricted cash		87,891		—

	$	567,290	$	529,020

LIABILITIES
Asset-backed secured financing at fair value	$	234,287	$	165,920
Accounts payable and accrued expenses—interest payable		679		477

	$	234,966	$	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 September 30,						Nine months ended September 30,
	2015			2014			2015			2014
	(in thousands, except per share data)
Net investment income
Interest income
From nonaffiliates	$	53,412		$	37,659		$	129,860		$	119,522
From PennyMac Financial Services, Inc.		8,026			3,577			17,596			9,578

		61,438			41,236			147,456			129,100

Interest expense
To nonaffiliates		36,471			22,020			91,423			63,660
To PennyMac Financial Services, Inc.		1,289			—			1,822			—

		37,760			22,020			93,245			63,660

Net interest income		23,678			19,216			54,211			65,440
Net gain on mortgage loans acquired for sale		13,884			9,509			35,219			29,702
Loan origination fees		9,135			6,447			21,701			13,288
Net gain on investments
From nonaffiliates		32,802			77,786			56,521			203,943
From PennyMac Financial Services, Inc.		(7,844	)		(7,396	)		(5,502	)		(17,834	)

		24,958			70,390			51,019			186,109
Net loan servicing fees		20,791			10,533			41,810			26,712
Results of real estate acquired in settlement of loans		(4,221	)		(11,926	)		(11,859	)		(23,900	)
Other		2,549			2,361			6,095			6,330

Net investment income		90,774			106,530			198,196			303,681

Expenses
Earned by PennyMac Financial Services, Inc.:
Loan fulfillment fees		17,553			15,497			45,752			36,832
Loan servicing fees		11,736			12,325			34,542			41,096
Management fees		5,742			9,623			18,524			26,609
Compensation		1,550			1,843			5,748			6,668
Professional services		1,759			1,927			5,249			6,348
Other		7,327			7,384			22,006			18,604

Total expenses		45,667			48,599			131,821			136,157

Income before provision for (benefit from) income taxes		45,107			57,931			66,375			167,524
Provision for (benefit from) income taxes		6,295			2,982			(8,016	)		(509	)

Net income	$	38,812		$	54,949		$	74,391		$	168,033

Earnings per share
Basic	$	0.51		$	0.74		$	0.98		$	2.28
Diluted	$	0.49		$	0.69		$	0.95		$	2.13
Weighted-average shares outstanding
Basic		74,681			74,140			74,675			73,254
Diluted		83,411			82,832			83,486			81,978
Dividends declared per share	$	0.47		$	0.61		$	1.69		$	1.79

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

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

Balance at December 31, 2014		74,510		$	745		$	1,479,699		$	97,728		$	1,578,172
Net income		—			—			—			74,391			74,391
Share-based compensation		302			3			4,977			—			4,980
Common share dividends, $1.69 per share		—			—			—			(127,166	)		(127,166	)
Issuance of common shares		—			—			8			—			8
Repurchase of common shares		(1,020	)		(10	)		(15,945	)		—			(15,955	)

Balance at September 30, 2015		73,792		$	738		$	1,468,739		$	44,953		$	1,514,430

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

PENNYMAC MORTGAGE INVESTMENT TRUST AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)


	Nine months ended September 30,
	2015			2014
	(in thousands)
Cash flows from operating activities
Net income	$	74,391		$	168,033
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		(884	)		(905	)
Capitalization of interest on mortgage loans at fair value		(34,979	)		(40,805	)
Accrual of interest on excess servicing spread		(17,596	)		(9,578	)
Amortization of credit facility commitment fees and debt issuance costs		8,491			7,298
Net gain on mortgage loans acquired for sale		(35,219	)		(29,702	)
Reversal of costs related to forward purchase agreements		—			(168	)
Net gain on investments		(51,019	)		(186,109	)
Change in fair value, amortization and impairment of mortgage servicing rights		32,876			30,285
Results of real estate acquired in settlement of loans		11,859			23,900
Share-based compensation expense		4,980			4,356
Purchases of mortgage loans acquired for sale at fair value from nonaffiliates		(35,922,418	)		(20,759,885	)
Purchases of mortgage loans acquired for sale at fair value from PennyMac Financial Services, Inc.		(13,708	)		(4,955	)
Repurchase of mortgage loans subject to representation and warranties		(14,873	)		(14,266	)
Sales and repayments of mortgage loans acquired for sale at fair value to nonaffiliates		10,593,309			8,548,903
Sales of mortgage loans acquired for sale to PennyMac Financial Services, Inc.		24,877,077			11,947,251
Increase in servicing advances		(16,930	)		(14,347	)
(Increase) decrease in due from PennyMac Financial Services, Inc.		(2,090	)		2,163
Increase in other assets		(14,891	)		(70,252	)
Increase in accounts payable and accrued liabilities		10,624			6,038
(Decrease) increase in payable to PennyMac Financial Services, Inc.		(6,487	)		3,076
(Decrease) increase in income taxes payable		(8,715	)		6,273

Net cash used in operating activities		(526,202	)		383,396


Cash flows from investing activities
Net decrease in short-term investments		108,382			54,946
Purchases of mortgage-backed securities at fair value		(62,224	)		(73,922	)
Repayments of mortgage-backed securities at fair value		52,520			9,830
Purchases of mortgage loans at fair value		(241,981	)		(283,017	)
Sales and repayments of mortgage loans at fair value		215,630			532,375
Repayments of mortgage loans under forward purchase agreements at fair value		—			6,413
Purchases of excess servicing spread from PennyMac Financial Services, Inc.		(271,452	)		(82,646	)
Repayments of excess servicing spread by PennyMac Financial Services, Inc.		55,800			25,280
Purchase of Federal Home Loan Bank capital stock		(7,330	)		—
Settlements of derivative financial instruments		(8,766	)		(7,879	)
Sale of mortgage loans at fair value to PennyMac Financial Services, Inc.		1,466			—
Purchase of real estate acquired in settlement of loans		—			(3,049	)
Sales of real estate acquired in settlement of loans		174,784			124,794
Sales of real estate acquired in settlement of loans under forward purchase agreements		—			5,365
Sale of mortgage servicing rights		392			137
Deposits of cash collateral to variable interest entities		(87,891	)		—
Decrease (increase) in margin deposits and restricted cash		1,438			(350	)

Net cash (used) provided by investing activities		(69,232	)		308,277

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

PENNYMAC MORTGAGE INVESTMENT TRUST AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)


