UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

Form 10-Q

(Mark One)

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

For the quarterly period ended June 30, 2020

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.)
3043 Townsgate Road, Westlake Village, California	91361
(Address of principal executive offices)	(Zip Code)

(818) 224-7442

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

Title of Each Class	Trading Symbol (s)	Name of Each Exchange on Which Registered
8.125% Series A Cumulative Redeemable Preferred Shares of Beneficial Interest, $0.01 Par Value	PMT/PA	New York Stock Exchange
8.00% Series B Cumulative Redeemable Preferred Shares of Beneficial Interest, $0.01 Par Value	PMT/PB	New York Stock Exchange
Common Shares of Beneficial Interest, $0.01 Par Value	PMT	New York Stock Exchange

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   ☒     No   ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files).     Yes   ☒     No   ☐

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

Large accelerated filer	☒	Accelerated filer	☐
Non-accelerated filer	☐	Smaller reporting company	☐
		Emerging growth company	☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

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

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

Class	Outstanding at August 6, 2020
Common Shares of Beneficial Interest, $0.01 par value	99,275,258

PENNYMAC MORTGAGE INVESTMENT TRUST

FORM 10-Q

June 30, 2020

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 Operation	6
	Consolidated Statements of Changes in Shareholders’ Equity	7
	Consolidated Statements of Cash Flows	9
	Notes to Consolidated Financial Statements	11
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	65
	Our Company	65
	Results of Operations	68
	Net Investment Income	70
	Expenses	83
	Balance Sheet Analysis	86
	Asset Acquisitions	87
	Investment Portfolio Composition	88
	Cash Flows	92
	Liquidity and Capital Resources	93
	Off-Balance Sheet Arrangements and Aggregate Contractual Obligations	95
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	97
Item 4.	Controls and Procedures	99
PART II. OTHER INFORMATION		100
Item 1.	Legal Proceedings	100
Item 1A.	Risk Factors	100
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	102
Item 3.	Defaults Upon Senior Securities	102
Item 4.	Mine Safety Disclosures	102
Item 5.	Other Information	102
Item 6.	Exhibits	103

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

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

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

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

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

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

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

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

You should not place undue reliance on any forward-looking statement and should consider the following uncertainties and risks, as well as the risks and uncertainties discussed elsewhere in this Report and the section entitled “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2019, filed with the Securities and Exchange Commission (“SEC”) on February 21, 2020.

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

• our exposure to risks of loss and disruptions in operations resulting from adverse weather conditions, man-made or natural disasters, climate change and pandemics such as COVID-19;

• the impact to our CRT agreements of increased borrower requests for forbearance under the CARES Act;

• 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 and housing markets or otherwise have a broad impact on financial and housing 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 domestic and international 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 loans and mortgage-related assets that satisfy our investment objectives;

• the inherent difficulty in winning bids to acquire 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;

1

• the adequacy of our cash reserves and working capital;

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

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

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

• the performance, financial condition and liquidity of borrowers;

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

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

• our indemnification and repurchase obligations in connection with loans we purchase and later sell or securitize;

• 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;

• the performance of loans underlying mortgage-backed securities (“MBS”) in which we retain credit risk;

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

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

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

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

• our ability to maintain appropriate internal control over financial reporting;

• technology failures, cybersecurity risks and incidents, and our ability to mitigate  cybersecurity 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 loan products;

• legislative and regulatory changes that impact the 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”) or the Veterans Administration (the “VA”), the U.S. Department of Agriculture (“USDA”), or government-sponsored entities (“GSEs”) 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 Consumer Financial Protection Bureau (“CFPB”) and its issued and future rules and the enforcement thereof;

• changes in government support of homeownership;

• changes in government or government-sponsored home affordability programs;

2

• 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 exclusion from the Investment Company Act of 1940 (the “Investment Company Act”) 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;

• our failure to deal appropriately with issues that may give rise to reputational risk; 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

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

PENNYMAC MORTGAGE INVESTMENT TRUST AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS (UNAUDITED)

	June 30,			December 31,
	2020			2019
	(in thousands, except share information)
ASSETS
Cash	$	346,007		$	104,056
Short-term investments at fair value		273,592			90,836
Mortgage-backed securities at fair value ($2,107,787 and $2,839,633 pledged to    creditors, respectively)		2,612,986			2,839,633
Loans acquired for sale at fair value ($2,135,617 and $4,070,134 pledged to creditors, respectively)		2,179,962			4,148,425
Loans at fair value ($226,414 and $268,757 pledged to creditors, respectively)		230,660			270,793
Excess servicing spread purchased from PennyMac Financial Services, Inc. at fair value    pledged to secure Assets sold to PennyMac Financial Services, Inc. under agreements to    repurchase		151,206			178,586
Derivative and credit risk transfer strip assets ($142,183 pledged to creditors at December 31, 2019)		114,346			202,318
Firm commitment to purchase credit risk transfer securities at fair value		—			109,513
Deposits securing credit risk transfer arrangements pledged to creditors		1,666,449			1,969,784
Mortgage servicing rights at fair value ($1,176,766 and $1,510,651 pledged to    creditors, respectively)		1,189,605			1,535,705
Servicing advances		38,254			48,971
Real estate acquired in settlement of loans ($25,057 and $40,938 pledged to creditors, respectively)		43,559			65,583
Due from PennyMac Financial Services, Inc.		3,458			2,760
Other		233,635			204,388
Total assets	$	9,083,719		$	11,771,351
LIABILITIES
Assets sold under agreements to repurchase	$	3,981,761		$	6,648,890
Mortgage loan participation purchase and sale agreements		93,117			—
Notes payable secured by credit risk transfer and mortgage servicing assets		1,810,845			1,696,295
Exchangeable senior notes		195,333			443,506
Asset-backed financing of a variable interest entity at fair value		212,170			243,360
Interest-only security payable at fair value		14,981			25,709
Assets sold to PennyMac Financial Services, Inc. under agreements to repurchase		90,101			107,512
Derivative and credit risk transfer strip liabilities at fair value		140,201			6,423
Firm commitment to purchase credit risk transfer securities at fair value		191,193			—
Accounts payable and accrued liabilities		48,735			91,149
Due to PennyMac Financial Services, Inc.		44,329			48,159
Income taxes payable		15,451			1,819
Liability for losses under representations and warranties		10,225			7,614
Total liabilities		6,848,442			9,320,436
Commitments and contingencies ─ Note 20
SHAREHOLDERS’ EQUITY
Preferred shares of beneficial interest, $0.01 par value per share, authorized 100,000,000 shares,    issued and outstanding 12,400,000 shares, liquidation preference $310,000,000		299,707			299,707
Common shares of beneficial interest—authorized, 500,000,000 common shares of $0.01    par value; issued and outstanding, 99,275,258 and 100,182,227 common shares, respectively		993			1,002
Additional paid-in capital		2,119,577			2,127,889
(Accumulated deficit) retained earnings		(185,000	)		22,317
Total shareholders’ equity		2,235,277			2,450,915
Total liabilities and shareholders’ equity	$	9,083,719		$	11,771,351

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

4

PENNYMAC MORTGAGE INVESTMENT TRUST AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS (UNAUDITED)

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):

	June 30,		December 31,
	2020		2019
	(in thousands)
ASSETS
Loans at fair value	$	222,249	$	256,367
Derivative and credit risk transfer assets at fair value		—		170,793
Deposits securing credit risk transfer arrangements		1,666,449		1,969,784
Other—interest receivable		615		712
	$	1,889,313	$	2,397,656
LIABILITIES
Asset-backed financing at fair value	$	212,170	$	243,360
Derivative and credit risk transfer liabilities at fair value		125,301		—
Interest-only security payable at fair value		14,981		25,709
Accounts payable and accrued liabilities—interest payable		615		712
	$	353,067	$	269,781

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

5

PENNYMAC MORTGAGE INVESTMENT TRUST AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)

	Quarter ended June 30,						Six months ended June 30,
	2020			2019			2020			2019
	(in thousands, except per share amounts)
Net investment income
Net gain (loss) on investments:
From nonaffiliates	$	489,035		$	90,965		$	(311,955	)	$	189,620
From PennyMac Financial Services, Inc.		(101	)		(3,211	)		(14,242	)		(6,773	)
		488,934			87,754			(326,197	)		182,847
Net loan servicing fees:
From nonaffiliates
Contractually specified		101,823			66,919			196,292			128,191
Other		11,887			6,408			19,078			9,616
		113,710			73,327			215,370			137,807
Change in fair value of mortgage servicing rights		(170,848	)		(183,467	)		(798,049	)		(320,796	)
Hedging results		(50,650	)		55,536			716,536			96,671
		(107,788	)		(54,604	)		133,857			(86,318	)
From PennyMac Financial Services, Inc.		5,128			1,015			8,055			1,649
		(102,660	)		(53,589	)		141,912			(84,669	)
Net gain on loans acquired for sale:
From nonaffiliates		158,890			31,089			203,504			50,418
From PennyMac Financial Services, Inc.		3,324			3,155			7,485			5,149
		162,214			34,244			210,989			55,567
Loan origination fees		25,208			17,630			49,136			30,568
Interest income:
From nonaffiliates		38,440			69,026			108,589			129,041
From PennyMac Financial Services, Inc.		2,372			2,767			4,346			5,833
		40,812			71,793			112,935			134,874
Interest expense:
To nonaffiliates		60,256			64,204			140,106			117,147
To PennyMac Financial Services, Inc.		792			1,692			2,010			3,488
		61,048			65,896			142,116			120,635
Net interest income (expense)		(20,236	)		5,897			(29,181	)		14,239
Results of real estate acquired in settlement of loans		2,856			2,075			2,888			595
Other		2,005			2,390			2,257			3,872
Net investment income		558,321			96,401			51,804			203,019
Expenses
Earned by PennyMac Financial Services, Inc.:
Loan fulfillment fees		52,815			29,590			94,755			57,164
Loan servicing fees		15,533			11,568			30,054			22,138
Management fees		8,288			8,832			17,343			16,080
Loan origination		4,468			3,118			8,717			5,395
Safekeeping		1,905			1,000			3,563			1,736
Professional services		1,492			1,733			2,988			3,060
Compensation		1,200			1,771			1,719			3,740
Loan collection and liquidation		864			1,247			1,614			2,831
Other		3,693			4,172			7,413			7,638
Total expenses		90,258			63,031			168,166			119,782
Income (loss) before provision for (benefit from) income taxes		468,063			33,370			(116,362	)		83,237
Provision for (benefit from) income taxes		3,443			(10,863	)		13,691			(14,523	)
Net income (loss)		464,620			44,233			(130,053	)		97,760
Dividends on preferred shares		6,235			6,234			12,469			12,469
Net income (loss) attributable to common shareholders	$	458,385		$	37,999		$	(142,522	)	$	85,291
Earnings (loss) per common share
Basic	$	4.59		$	0.52		$	(1.43	)	$	1.23
Diluted	$	4.51		$	0.50		$	(1.43	)	$	1.17
Weighted average common shares outstanding
Basic		99,689			73,425			99,967			69,051
Diluted		101,592			81,892			99,967			77,518
Dividends declared per common share	$	0.40		$	0.47		$	0.65		$	0.94

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

6

PENNYMAC MORTGAGE INVESTMENT TRUST AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY (UNAUDITED)

	Quarter ended June 30, 2019
	Preferred shares				Common shares
	Number				Number						Additional
	of				of			Par			paid-in			Accumulated
	shares		Amount		shares			value			capital			deficit			Total
	(in thousands, except per share amounts)
Balance at March 31, 2019		12,400	$	299,707		68,412		$	684		$	1,431,887		$	(4,689	)	$	1,727,589
Net income		—		—		—			—			—			44,233			44,233
Share-based compensation		—		—		—			—			1,415			—			1,415
Issuance of common shares		—		—		10,195			102			216,619			—			216,721
Issuance costs relating to common shares		—		—		—			—			(2,735	)		—			(2,735	)
Dividends:
Common shares ($0.47 per share)		—		—		—			—			—			(37,053	)		(37,053	)
Preferred shares		—		—		—			—			—			(6,236	)		(6,236	)
Balance at June 30, 2019		12,400	$	299,707		78,607		$	786		$	1,647,186		$	(3,745	)	$	1,943,934
	Quarter ended June 30, 2020
	Preferred shares				Common shares
	Number				Number						Additional
	of				of			Par			paid-in			Accumulated
	shares		Amount		shares			value			capital			deficit			Total
	(in thousands, except per share amounts)
Balance at March 31, 2020		12,400	$	299,707		99,841		$	998		$	2,126,264		$	(603,601	)	$	1,823,368
Net income		—		—		—			—			—			464,620			464,620
Share-based compensation		—		—		—			—			869			—			869
Dividends:
Common shares ($0.40 per share)		—		—		—			—			—			(39,783	)		(39,783	)
Preferred shares		—		—		—			—			—			(6,236	)		(6,236	)
Repurchase of common shares		—		—		(566	)		(5	)		(7,556	)		—			(7,561	)
Balance at June 30, 2020		12,400	$	299,707		99,275		$	993		$	2,119,577		$	(185,000	)	$	2,235,277

7

PENNYMAC MORTGAGE INVESTMENT TRUST AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY (UNAUDITED)

	Six months ended June 30, 2019
	Preferred shares				Common shares
	Number				Number						Additional
	of				of			Par			paid-in			Accumulated
	shares		Amount		shares			value			capital			deficit			Total
	(in thousands, except per share amounts)
Balance at December 31, 2018		12,400	$	299,707		60,951		$	610		$	1,285,533		$	(19,718	)	$	1,566,132
Net income		—		—		—			—			—			97,760			97,760
Share-based compensation		—		—		240			2			430			—			432
Issuance of common shares		—		—		17,416			174			366,014			—			366,188
Issuance cost relating to common shares		—		—		—			—			(4,791	)		—			(4,791	)
Dividends:
Common shares ($0.94 per share)		—		—		—			—			—			(69,315	)		(69,315	)
Preferred shares		—		—		—			—			—			(12,472	)		(12,472	)
Balance at June 30, 2019		12,400	$	299,707		78,607		$	786		$	1,647,186		$	(3,745	)	$	1,943,934
	Six months ended June 30, 2020
	Preferred shares				Common shares									Retained
	Number				Number						Additional			earnings
	of				of			Par			paid-in			(accumulated
	shares		Amount		shares			value			capital			deficit)			Total
	(in thousands, except per share amounts)
Balance at December 31, 2019		12,400	$	299,707		100,182		$	1,002		$	2,127,889		$	22,317		$	2,450,915
Net loss		—		—		—			—			—			(130,053	)		(130,053	)
Share-based compensation		—		—		201			2			(577	)		—			(575	)
Issuance of common shares		—		—		241			2			5,652			—			5,654
Issuance costs relating to common shares		—		—		—			—			(57	)		—			(57	)
Dividends:
Common shares ($0.65 per share)		—		—		—			—			—			(12,472	)		(12,472	)
Preferred shares		—		—		—			—			—			(64,792	)		(64,792	)
Repurchase of common shares		—		—		(1,349	)		(13	)		(13,330	)		—			(13,343	)
Balance at June 30, 2020		12,400	$	299,707		99,275		$	993		$	2,119,577		$	(185,000	)	$	2,235,277

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

8

PENNYMAC MORTGAGE INVESTMENT TRUST AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

	Six months ended June 30,
	2020			2019
	(in thousands)
Cash flows from operating activities
Net (loss) income	$	(130,053	)	$	97,760
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Net loss (gain) on investments		326,197			(182,847	)
Change in fair value of mortgage servicing rights		798,049			320,796
Mortgage servicing rights hedging results		(716,536	)		(96,671	)
Net gain on loans acquired for sale at fair value		(210,989	)		(55,567	)
Accrual of interest on excess servicing spread purchased from    PennyMac Financial Services, Inc.		(4,346	)		(5,833	)
Capitalization of interest and fees on loans at fair value		—			(1,928	)
Accrual of unearned discounts and amortization of purchase premiums on    mortgage-backed securities, loans at fair value, and asset-backed financing of a VIE		26,117			12,405
Amortization of debt issuance costs and (premiums), net		7,025			(4,596	)
Results of real estate acquired in settlement of loans		(2,888	)		(595	)
Gain on early extinguishment of debt		(1,738	)		—
Share-based compensation expense		1,054			3,032
Reversal of contingent underwriting fees		—			(1,134	)
Purchase of loans acquired for sale at fair value from nonaffiliates		(61,986,401	)		(37,634,892	)
Purchase of loans acquired for sale at fair value from    PennyMac Financial Services, Inc.		(2,248,869	)		(2,218,721	)
Repurchase of loans subject to representation and warranties		(30,069	)		(5,341	)
Sale to nonaffiliates and repayment of loans acquired for sale at fair value		39,890,722			20,802,011
Sale of loans acquired for sale to PennyMac Financial Services, Inc.		26,112,489			17,956,971
Settlement of repurchase agreement derivatives		—			11,567
Decrease in servicing advances		10,437			42,824
(Increase) decrease in due from PennyMac Financial Services, Inc.		(645	)		2,524
Decrease in other assets		793,650			97,717
Decrease in accounts payable and accrued liabilities		(34,933	)		(41,065	)
(Decrease) increase  in due to PennyMac Financial Services, Inc.		(3,970	)		1,189
Increase (decrease) in income taxes payable		13,632			(14,653	)
Net cash provided by (used in) operating activities		2,607,935			(915,047	)
Cash flows from investing activities
Net increase in short-term investments		(182,756	)		(1,881	)
Purchase of mortgage-backed securities at fair value		(1,615,486	)		(81,202	)
Sale and repayment of mortgage-backed securities at fair value		1,951,303			144,868
Repurchase of loans at fair value		(1,058	)		(886	)
Sale and repayment of loans at fair value		37,807			44,984
Repayment of excess servicing spread by PennyMac Financial Services, Inc.		17,430			21,082
Settlement of firm commitment to purchase credit risk transfer securities		—			31,925
Net settlement of derivative financial instruments		(72,208	)		(22,103	)
Sale of real estate acquired in settlement of loans		26,078			31,171
Distribution from credit risk transfer agreements		362,192			61,473
Deposit of cash securing credit risk transfer arrangements		—			(933,370	)
(Increase) decrease in margin deposits		(32,455	)		48,308
Net cash provided by (used in) investing activities		490,847			(655,631	)

