10-Q 1 d19307d10q.htm 10-Q 10-Q
Table of Contents

 

 

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

Or

 

¨ 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):

 

Large accelerated filer   x    Accelerated filer   ¨
Non-accelerated filer   ¨  (Do not check if a smaller reporting company)    Smaller reporting company   ¨

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

 

 

 


Table of Contents

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   


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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;

 

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    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;

 

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    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.

 

3


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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.

 

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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.

 

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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.

 

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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.

 

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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.

 

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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.

 

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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.

 

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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.

 

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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

 

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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   

 

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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.

 

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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   
  

 

 

    

 

 

 

 

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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.

 

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Table of Contents

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.

 

17


Table of Contents

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.

 

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Table of Contents

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   
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

 

19


Table of Contents

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   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

20


Table of Contents

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   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

21


Table of Contents

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.

 

22


Table of Contents

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.

 

23


Table of Contents
     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) 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.

 

24


Table of Contents

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.

 

25


Table of Contents
     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.

 

26


Table of Contents

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.

 

27


Table of Contents
     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.

 

28


Table of Contents

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   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

 

29


Table of Contents
     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
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

 

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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.

 

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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.

 

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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.

 

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Table of Contents

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.

 

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Table of Contents

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.

 

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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.

 

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(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.

 

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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.

 

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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   

 

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Table of Contents
     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   

 

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Table of Contents

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,
 
      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

 

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Table of Contents

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      

FHLB advances

   $ 140,025          $ —        

Asset-backed secured financing

   $ 477,271          $ 527,369