	Nine months ended September 30,
	2015			2014
	(in thousands)
Cash flows from financing activities
Sales of assets under agreement to repurchase		38,669,898			26,109,117
Repurchases of assets sold under agreements to repurchase		(38,534,306	)		(25,732,035	)
Sales of mortgage loan participation certificates		3,613,090			—
Repayments of mortgage loan participation certificates		(3,572,232	)		—
Issuances of credit risk transfer financing		1,204,187			—
Repayments of credit risk transfer financing		(1,204,187	)		—
Federal Home Loan Bank advances		461,484			—
Repayments of Federal Home Loan Bank advances		(278,484	)		—
Advances under note payable		346,179			—
Repayments under note payable		(153,765	)		—
Advances under note payable to PennyMac Financial Services, Inc.		168,546			—
Repayments under note payable to PennyMac Financial Services, Inc.		(18,546	)		—
Repayments of borrowings under forward purchase agreements		—			(227,866	)
Issuances of asset-backed secured financing at fair value		85,206			—
Repayments of asset-backed secured financing at fair value		(15,590	)		(6,161	)
Payments of debt issuance cost and commitment fees		(8,436	)		—
Issuances of common shares		8			82,453
Repurchases of common shares		(15,955	)		—
Payments of common share underwriting and offering costs		—			(1,052	)
Payments of contingent underwriting fees payable		(705	)		(1,295	)
Payments of dividends		(138,041	)		(128,966	)

Net cash provided financing activities		608,351			94,195

Net increase in cash		12,917			19,076
Cash at beginning of period		76,386			27,411

Cash at end of period	$	89,303		$	46,487

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

PENNYMAC MORTGAGE INVESTMENT TRUST AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Note 1—Organization and Basis of Presentation

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

The Company operates in two segments, correspondent production and investment activities:

•

The correspondent production segment represents the Company’s operations aimed at serving as an intermediary between mortgage lenders and the capital markets by purchasing, pooling and reselling newly originated prime credit quality mortgage loans either directly or in the form of mortgage-backed securities (“MBS”), using the services of PNMAC Capital Management, LLC (“PCM” or the “Manager”) and PennyMac Loan Services, LLC (“PLS” or the “Servicer”), both indirect subsidiaries of PennyMac Financial Services, Inc. (“PFSI”).

Most of the 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 the Federal Home Loan Mortgage Corporation (“Freddie Mac”) or through government agencies such as the Government National Mortgage Association (“Ginnie Mae”). Fannie Mae, Freddie Mac and Ginnie Mae are each referred to as an “Agency” and, collectively, as the “Agencies.”

•

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

The Company 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 (“ASC”) 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 fiscal 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 that may be anticipated for the full year. Intercompany accounts and transactions have been eliminated.

Preparation of financial statements in compliance with GAAP requires the Manager to make estimates and judgments 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 consolidated 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 Assets sold under agreements to repurchase, Mortgage loan participation and sale agreement and Exchangeable senior notes 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.

Following is a summary of the balance sheet reclassifications:


	December 31, 2014
	As reported		As previously reported		Reclassification
	(in thousands)
ASSETS
Other	$	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. The mortgage loans at fair value not acquired for sale are generally 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 PLS’ 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 September 30,				Nine months ended September 30,
	2015		2014		2015		2014
	(in thousands)
Investment portfolio purchases:
Mortgage loans	$	—	$	—	$	241,981	$	284,403
REO		—		—		—		3,117

	$	—	$	—	$	241,981	$	287,520

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

	$	—	$	—	$	—	$	26,805

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


	September 30, 2015		December 31, 2014
	(in thousands)
Mortgage loans	$	879,990	$	943,163
REO		97,619		108,302

	$	977,609	$	1,051,465

Total holdings of mortgage loans and REO	$	2,991,293	$	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 the CGM assets and related obligations as of the dates of the forward purchase agreements and recognized all subsequent income and changes in fair value relating to such assets. As a result of recognizing the CGM assets and related obligations, the Company’s consolidated statements of income and cash flows included the following amounts related to the forward purchase agreements:


	Quarter ended September 30, 2014		Nine months ended September 30, 2014
	(in thousands)
Statements of income:
Interest income	$	—	$	3,584
Interest expense	$	—	$	2,364
Net gain on investments	$	—	$	803
Net loan servicing fees	$	—	$	517
Results of REO	$	—	$	(473	)
Statements of cash flows:
Repayments of mortgage loans	$	—	$	6,413
Sales of REO	$	—	$	5,365
Repayments of borrowings under forward purchase agreements	$	—	$	(227,866	)

The Company had 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 September 30,				Nine months ended September 30,
	2015		2014		2015		2014
	(in thousands)
Fulfillment fees earned by PLS	$	17,553	$	15,497	$	45,752	$	36,832
Unpaid principal balance of loans fulfilled by PLS	$	4,073,201	$	3,677,613	$	10,542,411	$	8,588,955
Sourcing fees received from PLS	$	3,236	$	1,384	$	7,084	$	3,401
Unpaid principal balance of loans sold to PLS	$	10,783,882	$	4,609,947	$	23,602,020	$	11,332,898
Purchases of mortgage loans acquired for sale at fair value from PLS	$	2,880	$	2,970	$	13,708	$	4,955
Tax service fee to paid to PLS	$	1,291	$	703	$	3,293	$	1,753
At period end:
Mortgage loans included in mortgage loans acquired for sale pending sale to PLS	$	373,812	$	59,719

Mortgage Loan Servicing Activities

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


	Quarter ended September 30,				Nine months ended September 30,
	2015		2014		2015		2014
	(in thousands)
Mortgage loans acquired for sale at fair value:
Base	$	130	$	28	$	198	$	74
Activity-based		153		35		243		112

		283		63		441		186

Mortgage loans at fair value:
Distressed mortgage loans
Base		3,896		4,662		12,053		14,549
Activity-based		2,961		4,076		8,948		16,208

		6,857		8,738		21,001		30,757

Mortgage loans held in VIE
Base		34		17		92		71
Activity-based		—		—		—		—

		34		17		92		71

MSRs:
Base		4,473		3,459		12,783		9,930
Activity-based		89		48		225		152

		4,562		3,507		13,008		10,082

	$	11,736	$	12,325	$	34,542	$	41,096

Average investment in:
Mortgage loans acquired for sale at fair value	$	1,783,011	$	732,287	$	1,189,754	$	530,861
Distressed mortgage loans	$	2,201,533	$	2,122,397	$	2,268,538	$	2,171,724
Mortgage loans held in a VIE	$	481,925	$	537,367	$	504,351	$	534,784
Average mortgage loan servicing portfolio	$	38,172,371	$	30,701,324	$	36,446,663	$	28,597,033

Investing and Financing Activities

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


	Quarter ended September 30,						Nine months ended September 30,
	2015			2014			2015			2014
	(in thousands)
ESS:
Purchases	$	84,165		$	9,253		$	271,452		$	82,646
Recapture income recognized	$	2,428		$	2,143		$	5,173		$	6,558
Repayments	$	24,717		$	8,786		$	55,800		$	25,280
Interest income	$	8,026		$	3,577		$	17,596		$	9,578
Net gain (loss)	$	(10,272	)	$	(9,539	)	$	(10,675	)	$	(24,392	)
MSR recapture income recognized	$	670		$	—		$	670		$	9
Note payable:
Advances	$	97,474		$	—		$	168,546		$	—
Repayments	$	—		$	—		$	18,546		$	—
Interest expense	$	1,289		$	—		$	1,822		$	—

PLS is a party to a lending facility with a nonaffiliate lender pursuant to which it finances certain of its MSRs and servicing advance receivables. On April 30, 2015, PLS amended and restated the lending facility to increase the maximum loan amount to $407 million, $150 million of which is for the purpose of facilitating its financing of the related ESS by PennyMac Holdings, LLC (“PMH”), a wholly owned subsidiary of the Company.