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

9

PENNYMAC MORTGAGE INVESTMENT TRUST AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

	Six months ended June 30,
	2020			2019
	(in thousands)
Cash flows from financing activities
Sale of assets under agreements to repurchase		79,886,513			51,009,663
Repurchase of assets sold under agreements to repurchase		(82,547,315	)		(50,421,692	)
Issuance of mortgage loan participation purchase and sale agreements		2,623,439			2,756,486
Repayment of mortgage loan participation purchase and sale agreements		(2,530,322	)		(2,935,212	)
Issuance of notes payable secured by credit risk transfer and    mortgage servicing assets		350,000			933,730
Repayment of notes payable secured by credit risk transfer and    mortgage servicing assets		(235,977	)		(7,095	)
Repayment of exchangeable senior notes		(248,262	)		—
Repayment of asset-backed financing of a variable interest entity    at fair value		(32,519	)		(13,625	)
Repurchase of assets sold to PennyMac Financial Services, Inc. under    agreement to repurchase		(17,411	)		(12,309	)
Payment of debt issuance costs		(10,858	)		(6,331	)
Payment of contingent underwriting fees		(76	)		(353	)
Payment of dividends to preferred shareholders		(12,472	)		(12,472	)
Payment of dividends to common shareholders		(72,196	)		(61,078	)
Issuance of common shares		5,654			366,188
Payment of issuance costs related to common shares		(57	)		(4,791	)
Payment of vested share-based compensation withholdings		(1,629	)		(2,600	)
Repurchase of common shares		(13,343	)		—
Net cash (used in) provided by financing activities		(2,856,831	)		1,588,509
Net increase in cash		241,951			17,831
Cash at beginning of period		104,056			59,845
Cash at end of period	$	346,007		$	77,676

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

10

PENNYMAC MORTGAGE INVESTMENT TRUST AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Note 1—Organization

PennyMac Mortgage Investment Trust (“PMT” or the “Company”) is a specialty finance company, which, through its subsidiaries (all of which are wholly-owned), invests primarily in residential mortgage-related assets. The Company operates in four segments: credit sensitive strategies, interest rate sensitive strategies, correspondent production, and corporate:

• The credit sensitive strategies segment represents the Company’s investments in credit risk transfer (“CRT”) arrangements, including CRT agreements (“CRT Agreements”) and CRT securities (together, “CRT arrangements”), distressed loans, real estate, and non-Agency subordinated bonds.

• The interest rate sensitive strategies segment represents the Company’s investments in mortgage servicing rights (“MSRs”), excess servicing spread (“ESS”) purchased from PennyMac Financial Services, Inc. (“PFSI”), Agency and senior non-Agency mortgage-backed securities (“MBS”) and the related interest rate hedging activities.

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

The Company primarily sells the loans it acquires through its correspondent production activities to government-sponsored entities (“GSEs”) such as the Federal National Mortgage Association (“Fannie Mae”) and the Federal Home Loan Mortgage Corporation (“Freddie Mac”) or to PLS for sale into securitizations guaranteed by 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 corporate segment includes management fees, corporate expense amounts and certain interest income.

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 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. To maintain its tax status as a REIT, the Company is required to distribute at least 90% of its taxable income in the form of qualifying distributions to shareholders.

Note 2—Basis of Presentation and Accounting Change

Basis of Presentation

The Company’s 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. This interim consolidated information should be read together with the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2019.

These unaudited consolidated financial statements reflect all normal recurring adjustments necessary to present fairly the financial position, results of operations, and cash flows for the interim periods presented, 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 Company 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.

The Company held no restricted cash during the periods presented. Therefore, the consolidated statements of cash flows do not include references to restricted cash.

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Accounting Change

Effective January 1, 2020, the Company adopted FASB Accounting Standards Update 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, as amended (“ASU 2016-13”), using the modified retrospective approach. The adoption of ASU 2016-13 did not have any effect on the Company’s consolidated statements of operations, shareholders’ equity or cash flows.

Note 3—Concentration of Risks

As discussed in Note 1— Organization above, PMT’s operations and investing activities are centered in residential mortgage-related assets, including CRT arrangements and MSRs. CRT arrangements are more sensitive to borrower credit performance than other mortgage-related investments such as traditional loans and MBS. MSRs are sensitive to changes in prepayment rate activity and expectations.

Credit Risk

Note 6 – Variable Interest Entities details the Company’s investments in CRT arrangements whereby the Company sells pools of recently-originated loans into Fannie Mae-guaranteed securitizations while either:

• through May 2018, entering into CRT Agreements, whereby it retains a portion of the credit risk underlying such loans as part of the retention of an interest-only (“IO”) ownership interest in such loans and an obligation to absorb credit losses arising from such loans reaching a specific number of days delinquent (“Recourse Obligations”); or

• beginning in June 2018, entering into firm commitments to purchase and purchasing CRT securities that absorb losses from defaults of such loans and, upon purchase of such securities, holding CRT strips representing an IO ownership interest that absorbs realized credit losses arising from such loans.

The Company’s retention of credit risk through its investment in CRT arrangements subjects it to risks associated with delinquency and foreclosure similar to the risks of loss associated with owning the related loans, which is greater than the risk of loss associated with selling such loans to Fannie Mae without the retention of such credit risk.

CRT Agreements are structured such that loans that reach a specific number of days delinquent (including loans in forbearance which also includes those subject to the forbearance provided in the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”)) trigger losses chargeable to the CRT Agreements based on the size of the loan and a contractual schedule of loss severity. Therefore, the risks associated with delinquency and foreclosure may in some instances be greater than the risks associated with owning the related loans because the structure of the CRT Agreements provides that the Company may be required to absorb losses in the event of delinquency or foreclosure even when there is ultimately no loss realized with respect to such loans (e.g., as a result of a borrower’s re-performance).

The structure of the Company’s investment in CRT strips requires PMT to absorb losses only when the reference loans realize actual losses.

Fair Value Risk

The Company is exposed to fair value risk in addition to the risks specific to credit and, as a result of prevailing market conditions or the economy generally, may be required to recognize losses associated with adverse changes to the fair value of its investments in MSRs and CRT arrangements, including its firm commitment to purchase CRT securities:

• MSRs are generally subject to loss in fair value when mortgage interest rates decrease, when estimates of cost to service the underlying loans increase or when the returns demanded by market participants increase.

• The Company makes a firm commitment to purchase the CRT securities at the beginning of the aggregation period (the aggregation period is the time during which loans are sold into MBS and accumulated in the reference pool whose losses are the basis for losses chargeable to the CRT arrangements) and before the settlement of the CRT securities. The Company has elected to account for these commitments at fair value. Accordingly, the Company recognizes the fair value of such commitment as it sells loans subject to the firm commitment, and also recognizes changes in fair value of the firm commitment during the time it is outstanding.

• The Company has a significant investment in CRT arrangements and carries such arrangements at fair value. The fair value of CRT arrangements is sensitive to market perceptions of future credit performance of the underlying loans as well as the actual credit performance of such loans and to the returns required by market participants to hold such investments.

12

Note 4—Transactions with Related Parties

Operating Activities

Correspondent Production Activities

The Company is provided fulfillment and other services by PLS under an amended and restated mortgage banking services agreement.

Through June 30, 2020, pursuant to the terms of the agreement, the monthly fulfillment fee was an amount equal to (a) no greater than the product of (i) 0.35% and (ii) the aggregate initial unpaid principal balance (the “Initial UPB”) of all loans purchased in such month, plus (b) in the case of all loans other than loans sold to or securitized through Fannie Mae or Freddie Mac, no greater than the product of (i) 0.50% and (ii) the aggregate Initial UPB of all such loans sold and securitized in such month; provided however, that no fulfillment fee shall be due or payable to PLS with respect to any loans underwritten in accordance with the Ginnie Mae MBS Guide.

The Company does not hold the Ginnie Mae approval required to issue securities guaranteed by Ginnie Mae MBS and act as a servicer. Accordingly, under the agreement, PLS currently purchases loans saleable in accordance with the Ginnie Mae MBS Guide “as is” and without recourse of any kind from the Company at cost less any administrative fees paid by the correspondent to the Company plus accrued interest and a sourcing fee ranging from two to three and one-half basis points, generally based on the average number of calendar days loans are held by the Company prior to purchase by PLS.

On June 30, 2020, the mortgage banking services agreement was amended and restated for a term of five years (the “2020 MBS Agreement”). Effective July 1, 2020, the fulfillment fees and sourcing fees provided for in the 2020 MBS Agreement were revised as follows:

(i) the number of loan commitments multiplied by a pull-through factor of either .99 or .80 depending on whether the loan commitments are subject to a “mandatory trade confirmation” or a “best efforts lock confirmation”, respectively, and then multiplied by $585 for each pull-through adjusted loan commitment up to and including 16,500 per quarter and $315 for each pull-through adjusted loan commitment in excess of 16,500 per quarter, plus

(ii) $355 multiplied by the number of purchased loans up to the and including 16,500 per quarter and $195 multiplied by the number of purchased loans exceeding 16,500 per quarter, plus

(iii) $750 multiplied by the number of all purchased loans that are sold to or securitized with parties other than Fannie Mae or Freddie Mac; provided however, that no fulfillment fee shall be due or payable to PLS with respect to any Ginnie Mae mortgage loans.

(iv) Sourcing fees charged to PLS range from one to two basis points, generally based on the average number of calendar days loans are held by PMT before purchase by PLS.

In consideration for the mortgage banking services provided by PLS with respect to the Company’s acquisition of mortgage loans under PLS’s early purchase program, PLS is entitled to fees accruing (i) at a rate equal to $1,500 per annum per early purchase facility administered by PLS, and (ii) in the amount of $35 for each mortgage loan that the Company acquires.

The Company may purchase newly originated conforming balance non-government insured or guaranteed loans from PLS under a mortgage loan purchase and sale agreement. 

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

	Quarter ended June 30,				Six months ended June 30,
	2020		2019		2020		2019
	(in thousands)
Loan fulfillment fees earned by PLS	$	52,815	$	29,590	$	94,755	$	57,164
UPB of loans fulfilled by PLS	$	18,899,695	$	10,741,078	$	35,052,238	$	18,876,630
Sourcing fees received from PLS included in    Net gain on loans acquired for sale	$	3,324	$	3,155	$	7,485	$	5,149
UPB of loans sold to PLS	$	11,080,565	$	10,514,390	$	24,950,845	$	17,161,728
Purchases of loans acquired for sale from    PLS	$	2,742	$	1,334,211	$	2,248,869	$	2,218,721
Tax service fees paid to PLS	$	4,288	$	3,102	$	8,268	$	5,345

13

	June 30, 2020		December 31, 2019
	(in thousands)
Loans included in Loans acquired for sale at fair value    pending sale to PLS	$	132,105	$	490,383

The 2020 MBS Agreement expires, unless terminated earlier in accordance with its terms, on June 30, 2025, subject to automatic renewal for additional 18-month periods, unless terminated in accordance with its terms.

Loan Servicing

The Company, through its Operating Partnership, has a loan servicing agreement with PLS (the “Servicing Agreement”) pursuant to which PLS provides subservicing for the Company's portfolio of residential loans and its portfolio of MSRs. The Servicing Agreement provides for servicing fees earned by PLS that are established at a fixed per loan monthly amount based on the delinquency, bankruptcy and/or foreclosure status of the serviced loan or real estate acquired in settlement of loans (“ REO”). PLS is also entitled to market-based fees and charges including boarding and deboarding fees, liquidation and disposition, assumption, modification and origination fees and a percentage of late charges relating to loans it services for the Company.

Prime Servicing

The base servicing fees for non-distressed loans subserviced by PLS on the Company’s behalf are based on whether the loan is a fixed-rate or adjustable-rate loan. The base servicing fees are $7.50 per month for fixed-rate loans and $8.50 per month for adjustable-rate loans.

To the extent that these non-distressed loans become delinquent, PLS is entitled to an additional servicing fee per loan ranging from $10 to $55 per month and based on the delinquency, bankruptcy and foreclosure status of the loan or $75 per month if the underlying mortgaged property becomes REO. PLS is also entitled to customary ancillary income and certain market-based fees and charges, including boarding and deboarding fees, liquidation and disposition fees, assumption, modification and origination fees.

Special Servicing

The base servicing fee rates for distressed loans range from $30 per month for current loans up to $85 per month for loans where the borrower has declared bankruptcy. The base servicing fee rate for REO is $75 per month.

PLS is required to provide a range of services and activities significantly greater in scope than the services provided in connection with a customary servicing arrangement because the Company has a small number of employees and limited infrastructure. For these services, PLS receives a supplemental fee of $25 per month for each distressed loan. PLS is entitled to reimbursement for all customary, good faith reasonable and necessary out-of-pocket expenses incurred in the performance of its servicing obligations.

PLS is also entitled to certain activity-based fees for distressed loans that are charged based on the achievement of certain events. These fees range from $750 for a streamline modification to $1,750 for a full modification or liquidation and $500 for a deed-in-lieu of foreclosure. PLS is not entitled to earn more than one liquidation fee, reperformance fee or modification fee per loan in any 18-month period.

To the extent that the Company rents its REO under an REO rental program, the Company pays PLS an REO rental fee of $30 per month per REO, an REO property lease renewal fee of $100 per lease renewal, and a property management fee in an amount equal to PLS’ cost if property management services and/or any related software costs are outsourced to a third-party property management firm or 9% of gross rental income if PLS provides property management services directly. PLS is also entitled to retain any tenant paid application fees and late rent fees and seek reimbursement for certain third party vendor fees.

Except as otherwise provided in the MSR recapture agreement, when PLS effects a refinancing of a loan on behalf of the Company and not through a third-party lender and the resulting loan is readily saleable, or PLS originates a loan to facilitate the disposition of an REO, PLS is entitled to receive from the Company market-based fees and compensation consistent with pricing and terms PLS offers unaffiliated parties on a retail basis.

On June 30, 2020, the Servicing Agreement was amended and restated for a term of five years (the “2020 Servicing Agreement”). The terms of the 2020 Servicing Agreement are substantially similar to those in the prior servicing agreement except that they now include certain fees relating to forbearance and modification activities required as a result of the COVID-19 pandemic. The 2020 Servicing Agreement expires on June 30, 2025, subject to automatic renewal for additional 18-month periods, unless terminated earlier in accordance with its terms.

14

MSR Recapture Agreement

Pursuant to the terms of an amended and restated MSR recapture agreement, if PLS refinances loans for which the Company previously held the MSRs, PLS is generally required to transfer and convey to one of the Company’s wholly-owned subsidiaries cash in an amount equal to 30% of the fair market value of the MSRs related to all the loans so originated.

Through June 30, 2020, pursuant to the terms of an MSR recapture agreement by and between PFSI and the Company, if PFSI refinanced mortgage loans for which the Company previously held the MSRs, PFSI was generally required to transfer and convey to the Company cash in an amount equal to 30% of the fair market value of the MSRs related to all such mortgage loans. On June 30, 2020, the MSR recapture agreement was amended and restated for a term of five years (the “2020 MSR Recapture Agreement”).

Effective July 1, 2020, the 2020 MSR Recapture Agreement changes the recapture fee payable to the Company to a tiered amount equal to 40% of the fair market value of the MSRs relating to the recaptured loans subject to the first 15% of the “recapture rate,” 35% of the fair market value of the MSRs relating to the recaptured loans subject to the recapture rate in excess of 15% and up to 30%, and 30% of the fair market value of the MSRs relating to the recaptured loans subject to the recapture rate in excess of 30%. The “recapture rate” means, during each month, the ratio of (i) the aggregate unpaid principal balance of all recaptured loans, to (ii) the aggregate unpaid principal balance of all mortgage loans for which the Company held the MSRs and that were refinanced or otherwise paid off in such month. PFSI has further agreed to allocate sufficient resources to target a recapture rate of 15%.

The 2020 MSR Recapture Agreement expires, unless terminated earlier in accordance with its terms, on June 30, 2025, subject to automatic renewal for additional 18-month periods, unless terminated in accordance with its terms.