In connection with the amendment to lending facility, PMH and PLS entered into an underlying loan and security agreement, dated as of April 30, 2015, pursuant to which PMH may borrow up to $150 million from PLS for the purpose of financing its purchase of ESS. The principal amount of the borrowings under the underlying loan and security agreement is based upon a percentage of the market value of the ESS pledged by PMH, subject to the $150 million sublimit described above. Pursuant to the underlying loan and security agreement, PMH granted to PLS a security interest in all of its right, title and interest in, to and under the ESS pledged to secure loans. The portion of the loan amount outstanding under the lending facility between PLS and the nonaffiliate lender and relating to advances for ESS outstanding with PMH under the underlying loan and security agreement was guaranteed in full by the Company.

PMH and PLS have agreed that PMH is required to repay PLS the principal amount of such borrowings plus accrued interest to the date of such repayment, and PLS is required to repay its lender the corresponding amount under the lending facility. Interest accrues under the underlying loan and security agreement at a rate based on the nonaffiliate lender’s cost of funds. PMH was also required to pay PLS a fee for the structuring of the underlying loan and security agreement in an amount equal to the portion of the corresponding fee paid by PLS to the nonaffiliate lender under the lending facility and allocable to the $150 million relating to the ESS financing.

In addition, in connection with its initial public offering of common shares on August 4, 2009 (“IPO”), the Company conditionally agreed to reimburse PCM up to $2.9 million for underwriting fees paid to the IPO underwriters by PCM on the Company’s behalf. During the quarter and nine months ended September 30, 2015, the Company reimbursed PCM $7,000 and $237,000, respectively, compared to $256,000 and $292,000 for the same periods in 2014.

Also in connection with its IPO, the Company agreed to pay the IPO underwriters up to $5.9 million in contingent underwriting fees. During the quarter and nine months ended September 30, 2015, the Company paid $14,000 and $473,000 to the underwriters, respectively, compared to $615,000 and $1.0 million for the same periods in 2014. At September 30, 2015 and December 31, 2014, $459,000 and $1.7 million, respectively, of contingent underwriting fees were included in accounts payable and accrued liabilities.

Other Transactions

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


	Quarter ended September 30,				Nine months ended September 30,
	2015		2014		2015		2014
	(in thousands)
Base	$	5,742	$	6,033	$	17,181	$	17,392
Performance incentive		—		3,590		1,343		9,217

Total management fee incurred during the period	$	5,742	$	9,623	$	18,524	$	26,609

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 September 30,					Nine months ended September 30,
	2015			2014		2015		2014
	(in thousands)
Reimbursement of:
Common overhead incurred by PCM and its affiliates (1)	$	2,694		$	2,912	$	8,125	$	8,181
Expenses incurred on the Company’s behalf		(85	)		122		377		671

	$	2,609		$	3,034	$	8,502	$	8,852

Payments and settlements during the period (2)	$	17,709		$	31,621	$	64,575	$	72,975

(1)	For the quarter and nine months ended September 30, 2015, in accordance with the terms of the management agreement, PCM provided the Company discretionary waivers of $900,000 and $1.6 million, respectively, 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, on the one hand, and PCM and PLS, on the other hand.

Amounts due to PCM and PLS are summarized below:


	September 30, 2015		December 31, 2014
	(in thousands)
Management fees	$	5,742	$	8,426
Allocated expenses		5,237		6,582
Fulfillment fees		3,031		506
Servicing fees		2,310		3,457
Conditional reimbursement		900		1,136
Unsettled purchases of ESS		—		3,836

	$	17,220	$	23,943

Amounts due from PCM and its affiliates totaled $9.1 million and $6.6 million at September 30, 2015 and December 31, 2014, respectively. At September 30, 2015 and December 31, 2015, the balance represents payments receivable relating to cash flows from the Company’s investment in ESS and amounts receivable relating to unsettled ESS and MSR recaptures.

PFSI, through a controlled subsidiary, held 75,000 of the Company’s common shares at both September 30, 2015 and December 31, 2014.

Note 4—Earnings Per Share

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

Under the two-class method, all earnings (distributed and undistributed) are allocated to common shares and participating securities, based on their respective rights to receive dividends. Basic earnings per share is determined by dividing net income, reduced by income attributable to the participating securities, by the weighted-average common shares outstanding during the period.

Diluted earnings per share is determined by dividing net income attributable to diluted shareholders, which adds back to net income the interest expense, net of applicable income taxes, on the Company’s exchangeable senior notes (the “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 September 30,						Nine months ended September 30,
	2015			2014			2015			2014
	(in thousands except per share amounts)
Basic earnings per share:
Net income		38,812		$	54,949		$	74,391		$	168,033
Effect of participating securities—share-based compensation awards		(361	)		(305	)		(1,352	)		(1,360	)

Net income attributable to common shareholders	$	38,451		$	54,644		$	73,039		$	166,673

Diluted earnings per share:
Net income attributable to common shareholders	$	38,451		$	54,949		$	73,039		$	168,033
Interest on Exchangeable Notes, net of income taxes		2,123			2,081			6,364			6,237

Net income attributable to diluted shareholders	$	40,574		$	57,030		$	79,403		$	174,270

Weighted-average basic shares outstanding		74,681			74,140			74,675			73,254
Potentially dilutive securities:
Shares issuable pursuant to exchange of the Exchangeable Notes		8,414			8,401			8,414			8,401
Shares issuable under share-based compensation plan		316			291			397			323

Diluted weighted-average number of shares outstanding		83,411			82,832			83,486			81,978

Basic earnings per share	$	0.51		$	0.74		$	0.98		$	2.28

Diluted earnings per share	$	0.49		$	0.69		$	0.95		$	2.13

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.

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 (“UPB”) information at period end:


	Quarter ended September 30,				Nine months ended September 30,
	2015		2014		2015		2014
	(in thousands)
Cash flows:
Proceeds from sales	$	4,885,668	$	3,745,193	$	10,593,309	$	8,534,637
Servicing fees received (1)	$	25,054	$	17,797	$	69,876	$	52,704
Period end information:
Unpaid principal balance of:
Mortgage loans outstanding	$	39,786,376	$	32,134,609
Delinquent mortgage loans:
30-89 days delinquent	$	154,346	$	87,374
90 or more days delinquent
Not in foreclosure or bankruptcy		25,243		20,708
In foreclosure or bankruptcy		30,406		11,583

		55,649		32,291

	$	209,995	$	119,665

(1)	Net of guarantee fees.

Consolidated VIEs

Credit Risk Transfer (“CRT”) Transactions

The Company, through its wholly-owned subsidiary, PennyMac Corp. (“PMC”), entered into CRT arrangements with Fannie Mae, pursuant to which PMC, through subsidiary trust entities, may sell pools of mortgage loans into Fannie Mae-guaranteed securitizations while retaining a portion of the credit risk underlying such mortgage loans (the “CRT Agreements”).

Transfers of mortgage loans subject to CRT Agreements receive sale accounting treatment upon fulfillment of the criteria for sale recognition contained in the Transfers and Servicing topic of the FASB’s ASC.

The Company retains a portion of the credit risk underlying such mortgage loans by issuing a credit guarantee to Fannie Mae in exchange for a portion of the guarantee fee normally charged by Fannie Mae for mortgage loan securitizations that it guarantees. The mortgage loans subject to the CRT Agreements are transferred by PMC to subsidiary trust entities which sell the mortgage loans into Fannie Mae mortgage loan securitizations and issue the credit guarantees to Fannie Mae.

The Manager has concluded that the Company’s subsidiary trust entities are VIEs. The Manager concluded that the Company is the primary beneficiary of the VIEs as it is the holder of the primary beneficial interests which absorb the variability of the trusts’ results of operations. Consolidation of the VIEs results in the inclusion on the Company’s consolidated balance sheet of the credit guarantees, including the cash pledged to fulfill the guarantee obligation, on the Company’s consolidated balance sheet in the form of a net derivative and the restricted cash deposited to secure the guarantee obligation. The restricted cash represents the Company’s maximum contractual exposure to claims under its credit guarantee and is the sole source of settlement of losses under the CRT Agreements. Gains and losses on net derivatives related to CRT Agreements are included in net gain on investments in the consolidated statements of income.

Following is a summary of the CRT Agreements:


	Quarter ended September 30,		Nine months ended September 30,
	2015		2015
	(in thousands)
During the period:
UPB of mortgage loans transferred and sold under CRT Agreements	$	1,660,280	$	2,400,433
Restricted cash deposited to fund guarantees	$	59,841	$	87,891
Gains recognized on net derivatives related to CRT Agreements
Realized	$	—	$	—
Resulting from valuation changes		626		626

	$	626	$	626

Payments made to settle losses	$	—	$	—

At period end:
UPB of mortgage loans subject to guarantee obligation	$	2,400,433
Delinquency
Current—89 days delinquent	$	2,400,433
90 or more days delinquent		—

	$	2,400,433

Carrying value of CRT Agreements:
Restricted cash included in Other assets	$	87,891
Net derivative assets included in Derivative assets		626

	$	88,517

Jumbo Mortgage Loan Financing

On September 30, 2013, the Company completed a securitization transaction in which a VIE issued $537.0 million in UPB of 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. During the quarter ended September 30, 2015, the Company sold an additional $85.2 million in certificates issued under PMT Loan Trust 2013-J1, thereby reducing the certificates retained by the Company to $238.8 million as of September 30, 2015.

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 held in VIE, 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 and the net derivatives related to CRT Agreements. As of September 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 and the net derivatives related to CRT Agreements are subject to master netting arrangements.


	September 30, 2015								December 31, 2014
	Gross amounts of recognized assets		Gross amounts offset in the consolidated balance sheet			Net amounts of assets presented in the consolidated balance sheet			Gross amounts of recognized assets		Gross amounts offset in the consolidated balance sheet			Net amounts of assets presented in the consolidated balance sheet
	(in thousands)
Derivatives subject to master netting arrangements:
MBS put options	$	—	$	—		$	—		$	374	$	—		$	374
MBS call options		—		—			—			—		—			—
Forward purchase contracts		22,985		—			22,985			3,775		—			3,775
Forward sale contracts		15		—			15			52		—			52
Put options on interest rate futures		693		—			693			193		—			193
Call options on interest rate futures		3,270		—			3,270			3,319		—			3,319
Treasury futures contracts		—		—			—			—		—			—
Netting		—		(19,892	)		(19,892	)		—		(2,284	)		(2,284	)

		26,963		(19,892	)		7,071			7,713		(2,284	)		5,429
Derivatives not subject to master netting arrangements:
Interest rate lock commitments		9,109		—			9,109			5,678		—			5,678
Net derivatives related to CRT Agreements		626		—			626			—		—			—

	$	36,698	$	(19,892	)	$	16,806		$	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.


	September 30, 2015								December 31, 2014
	Net amount of assets presented in the consolidated balance sheet		Gross amounts not offset in the consolidated balance sheet						Net amount of assets presented in the consolidated balance sheet		Gross amounts not offset in the consolidated balance sheet
			Financial instruments		Cash collateral received		Net amount				Financial instruments		Cash collateral received		Net amount
	(in thousands)
Interest rate lock commitments	$	9,109	$	—	$	—	$	9,109	$	5,678	$	—	$	—	$	5,678
RJ O’Brien & Associates, LLC		3,112		—		—		3,112		3,034		—		—		3,034
Nomura Securities International, Inc		733		—		—		733		—		—		—		—
Fannie Mae Capital Markets		730		—		—		730		—		—		—		—
Jefferies Group, LLC		598		—		—		598		133		—		—		133
Deutsche Bank		572		—		—		572		124		—		—		124
Morgan Stanley Bank, N.A.		531		—		—		531		104		—		—		104
Bank of New York Mellon		403		—		—		403		—		—		—		—
JP Morgan Chase & Co.		313		—		—		313		—		—		—		—
Credit Suisse First Boston Mortgage Capital LLC		188		—		—		188		253		—		—		253
Goldman Sachs		186		—		—		186		—		—		—		—
Royal Bank of Canada		173		—		—		173		—		—		—		—
Daiwa Capital Markets		100		—		—		100		29		—		—		29
Bank of America, N.A.		—		—		—		—		738		—		—		738
Other		58		—		—		58		1,014		—		—		1,014

Total	$	16,806	$	—	$	—	$	16,806	$	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.


	September 30, 2015									December 31, 2014
	Gross amounts of recognized liabilities in the consolidated balance sheet			Gross amounts offset in the consolidated balance sheet			Net amounts of liabilities presented in the consolidated balance sheet			Gross amounts of recognized liabilities in the consolidated balance sheet			Gross amounts offset in the consolidated balance sheet			Net amounts of liabilities presented in the consolidated balance sheet
	(in thousands)
Derivatives subject to master netting arrangements:
Forward purchase contracts	$	6		$	—		$	6		$	34		$	—		$	34
Forward sales contracts		21,794			—			21,794			6,649			—			6,649
Treasury futures sales contracts		—			—			—			478			—			478
Netting		—			(19,316	)		(19,316	)		—			(4,748	)		(4,748	)

		21,800			(19,316	)		2,484			7,161			(4,748	)		2,413

Derivatives not subject to master netting arrangements:
Interest rate lock commitments		302			—			302			17			—			17

		22,102			(19,316	)		2,786			7,178			(4,748	)		2,430

Assets sold under agreements to repurchase		2,865,722			—			2,865,722			2,730,130			—			2,730,130
Unamortized commitment fees and issuance cost		(1,690	)		—			(1,690	)		(1,103	)		—			(1,103	)

		2,864,032			—			2,864,032			2,729,027			—			2,729,027

	$	2,886,134		$	(19,316	)	$	2,866,818		$	2,736,205		$	(4,748	)	$	2,731,457

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.