Following is a summary of loan servicing fees earned by PLS and MSR recapture income earned from PLS:

	Quarter ended June 30,				Six months ended June 30,
	2020		2019		2020		2019
	(in thousands)
Loan servicing fees:
Loans acquired for sale at fair value	$	607	$	385	$	1,143	$	624
Loans at fair value		188		617		488		1,080
MSRs		14,738		10,566		28,423		20,434
	$	15,533	$	11,568	$	30,054	$	22,138
Average investment in:
Loans acquired for sale at fair value	$	2,047,202	$	2,053,214	$	2,631,047	$	1,845,847
Loans at fair value:
Distressed	$	8,919	$	96,727	$	10,084	$	105,818
Held in a VIE	$	231,973	$	286,188	$	242,866	$	287,965
Average MSR portfolio UPB	$	143,856,366	$	102,476,058	$	140,056,208	$	99,205,766
MSR recapture income recognized included    in Net loan servicing fees —from    PennyMac Financial Services, Inc.	$	5,128	$	1,015	$	8,055	$	1,649

Management Fees

The Company has a management agreement with PCM, pursuant to which the Company pays PCM management fees as follows:

A base management fee that is calculated quarterly and is equal to the sum of (i) 1.5% per year of average shareholders’ equity up to $2 billion, (ii) 1.375% per year of average shareholders’ equity in excess of $2 billion and up to $5 billion, and (iii) 1.25% per year of average shareholders’ equity in excess of $5 billion.

A performance incentive fee that is calculated quarterly at a defined annualized percentage of the amount by which “net income,” on a rolling four-quarter basis and before deducting the incentive fee, exceeds certain levels of return on “equity.”

The performance incentive fee is equal to the sum of: (a) 10% of the amount by which “net income” for the quarter exceeds (i) an 8% return on “equity” plus the “high watermark”, up to (ii) a 12% return on “equity”; plus (b) 15% of the amount by which “net income” for the quarter exceeds (i) a 12% return on “equity” plus the “high watermark”, up to (ii) a 16% return on “equity”; plus (c) 20% of the amount by which “net income” for the quarter exceeds a 16% return on “equity” plus the “high watermark”.

15

For the purpose of determining the amount of the performance incentive fee:

“Net income” is defined as net income or loss attributable to common shares of beneficial interest computed in accordance with GAAP and certain other non-cash charges determined after discussions between PCM and the Company’s independent trustees and after approval by a majority of the Company’s independent trustees.

“Equity” is the weighted average of the issue price per common share of all of the Company’s public offerings, multiplied by the weighted average number of common shares outstanding (including restricted share units) in the rolling four-quarter period.  

“High watermark” is the quarterly adjustment that reflects the amount by which the “net income” (stated as a percentage of return on equity) in that quarter exceeds or falls short of the lesser of 8% and the average Fannie Mae 30-year MBS yield (the target yield) for the four quarters then ended. The “high watermark” starts at zero and is adjusted quarterly. If the “net income” is lower than the target yield, the high watermark is increased by the difference. If the “net income” is higher than the target yield, the high watermark is reduced by the difference. Each time a performance incentive fee is earned, the high watermark returns to zero. As a result, the threshold amounts required for PCM to earn a performance incentive fee are adjusted cumulatively based on the performance of PMT’s “net income” over (or under) the target yield, until the “net income” in excess of the target yield exceeds the then-current cumulative “high watermark” amount.

The base management fee and the performance incentive fee are both payable quarterly in arrears. The performance incentive fee may be paid in cash or a combination of cash and the Company’s common shares (subject to a limit of no more than 50% paid in common shares), at the Company’s option.

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

Following is a summary of management fee expenses:

	Quarter ended June 30,				Six months ended June 30,
	2020		2019		2020		2019
	(in thousands)
Base management	$	8,288	$	6,839	$	17,343	$	12,948
Performance incentive		—		1,993		—		3,132
	$	8,288	$	8,832	$	17,343	$	16,080
Average shareholders' equity amounts used    to calculate management fee expense	$	2,242,460	$	1,828,786	$	2,354,600	$	1,740,217

Expense Reimbursement and Amounts Payable to and Receivable from PCM

Under the management agreement, PCM is entitled to reimbursement of its organizational and operating expenses, including third-party expenses, incurred on the Company’s behalf, it being understood that PCM and its affiliates shall allocate a portion of their personnel’s time to provide certain legal, tax and investor relations services for the direct benefit of the Company. PCM was reimbursed $120,000 quarter through June 30, 2020, such amount to be reviewed annually and to not preclude reimbursement for any other services performed by PCM or its affiliates.

The Company is required to pay PCM and its affiliates a portion of rent, telephone, utilities, office furniture, equipment, machinery and other office, internal and overhead expenses of PCM and its affiliates required for the Company’s and its subsidiaries’ operations. These expenses are allocated based on the ratio of the Company’s and its subsidiaries’ proportion of gross assets compared to all remaining gross assets managed by PCM as calculated at each fiscal quarter end.

16

On June 30, 2020, the Management Agreement was amended and restated for a term of five years (the “2020 Management Agreement”). The terms of the 2020 Management Agreement are materially consistent with those of the prior agreement, except that, effective July 1, 2020, PMT’s reimbursement of PCM’s and its affiliate’s compensation expenses was increased from $120,000 to $165,000 per fiscal quarter.

Following is a summary of the Company’s reimbursements to PCM and its affiliates for expenses:

	Quarter ended June 30,				Six months ended June 30,
	2020		2019		2020		2019
	(in thousands)
Reimbursement of:
Common overhead incurred by PCM and    its affiliates	$	1,585	$	1,276	$	3,125	$	2,512
Compensation		120		120		240		240
Expenses incurred on the Company’s    behalf, net		1,438		489		2,709		1,059
	$	3,143	$	1,885	$	6,074	$	3,811
Payments and settlements during the period (1)	$	136,352	$	28,031	$	170,035	$	43,220

(1) Payments and settlements include payments and netting settlements made pursuant to master netting agreements between the Company and PFSI for the operating, investing and financing activities itemized in this Note.

Investing Activities

Spread Acquisition and MSR Servicing Agreements

The Company, through a wholly-owned subsidiary, PennyMac Holdings, LLC (“PMH”), has an amended and restated a master spread acquisition and MSR servicing agreement with PLS (the “Spread Acquisition Agreement”), pursuant to which the Company may purchase from PLS, from time to time, participation certificates representing beneficial ownership in ESS arising from Ginnie Mae MSRs acquired by PLS, in which case PLS generally would be required to service or subservice the related loans for Ginnie Mae. The primary purpose of the amendment and restatement was to facilitate the continued financing of the ESS owned by the Company in connection with its participation in the GNMA MSR Facility (as defined below).

To the extent PLS refinances any of the loans relating to the ESS the Company has acquired, the Spread Acquisition Agreement also contains recapture provisions requiring that PLS transfer to the Company, at no cost, the ESS relating to a certain percentage of the unpaid principal balance of the newly originated loans. However, under the Spread Acquisition Agreement, in any month where the transferred ESS relating to newly originated Ginnie Mae loans is not equal to at least 90% of the product of the excess servicing fee rate and the unpaid principal balance of the refinanced loans, PLS is also required to transfer additional ESS or cash in the amount of such shortfall. Similarly, in any month where the transferred ESS relating to modified Ginnie Mae loans is not equal to at least 90% of the product of the excess servicing fee rate and the unpaid principal balance of the modified loans, the Spread Acquisition Agreement contains provisions that require PLS to transfer additional ESS or cash in the amount of such shortfall. To the extent the fair market value of the aggregate ESS to be transferred for the applicable month is less than $200,000, PLS may, at its option, settle its recapture liability to the Company in cash in an amount equal to such fair market value in lieu of transferring such ESS.

17

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

	Quarter ended June 30,						Six months ended June 30,
	2020			2019			2020			2019
	(in thousands)
ESS:
Received pursuant to a recapture    agreement	$	483		$	442		$	862		$	950
Repayments	$	8,122		$	10,530		$	17,430		$	21,082
Interest income	$	2,372		$	2,767		$	4,346		$	5,833
Net loss included in Net gain (loss)    on investments:
Valuation changes	$	(636	)	$	(3,604	)	$	(15,158	)	$	(7,655	)
Recapture income		535			393			916			882
	$	(101	)	$	(3,211	)	$	(14,242	)	$	(6,773	)
	June 30, 2020			December 31, 2019
	(in thousands)
Excess servicing spread purchased from    PennyMac Financial Services, Inc. at fair    value	$	151,206		$	178,586

Financing Activities

PFSI held 75,000 of the Company’s common shares at both June 30, 2020 and December 31, 2019.

Repurchase Agreement with PLS

On December 19, 2016, the Company, through PMH, entered into a master repurchase agreement with PLS (the “PMH Repurchase Agreement”), pursuant to which PMH may borrow from PLS for the purpose of financing PMH’s participation certificates representing beneficial ownership in ESS acquired from PLS under the Spread Acquisition Agreement. PLS then re-pledges such participation certificates to PNMAC GMSR ISSUER TRUST (the “Issuer Trust”) under a master repurchase agreement by and among PLS, the Issuer Trust and Private National Mortgage Acceptance Company, LLC, as guarantor (the “PC Repurchase Agreement”). The Issuer Trust was formed for the purpose of allowing PLS to finance MSRs and ESS relating to such MSRs (the “GNMA MSR Facility”).

In connection with the GNMA MSR Facility, PLS pledges and/or sells to the Issuer Trust participation certificates representing beneficial interests in MSRs and ESS pursuant to the terms of the PC Repurchase Agreement. In return, the Issuer Trust (a) has issued to PLS, pursuant to the terms of an indenture, the Series 2016-MSRVF1 Variable Funding Note, dated December 19, 2016, known as the “PNMAC GMSR ISSUER TRUST MSR Collateralized Notes, Series 2016-MSRVF1” (the “VFN”), and (b) may, from time to time pursuant to the terms of any supplemental indenture, issue to institutional investors additional term notes (“Term Notes”), in each case secured on a pari passu basis by the participation certificates relating to the MSRs and ESS. The maximum principal balance of the VFN is $1.0 billion.

The principal amount paid by PLS for the participation certificates under the PMH Repurchase Agreement is based upon a percentage of the market value of the underlying ESS. Upon PMH’s repurchase of the participation certificates, PMH is required to repay PLS the principal amount relating thereto plus accrued interest (at a rate reflective of the current market and consistent with the weighted average note rate of the VFN and any outstanding Term Notes) to the date of such repurchase. PLS is then required to repay the Issuer Trust the corresponding amount under the PC Repurchase Agreement.

Conditional Reimbursement of Initial Public Offering (“IPO”) Underwriting Fees

In connection with its 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 (the “Conditional Reimbursement”). On February 1, 2019, the term of the reimbursement agreement was extended and now expires on February 1, 2023.

18

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

	Quarter ended June 30,				Six months ended June 30,
	2020		2019		2020		2019
	(in thousands)
Net repayments of assets sold under    agreements to repurchase	$	9,665	$	7,213	$	17,411	$	12,309
Interest expense	$	792	$	1,692	$	2,010	$	3,488
Payment of conditional reimbursement to PCM	$	—	$	144	$	211	$	219

	June 30, 2020		December 31, 2019
	(in thousands)
Assets sold to PFSI under agreement to repurchase	$	90,101	$	107,512
Conditional Reimbursement payable to PCM included    in Due to PennyMac Financial Services, Inc.	$	10	$	221

Amounts Receivable from and Payable to PFSI

Amounts receivable from and payable to PFSI are summarized below:

	June 30, 2020		December 31, 2019
	(in thousands)
Due from PFSI:
MSR recapture	$	202	$	149
Other		3,256		2,611
	$	3,458	$	2,760
Due to PFSI:
Fulfillment fees	$	11,549	$	18,285
Allocated expenses and expenses paid by PFSI on    PMT’s behalf		11,867		3,724
Management fees		8,288		10,579
Correspondent production fees		7,746		10,606
Loan servicing fees		4,824		4,659
Interest on Assets sold to PFSI under agreement to    repurchase		45		85
Conditional Reimbursement		10		221
	$	44,329	$	48,159

The Company has also transferred cash to fund loan servicing advances and REO property acquisition and preservation costs advanced on its behalf by PLS. Such amounts are included in the respective balance sheet items as summarized below:

Balance sheet line including advance amount	June 30, 2020		December 31, 2019
	(in thousands)
Loan servicing advances	$	38,254	$	48,971
Real estate acquired in settlement of loans		14,846		21,549
	$	53,100	$	70,520

Note 5—Loan Sales

The following table summarizes cash flows between the Company and transferees in transfers of loans that are accounted for as sales where the Company maintains continuing involvement with the loans as servicer:

	Quarter ended June 30,				Six months ended June 30,
	2020		2019		2020		2019
	(in thousands)
Cash flows:
Proceeds from sales	$	20,172,571	$	11,326,837	$	39,890,722	$	20,802,011
Loan servicing fees received net of    guarantee fees	$	101,823	$	66,919	$	196,292	$	128,191

19

The following table summarizes collection status information for loans that are accounted for as sales where the Company maintains continuing involvement for the dates presented:

	June 30, 2020		December 31, 2019
	(in thousands)
UPB of loans outstanding	$	145,006,382	$	130,663,117
Collection Status (UPB)
Delinquency (1):
30-89 days delinquent	$	4,752,249	$	1,014,094
90 or more days delinquent:
Not in foreclosure	$	5,381,479	$	258,036
In foreclosure	$	40,002	$	53,697
Bankruptcy	$	152,322	$	130,936
Custodial funds managed by the Company (2)	$	5,339,922	$	2,529,984

(1) At June 30, 2020, delinquent loans include loans subject to forbearance agreements entered into under the CARES Act with UPBs totaling $3.6 billion in the 30-89 days delinquent category and $4.4 billion in the 90 or more days delinquent not in foreclosure category.

(2) Custodial funds include borrower and investor custodial cash accounts relating to loans serviced under mortgage servicing agreements and are not included on the Company’s consolidated balance sheets. The Company earns placement fees on certain of the custodial funds it manages on behalf of the loans’ borrowers and investors, which are included in Interest income in the Company’s consolidated statements of operations.

Note 6—Variable Interest Entities

The Company is a variable interest holder in various VIEs that relate to its investing and financing activities.

Credit Risk Transfer Arrangements

The Company has entered into certain loan sales arrangements pursuant to which it accepts credit risk relating to the loans sold in exchange for a portion of the interest earned on such loans. These arrangements absorb credit losses on such loans and include CRT Agreements, CRT strips and sales of loans that include firm commitments to purchase CRT securities.

The Company, through its subsidiary, PennyMac Corp. (“PMC”), entered into CRT Agreements with Fannie Mae, pursuant to which PMC, through subsidiary trust entities, sold pools of loans into Fannie Mae-guaranteed securitizations while retaining Recourse Obligations as part of the retention of IO ownership interests in such loans. The transfers of loans subject to CRT arrangements are accounted for as sales. The Company places Deposits securing CRT arrangements into the subsidiary trust entities to secure its Recourse Obligations. The Deposits securing CRT arrangements represent the Company’s maximum contractual exposure to claims under its Recourse Obligations and is the sole source of settlement of losses under the CRT arrangements.

The Company’s exposure to losses under its Recourse Obligations was initially established at 3.5% to 4.0% of the UPB of the loans sold under the CRT Agreements. As the UPB of the underlying loans subject to each CRT Agreement is reduced through repayments, the percentage exposure of each CRT Agreement will increase to maximums of 4.5% to 5.0% of outstanding UPB, although the total dollar amount of exposure to losses does not increase. The final sales of loans subject to the CRT Agreements were made during May 2018.

Effective in June 2018, the Company began entering into different types of CRT arrangements. Under the new arrangements, the Company sells loans subject to agreements that require the Company to purchase securities that absorb incurred credit losses on such loans. The Company recognizes these purchase commitments initially as a component of Net gain on loans acquired for sale; subsequent changes in fair value are recognized in Net gain (loss) on investments.

During 2019, the Company purchased securities subject to the firm commitments. Similar to the CRT Agreements, the Company accounts for the cash collateralizing these securities as Deposits securing CRT arrangements and recognizes its IO ownership interests and Recourse Obligations as CRT strips which are included on the consolidated balance sheet in Derivative and credit risk transfer strip assets and Derivative and credit risk transfer strip liabilities. Gains and losses on the derivatives and strips (including the IO ownership interest sold to nonaffiliates) included in the CRT arrangements are included in Net gain (loss) on investments in the consolidated statements of operations.