	September 30, 2015										December 31, 2014
				Gross amounts not offset in the consolidated balance sheet										Gross amounts not offset in the consolidated balance sheet
	Net amount of liabilities presented in the consolidated balance sheet			Financial instruments (1)			Cash collateral pledged		Net amount		Net amount of liabilities presented in the consolidated balance sheet			Financial instruments			Cash collateral pledged		Net amount
	(in thousands)
Interest rate lock commitments	$	302		$	—		$	—	$	302	$	17		$	—		$	—	$	17
Morgan Stanley Bank, N.A.		163,104			(163,104	)		—		—		121,975			(121,975	)		—		—
Credit Suisse First Boston Mortgage Capital LLC		861,527			(861,527	)		—		—		966,155			(966,155	)		—		—
Citibank		843,743			(843,743	)		—		—		797,851			(797,663	)		—		188
JPMorgan Chase & Co.		446,348			(446,348	)		—		—		—			—			—		—
Bank of America, N.A.		403,193			(402,917	)		—		276		508,908			(508,908	)		—		—
Daiwa Capital Markets		148,083			(148,083	)		—		—		126,909			(126,909	)		—		—
RBS Securities		—			—			—		—		208,520			(208,520	)		—		—
Other		2,208			—			—		2,208		2,225			—			—		2,225
Unamortized commitment fees and issuance cost		(1,690	)		1,690			—		—		(1,103	)		1,103			—		—

Total	$	2,866,818		$	(2,864,032	)	$	—	$	2,786	$	2,731,457		$	(2,729,027	)	$	—	$	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 CRT financing and 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 these financings.

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:


	September 30, 2015
	Level 1		Level 2		Level 3		Total
	(in thousands)
Assets:
Short-term investments	$	31,518	$	—	$	—	$	31,518
Mortgage-backed securities at fair value		—		315,599		—		315,599
Mortgage loans acquired for sale at fair value		—		1,050,296		—		1,050,296
Mortgage loans at fair value		—		477,271		2,160,459		2,637,730
Excess servicing spread purchased from PFSI		—		—		418,573		418,573
Derivative assets:
Interest rate lock commitments		—		—		9,109		9,109
Forward purchase contracts		—		22,985		—		22,985
Forward sales contracts		—		15		—		15
Net derivatives related to CRT Agreements		—		—		626		626
Put options on interest rate futures		693		—		—		693
Call options on interest rate futures		3,270		—		—		3,270

Total derivative assets before netting before netting		3,963		23,000		9,735		36,698
Netting (1)		—		—		—		(19,892	)

Total derivative assets after netting		3,963		23,000		9,735		16,806

Mortgage servicing rights at fair value		—		—		57,751		57,751

	$	35,481	$	1,866,166	$	2,646,518	$	4,528,273

Liabilities:
Asset-backed secured financing of a variable interest entity at fair value		—		234,287		—		234,287
Derivative liabilities:
Interest rate lock commitments		—		—		302		302
Forward purchase contracts		—		6		—		6
Forward sales contracts		—		21,794		—		21,794

Total derivative liabilities before netting		—		21,800		302		22,102
Netting (1)		—		—		—		(19,316	)

Total derivative liabilities after netting		—		21,800		302		2,786

	$	—	$	256,087	$	302	$	237,073

(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 a 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 September 30, 2015
	Mortgage loans at fair value			Excess servicing spread			Interest rate lock commitments (1)			Net derivatives related to CRT Agreements		Mortgage servicing rights			Total
	(in thousands)
Assets:
Balance, June 30, 2015	$	2,246,944		$	359,102		$	(267	)	$	—	$	57,343		$	2,663,122
Purchases		—			84,165			—			—		—			84,165
Repayments and sales		(57,022	)		(24,717	)		—			—		—			(81,739	)
Capitalization of interest		14,849			8,026			—			—		—			22,875
ESS received pursuant to a recapture agreement with PFSI		—			2,268			—			—		—			2,268
Interest rate lock commitments issued, net		—			—			11,834			—		—			11,834
Servicing received as proceeds from sales of mortgage loans													5,674			5,674
Changes in fair value included in income arising from:
Changes in instrument-specific credit risk		9,255			—			—			—		—			9,255
Other factors		22,638			(10,271	)		16,458			626		(5,266	)		24,185

		31,893			(10,271	)		16,458			626		(5,266	)		33,440

Transfers of mortgage loans to REO		(76,205	)		—			—			—		—			(76,205	)
Transfers of interest rate lock commitments to mortgage loans acquired for sale		—			—			(19,218	)		—		—			(19,218	)

Balance, September 30, 2015	$	2,160,459		$	418,573		$	8,807		$	626	$	57,751		$	2,646,216

Changes in fair value recognized during the period relating to assets still held at September 30, 2015	$	32,971		$	(10,271	)	$	8,807		$	626	$	(5,266	)	$	26,867

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


	Quarter ended September 30, 2014
	Mortgage loans at fair value			Excess servicing spread			Net interest rate lock commitments (1)			Mortgage servicing rights			Total
	(in thousands)
Assets:
Balance, June 30, 2014	$	2,156,501		$	190,244		$	11,087		$	46,802		$	2,404,634
Purchases		—			9,253			—			—			9,253
Repayments and sales		(126,413	)		(8,786	)		—			(137	)		(135,336	)
Capitalization of interest		10,451			3,577			—			—			14,028
ESS received pursuant to a recapture agreement with PFSI		—			2,619			—			—			2,619
Interest rate lock commitments issued, net		—			—			14,046			—			14,046
Servicing received as proceeds from sales of mortgage loans		—			—			—			12,812			12,812
Changes in fair value included in income arising from:
Changes in instrument-specific credit risk		13,850			—			—			—			13,850
Other factors		67,446			(9,539	)		843			(1,606	)		57,144

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

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

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

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

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


	Nine months ended September 30, 2015
	Mortgage loans at fair value			Excess servicing spread			Interest rate lock commitments (1)			Net derivatives related to CRT Agreements		Mortgage servicing rights			Total
	(in thousands)
Assets:
Balance, December 31, 2014	$	2,199,583		$	191,166		$	5,661		$	—	$	57,358		$	2,453,768
Purchases		241,981			271,452			—			—		—			513,433
Repayments and sales		(171,093	)		(55,800	)		—			—		—			(226,893	)
Capitalization of interest		34,979			17,596			—			—		—			52,575
ESS received pursuant to a recapture agreement with PFSI		—			4,833			—			—		—			4,833
Interest rate lock commitments issued, net		—			—			42,917			—		—			42,917
Servicing received as proceeds from sales of mortgage loans		—			—			—			—		9,169			9,169
Charges in fair value included in income arising from:
Changes in instrument-specific credit risk		29,563			—			—			—		—			29,563
Other factors		49,584			(10,674	)		(6,941	)		626		(8,776	)		23,819

		79,147			(10,674	)		(6,941	)		626		(8,776	)		53,382

Transfers of mortgage loans to REO		(224,138	)		—			—			—		—			(224,138	)
Transfers of interest rate lock commitments to mortgage loans acquired for sale		—			—			(32,830	)		—		—			(32,830	)

Balance, September 30, 2015	$	2,160,459		$	418,573		$	8,807		$	626	$	57,751		$	2,646,216

Changes in fair value recognized during the period relating to assets still held at September 30, 2015	$	80,885		$	(10,674	)	$	8,807		$	626	$	(8,776	)	$	70,868

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


	Nine months ended September 30, 2014
	Mortgage loans at fair value			Mortgage loans under forward purchase agreements			Excess servicing spread			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			82,646			—			—			367,049
Repayments and sales		(513,843	)		(6,413	)		(25,280	)		—			(137	)		(545,673	)
Capitalization of interest		39,005			1,800			9,578			—			—			50,383
ESS received pursuant to a recapture agreement with PFSI		—			—			6,093			—			—			6,093
Interest rate lock commitments issued, net		—			—			—			45,800			—			45,800
Servicing received as proceeds from sales of mortgage loans		—			—			—			—			39,954			39,954
Changes in fair value included in income arising from:
Changes in instrument-specific credit risk		54,612			2,269			—			—						56,881
Other factors		139,393			(1,466	)		(24,392	)		12,837			(8,398	)		117,974

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

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

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

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

(1)	For 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):


	September 30, 2015
	Fair value		Principal amount due upon maturity		Difference
	(in thousands)
Mortgage loans acquired for sale at fair value:
Current through 89 days delinquent	$	1,050,006	$	1,003,249	$	46,757
90 or more days delinquent (1)
Not in foreclosure		85		116		(31	)
In foreclosure		205		254		(49	)

		290		370		(80	)

	$	1,050,296	$	1,003,619	$	46,677

Mortgage loans at fair value:
Mortgage loans held in a consolidated VIE:
Current through 89 days delinquent	$	477,271	$	471,496	$	5,775
90 or more days delinquent (1)
Not in foreclosure		—		—		—
In foreclosure		—		—		—

		—		—		—

		477,271		471,496		5,775

Other mortgage loans at fair value:
Current through 89 days delinquent		801,018		1,049,502		(248,484	)
90 or more days delinquent (1)
Not in foreclosure		533,070		739,183		(206,113	)
In foreclosure		826,371		1,149,326		(322,955	)

		1,359,441		1,888,509		(529,068	)

		2,160,459		2,938,011		(777,552	)

	$	2,637,730	$	3,409,507	$	(771,777	)

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


	December 31, 2014
	Fair value		Principal amount due 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

Mortgage loans at fair value:
Mortgage loans held in a consolidated VIE:
Current through 89 days delinquent	$	527,369	$	517,500	$	9,869
90 or more days delinquent (1)
Not in foreclosure		—		—		—
In foreclosure		—		—		—

		—		—		—

		527,369		517,500		9,869

Other mortgage loans at fair value:
Current through 89 days delinquent		664,266		935,385		(271,119	)
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 September 30, 2015
	Net gain on mortgage loans acquired for sale		Net interest income			Net gain on investments			Net loan servicing fees			Total
	(in thousands)
Assets:
Short-term investments	$	—	$	—		$	—		$	—		$	—
Mortgage-backed securities at fair value		—		91			3,564			—			3,655
Mortgage loans acquired for sale at fair value		39,504		—			—			—			39,504
Mortgage loans at fair value		—		1,024			39,273			—			40,297
Excess servicing spread at fair value		—		—			(7,844	)		—			(7,844	)
Mortgage servicing rights at fair value		—		—			—			(5,266	)		(5,266	)

	$	39,504	$	1,115		$	34,993		$	(5,266	)	$	70,346

Liabilities:
Asset-backed secured financing at fair value		—		(351	)		(3,940	)		—			(4,291	)

	$	—	$	(351	)	$	(3,940	)	$	—		$	(4,291	)


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

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

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

	$	—	$	(124	)	$	696		$	—		$	572


	Nine months ended September 30, 2015
	Net gain on mortgage loans acquired for sale		Net interest income			Net gain on investments			Net loan servicing fees			Total
	(in thousands)
Assets:
Short-term investments	$	—	$	—					$	—		$	—
Mortgage-backed securities at fair value		—		155			(1,622	)		—			(1,467	)
Mortgage loans acquired for sale at fair value		57,568		—			—			—			57,568
Mortgage loans at fair value		—		1,203			76,249			—			77,452
Excess servicing spread at fair value		—		—			(5,502	)		—			(5,502	)
Mortgage servicing rights at fair value		—		—			—			(8,776	)		(8,776	)

	$	57,568	$	1,358		$	69,125		$	(8,776	)	$	119,275

Liabilities:
Asset-backed secured financing at fair value		—		(474	)		(719	)		—			(1,193	)

	$	—	$	(474	)	$	(719	)	$	—		$	(1,193	)


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

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

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

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

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:


	September 30, 2015
	Level 1		Level 2		Level 3		Total
	(in thousands)
Real estate asset acquired in settlement of loans	$	—	$	—	$	145,815	$	145,815
Mortgage servicing rights at lower of amortized cost or fair value		—		—		125,952		125,952

	$	—	$	—	$	271,767	$	271,767


	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 fair value on a nonrecurring basis:


	Quarter ended September 30,						Nine months ended September 30,
	2015			2014			2015			2014
	(in thousands)
Real estate asset acquired in settlement of loans	$	(8,182	)	$	(14,242	)	$	(18,308	)	$	(24,027	)
Mortgage servicing rights at lower of amortized cost or fair value		(7,845	)		602			(7,142	)		(2,249	)

	$	(16,027	)	$	(13,640	)	$	(25,450	)	$	(26,276	)

Real Estate Acquired in Settlement of Loans

The Company evaluates its REO for impairment with reference to the respective properties’ fair values less cost to sell on a nonrecurring basis. The initial carrying value of the REO is measured at 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 asset’s 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, 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 loan participation and sale agreement are classified as “Level 3” financial statement instruments as of September 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 and Mortgage loan participation and sale agreement approximate the agreements’ carrying values due to the immediate realizability of cash at their carrying amounts 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 September 30, 2015 and December 31, 2014 was $225.0 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 September 30, 2015 due to the lack of current market activity.

Valuation Techniques and Inputs

Most of the Company’s assets and asset-backed financing of a VIE 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 judgments 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, risk 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 financial statement items, 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 current holdings of MBS as “Level 2” financial statement items. Fair value of Agency and senior non-Agency MBS is established 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 the 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:


	Range
	(Weighted average)
Key inputs	September 30, 2015	December 31, 2014
Discount rate
Range	2.5% – 15.0%	2.3% – 15.0%
Weighted average	6.9%	7.7%
Twelve-month projected housing price index change
Range	2.0% – 4.3%	4.0% – 5.3%
Weighted average	3.9%	4.8%
Prepayment speed (1)
Range	0.1% – 4.6%	0.0% – 6.5%
Weighted average	3.6%	3.1%
Total prepayment speed (2)
Range	3.6% – 27.3%	0.0% – 27.9%
Weighted average	20.5%	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	September 30, 2015	December 31, 2014
Unpaid principal balance of underlying mortgage loans (in thousands)	$54,189,421	$28,227,340
Average servicing fee rate (in basis points)	32	31
Average ESS rate (in basis points)	17	16
Pricing spread (1)
Range	4.8% – 6.5%	1.7% – 12.0%
Weighted average	5.7%	5.3%
Life (in years)
Range	1.5 – 8.9	0.4 – 7.3
Weighted average	6.7	5.8
Annual total prepayment speed (2)
Range	5.5% – 50.3%	7.6% – 74.6%
Weighted average	10.4%	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 or 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 mortgage loans whose payments cash flows have decreased in fair value.