20

Following is a summary of the CRT arrangements:

	Quarter ended June 30,						Six months ended June 30,
	2020			2019			2020			2019
	(in thousands)
UPB of loans sold	$	1,795,130		$	9,264,173		$	16,478,185		$	16,966,253
Investments:
Deposits securing CRT arrangements	$	—		$	933,370		$	—		$	933,370
Change in expected face amount of firm    commitment to purchase CRT securities		(262,176	)		(562,710	)		292,514			(280,793	)
	$	(262,176	)	$	370,660		$	292,514		$	652,577
Investment income (loss):
Net gain (loss) on investments:
Derivative and CRT strips:
CRT strips
Realized	$	13,355		$	5,675		$	28,105		$	5,675
Valuation changes		113,570			—			(116,305	)		—
		126,925			5,675			(88,200	)		5,675
CRT derivatives
Realized		13,550			21,170			30,751			42,213
Valuation changes		122,535			(6,414	)		(178,408	)		46
		136,085			14,756			(147,657	)		42,259
Interest-only security payable at fair value		(847	)		6,208			10,728			9,655
		262,163			26,639			(225,129	)		57,589
Firm commitments to purchase CRT securities		226,035			4,130			(266,478	)		26,320
		488,198			30,769			(491,607	)		83,909
Net gain on loans acquired for sale — Fair value    of firm commitment to purchase CRT securities    recognized upon sale of loans		(7,579	)		20,396			(34,228	)		39,996
Interest income — Deposits securing CRT    arrangements		507			7,830			6,606			14,605
	$	481,126		$	58,995		$	(519,229	)	$	138,510
Payments made to settle losses on credit risk    transfer arrangements	$	2,662		$	881		$	4,179		$	1,776

21

	June 30, 2020			December 31, 2019
	(in thousands)
Carrying value of CRT arrangements:
Derivative and credit risk transfer strip assets
CRT strips	$	—		$	54,930
CRT derivatives		—			115,863
	$	—		$	170,793
Derivative and credit risk transfer strip liabilities
CRT strips	$	61,375		$	—
CRT derivatives		63,926			—
	$	125,301		$	—
Firm commitment to purchase credit risk transfer    securities at fair value	$	(191,193	)	$	109,513
Deposits securing CRT arrangements	$	1,666,449		$	1,969,784
Interest-only security payable at fair value	$	14,981		$	25,709
CRT arrangement assets pledged to secure borrowings:
Derivative and credit risk transfer strip assets	$	—		$	142,183
Deposits securing CRT arrangements (1)	$	1,666,449		$	1,969,784
Face amount of firm commitment to purchase CRT    securities	$	1,794,717		$	1,502,203
UPB of loans — funded credit risk transfer    arrangements	$	32,086,351		$	41,944,117
Collection status (UPB):
Delinquency (2)
Current	$	28,675,256		$	41,355,622
30-89 days delinquent	$	1,447,239		$	463,331
90-180 days delinquent	$	1,926,900		$	106,234
180 or more days delinquent	$	30,878		$	8,802
Foreclosure	$	6,078		$	10,128
Bankruptcy	$	66,209		$	55,452
UPB of loans — firm commitment to purchase CRT    securities	$	48,446,109		$	38,738,396
Collection status (UPB):
Delinquency (3)
Current	$	44,873,703		$	38,581,080
30-89 days delinquent	$	1,739,832		$	146,256
90-180 days delinquent	$	1,822,548		$	9,109
180 or more days delinquent	$	7,327		$	—
Foreclosure	$	2,699		$	1,951
Bankruptcy	$	12,190		$	2,980

(1) Deposits securing credit risk transfer strip liabilities also secure $125.3 million in CRT strip and CRT derivative liabilities at June 30, 2020.

(2) At June 30, 2020, delinquent loans include loans subject to forbearance agreements entered into under the CARES Act with UPBs totaling $1.1 billion in the 30-89 days delinquent category; $1.6 billion in 90-180 days delinquent category; and $1.7 million in the 180 or more days delinquent not in foreclosure category.

(3) At June 30, 2020, delinquent loans include loans subject to forbearance agreements entered into under the CARES Act with UPBs totaling $1.4 billion in the 30-89 days delinquent category; $1.5 billion in the 90-180 days delinquent category; $1.9 million in the 180 days or more delinquent not in foreclosure category; and $1.5 million in bankruptcy.

22

Jumbo Loan Financing

On September 30, 2013, the Company completed a securitization transaction in which PMT Loan Trust 2013-J1 issued $537.0 million in UPB of certificates backed by fixed-rate prime jumbo loans, at a 3.9% weighted yield. The Company includes the balance of the loans held in the trust in Loans at fair value and the certificates issued to nonaffiliates in Asset backed financing of a variable interest entity at fair value in its consolidated balance sheets. The Company includes the interest earned on the loans held in the trust in Interest Income – from nonaffiliates and the interest paid to nonaffiliates in Interest Expense – to nonaffiliates in its consolidated statements of operations.

Following is a summary of the Company’s jumbo loan financing:

	Quarter ended June 30,				Six months ended June 30,
	2020		2019		2020		2019
	(in thousands)
Interest income	$	2,712	$	2,952	$	5,353	$	5,876
Interest expense	$	2,470	$	3,557	$	6,997	$	6,825

	June 30, 2020		December 31, 2019
	(in thousands)
Loans at fair value	$	222,249	$	256,367
Asset-backed financing at fair value	$	212,170	$	243,360
Certificates retained at fair value	$	10,079	$	13,007

Note 7Fair Value

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

The Company groups its assets and liabilities at fair value in three levels, based on the markets in which the assets and liabilities are traded and the observability of the inputs that are significant to the determination of fair value. These levels are:

• Level 1—Quoted prices in active markets for identical assets or liabilities.

• Level 2—Prices determined or determinable using other significant observable inputs. Observable inputs are inputs that other market participants would use in pricing an asset or liability and are developed based on market data obtained from sources independent of the Company.

• Level 3—Prices determined using significant unobservable inputs. In situations where significant observable inputs are unavailable, unobservable inputs may be used. 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 in the circumstances.

As a result of the difficulty in observing certain significant valuation inputs affecting “Level 3” fair value assets and liabilities, the Company is required to make judgments regarding these items’ fair values. Different persons in possession of the same facts may reasonably arrive at different conclusions as to the inputs to be applied in valuing these assets and liabilities and their fair values. Such differences may result in significantly different fair value measurements. Likewise, due to the general illiquidity of some of these assets and liabilities, subsequent transactions may be at values significantly different from those reported.

The Company reclassifies its assets and liabilities between levels of the fair value hierarchy when the inputs required to establish fair value at a level of the fair value hierarchy are no longer readily available, requiring the use of lower-level inputs, or when the inputs required to establish fair value at a higher level of the hierarchy become available.

Fair Value Accounting Elections

The Company identified all of PMT’s non-cash financial assets, its Firm commitment to purchase CRT securities and MSRs to be accounted for at fair value. The Company has elected to account for these assets 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.

23

The Company has also identified its Asset-backed financing of a VIE at fair value and Interest-only security payable at fair value to be accounted for at fair value to reflect the generally offsetting changes in fair value of these borrowings to changes in fair value of the assets at fair value collateralizing these financings. For other borrowings, the Company has determined that historical cost accounting is more appropriate because under this method debt issuance costs are amortized over the term of the debt facility, thereby matching the debt issuance cost to the periods benefiting from the availability of the debt.

Financial Statement Items Measured at Fair Value on a Recurring Basis

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

	June 30, 2020
	Level 1		Level 2		Level 3		Total
	(in thousands)
Assets:
Short-term investments	$	273,592	$	—	$	—	$	273,592
Mortgage-backed securities at fair value		—		2,612,986		—		2,612,986
Loans acquired for sale at fair value		—		2,150,649		29,313		2,179,962
Loans at fair value		—		222,249		8,411		230,660
Excess servicing spread purchased from PFSI		—		—		151,206		151,206
Derivative and credit risk transfer strip assets:
Call options on interest rate futures		586		—		—		586
Put options on interest rate futures		680		—		—		680
Forward purchase contracts		—		39,974		—		39,974
Forward sale contracts		—		644		—		644
MBS put options		—		7,374		—		7,374
Swap futures		—		4,283		—		4,283
Interest rate lock commitments		—		—		84,423		84,423
Repurchase agreement derivatives		—		—		5,275		5,275
Total derivative and credit risk transfer strip assets    before netting		1,266		52,275		89,698		143,239
Netting		—		—		—		(28,893	)
Total derivative and credit risk transfer strip assets    after netting		1,266		52,275		89,698		114,346
Mortgage servicing rights at fair value		—		—		1,189,605		1,189,605
	$	274,858	$	5,038,159	$	1,468,233	$	6,752,357
Liabilities:
Asset-backed financing of a VIE at fair value	$	—	$	212,170	$	—	$	212,170
Interest-only security payable at fair value		—		—		14,981		14,981
Derivative and credit risk transfer strip liabilities:
Forward purchase contracts		—		491		—		491
Forward sales contracts		—		63,390		—		63,390
MBS put options		—		2		—		2
Interest rate lock commitments		—		—		467		467
Credit risk transfer strips		—		—		61,375		61,375
CRT derivatives		—		—		63,926		63,926
Total derivative liabilities before netting		—		63,883		125,768		189,651
Netting		—		—		—		(49,450	)
Total derivative liabilities after netting		—		63,883		125,768		140,201
Firm commitment to purchase credit risk transfer securities    at fair value		—		—		191,193		191,193
	$	—	$	276,053	$	331,942	$	558,545

24

	December 31, 2019
	Level 1		Level 2		Level 3		Total
	(in thousands)
Assets:
Short-term investments	$	90,836	$	—	$	—	$	90,836
Mortgage-backed securities at fair value		—		2,839,633		—		2,839,633
Loans acquired for sale at fair value		—		4,129,858		18,567		4,148,425
Loans at fair value		—		256,367		14,426		270,793
Excess servicing spread purchased from PFSI		—		—		178,586		178,586
Derivative and credit risk transfer strip assets:
Call options on interest rate futures		3,809		—		—		3,809
Put options on interest rate futures		2,859		—		—		2,859
Forward purchase contracts		—		7,525		—		7,525
Forward sale contracts		—		637		—		637
MBS put options		—		1,625		—		1,625
Swap futures		—		4,347		—		4,347
Credit risk transfer strips		—		—		54,930		54,930
CRT derivatives		—		—		115,863		115,863
Interest rate lock commitments		—		—		11,726		11,726
Repurchase agreement derivatives		—		—		5,275		5,275
Total derivative assets before netting		6,668		14,134		187,794		208,596
Netting		—		—		—		(6,278	)
Total derivative assets after netting		6,668		14,134		187,794		202,318
Firm commitment to purchase credit risk transfer    securities at fair value		—		—		109,513		109,513
Mortgage servicing rights at fair value		—		—		1,535,705		1,535,705
	$	97,504	$	7,239,992	$	2,044,591	$	9,375,809
Liabilities:
Asset-backed financing of a VIE at fair value	$	—	$	243,360	$	—	$	243,360
Interest-only security payable at fair value		—		—		25,709		25,709
Derivative liabilities:
Forward purchase contracts		—		3,600		—		3,600
Forward sales contracts		—		15,644		—		15,644
Interest rate lock commitments		—		—		572		572
Total derivative liabilities before netting		—		19,244		572		19,816
Netting		—		—		—		(13,393	)
Total derivative liabilities after netting		—		19,244		572		6,423
	$	—	$	262,604	$	26,281	$	275,492

25

The following is a summary of changes in items measured at fair value on a recurring basis using Level 3 inputs that are significant to the estimation of the fair values of the assets and liabilities at either the beginning or end of the periods presented:

	Quarter ended June 30, 2020
Assets (1)	Loans acquired for sale			Loans at fair value			Excess servicing spread			CRT strips			CRT derivatives			Interest rate lock commitments			Repurchase agreement derivatives		Firm commitment to purchase CRT securities			Mortgage servicing rights			Total
	(in thousands)
Balance, March 31, 2020	$	22,541		$	9,122		$	157,109		$	(174,945	)	$	(185,933	)	$	79,384		$	5,275	$	(409,649	)	$	1,157,326		$	660,230
Purchases and issuances		20,996			—			—			—			—			172,047			—		—			—			193,043
Repayments and sales		(13,475	)		(590	)		(8,122	)		(13,355	)		(14,078	)		—			—		—			—			(49,620	)
Capitalization of interest    and fees		—			—			2,372			—			—			—			—		—			—			2,372
ESS received pursuant to a    recapture agreement with    PFSI		—			—			483			—			—			—			—		—			—			483
Amounts (incurred) received       pursuant to sales of loans		—			—			—			—			—			—			—		(7,579	)		203,127			195,548
Changes in fair value included    in income arising from:
Changes in instrument-    specific credit risk		—			—			—			—			—			—			—		—			—			—
Other factors		(749	)		(121	)		(636	)		126,925			136,085			96,053			—		226,035			(170,848	)		412,744
		(749	)		(121	)		(636	)		126,925			136,085			96,053			—		226,035			(170,848	)		412,744
Transfers:
Interest rate lock commitments    to loans acquired for sale (2)		—			—			—			—			—			(263,528	)		—		—			—			(263,528	)
Balance, June 30, 2020	$	29,313		$	8,411		$	151,206		$	(61,375	)	$	(63,926	)	$	83,956		$	5,275	$	(191,193	)	$	1,189,605		$	1,151,272
Changes in fair value    recognized during the quarter    relating to assets still held at    June 30, 2020	$	(704	)	$	(322	)	$	(636	)	$	113,570		$	122,535		$	83,956		$	—	$	226,035		$	(170,848	)	$	373,586

(1) For the purpose of this table, CRT strips, CRT derivatives, interest rate lock commitments (“IRLCs”), and firm commitment to purchase CRT securities asset and liability positions are shown net.

(2) The Company had transfers among the fair value levels arising from transfers of IRLCs to loans acquired for sale at fair value upon purchase of the respective loans.

Liabilities	Quarter ended June 30, 2020
	(in thousands)
Interest-only security payable:
Balance, March 31, 2020	$	14,134
Changes in fair value included in income arising from:
Changes in instrument-specific credit risk		—
Other factors		847
		847
Balance, June 30, 2020	$	14,981
Changes in fair value recognized during the quarter relating    to liability outstanding at June 30, 2020	$	847

26

	Quarter ended June 30, 2019
Assets	Loans acquired for sale			Loans at fair value			Excess servicing spread			Interest rate lock commitments (1)			CRT strips		CRT derivatives			Repurchase agreement derivatives			Firm commitments to purchase CRT securities			Mortgage servicing rights			Total
	(in thousands)
Balance, March 31, 2019	$	18,361		$	109,112		$	205,081		$	10,457		$	—	$	130,447		$	17,701		$	79,784		$	1,156,908		$	1,727,851
Purchases and issuances		3,748			—			—			11,350			—		—			1,384			—			—			16,482
Repayments and sales		(8,797	)		(27,795	)		(10,530	)		—			—		(21,170	)		(7,075	)		(31,925	)		—			(107,292	)
Capitalization of interest		—			1,166			2,767			—			—		—			—			—			—			3,933
Capitalization of advances		—			694			—			—			—		—			—			—			—			694
ESS received pursuant to a recapture agreement with PFSI		—			—			442			—			—		—			—			—			—			442
Amounts received as proceeds    from sales of loans		—			—			—			—			—		—			—			20,396			152,986			173,382
Changes in fair value included    in income arising from:
Changes in instrument-    specific credit risk		—			2,678			—			—			—		—			—			—			—			2,678
Other factors		857			(8,129	)		(3,604	)		33,793			5,675		14,756			36			4,130			(183,467	)		(135,953	)
		857			(5,451	)		(3,604	)		33,793			5,675		14,756			36			4,130			(183,467	)		(133,275	)
Transfers:
Loans to REO		—			(3,253	)		—			—			—		—			—			—			—			(3,253	)
Loans acquired for sale at fair    value from "Level 2" to    "Level 3" (2)		19			—			—			—			—		—			—			—			—			19
Firm commitment to purchase    CRT securities to CRT strips		—			—			—			—			56,804		—			—			(56,804	)		—			—
Interest rate lock commitments    to loans acquired for sale		—			—			—			(41,986	)		—		—			—			—			—			(41,986	)
Balance, June 30, 2019	$	14,188		$	74,473		$	194,156		$	13,614		$	62,479	$	124,033		$	12,046		$	15,581		$	1,126,427		$	1,636,997
Changes in fair value    recognized during the quarter    relating to assets still held    at June 30, 2019	$	545		$	(6,094	)	$	(3,604	)	$	13,614		$	5,675	$	(6,414	)	$	—		$	4,130		$	(183,467	)	$	(175,615	)

(1) For the purpose of this table IRLC assets and liability positions are shown net.

(2) The Company identified certain “Level 2” fair value loans acquired for sale that were not saleable into the prime mortgage market and therefore transferred them to “Level 3”.

Liabilities	Quarter ended June 30, 2019
	(in thousands)
Interest-only security payable:
Balance, March 31, 2019	$	32,564
Changes in fair value included in income arising from:
Changes in instrument-specific credit risk		—
Other factors		(6,208	)
		(6,208	)
Balance, June 30, 2019	$	26,356
Changes in fair value recognized during the quarter    relating to liability outstanding at June 30, 2019	$	(6,208	)

27

	Six months ended June 30, 2020
Assets (1)	Loans acquired for sale			Loans at fair value			Excess servicing spread			CRT strips			CRT derivatives			Interest rate lock commitments			Repurchase agreement derivatives		Firm commitment to purchase CRT securities			Mortgage servicing rights			Total
	(in thousands)
Balance, December 31, 2019	$	18,567		$	14,426		$	178,586		$	54,930		$	115,863		$	11,154		$	5,275	$	109,513		$	1,535,705		$	2,044,019
Purchases and issuances		32,287			1,058			—			—			—			261,966			—		—			—			295,311
Repayments and sales		(21,032	)		(4,925	)		(17,430	)		(28,105	)		(32,132	)		—			—		—			—			(103,624	)
Capitalization of interest    and fees		—			—			4,346			—			—			—			—		—			—			4,346
ESS received pursuant to a    recapture agreement with    PFSI		—			—			862			—			—			—			—		—			—			862
Amounts (incurred) received      pursuant to sales of loans		—			—			—			—			—			—			—		(34,228	)		451,949			417,721
Changes in fair value included    in results of operations    arising from:
Changes in instrument-    specific credit risk		—			—			—			—			—			—			—		—			—			—
Other factors		(509	)		(1,263	)		(15,158	)		(88,200	)		(147,657	)		199,698			—		(266,478	)		(798,049	)		(1,117,616	)
		(509	)		(1,263	)		(15,158	)		(88,200	)		(147,657	)		199,698			—		(266,478	)		(798,049	)		(1,117,616	)
Transfers:
Loans to REO		—			(885	)		—			—			—			—			—		—			—			(885	)
Interest rate lock commitments    to loans acquired for sale (2)		—			—			—			—			—			(388,862	)		—		—			—			(388,862	)
Balance, June 30, 2020	$	29,313		$	8,411		$	151,206		$	(61,375	)	$	(63,926	)	$	83,956		$	5,275	$	(191,193	)	$	1,189,605		$	1,151,272
Changes in fair value    recognized during the period    relating to assets still held at    June 30, 2020	$	(656	)	$	(1,157	)	$	(15,158	)	$	(116,305	)	$	(178,408	)	$	83,956		$	—	$	(266,478	)	$	(798,049	)	$	(1,292,255	)

(1) For the purpose of this table, CRT strips, CRT derivatives, IRLCs, and Firm commitment to purchase CRT securities asset and liability positions are shown net.

(2) The Company had transfers among the fair value levels arising from transfers of IRLCs to loans acquired for sale at fair value upon purchase of the respective loans.

Liabilities	Six months ended June 30, 2020
	(in thousands)
Interest-only security payable:
Balance, December 31, 2019	$	25,709
Changes in fair value included in results of operations arising from:
Changes in instrument-specific credit risk		—
Other factors		(10,728	)
		(10,728	)
Balance, June 30, 2020	$	14,981
Changes in fair value recognized during the period relating     to liability outstanding at June 30, 2020	$	(10,728	)

28

	Six months ended June 30, 2019
Assets	Loans acquired for sale			Loans at fair value			Excess servicing spread			CRT strip		CRT Agreement derivatives			Interest rate lock commitments (1)			Repurchase agreement derivatives			Firm commitment to purchase CRT securities			Mortgage servicing rights			Total
	(in thousands)
Balance, December 31, 2018	$	17,474		$	117,732		$	216,110		$	—	$	123,987		$	11,988		$	14,511		$	37,994		$	1,162,369		$	1,702,165
Purchases and issuances		7,079			1,077			—			—		—			14,321			9,297			—			—			31,774
Repayments and sales		(12,019	)		(31,404	)		(21,082	)		—		(42,213	)		—			(11,567	)		(31,925	)		—			(150,210	)
Capitalization of interest		—			1,928			5,833			—		—			—			—			—			—			7,761
Capitalization of advances		—			1,151			—			—		—			—			—			—			—			1,151
ESS received pursuant to a      recapture agreement with PFSI		—			—			950			—		—			—			—			—			—			950
Amounts received pursuant     to sales of loans		—			—			—			—		—			—			—			39,996			284,854			324,850
Changes in fair value included    in results of operations arising    from:
Changes in instrument-    specific credit risk		—			3,737			—			—		—			—			—			—			—			3,737
Other factors		845			(8,703	)		(7,655	)		5,675		42,259			59,324			(195	)		26,320			(320,796	)		(202,926	)
		845			(4,966	)		(7,655	)		5,675		42,259			59,324			(195	)		26,320			(320,796	)		(199,189	)
Transfers:
Loans to REO		—			(11,045	)		—			—		—			—			—			—			—			(11,045	)
Loans acquired for sale at fair    value from "Level 2" to    "Level 3" (2)		809			—			—			—		—			—			—			—			—			809
Firm commitment to purchase    CRT securities to CRT strips		—			—			—			56,804		—			—			—			(56,804	)		—			—
Interest rate lock commitments to loans acquired for sale		—			—			—			—		—			(72,019	)		—			—			—			(72,019	)
Balance, June 30, 2019	$	14,188		$	74,473		$	194,156		$	62,479	$	124,033		$	13,614		$	12,046		$	15,581		$	1,126,427		$	1,636,997
Changes in fair value recognized during the period relating to assets still held at June 30, 2019	$	672		$	(6,092	)	$	(7,655	)	$	5,675	$	47		$	13,614		$	—		$	26,320		$	(320,796	)	$	(288,215	)

(1) For the purpose of this table IRLC assets and liability positions are shown net.

(2) The Company identified certain “Level 2” fair value loans acquired for sale that were not saleable into the prime mortgage market and therefore transferred them to “Level 3”.

Liabilities	Six months ended June 30, 2019
	(in thousands)
Interest-only security payable:
Balance, December 31, 2018	$	36,011
Changes in fair value included in results of operations arising    from:
Changes in instrument- specific credit risk		—
Other factors		(9,655	)
		(9,655	)
Balance, June 30, 2019	$	26,356
Changes in fair value recognized during the period    relating to liability outstanding at June 30, 2019	$	(9,655	)

29

Financial Statement Items Measured at Fair Value under the Fair Value Option

Following are the fair values and related principal amounts due upon maturity of loans accounted for under the fair value option (including loans acquired for sale, loans held in a consolidated VIE, and distressed loans): 

	June 30, 2020							December 31, 2019
	Fair value		Principal amount due upon maturity		Difference			Fair value		Principal amount due upon maturity		Difference
	(in thousands)
Loans acquired for sale at fair value:
Current through 89 days delinquent:	$	2,173,967	$	2,071,662	$	102,305		$	4,147,374	$	4,010,444	$	136,930
90 or more days delinquent:
Not in foreclosure		5,158		5,494		(336	)		572		615		(43	)
In foreclosure		837		1,003		(166	)		479		566		(87	)
		5,995		6,497		(502	)		1,051		1,181		(130	)
	$	2,179,962	$	2,078,159	$	101,803		$	4,148,425	$	4,011,625	$	136,800
Loans at fair value:
Loans held in a consolidated VIE:
Current through 89 days delinquent	$	214,854	$	207,563	$	7,291		$	255,706	$	251,425	$	4,281
90 or more days delinquent:
Not in foreclosure		7,395		8,985		(1,590	)		661		809		(148	)
In foreclosure		—		—		—			—		—		—
		7,395		8,985		(1,590	)		661		809		(148	)
		222,249		216,548		5,701			256,367		252,234		4,133
Distressed loans:
Current through 89 days delinquent		2,212		4,269		(2,057	)		3,179		6,202		(3,023	)
90 or more days delinquent:
Not in foreclosure		3,253		12,473		(9,220	)		4,897		13,154		(8,257	)
In foreclosure		2,946		6,060		(3,114	)		6,350		15,698		(9,348	)
		6,199		18,533		(12,334	)		11,247		28,852		(17,605	)
		8,411		22,802		(14,391	)		14,426		35,054		(20,628	)
	$	230,660	$	239,350	$	(8,690	)	$	270,793	$	287,288	$	(16,495	)

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

	Quarter ended June 30, 2020
	Net gain (loss) on investments			Net loan servicing fees			Net gain on loans acquired for sale			Net interest (expense) income			Total
	(in thousands)
Assets:
Mortgage-backed securities at fair value	$	17,064		$	—		$	—		$	(11,859	)	$	5,205.00
Credit risk transfer strips		126,925			—			—			—			126,925
Loans acquired for sale at fair value		—			—			257,469			—			257,469
Loans at fair value		674			—			—			546			1,220
ESS at fair value		(636	)		—			—			2,372			1,736
Firm commitment to purchase credit risk transfer    securities at fair value		226,035			—			(7,579	)		—			218,456
MSRs at fair value		—			(170,848	)		—			—			(170,848	)
	$	370,062		$	(170,848	)	$	249,890		$	(8,941	)	$	440,163
Liabilities:
Interest-only security payable at fair value	$	(847	)	$	—		$	—		$	—		$	(847	)
Asset-backed financing of a VIE at fair value		(162	)		—			—			604			442
	$	(1,009	)	$	—		$	—		$	604		$	(405	)

30

	Quarter ended June 30, 2019
	Net gain (loss) on investments			Net loan servicing fees			Net gain on loans acquired for sale		Net interest (expense) income			Total
	(in thousands)
Assets:
Mortgage-backed securities at fair value	$	27,448		$	—		$	—	$	(6,214	)	$	21,234
Credit risk transfer strips		5,675			—			—		—			5,675
Loans acquired for sale at fair value		—			—			54,790		—			54,790
Loans at fair value		(2,092	)		—			—		1,367			(725	)
ESS at fair value		(3,604	)		—			—		2,767			(837	)
Firm commitment to purchase credit risk transfer    securities at fair value		4,130			—			20,396		—			24,526
MSRs at fair value		—			(183,467	)		—		—			(183,467	)
	$	31,557		$	(183,467	)	$	75,186	$	(2,080	)	$	(78,804	)
Liabilities:
Interest-only security payable	$	6,208		$	—		$	—	$	—		$	6,208
Asset-backed financing of a VIE at fair value		(2,341	)		—			—		(1,184	)		(3,525	)
	$	3,867		$	—		$	—	$	(1,184	)	$	2,683

	Six months ended June 30, 2020
	Net gain (loss) on investments			Net loan servicing fees			Net gain on loans acquired for sale			Net interest (expense) income			Total
	(in thousands)
Assets:
Mortgage-backed securities at fair value	$	133,031		$	—		$	—		$	(23,861	)	$	109,170
Credit risk transfer strips		(88,200	)		—			—			—			(88,200	)
Loans acquired for sale at fair value		—			—			405,027			—			405,027
Loans at fair value		(3,337	)		—			—			839			(2,498	)
ESS at fair value		(15,158	)		—			—			4,346			(10,812	)
Firm commitment to purchase credit risk transfer    securities at fair value		(266,478	)		—			(34,228	)		—			(300,706	)
MSRs at fair value		—			(798,049	)		—			—			(798,049	)
	$	(240,142	)	$	(798,049	)	$	370,799		$	(18,676	)	$	(686,068	)
Liabilities:
Interest-only security payable at fair value	$	10,728		$	—		$	—		$	—		$	10,728
Asset-backed financing of a VIE at fair value		1,766			—			—			(3,095	)		(1,329	)
	$	12,494		$	—		$	—		$	(3,095	)	$	9,399

31

	Six months ended June 30, 2019
	Net gain (loss) on investments			Net loan servicing fees			Net gain on loans acquired for sale		Net interest (expense) income			Total
	(in thousands)
Assets:
Mortgage-backed securities at fair value	$	64,370		$	—		$	—	$	(10,770	)	$	53,600
Credit risk transfer strips		5,675			—			—		—			5,675
Loans acquired for sale at fair value		—			—			92,593		—			92,593
Loans at fair value		1,978			—			—		2,279			4,257
ESS at fair value		(7,655	)		—			—		5,833			(1,822	)
Firm commitment to purchase credit risk transfer    securities at fair value		26,320			—			39,996		—			66,316
MSRs at fair value		—			(320,796	)		—		—			(320,796	)
	$	90,688		$	(320,796	)	$	132,589	$	(2,658	)	$	(100,177	)
Liabilities:
Interest-only security payable at fair value	$	9,655		$	—		$	—	$	—		$	9,655
Asset-backed financing of a VIE at fair value		(5,198	)		—			—		(2,055	)		(7,253	)
	$	4,457		$	—		$	—	$	(2,055	)	$	2,402

Financial Statement Item Measured at Fair Value on a Nonrecurring Basis

Following is a summary of the carrying value of assets that were re-measured during the period based on fair value on a nonrecurring basis:

Real estate acquired in settlement of loans	Level 1		Level 2		Level 3		Total
	(in thousands)
June 30, 2020	$	—	$	—	$	13,643	$	13,643
December 31, 2019	$	—	$	—	$	24,115	$	24,115

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

	Quarter ended June 30,					Six months ended June 30,
	2020			2019		2020			2019
	(in thousands)
Real estate asset acquired in settlement of loans	$	(47	)	$	1,831	$	(1,195	)	$	(607	)

The Company remeasures its REO based on fair value when it evaluates the REO for impairment. The Company evaluates its REO for impairment with reference to the respective properties’ fair values less cost to sell. REO may be revalued after acquisition 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 fair 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 operations.

Fair Value of Financial Instruments Carried at Amortized Cost

Most of the Company’s borrowings are carried at amortized cost. The Company’s Assets sold under agreements to repurchase, Mortgage loan participation purchase and sale agreements, Notes payable secured by credit risk transfer and mortgage servicing assets, Exchangeable senior notes, and Assets sold to PennyMac Financial Services, Inc. under agreements to repurchase are classified as “Level 3” fair value liabilities due to the Company’s reliance on unobservable inputs to estimate these instruments’ fair values.

The Company has concluded that the fair values of these borrowings other than Notes payable secured by credit risk transfer and mortgage servicing assets and Exchangeable senior notes approximate the agreements’ carrying values due to the borrowing agreements’ variable interest rates and short maturities.

32

Following are the fair values of the Notes payable secured by credit risk transfer and mortgage servicing assets and Exchangeable senior notes: 

	June 30, 2020				December 31, 2019
Instrument	Carrying value		Fair value		Carrying value		Fair value
	(in thousands)
Notes payable secured by credit risk transfer    and mortgage servicing assets	$	1,810,845	$	1,635,072	$	1,696,295	$	1,705,544
Exchangeable senior notes	$	195,333	$	199,202	$	443,506	$	462,117

The fair value of the Notes payable secured by credit risk transfer and mortgage servicing rights and Exchangeable senior notes were based on non-affiliate broker indications of fair value for the dates presented.

Valuation Governance

Most of the Company’s assets, its Asset-backed financing of a VIE at fair value, Interest-only security payable at fair value and Derivative and credit risk transfer strip liabilities are carried at fair value with changes in fair value recognized in current period results of operations. A substantial portion of these items are “Level 3” fair value assets and liabilities which require the use of unobservable inputs that are significant to the estimation of the fair values of the assets and liabilities. 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” fair value assets and liabilities, the Company has assigned responsibility for estimating the fair value of these assets and liabilities to specialized staff and subjects the valuation process to significant senior management oversight. PFSI’s Financial Analysis and Valuation group (the “FAV group”) is responsible for estimating the fair values of “Level 3” fair value assets and liabilities other than IRLCs and maintaining its valuation policies and procedures. The fair value of the Company’s IRLCs is developed by PFSI’s Capital Markets Risk Management staff and is reviewed by the PFSI’s Capital Markets Operations group.

The FAV group monitors the models used for valuation of the Company’s “Level 3” fair value assets and liabilities, including the models’ performance versus actual results, and reports those results to PFSI’s senior management valuation committee. PFSI’s senior management valuation committee includes the Company’s chief financial, risk, and investment officers as well as other senior members of the Company’s finance, capital markets and risk management staffs.

With respect to the non-IRLC “Level 3” valuations, the FAV group reports to PFSI’s senior management valuation committee, which oversees the valuations. The FAV group is responsible for reporting to PFSI’s senior management valuation committee on the changes in the valuation of the non-IRLC “Level 3” fair value assets and liabilities, 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.

Valuation Techniques and Inputs

The following is a description of the techniques and inputs used in estimating the fair values of “Level 2” and “Level 3” fair value assets and liabilities:

Mortgage-Backed Securities

The Company categorizes MBS as “Level 2” fair value assets. Fair value of these MBS is established based on quoted market prices for the Company’s MBS holdings or similar securities. Changes in the fair value of MBS are included in Net gain (loss) on investments in the consolidated statements of operations.

33

Loans

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

• Loans that are saleable into active markets, comprised of most of the Company’s loans acquired for sale at fair value and all of the loans at fair value held in a VIE, are categorized as “Level 2” fair value assets:

• For loans acquired for sale, the fair values are established using the loans’ contracted selling price or quoted market price or market price equivalent.

• For the loans at fair value held in a VIE, the quoted fair values of all of the individual securities issued by the securitization trust are used to derive a fair value for the 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 Company believes are similar to the models and inputs used by other market participants.

• Loans that are not saleable into active markets, comprised primarily of distressed loans, are categorized as “Level 3” fair value assets and:

• For loans held for sale categorized as “Level 3” fair value assets and, before September 30, 2019, distressed loans, fair values were estimated using a discounted cash flow approach. Inputs to the discounted cash flow model included current interest rates, loan amount, payment status, property type, discount rates and forecasts of future interest rates, home prices, prepayment speeds, default speeds, loss severities or contracted selling price when applicable.

• Beginning September 30, 2019, the Company changed its discounted cash flow approach and the inputs to the model for distressed loans. Distressed loan fair values are now estimated based on the expected resolution to be realized from the individual asset’s disposition strategies. When a cash flow projection is used to estimate the fair value of the resolution, those cash flows are discounted at annual rates up to 20%. The Company changed its approach to valuation of distressed loans during the quarter ended September 30, 2019 because it substantially liquidated its investment in distressed loans during that quarter and concluded that the small number of remaining assets are most accurately valued on an individual expected resolution basis.

Excess Servicing Spread Purchased from PFSI

The Company categorizes ESS as a “Level 3” fair value asset. 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 pricing spread (discount rate) and prepayment speed. 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. Changes in the fair value of ESS are included in Net gain (loss) on investments in the consolidated statements of operations.