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


	Range
	(Weighted average)
Key inputs	September 30, 2015	December 31, 2014
Pull-through rate
Range	44.8% – 99.9%	65.0% – 98.0%
Weighted average	88.6%	94.9%
MSR value expressed as:
Servicing fee multiple
Range	1.9 – 6.0	0.7 – 5.2
Weighted average	4.5	4.3
Percentage of unpaid principal balance
Range	0.5% – 3.7%	0.2% – 1.3%
Weighted average	1.2%	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 uses as hedging derivatives 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 estimation of the fair value of MSRs include prepayment and default rates of the underlying mortgage 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 September 30,
	2015				2014
Key inputs	Amortized cost		Fair value		Amortized cost		Fair value
	(MSR recognized and unpaid principal balance of underlying loan amounts in thousands)
MSR recognized	$	47,140	$	5,674	$	26,802	$	12,812
Unpaid principal balance of underlying mortgage loans	$	3,512,016	$	578,894	$	2,423,013	$	1,234,028
Weighted-average annual servicing fee rate (in basis points)		25		25		25		25
Pricing spread (1)
Range		6.5% – 13.0%		7.2% – 14.3%		6.5% – 17.5%		8.8% – 13.5%
Weighted average		7.8%		8.4%		8.5%		9.1%
Life (in years)
Range		2.0 – 7.4		2.3 – 7.2		1.4 – 7.3		2.8 – 7.3
Weighted average		6.8		6.6		6.6		7.1
Annual total prepayment speed (2)
Range		7.6% – 37.6%		8.4% – 22.4%		7.6% – 48.8%		8.0% – 30.4%
Weighted average		9.2%		11.9%		9.2%		9.7%
Annual per-loan cost of servicing
Range		$62 – $68		$62 – $68		$68 – $140		$68 – $140
Weighted average		$65		$65		$70		$70


	Nine months ended September 30,
	2015				2014
Key inputs	Amortized cost		Fair value		Amortized cost		Fair value
	(MSR recognized and unpaid principal balance of underlying loan amounts in thousands)
MSR recognized	$	103,281	$	9,169	$	49,276	$	39,954
Unpaid principal balance of underlying mortgage loans	$	9,140,782	$	978,951	$	4,518,100	$	3,784,142
Weighted-average annual servicing fee rate (in basis points)		25		25		25		25
Pricing spread (1)
Range		6.5% – 17.5%		7.2% – 16.3%		6.3% – 17.5%		8.5% – 13.5%
Weighted average		8.1%		9.2%		8.5%		9.1%
Life (in years)
Range		1.3 – 7.7		2.3 – 7.3		1.1 – 7.3		2.8 – 7.3
Weighted average		6.7		6.5		6.3		7.1
Annual total prepayment speed (2)
Range		7.6% – 51.0%		8.3% – 34.2%		7.6% – 56.4%		8.0% – 30.4%
Weighted average		8.9%		12.1%		9.7%		9.5%
Annual per-loan cost of servicing
Range		$62 – $134		$62 – $68		$68 – $140		$68 – $140
Weighted average		$63		$64		$69		$69

(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:


	September 30, 2015						December 31, 2014
	Amortized cost			Fair value			Amortized cost			Fair value
	(Carrying value, unpaid principal balance and effect on fair value amounts in thousands)
Carrying value	$	365,344		$	57,751		$	300,422		$	57,358
Key inputs:
Unpaid principal balance of underlying mortgage loans	$	33,834,143		$	6,061,654		$	28,006,797		$	6,278,676
Weighted-average annual servicing fee rate (in basis points)		26			25			26			25
Weighted-average note interest rate		3.84	%		4.77	%		3.80	%		4.78	%

Pricing spread (1) (2)
Range		7.2% – 10.7%			7.2% – 10.7%			6.3% – 17.5%			8.1% – 16.3%
Weighted average		7.2%			7.2%			7.9%			10.3%
Effect on fair value of a:
5% adverse change	$	(5,826	)	$	(813	)	$	(5,801	)	$	(937	)
10% adverse change	$	(11,484	)	$	(1,602	)	$	(11,410	)	$	(1,845	)
20% adverse change	$	(22,318	)	$	(3,117	)	$	(22,086	)	$	(3,577	)

Weighted average life (in years)
Range		1.3 – 7.4			1.9 – 5.6			1.8 – 7.2			1.8 – 7.2
Weighted average		6.9			5.6			6.4			6.7
Prepayment speed (1) (3)
Range		8.6% – 54.2%			14.3% – 38.5%			7.8% – 47.9%			8.0% – 39.6%
Weighted average		10.2%			14.6%			8.8%			11.4%
Effect on fair value of a:
5% adverse change	$	(8,064	)	$	(1,751	)	$	(6,166	)	$	(1,430	)
10% adverse change	$	(15,826	)	$	(3,416	)	$	(12,138	)	$	(2,803	)
20% adverse change	$	(30,511	)	$	(6,508	)	$	(23,532	)	$	(5,394	)

Annual per-loan cost of servicing
Range		$68 – $68			$68 – $68			$62 – $134			$62 – $134
Weighted average		$68			$68			$62			$62
Effect on fair value of a:
5% adverse change	$	(2,512	)	$	(412	)	$	(1,807	)	$	(334	)
10% adverse change	$	(5,024	)	$	(824	)	$	(3,614	)	$	(668	)
20% adverse change	$	(10,047	)	$	(1,648	)	$	(7,228	)	$	(1,337	)

(1)	The effect on fair 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:


	September 30, 2015				December 31, 2014
Loan type	Fair value		Unpaid principal balance		Fair value		Unpaid principal balance
	(in thousands)
Conventional:
Agency-eligible	$	601,394	$	575,458	$	287,300	$	274,650
Jumbo		69,157		67,544		137,440		134,079
Held for sale to PennyMac Loan Services, LLC—Government insured or guaranteed		373,812		354,529		209,325		198,265
Commercial real estate loan		1,851		1,798		—		—
Mortgage loans repurchased pursuant to representations and warranties		4,082		4,291		3,657		3,634

	$	1,050,296	$	1,003,620	$	637,722	$	610,628

Mortgage loans pledged to secure:
Assets sold under agreements to repurchase	$	903,806			$	609,608
Mortgage loan participation and sale agreements	$	63,162			$	20,862
Federal Home Loan Bank (“FHLB”) advances	$	68,937			$	—

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 UPB 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, MSRs, ESS, mortgage loans held by VIE, asset backed financing, 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 uses Eurodollar futures, which settle daily, 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 has entered into CRT Agreements whereby it retains a portion of the credit risk relating to mortgage loans it sells into Fannie Mae-guaranteed securitizations. These investments are accounted for as derivative financial instruments. The Company’s remaining derivative financial instrument transactions, except for IRLCs, are in support of its risk management activities. IRLCs are generated in the normal course of business when the Company commits to purchase mortgage loans acquired for sale.