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

	June 30, 2020		December 31, 2019
Fair value (in thousands)	$	151,206	$	178,586
UPB of underlying loans (in thousands)	$	18,197,844	$	19,904,571
Average servicing fee rate (in basis points)		34		34
Average ESS rate (in basis points)		19		19
Key inputs (1)
Pricing spread (2)
Range	4.9% – 5.3%		3.0% – 3.3%
Weighted average	5.1%		3.1%
Annual total prepayment speed (3)
Range	9.5% – 17.9%		8.7% – 16.2%
Weighted average	12.1%		11.0%
Equivalent life (in years)
Range	2.4 - 6.7		2.7 - 7.2
Weighted average	5.7		6.1

(1) Weighted-average inputs are based on UPB of the underlying loans.

(2) Pricing spread represents a margin that is applied to a reference forward rate to develop periodic discount rates. The Company applies pricing spreads to the forward rates implied by the United States Dollar London Interbank Offered Rate (“LIBOR”)/ swap curve for purposes of discounting cash flows relating to ESS.

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(3) Prepayment speed is measured using Life Total Conditional Prepayment Rate (“CPR”). Equivalent life is included for informational purposes.

Derivative and Credit Risk Transfer Strip Assets and Liabilities

CRT Derivatives

The Company categorizes CRT derivatives as “Level 3” fair value assets and liabilities. The fair value of CRT derivatives is based on indications of fair value provided to the Company by nonaffiliated brokers for the certificates representing the beneficial interests in the trust holding the Deposits securing credit risk transfer arrangements pledged to creditors, the Recourse Obligations and the IO ownership interests. Together, the Recourse Obligation and the IO ownership interest comprise the CRT derivative. Fair value of the CRT derivative is derived by deducting the balance of the Deposits securing credit risk transfer arrangements pledged to creditors from the fair value of the certificates derived from indications provided by the nonaffiliated brokers. The Company assesses the fair values it receives from nonaffiliated brokers using the discounted cash flow approach.

The significant unobservable inputs used by the Company in its review and approval of the valuation of CRT derivatives are the discount rate, voluntary and involuntary prepayment speeds and the remaining loss expectations of the reference loans. Changes in fair value of CRT derivatives are included in Net gain (loss) on investments in the consolidated statements of operations.

Following is a quantitative summary of key unobservable inputs used in the Company’s review and approval of broker-provided fair values for CRT Agreements:

	June 30, 2020		December 31, 2019
	(dollars in thousands)
Fair value
CRT derivatives:
Assets	$	—	$	115,863
Liabilities	$	63,926	$	—
UPB of loans in reference pools	$	19,955,958	$	24,824,616
Key inputs (1)
Discount rate
Range	6.4% – 7.3%		4.7% – 5.3%
Weighted average	7.2%		5.2%
Voluntary prepayment speed (2)
Range	22.2% – 26.8%		16.4% – 18.5%
Weighted average	25.8%		17.9%
Involuntary prepayment speed (3)
Range	0.6% – 0.9%		0.2% – 0.3%
Weighted average	0.8%		0.3%
Remaining loss expectation (4)
Range	0.2% – 0.4%		0.1% – 0.1%
Weighted average	0.3%		0.1%

(1) Weighted average inputs are based on fair value amounts of the CRT Agreements.

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

(3) Involuntary prepayment speed is measured using Life Involuntary CPR.

(4) Remaining loss expectation is measured as expected future contractual losses divided by the UPB of the reference loans.

Interest Rate Lock Commitments

The Company categorizes IRLCs as “Level 3” fair value assets and liabilities. The Company estimates the fair value of IRLCs based on quoted Agency MBS prices, the probability that the loan will be purchased under the commitment (the “pull-through rate”) and the Company’s estimate of the fair value of the MSRs it expects to receive upon sale of the loan.

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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 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 the IRLCs’ 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 fair value, but also increase the pull-through rate for the loan principal and interest payment cash flow component that has decreased in fair value. Changes in fair value of IRLCs are included in Net gain on loans acquired for sale in the consolidated statements of operations.

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

	June 30, 2020		December 31, 2019
Fair value (in thousands) (1)	$	83,956	$	11,154
Key inputs (2)
Pull-through rate
Range	48.3% – 100%		64.6% – 100%
Weighted average	82.9%		93.3%
MSR fair value expressed as
Servicing fee multiple
Range	1.1 – 5.2		2.1 – 5.8
Weighted average	3.6		4.7
Percentage of UPB
Range	0.3% – 1.7%		0.7% – 2.2%
Weighted average	1.0%		1.4%

(1) For purposes of this table, IRLC asset and liability positions are shown net.

(2) Weighted-average inputs are based on the committed amounts.

Repurchase Agreement Derivatives

The Company had a master repurchase agreement that included incentives for financing loans approved for satisfying certain consumer relief characteristics. These incentives were classified as embedded derivatives for reporting purposes and are reported separately from the repurchase agreements. The Company classifies repurchase agreement derivatives as “Level 3” fair value assets.

The significant unobservable inputs into the valuation of repurchase agreement derivative assets are the discount rate and the expected approval rate of the loans financed under the master repurchase agreement. The resulting ratio included in the Company’s fair value estimate was 99.0% at June 30, 2020 and December 31, 2019. Changes in fair value of repurchase agreement derivatives are included in Interest expense in the consolidated statements of operations.

Hedging Derivatives

Fair values of derivative financial instruments actively traded on exchanges are categorized by the Company as “Level 1” fair value assets and liabilities; fair values of derivative financial instruments based on observable interest rates, volatilities and prices in the MBS or other markets are categorized by the Company as “Level 2” fair value assets and liabilities. Changes in the fair value of hedging derivatives are included in Net gain (loss) on investments, Net loan servicing fees, or Net gain on loans acquired for sale as applicable, in the consolidated statements of operations.

Credit Risk Transfer Strips

The Company categorizes CRT strips as “Level 3” fair value assets or liabilities. The fair value of CRT strips is based on indications of fair value provided to the Company by nonaffiliated brokers for the certificates representing the beneficial interest in the trust holding the CRT strips and Deposits securing CRT arrangements. The Company applies adjustments to the fair value derived from these indications to account for contractual restrictions limiting PMT’s ability to sell the certificates. Fair value of the CRT strips is derived by deducting the balance of the Deposits securing CRT arrangements from the fair value of the certificates derived from indications provided by the nonaffiliated brokers.

The significant unobservable inputs into the valuation of CRT strips are the discount rate, voluntary and involuntary prepayment speeds and the remaining loss expectations of the reference loans. Changes in fair value of CRT strips are included in Net gain (loss) on investments. 

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Following is a quantitative summary of key unobservable inputs used in the Company’s review and approval of the adjusted broker-provided fair values used to derive the value of the CRT strips:

	June 30, 2020			December 31, 2019
	(dollars in thousands)
Carrying value
CRT strips:
Assets	$	—		$	54,930
Liabilities	$	61,375		$	—
UPB of loans in the reference pools	$	12,130,393		$	17,119,501
Key inputs (1)
Discount rate		8.8	%		6.3	%
Voluntary prepayment speed (2)		33.6	%		23.4	%
Involuntary prepayment speed (3)		1.0	%		0.2	%
Remaining loss expectation (4)		0.4	%		0.1	%

(1) Weighted average inputs are based on the fair value amounts of the loans in the reference pools.

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

(3) Involuntary prepayment speed is measured using Life Involuntary CPR.

(4) Remaining loss expectation is measured as expected future losses divided by the UPB of the reference loans.

Firm commitment to purchase CRT securities

The Company categorizes its firm commitment to purchase CRT securities as a “Level 3” fair value asset or liability. The fair value of the firm commitment is estimated using a discounted cash flow approach to estimate the fair value of the CRT securities to be purchased less the contractual purchase price. Key inputs used in the estimation of fair value of the firm commitment are the discount rate, and the voluntary and involuntary prepayment speeds and remaining loss expectations of the loans in the reference pools. The firm commitment to purchase CRT securities is recognized initially as a component of Net gain on loans acquired for sale. Subsequent changes in fair value are recorded in Net gain (loss) on investments in the consolidated statements of operations.

Following is a quantitative summary of key unobservable inputs in the valuation of firm commitment to purchase CRT securities:

	June 30, 2020			December 31, 2019
	(dollars in thousands)
Fair value:
Assets	$	—		$	109,513
Liabilities	$	191,193		$	—
UPB of loans in the reference pools	$	48,446,109		$	38,738,396
Key inputs (1)
Discount rate		9.3	%		6.5	%
Voluntary prepayment speed (2)		19.6	%		14.3	%
Involuntary prepayment speed (3)		0.5	%		0.1	%
Remaining loss expectation (4)		0.3	%		0.1	%

(1) Weighted average inputs are based on the fair value amounts of the loans in the reference pools.

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

(3) Involuntary prepayment speed is measured using Life Involuntary CPR.

(4) Remaining loss expectation is measured as expected future losses divided by the UPB of the reference loans.

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” fair value asset. Fair value of REO is established by using a current estimate of fair value from either a broker’s price opinion, a full appraisal, or the price given in a pending contract of sale.

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REO fair values are reviewed by PLS staff appraisers when the Company obtains multiple indications of fair value and there is a significant difference between the fair values received. PLS 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 fair value. Recognized changes in the fair value of REO are included in Results of real estate acquired in settlement of loans in the consolidated statements of operations.

Mortgage Servicing Rights

The Company uses a discounted cash flow approach to estimate the fair value of MSRs. The fair value of MSRs is derived from the net positive cash flows associated with the servicing contracts. The Company receives a servicing fee based on the remaining outstanding principal balances of the loans subject to the servicing agreements. The Company generally receives other remuneration including rights to various mortgagor-contracted fees such as late charges and collateral reconveyance charges, and the Company is generally entitled to retain any placement fees earned on funds held pending remittance of mortgagor principal, interest, tax and insurance payments.

The key inputs used in the estimation of the fair value of MSRs include the applicable pricing spread, the prepayment rates of the underlying loans (“prepayment speed”) and the annual per-loan cost to service 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. Changes in the fair value of MSRs are included in Net loan servicing fees – Change in fair value of mortgage servicing rights in the consolidated statements of operations.

MSRs are generally subject to loss in fair value when mortgage interest rates decrease, annual per-loan cost of servicing increase, or when returns required by market participants increase. Reductions in the fair value of MSRs affect income primarily through recognition of the change in fair value.

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

	Quarter ended June 30,				Six months ended June 30,
	2020		2019		2020		2019
	(MSR recognized and UPB of underlying loans amounts in thousands)
MSR recognized	$	203,127	$	152,986	$	451,949	$	284,854
UPB of underlying loans	$	19,458,673	$	11,086,509	$	38,799,943	$	20,331,686
Weighted average annual servicing fee rate (in basis points)	28		31		29		32
Key inputs (1)
Pricing spread (2)
Range	8.1% – 11.3%		5.9% – 9.9%		6.7% – 11.3%		5.8% – 9.9%
Weighted average	8.2%		5.9%		7.5%		5.9%
Prepayment speed (3)
Range	9.0% – 19.4%		9.0% – 20.1%		9.0% – 20.9%		8.7% – 22.8%
Weighted average	9.9%		12.0%		11.1%		12.1%
Equivalent average life (in years)
Range	3.7 – 8.0		3.6 – 6.7		3.6 – 8.0		3.6 – 6.9
Weighted average	7.4		6.6		6.9		6.6
Annual per-loan cost of servicing
Range	$79 – $79		$78 – $78		$78 – $79		$78 – $78
Weighted average	$79		$78		$78		$78

(1) Weighted average inputs are based on UPB of the underlying loans.

(2) The Company applies pricing spreads to the forward rates implied by the United States Dollar LIBOR/swap curve for purposes of discounting cash flows relating to MSRs.

(3) Prepayment speed is measured using Life Total CPR, which includes both voluntary and involuntary prepayments. Equivalent average life is included for informational purposes.

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Following is a quantitative summary of key inputs used in the valuation of MSRs as of the dates presented, and the effect on the fair value from adverse changes in those inputs: 

	June 30, 2020		December 31, 2019
	(Fair value, UPB of underlying loans and effect on fair value amounts in thousands)
Fair value	$	1,189,605	$	1,535,705
UPB of underlying loans	$	145,314,863	$	131,024,381
Weighted average annual servicing fee    rate (in basis points)	28		28
Weighted average note interest rate	4.0%		4.2%
Key inputs (1):
Pricing spread (2)
Range	8.0% – 11.1%		6.8% – 9.9%
Weighted average	8.0%		6.8%
Effect on fair value of:
5% adverse change	$(18,746)		$(20,666)
10% adverse change	$(36,885)		$(40,783)
20% adverse change	$(71,445)		$(79,453)
Prepayment speed (3)
Range	15.5% – 30.6%		10.2% – 22.0%
Weighted average	17.2%		12.1%
Equivalent average life (in years)
Range	2.4 – 5.1		2.4 – 6.5
Weighted average	4.9		6.3
Effect on fair value of:
5% adverse change	$(43,376)		$(35,768)
10% adverse change	$(84,491)		$(69,973)
20% adverse change	$(160,521)		$(134,068)
Annual per-loan cost of servicing
Range	$80 – $108		$77 – $78
Weighted average	$80		$78
Effect on fair value of:
5% adverse change	$(8,721)		$(9,964)
10% adverse change	$(17,442)		$(19,928)
20% adverse change	$(34,883)		$(39,856)

(1) Weighted-average inputs are based on the UPB of the underlying loans.

(2) The Company applies pricing spreads to the forward rates implied by the United States Dollar LIBOR/swap curve for purposes of discounting cash flows relating to MSRs.

(3) Prepayment speed is measured using Life Total CPR, which includes both voluntary and involuntary prepayments. Equivalent average life is included for informational purposes.

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

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Note 8— Mortgage-Backed Securities

Following is a summary of activity in the Company’s investment in MBS:

	Quarter ended June 30,						Six months ended June 30,
	2020			2019			2020			2019
	(in thousands)
Balance at beginning of period	$	3,947,420		$	2,589,106		$	2,839,633		$	2,610,422
Purchases		—			81,202			1,615,486			81,202
Sales		(1,112,761	)		—			(1,601,490	)		—
Repayments		(226,878	)		(91,186	)		(349,813	)		(144,868	)
Changes in fair value included in income arising from:
Amortization of net purchase premiums		(11,859	)		(6,213	)		(23,861	)		(10,769	)
Valuation adjustments		17,064			27,448			133,031			64,370
		5,205			21,235			109,170			53,601
Balance at end of period	$	2,612,986		$	2,600,357		$	2,612,986		$	2,600,357

Following is a summary of the Company’s investment in MBS:

	June 30, 2020								December 31, 2019
Agency: (1)	Principal balance		Unamortized net purchase premiums		Accumulated valuation changes		Fair value		Principal balance		Unamortized net purchase premiums		Accumulated valuation changes		Fair value
	(in thousands)
Fannie Mae	$	1,142,570	$	18,557	$	42,200	$	1,203,327	$	1,946,203	$	29,657	$	33,233	$	2,009,093
Freddie Mac		1,336,394		22,714		50,551		1,409,659		809,595		11,083		9,862		830,540
	$	2,478,964	$	41,271	$	92,751	$	2,612,986	$	2,755,798	$	40,740	$	43,095	$	2,839,633

(1) All MBS are fixed-rate pass-through securities with maturities of more than ten years. $2.1billion and $2.8 billion are pledged to secure Assets sold under agreements to repurchase, respectively at June 30, 2020 and December 31, 2019.

Note 9—Loans Acquired for Sale at Fair Value

Loans acquired for sale at fair value is comprised of recently originated loans purchased by the Company for resale. Following is a summary of the distribution of the Company’s loans acquired for sale at fair value:

Loan type	June 30, 2020		December 31, 2019
	(in thousands)
Agency-eligible	$	2,013,685	$	3,626,038
Held for sale to PLS — Government insured or    guaranteed		132,105		490,383
Jumbo		4,859		13,437
Commercial real estate		1,031		1,015
Home equity lines of credit		6,257		4,632
Repurchased pursuant to representations and    warranties		22,025		12,920
	$	2,179,962	$	4,148,425
Loans pledged to secure:
Assets sold under agreements to repurchase	$	2,038,716	$	4,070,134
Mortgage loan participation purchase and sale agreeements		96,901		—
	$	2,135,617	$	4,070,134

The Company is not approved by Ginnie Mae as an issuer of Ginnie Mae-guaranteed securities which are backed by government-insured or guaranteed loans. The Company transfers government-insured or guaranteed loans that it purchases from correspondent sellers to PLS, which is a Ginnie Mae-approved issuer, and earns a sourcing fee ranging from two to three and one-half basis points, generally based on the average number of calendar days that loans are held before being purchased by PLS.

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Note 10—Loans at Fair Value

Loans at fair value are comprised primarily of fixed interest rate jumbo loans held in a VIE securing an asset-backed financing and distressed loans that were not acquired for sale and may be sold at a later date pursuant to the Company’s determination that such a sale represents the most advantageous disposition strategy for the identified loan.

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

Loan type	June 30, 2020		December 31, 2019
	(in thousands)
Fixed interest rate jumbo loans held in a VIE	$	222,249	$	256,367
Distressed loans		8,411		14,426
	$	230,660	$	270,793
Loans at fair value pledged to secure:
Asset-backed financing of a VIE at fair value	$	222,249	$	256,367
Assets sold under agreements to repurchase		4,165		12,390
	$	226,414	$	268,757

Note 11—Derivative and Credit Risk Transfer Strip Assets and Liabilities

Derivative and credit risk transfer assets and liabilities are summarized below:

	June 30, 2020		December 31, 2019
	(in thousands)
Derivative assets	$	114,346	$	147,388
Credit risk transfer strip assets		—		54,930
	$	114,346	$	202,318
Derivative liabilities	$	78,826	$	6,423
Credit risk transfer strip liabilities		61,375		—
	$	140,201	$	6,423

Derivative Activities

The Company holds and issues derivative financial instruments in connection with its operating, investing and financing activities. Derivative financial instruments are created as a result of certain of the Company’s operations and the Company also enters into derivative transactions as part of its interest rate risk management activities.

Derivative financial instruments created as a result of the Company’s operations include:

• IRLCs that are created when the Company commits to purchase loans for sale;

• CRT Agreements whereby the Company retains a Recourse Obligation relating to certain loans it sells into Fannie Mae guaranteed securitizations as part of the retention of an IO ownership interest in such loans; and

• Derivatives that were embedded in a master repurchase agreement that provided for the Company to receive interest expense offsets if it financed loans approved as satisfying certain consumer credit relief characteristics under the master repurchase agreement.

The Company engages in interest rate risk management activities in an effort to reduce the variability of earnings caused by the effects of changes in interest rates on the fair value of certain of its assets and liabilities. The Company bears price risk related to its mortgage production, servicing and MBS financing activities due to changes in market interest rates as discussed below:

• The Company is exposed to losses if market mortgage interest rates increase, because market interest rate increases generally cause the fair value of IRLCs and loans acquired for sale to decrease.

• The Company is exposed to losses if market mortgage interest rates decrease, because market interest rate decreases generally cause the fair value of MSRs to decrease and of MBS financing to increase.

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To manage the price risk resulting from these interest rate risks, the Company uses derivative financial instruments 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 inventory of loans acquired for sale, loans held in a VIE, IRLCs, MSRs and MBS financing.

The Company records all derivative and CRT strip assets and liabilities at fair value and records changes in fair value in current period results of operations. The Company does not designate and qualify any of its derivative financial instruments for hedge accounting.

Derivative Notional Amounts and Fair Value of Derivatives

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

	June 30, 2020								December 31, 2019
			Fair value								Fair value
	Notional		Derivative			Derivative			Notional		Derivative			Derivative
Instrument	amount		assets			liabilities			amount		assets			liabilities
	(in thousands)
Subject to master netting agreements─used for    economic hedging purposes:
Call options on interest rate futures		600,000	$	586		$	—			2,662,500	$	3,809		$	—
Put options on interest rate futures		550,000		680			—			950,000		2,859			—
Forward purchase contracts		9,714,759		39,974			491			5,883,198		7,525			3,600
Forward sale contracts		14,851,973		644			63,390			9,297,179		637			15,644
MBS put options		10,650,000		7,374			2			4,000,000		1,625			—
Swap futures		3,325,000		4,283			—			2,075,000		4,347			—
Swaptions		1,875,000		—			—			2,700,000		—			—
Bond futures		324,500		—			—			114,500		—			—
Not subject to master netting arrangements:
CRT derivatives		19,955,958		—			63,926			24,824,616		115,863			—
Interest rate lock commitments		8,725,812		84,423			467			3,199,680		11,726			572
Repurchase agreement derivatives				5,275			—					5,275			—
Total derivative instruments before netting				143,239			128,276					153,666			19,816
Netting				(28,893	)		(49,450	)				(6,278	)		(13,393	)
			$	114,346		$	78,826				$	147,388		$	6,423
Margin deposits placed with   derivatives counterparties, net			$	20,558							$	7,114
Derivative assets pledged to secure:
Assets sold under agreements to repurchase											$	27,073
Notes payable												115,110
											$	142,183

The following tables summarize the notional amount activity for derivative contracts used for economic hedging purposes:

	Notional amounts, quarter ended June 30, 2020
	Beginning				Dispositions/			End
Instrument	of quarter		Additions		expirations			of quarter
	(in thousands)
Call options on interest rate futures		2,800,000		11,450,000		(13,650,000	)		600,000
Put options on interest rate futures		7,425,000		15,875,000		(22,750,000	)		550,000
Forward purchase contracts		11,876,671		96,763,338		(98,925,250	)		9,714,759
Forward sales contracts		10,244,926		122,986,931		(118,379,884	)		14,851,973
MBS put options		8,550,000		24,800,000		(22,700,000	)		10,650,000
Swap futures		2,500,000		6,325,000		(5,500,000	)		3,325,000
Swaptions		3,700,000		7,375,000		(9,200,000	)		1,875,000
Bond futures		235,500		5,420,200		(5,331,200	)		324,500

42

	Notional amounts, quarter ended June 30, 2019
	Beginning				Dispositions/			End
Instrument	of quarter		Additions		expirations			of quarter
	(in thousands)
Call options on interest rate futures		1,475,000		5,868,500		(4,930,000	)		2,413,500
Put options on interest rate futures		950,000		3,623,700		(2,462,500	)		2,111,200
Forward purchase contracts		5,126,069		54,810,404		(47,078,117	)		12,858,356
Forward sales contracts		4,941,484		65,485,012		(61,324,872	)		9,101,624
MBS put options		4,150,000		14,900,000		(10,000,000	)		9,050,000
MBS call options		3,100,000		5,450,000		(6,200,000	)		2,350,000
Swap futures		150,000		250,000		—			400,000
Bond futures		165,000		5,258,100		(4,503,100	)		920,000

	Notional amounts, six months ended June 30, 2020
	Beginning				Dispositions/			End
Instrument	of period		Additions		expirations			of period
	(in thousands)
Call options on interest rate futures		2,662,500		30,742,500		(32,805,000	)		600,000
Put options on interest rate futures		950,000		30,900,000		(31,300,000	)		550,000
Forward purchase contracts		5,883,198		186,402,272		(182,570,711	)		9,714,759
Forward sales contracts		9,297,179		231,390,595		(225,835,801	)		14,851,973
MBS put options		4,000,000		39,050,000		(32,400,000	)		10,650,000
Swap futures		2,075,000		11,250,000		(10,000,000	)		3,325,000
Swaptions		2,700,000		16,775,000		(17,600,000	)		1,875,000
Bond futures		114,500		10,353,000		(10,143,000	)		324,500

	Notional amounts, six months ended June 30, 2019
	Beginning				Dispositions/			End
Instrument	of period		Additions		expirations			of period
	(in thousands)
Call options on interest rate futures		512,500		9,406,000		(7,505,000	)		2,413,500
Put options on interest rate futures		1,102,500		8,976,200		(7,967,500	)		2,111,200
Forward purchase contracts		3,072,223		88,230,336		(78,444,203	)		12,858,356
Forward sales contracts		4,595,241		107,823,658		(103,317,275	)		9,101,624
MBS put options		2,550,000		24,500,000		(18,000,000	)		9,050,000
MBS call options		500,000		10,850,000		(9,000,000	)		2,350,000
Swap futures		—		400,000		—			400,000
Bond futures		815,000		7,960,500		(7,855,500	)		920,000

Netting of Financial Instruments

The Company has elected to net derivative asset and liability positions, and cash collateral placed with or received from its counterparties when subject to a legally enforceable master netting arrangement. The derivative financial instruments that are not subject to master netting arrangements are CRT derivatives, IRLCs and repurchase agreement derivatives. As of June 30, 2020 and December 31, 2019, the Company was not a party to any reverse repurchase agreements or securities lending transactions that are required to be disclosed in the following tables.

43

Offsetting of Derivative Assets

Following is a summary of net derivative assets:

	June 30, 2020								December 31, 2019
	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)
Derivative assets
Subject to master netting arrangements:
Call options on interest rate futures	$	586	$	—		$	586		$	3,809	$	—		$	3,809
Put options on interest rate futures		680		—			680			2,859		—			2,859
Forward purchase contracts		39,974		—			39,974			7,525		—			7,525
Forward sale contracts		644		—			644			637		—			637
MBS put options		7,374		—			7,374			1,625		—			1,625
Swap futures		4,283		—			4,283			4,347		—			4,347
Netting		—		(28,893	)		(28,893	)		—		(6,278	)		(6,278	)
		53,541		(28,893	)		24,648			20,802		(6,278	)		14,524
Not subject to master netting arrangements:
CRT derivatives		—		—			—			115,863		—			115,863
Interest rate lock commitments		84,423		—			84,423			11,726		—			11,726
Repurchase agreement derivatives		5,275		—			5,275			5,275		—			5,275
		89,698		—			89,698			132,864		—			132,864
	$	143,239	$	(28,893	)	$	114,346		$	153,666	$	(6,278	)	$	147,388

Derivative Assets, Financial Instruments 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 setoff accounting.

	June 30, 2020								December 31, 2019
	Net amount		Gross amounts						Net amount		Gross amounts
	of assets		not offset in the						of assets		not offset in the
	presented		consolidated						presented		consolidated
	in the		balance sheet						in the		balance sheet
	consolidated				Cash				consolidated				Cash
	balance		Financial		collateral		Net		balance		Financial		collateral		Net
	sheet		instruments		received		amount		sheet		instruments		received		amount
	(in thousands)
CRT derivatives	$	—	$	—	$	—	$	—	$	115,863	$	—	$	—	$	115,863
Interest rate lock commitments		84,423		—		—		84,423		11,726		—		—		11,726
Bank of America, N.A.		7,306		—		—		7,306		2,489		—		—		2,489
J.P. Morgan Securities LLC		6,710		—		—		6,710		1,551		—		—		1,551
Deutsche Bank Securities LLC		5,275		—		—		5,275		5,398		—		—		5,398
PNC Capital Markets LLC		2,679		—		—		2,679		—		—		—		—
Mizuho Securities		2,299		—		—		2,299		—		—		—		—
Credit Suisse Securities (USA) LLC		2,053		—		—		2,053		—		—		—		—
RJ O’Brien & Associates, LLC		1,266		—		—		1,266		6,668		—		—		6,668
Other		2,335		—		—		2,335		3,693		—		—		3,693
	$	114,346	$	—	$	—	$	114,346	$	147,388	$	—	$	—	$	147,388

44

Offsetting of Derivative Liabilities and Financial Liabilities

Following is a summary of net derivative liabilities and assets sold under agreements to repurchase. Assets sold under agreements to repurchase do not qualify for setoff accounting.

	June 30, 2020									December 31, 2019
	Gross amounts of recognized liabilities			Gross amounts offset in the consolidated balance sheet			Net amounts of liabilities presented in the consolidated balance sheet			Gross amounts of recognized liabilities			Gross amounts offset in the consolidated balance sheet			Net amounts of liabilities presented in the consolidated balance sheet
	(in thousands)
Derivative liabilities:
Subject to master netting arrangements:
Forward purchase contracts	$	491		$	—		$	491		$	3,600		$	—		$	3,600
Forward sales contracts		63,390			—			63,390			15,644			—			15,644
MBS put options		2			—			2			—			—			—
Netting		—			(49,450	)		(49,450	)		—			(13,393	)		(13,393	)
		63,883			(49,450	)		14,433			19,244			(13,393	)		5,851
Not subject to master netting arrangements
CRT derivatives		63,926			—			63,926			—			—			—
Interest rate lock commitments		467			—			467			572			—			572
		128,276			(49,450	)		78,826			19,816			(13,393	)		6,423
Assets sold under agreements to repurchase:
UPB		3,988,237			—			3,988,237			6,649,179			—			6,649,179
Unamortized debt issuance costs		(6,476	)		—			(6,476	)		(289	)		—			(289	)
		3,981,761			—			3,981,761			6,648,890			—			6,648,890
	$	4,110,037		$	(49,450	)	$	4,060,587		$	6,668,706		$	(13,393	)	$	6,655,313

45

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 qualify for setoff accounting. All assets sold under agreements to repurchase represent sufficient collateral or exceed the liability amount recorded on the consolidated balance sheet.

	June 30, 2020									December 31, 2019
	Net amount		Gross amounts							Net amount		Gross amounts
	of liabilities		not offset in the							of liabilities		not offset in the
	presented		consolidated							presented		consolidated
	in the		balance sheet							in the		balance sheet
	consolidated					Cash				consolidated					Cash
	balance		Financial			collateral		Net		balance		Financial			collateral		Net
	sheet		instruments			pledged		amount		sheet		instruments			pledged		amount
	(in thousands)
CRT derivatives	$	63,926	$	—		$	—	$	63,926	$	—	$	—		$	—	$	—
Interest rate lock commitments		467		—			—		467		572		—			—		572
Mizuho Securities		527,430		(527,430	)		—		—		392,038		(391,627	)		—		411
Citigroup Global Markets Inc.		518,789		(517,722	)		—		1,067		412,999		(411,933	)		—		1,066
Daiwa Capital Markets		481,950		(481,950	)		—		—		906,439		(906,439	)		—		—
Bank of America, N.A.		474,718		(474,718	)		—		—		1,339,291		(1,339,291	)		—		—
J.P. Morgan Securities LLC		446,740		(446,740	)		—		—		1,736,829		(1,736,829	)		—		—
Credit Suisse Securities (USA) LLC		365,228		(365,228	)		—		—		720,411		(719,902	)		—		509
Morgan Stanley & Co. LLC		364,412		(361,583	)		—		2,829		656,728		(656,728	)		—		—
RBC Capital Markets, L.P.		359,077		(359,077	)		—		—		290,388		(290,388	)		—		—
Amherst Pierpont Securities LLC		165,001		(164,099	)		—		902		80,309		(80,309	)		—		—
Barclays Capital Inc.		147,520		(146,658	)		—		862		52		—			—		52
BNP Paribas		143,531		(143,032	)		—		499		116,155		(115,733	)		—		422
Wells Fargo Securities, LLC		6,770		—			—		6,770		—		—			—		—
Federal National Mortgage    Association		593		—			—		593		1,996		—			—		1,996
Other		911		—			—		911		1,395		—			—		1,395
	$	4,067,063	$	(3,988,237	)	$	—	$	78,826	$	6,655,602	$	(6,649,179	)	$	—	$	6,423

Following are the net gains (losses) recognized by the Company on derivative financial instruments and the consolidated statements of operations line items where such gains and losses are included:

		Quarter ended June 30,						Six months ended June 30,
Derivative activity	Statement of operations line	2020			2019			2020			2019
		(in thousands)
Interest rate lock commitments	Net gain on loans     acquired for sale (1)	$	4,572		$	45,143		$	72,803		$	73,645
CRT derivatives	Net gain (loss) on investments	$	136,085		$	14,757		$	(147,657	)	$	42,260
Repurchase agreement derivatives	Interest expense	$	—		$	36		$	—		$	(195	)
Hedged item:
Interest rate lock commitments    and loans acquired for sale	Net gain on loans     acquired for sale	$	(91,897	)	$	(44,244	)	$	(232,265	)	$	(78,589	)
Mortgage servicing rights	Net loan servicing fees	$	(50,650	)	$	55,536		$	716,536		$	96,671
Fixed-rate and prepayment sensitive assets and LIBOR-indexed repurchase agreements	Net gain (loss) on investments	$	(16,739	)	$	37,181		$	48,192		$	44,561

(1) Represents net increase in fair value of IRLCs from the beginning to the end of the reporting period. Amounts recognized at the date of commitment and fair value changes recognized during the period until purchase of the underlying loan are shown in the rollforward of IRLCs for the period in Note 7– Fair Value - Financial Statement Items Measured at Fair Value on a Recurring Basis.

46

Credit Risk Transfer Strips

Following is a summary of the Company’s investment in CRT strips

Credit risk transfer strips contractually restricted from sale (1)	June 30, 2020		December 31, 2019
	(in thousands)
Assets
Through June 13, 2020	$	—	$	17,629
To maturity		—		37,301
	$	—	$	54,930
Liabilities
Through June 13, 2020	$	2,788	$	—
To maturity		58,587		—
	$	61,375	$	—

(1) The terms of the agreement underlying the CRT securities restricts sales of the securities, other than sales under agreements to repurchase, without the approval of Fannie Mae, for specified periods from the date of issuance.

Note 12—Mortgage Servicing Rights

Following is a summary of MSRs: 

	Quarter ended June 30,						Six months ended June 30,
	2020			2019			2020			2019
	(in thousands)
Balance at beginning of period	$	1,157,326		$	1,156,908		$	1,535,705		$	1,162,369
MSRs resulting from loan sales		203,127			152,986			451,949			284,854
Changes in fair value:
Due to changes in valuation inputs    used in valuation model (1)		(111,649	)		(136,887	)		(674,896	)		(233,395	)
Other changes in fair value (2)		(59,199	)		(46,580	)		(123,153	)		(87,401	)
		(170,848	)		(183,467	)		(798,049	)		(320,796	)
Balance at end of period	$	1,189,605		$	1,126,427		$	1,189,605		$	1,126,427
	June 30, 2020			December 31, 2019
	(in thousands)
Fair value of mortgage servicing rights pledged    to secure Assets sold under agreements to    repurchase and Notes payable secured by credit    risk transfer and mortgage servicing assets	$	1,176,766		$	1,510,651

(1) Primarily reflects changes in pricing spread (discount rate), prepayment speed, and servicing cost inputs.