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


	September 30, 2015								December 31, 2014
			Fair value								Fair value
Instrument	Notional amount		Derivative assets			Derivative liabilities			Notional amount		Derivative assets			Derivative liabilities
	(in thousands)
Derivatives not designated as hedging instruments:
Free-standing derivatives:
Interest rate lock commitments		1,163,415	$	9,109		$	302			695,488	$	5,678		$	17
Forward sales contracts		3,410,839		15			21,794			1,601,282		52			6,649
Forward purchase contracts		3,282,364		22,985			6			1,100,700		3,775			34
MBS put options		450,000		—			—			340,000		374			—
MBS call options		—		—			—			—		—			—
Eurodollar future sales contracts		1,756,000		—			—			7,426,000		—			—
Eurodollar future purchase contracts		—		—			—			800,000		—			—
Treasury future contracts		—		—			—			85,000		—			478
Call options on interest rate futures		1,555,000		3,270			—			1,030,000		3,319			—
Put options on interest rate futures		1,625,000		693			—			275,000		193			—
Net derivative related to CRT transactions		2,400,433		626			—			—		—			—

Total derivative instruments before netting				36,698			22,102					13,391			7,178
Netting				(19,892	)		(19,316	)				(2,284	)		(4,748	)

			$	16,806		$	2,786				$	11,107		$	2,430

The following tables summarize the notional amount activity for derivative arising from CRT Agreements and 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 September 30, 2015
Instrument	Balance, beginning of period		Additions		Dispositions/ expirations			Balance, end of period
	(in thousands)
Forward sales contracts		3,252,286		15,003,760		(14,845,207	)		3,410,839
Forward purchase contracts		2,263,622		10,938,733		(9,919,991	)		3,282,364
MBS put options		367,500		700,000		(617,500	)		450,000
MBS call options		40,000		—		(40,000	)		—
Eurodollar future sale contracts		5,984,000		—		(4,228,000	)		1,756,000
Treasury future contracts		40,000		—		(40,000	)		—
Call option on interest rate futures		1,135,000		1,805,000		(1,385,000	)		1,555,000
Put options on interest rate futures		1,273,000		1,650,000		(1,298,000	)		1,625,000
Net derivative related to CRT transactions		—		2,400,433		—			2,400,433


	Quarter ended September 30, 2014
Instrument	Balance, beginning of period		Additions		Dispositions/ expirations			Balance, end of period
	(in thousands)
Forward purchase contracts		3,058,604		8,216,022		(9,364,487	)		1,910,139
Forward sales contracts		4,185,633		11,670,826		(13,080,210	)		2,776,249
MBS put option		392,500		640,000		(467,500	)		565,000
MBS call option		95,000		75,000		(120,000	)		50,000
Eurodollar future sale contracts		5,562,000		990,000		(290,000	)		6,262,000
Eurodollar future purchase contracts		—		290,000		(290,000	)		—
Treasury future sale contracts		85,000		154,500		(154,500	)		85,000
Treasury future purchase contracts		—		138,300		(138,300	)		—
Put options on interest rate futures		125,000		490,500		(395,500	)		220,000
Call options on interest rate futures		230,000		580,000		(455,000	)		355,000


	Nine months ended September 30, 2015
Instrument	Balance, beginning of period		Additions		Dispositions/ expirations			Balance, end of period
	(in thousands)
Forward sales contracts		1,601,283		38,880,821		(37,071,265	)		3,410,839
Forward purchase contracts		1,100,700		27,871,913		(25,690,249	)		3,282,364
MBS put options		340,000		1,692,500		(1,582,500	)		450,000
MBS call options		—		140,000		(140,000	)		—
Eurodollar future sale contracts		7,426,000		285,000		(5,955,000	)		1,756,000
Eurodollar future purchase contracts		800,000		—		(800,000	)		—
Treasury future contracts		85,000		161,500		(246,500	)		—
Call options on interest rate futures		1,030,000		4,080,000		(3,555,000	)		1,555,000
Put options on interest rate futures		275,000		4,318,000		(2,968,000	)		1,625,000
Net derivative related to CRT transactions		—		2,400,433		—			2,400,433


	Nine months ended September 30, 2014
Instrument	Balance, beginning of period		Additions		Dispositions/ expirations			Balance, end of period
	(in thousands)
Forward purchase contracts		2,781,066		26,650,920		(27,521,847	)		1,910,139
Forward sales contracts		3,588,027		35,657,347		(36,469,125	)		2,776,249
MBS put option		55,000		1,482,500		(972,500	)		565,000
MBS call option		110,000		230,000		(290,000	)		50,000
Eurodollar future sale contracts		8,779,000		1,452,000		(3,969,000	)		6,262,000
Eurodollar future purchase contracts		—		3,287,000		(3,287,000	)		—
Treasury future sale contracts		105,000		375,300		(395,300	)		85,000
Treasury future purchase contracts		—		331,900		(331,900	)		—
Put options on interest rate futures		52,500		1,052,500		(885,000	)		220,000
Call options on interest rate futures		—		960,000		(605,000	)		355,000

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:


Hedged Item	Income Statement Line	Quarter ended September 30,						Nine months ended September 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	$	(33,652	)	$	(4,503	)	$	(23,198	)	$	(44,003	)
Mortgage servicing rights	Net loan servicing fees	$	19,061		$	(654	)	$	13,868		$	3,532
Fixed-rate assets and LIBOR—indexed repurchase agreements	Net gain on investments	$	(6,772	)	$	(807	)	$	(18,065	)	$	(14,609	)

Note 10—Mortgage Loans at Fair Value

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


	September 30, 2015				December 31, 2014
Loan type	Fair value		Unpaid principal balance		Fair value		Unpaid principal balance
	(in thousands)
Distressed mortgage loans:
Nonperforming mortgage loans	$	1,359,441	$	1,888,509	$	1,535,317	$	2,246,585
Performing mortgage loans:
Fixed interest rate		380,322		494,804		322,704		449,496
Adjustable-rate/hybrid		157,265		186,534		127,405		162,329
Interest rate step-up		263,270		367,958		213,999		323,350
Balloon		161		206		158		210

		801,018		1,049,502		664,266		935,385
Fixed interest rate jumbo mortgage loans held in a VIE		477,271		471,496		527,369		517,500

	$	2,637,730	$	3,409,507	$	2,726,952	$	3,699,470

Mortgage loans at fair value pledged to secure :
Assets sold under agreements to repurchase	$	2,390,784			$	2,543,242