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

Servicing fees relating to MSRs are recorded in Net loan servicing fees – from nonaffiliates on the Company’s consolidated statements of operations and are summarized below:

	Quarter ended June 30,				Six months ended June 30,
	2020		2019		2020		2019
	(in thousands)
Contractually-specified servicing fees	$	101,823	$	66,919	$	196,292	$	128,191
Ancillary and other fees:
Late charges		399		340		899		670
Other		11,488		6,068		18,179		8,946
	$	113,710	$	73,327	$	215,370	$	137,807

47

Note 13—Real Estate Acquired in Settlement of Loans

Following is a summary of financial information relating to REO:

	Quarter ended June 30,						Six months ended June 30,
	2020			2019			2020			2019
	(in thousands)
Balance at beginning of period	$	50,838		$	72,175		$	65,583		$	85,681
Transfers:
From loans at fair value and advances		—			7,721			1,166			12,271
From real estate held for investment (1)		—			30,108			—			30,432
Results of REO:
Valuation adjustments, net		(68	)		146			(1,571	)		(3,415	)
Gain on sale, net		2,924			1,929			4,459			4,010
		2,856			2,075			2,888			595
Sales		(10,135	)		(14,271	)		(26,078	)		(31,171	)
Balance at end of period	$	43,559		$	97,808		$	43,559		$	97,808
	June 30, 2020			December 31, 2019
	(in thousands)
REO pledged to secure assets sold    under agreements to repurchase	$	25,057		$	40,938

(1) During the quarter ended June 30, 2019, the Company committed to liquidate its real estate held for investment and transferred its holdings to real estate acquired in settlement of loans.

Note 14—Assets Sold Under Agreements to Repurchase

Following is a summary of financial information relating to assets sold under agreements to repurchase:

	Quarter ended June 30,						Six months ended June 30,
	2020			2019			2020			2019
	(dollars in thousands)
Weighted average interest rate (1)		1.24	%		3.34	%		1.85	%		3.42	%
Average balance	$	4,755,992		$	4,911,964		$	5,529,446		$	4,878,768
Total interest expense (2)	$	17,071		$	41,029		$	54,822		$	77,880
Maximum daily amount outstanding	$	6,627,618		$	6,225,700		$	8,664,587		$	6,414,651

(1) Excludes the effect of amortization of net debt issuance costs of $2.4 million and $3.9 million, respectively, for the quarter and six months ended June 30, 2020 and net debt issuance premiums of $472,000 and $6.2 million for the quarter and six months ended June 30, 2019.

(2) The Company’s interest expense relating to assets sold under agreements to repurchase for the quarter and six months ended June 30, 2019 include recognition of incentives it received for financing certain of its loans acquired for sale satisfying certain consumer debt relief characteristics under a master repurchase agreement. During the quarter and six months ended June 30, 2019, the Company recognized $2.3 million and $9.8 million, respectively, in such incentives as a reduction of Interest expense. The master repurchase agreement expired on August 21, 2019.

48

	June 30, 2020			December 31, 2019
	(dollars in thousands)
Carrying value:
Unpaid principal balance	$	3,988,237		$	6,649,179
Unamortized debt issuance costs, net		(6,476	)		(289	)
	$	3,981,761		$	6,648,890
Weighted average interest rate		1.24	%		2.85	%
Available borrowing capacity (1):
Committed	$	541,728		$	—
Uncommitted		2,751,015			2,278,264
	$	3,292,743		$	2,278,264
Margin deposits placed with counterparties included in    Other assets	$	36,288		$	91,871
Assets securing agreements to repurchase:
Mortgage-backed securities	$	2,107,787		$	2,839,633
Loans acquired for sale at fair value	$	2,038,716		$	4,070,134
Loans at fair value	$	4,165		$	12,390
CRT derivatives	$	—		$	27,073
Real estate acquired in settlement of loans	$	25,057		$	40,938
MSRs (2)	$	1,176,766		$	1,354,907
Deposits securing CRT arrangements	$	—		$	445,194

(1) The amount the Company is able to borrow under asset repurchase agreements is tied to the fair value of unencumbered assets eligible to secure those agreements and the Company’s ability to fund the agreements’ margin requirements relating to the assets financed.

(2) Beneficial interests in Freddie Mac and Fannie Mae MSRs are pledged as collateral under both Assets sold under agreements to repurchase and Notes payable secured by credit risk transfer and mortgage servicing assets.

Following is a summary of maturities of outstanding advances under repurchase agreements by maturity date:

Remaining maturity at June 30, 2020	Unpaid principal balance
	(in thousands)
Within 30 days	$	2,030,980
Over 30 to 90 days		1,548,180
Over 90 days to 180 days		409,077
	$	3,988,237
Weighted average maturity (in months)		1.6

The Company is subject to margin calls during the period the repurchase agreements are outstanding and therefore may be required to repay a portion of the borrowings before the respective repurchase agreements mature if the fair value (as determined by the applicable lender) of the assets securing those repurchase agreements decreases.

49

The amount at risk (the fair value of the assets pledged plus the related margin deposit, less the amount advanced by the counterparty and interest payable) and maturity information relating to the Company’s assets sold under agreements to repurchase is summarized by pledged asset and counterparty below as of June 30, 2020:

Loans, REO and MSRs

Counterparty	Amount at risk		Weighted average maturity	Facility maturity
	(in thousands)
Bank of America, N.A.	$	14,008	August 7, 2020	March 11, 2021
Citibank, N.A.	$	33,381	August 4, 2020	August 4, 2020
Morgan Stanley	$	26,078	August 21, 2020	August 21, 2020
JPMorgan Chase & Co.	$	6,979	August 20, 2020	October 9, 2020
Royal Bank of Canada	$	24,905	August 31, 2020	August 31, 2020
Credit Suisse First Boston Mortgage Capital LLC	$	23,267	September 22, 2020	April 23, 2021
BNP Paribas	$	9,991	July 31, 2020	July 31, 2020

Securities

Counterparty	Amount at risk		Weighted average maturity
	(in thousands)
Bank of America, N.A.	$	21,437	July 12, 2020
Daiwa Capital Markets America Inc.	$	30,368	July 14, 2020
Mizuho Securities	$	29,684	July 11, 2020
JPMorgan Chase & Co.	$	19,098	July 11, 2020
Amherst Pierpont Securities LLC	$	8,691	July 12, 2020
Barclays Capital Inc.	$	4,861	July 15, 2020

Note 15—Mortgage Loan Participation Purchase and Sale Agreements

Certain borrowing facilities are in the form of mortgage loan participation purchase and sale agreements. Participation certificates, each of which represents an undivided beneficial ownership interest in a pool of mortgage loans that have been pooled with Fannie Mae or Freddie Mac, are sold to a lender pending the securitization of such loans and the sale of the resulting security. The commitment between the Company and a nonaffiliate to sell such security is also assigned to the lender at the time a participation certificate is sold.

The purchase price paid by the lender for each participation certificate is based on the trade price of the security, plus an amount of interest expected to accrue on the security to its anticipated delivery date, minus a present value adjustment, any related hedging costs and a holdback amount. The holdback amount is based on a percentage of the purchase price and is not required to be paid to the Company until the settlement of the security and its delivery to the lender.

50

Mortgage loan participation purchase and sale agreements are summarized below:

	Quarter ended June 30,						Six months ended June 30,
	2020			2019			2020			2019
	(dollars in thousands)
Weighted average interest rate (1)		1.57	%		3.61	%		2.17	%		3.67	%
Average balance	$	39,048		$	34,516		$	40,174		$	45,303
Total interest expense	$	210		$	348		$	548		$	922
Maximum daily amount outstanding	$	96,570		$	91,934		$	96,570		$	207,065

(1) Excludes the effect of amortization of debt issuance costs of $57,000 and $113,000 for the quarter and six months ended June 30, 2020, respectively, and $33,000 and $87,000 for the quarter and six months ended June 30, 2019, respectively.

	June 30, 2020
	(dollars in thousands)
Carrying value:
Amount outstanding	$	93,117
Unamortized debt issuance costs		—
	$	93,117
Weighted average interest rate		1.41	%
Loans acquired for sale pledged to secure    mortgage loan participation purchase and sale agreements	$	96,901

Note 16—Notes Payable Secured By Credit Risk Transfer and Mortgage Servicing Assets

The Company, through its indirect subsidiary, PMT CREDIT RISK TRANSFER TRUST (the “Issuer Trust”), issued Term Notes to qualified institutional buyers under Rule 144A of the Securities Act of 1933, as amended (the “Securities Act”). All of the Term Notes rank pari passu with each other and with the VFN issued by another one of the Company’s indirect subsidiaries, PMT ISSUER TRUST-FMSR (the “FMSR VFN”).

Following is a summary of the secured Term Notes issued:

						Maturity date (2)
Issuance date	Issued		Unpaid principal balance		Interest rate spread (1)	Stated	Optional extension
	(in thousands)				(Annual)
2020 1R Term Notes - February 14, 2020	$	350,000	$	274,075	2.35%	March 1, 2023	February 27, 2025
2019 3R Term Notes - October 16, 2019	$	375,000		266,668	2.70%	October 27, 2022	October 29, 2024
2019 2R Term Notes - June 11, 2019	$	638,000		591,737	2.75%	May 29, 2023	May 29, 2025
2019 1R Term Notes - March 29, 2019	$	295,700		233,806	2.00%	March 27, 2022	March 29, 2024
			$	1,366,286

(1) Spread over 1-month LIBOR.

(2) The indentures relating to these issuances provide the Company with the option of extending the maturity dates of the Term Notes under the conditions specified in respective agreements.

On April 25, 2018, the Company, through its indirect subsidiary, PMT ISSUER TRUST-FMSR, issued an aggregate principal amount of $450 million in secured term notes (the “2018-FT1 Notes”) to qualified institutional buyers under Rule 144A of the Securities Act. The 2018-FT1 Notes bear interest at a rate equal to one-month LIBOR plus 2.35% per annum. The 2018-FT1 Notes mature on April 25, 2023 or, if extended pursuant to the terms of the related term note indenture supplement, April 25, 2025 (unless earlier redeemed in accordance with their terms). The 2018-FT1 Notes rank pari passu with the Series 2017-VF1 Note dated December 20, 2017 (the “FMSR VFN”) pledged to Credit Suisse under an agreement to repurchase. The 2018-FT1 Notes and the FMSR VFN are secured by certain participation certificates relating to Fannie Mae MSRs and ESS relating to such MSRs.

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On February 1, 2018, the Company, through PMC and PMH, entered into a Loan and Security Agreement with Credit Suisse First Boston Mortgage Capital LLC, pursuant to which PMC and PMH may finance certain mortgage servicing rights (inclusive of any related excess servicing spread arising therefrom and that may be transferred from PMC to PMH from time to time) relating to loans pooled into Freddie Mac securities (collectively, the “Freddie MSRs”), in an aggregate loan amount not to exceed $175 million. The Freddie MSR note matures on October 21, 2020.

Following is a summary of financial information relating to the notes payable: 

	Quarter ended June 30,						Six months ended June 30,
	2020			2019			2020			2019
	(dollars in thousands)
Weighted average interest rate (1)		3.07	%		4.81	%		3.58	%		4.82	%
Average balance	$	1,934,476		$	883,438		$	1,897,344		$	672,818
Total interest expense	$	15,449		$	11,194		$	35,067		$	17,017
Maximum daily amount outstanding	$	1,973,252		$	1,379,504		$	2,032,665		$	1,379,504

(1) Excludes the effect of amortization of debt issuance costs of $620,000 and $1.2 million for the quarter and six months ended June 30, 2020, respectively, and $457,000 and $713,000 for the quarter and six months ended June 30, 2019, respectively.

	June 30, 2020			December 31, 2019
	(dollars in thousands)
Carrying value:
Amount outstanding	$	1,816,286		$	1,702,262
Unamortized debt issuance costs		(5,441	)		(5,967	)
	$	1,810,845		$	1,696,295
Weighted average interest rate		3.34	%		4.30	%
Assets securing notes payable:
MSRs (1)	$	1,176,766		$	1,510,651
CRT Agreements:
Deposits securing CRT arrangements	$	1,666,449		$	1,524,590
Derivative assets	$	—		$	115,110

(1) Beneficial interests in Freddie Mac and Fannie Mae MSRs are pledged as collateral for both Assets sold under agreements to repurchase and Notes payable secured by credit risk transfer and mortgage servicing assets.

Note 17—Exchangeable Senior Notes

On November 4, 2019, PMC issued $210 million in principal amount of 5.50% exchangeable senior notes due 2024 (the “2024 Notes”) in a private offering. The 2024 Notes will mature on November 1, 2024 unless repurchased or exchanged in accordance with their terms before such date. The 2024 Notes are fully and unconditionally guaranteed by the Company and are exchangeable for PMT common shares, cash, or a combination thereof, at PMC’s election, at any time until the close of business on the second scheduled trading day immediately preceding the maturity date, subject to the satisfaction of certain conditions if the exchange occurs before August 1, 2024. The exchange rate initially equals 40.1010 common shares per $1,000 principal amount of the 2024 Notes and is subject to adjustment upon the occurrence of certain events, but will not be adjusted for any accrued and unpaid interest.

On April 30, 2013, PMC issued in a private offering $250 million in principal amount of 5.375% exchangeable notes due May 1, 2020 (the “2020 Notes”, together with the 2024 Notes, the “Exchangeable Notes”). The 2020 Notes bore interest at a rate of 5.375% per year, payable semiannually. The Company repurchased and repaid the 2020 Notes during the quarter ended June 30, 2020 and recorded a gain on early extinguishment of debt relating to the repurchased notes totaling $1.7 million in Other income.

Following is financial information relating to the Exchangeable Notes:

	Quarter ended June 30,				Six months ended June 30,
	2020		2019		2020		2019
	(in thousands)
Average balance	$	242,469	$	250,000	$	343,316	$	250,000
Total interest expense	$	4,343	$	3,666	$	11,609	$	7,327

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	June 30, 2020			December 31, 2019
	(in thousands)
Carrying value:
UPB	$	210,000		$	460,000
Unamortized debt issuance costs and conversion option		(14,667	)		(16,494	)
	$	195,333		$	443,506

Note 18—Asset-Backed Financing of a Variable Interest Entity at Fair Value

Following is a summary of financial information relating to the asset-backed financing of a VIE at fair value described in Note 6— Variable Interest Entities-Jumbo loan financing:

	Quarter ended June 30,						Six months ended June 30,
	2020			2019			2020			2019
	(dollars in thousands)
Average balance	$	222,578		$	272,231		$	231,672		$	273,999
Total interest expense	$	2,470		$	3,557		$	6,997		$	6,825
Weighted average interest rate		3.36	%		3.45	%		3.38	%		3.50	%

	June 30, 2020			December 31, 2019
	(dollars in thousands)
Fair value	$	212,170		$	243,360
UPB	$	206,649		$	239,169
Weighted average interest rate		3.55	%		3.51	%

The asset-backed financing of a VIE is a non-recourse liability and is secured solely by the assets of a consolidated VIE and not by any other assets of the Company. The assets of the VIE are the only source of funds for repayment of the certificates.

Note 19—Liability for Losses Under Representations and Warranties

Following is a summary of the Company’s liability for losses under representations and warranties:

	Quarter ended June 30,						Six months ended June 30,
	2020			2019			2020			2019
	(in thousands)
Balance, beginning of period	$	7,300		$	7,688		$	7,614		$	7,514
Provision for losses:
Pursuant to loan sales		3,215			713			4,245			1,433
Reduction in liability due to change in estimate		(211	)		(596	)		(1,555	)		(1,124	)
Losses incurred, net		(79	)		(77	)		(79	)		(95	)
Balance, end of period	$	10,225		$	7,728		$	10,225		$	7,728
UPB of loans subject to representations and warranties at    end of period	$	135,538,011		$	94,378,938

Note 20—Commitments and Contingencies

Litigation

From time to time, the Company may be involved in various proceedings, claims and legal actions arising in the ordinary course of business. The amount, if any, of ultimate liability with respect to such matters cannot be determined, but despite the inherent uncertainties of litigation, management believes that the ultimate disposition of any such proceedings and exposure will not have, individually or taken together, a material adverse effect on the financial condition, results of operations, or cash flows of the Company.

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Commitments

The following table summarizes the Company’s outstanding contractual commitments:

	June 30, 2020
	(in thousands)
Commitments to purchase loans acquired for sale	$	8,725,812
Face amount of firm commitment to purchase credit risk    transfer securities	$	1,794,717

Note 21—Shareholders’ Equity

Preferred Shares of Beneficial Interest

Preferred shares of beneficial interest are summarized below:

										Dividends per share, period ended June 30,
										Quarter				Six months
Series	Description (1)	Number of shares		Liquidation preference		Issuance discount		Carrying value		2020		2019		2020		2019
Fixed-to-floating rate cumulative redeemable preferred		(in thousands, except dividends per share)
A	8.125% Issued March 2017		4,600	$	115,000	$	3,828	$	111,172	$	0.51	$	0.51	$	1.02	$	1.02
B	8.00% Issued July 2017		7,800		195,000		6,465		188,535	$	0.50	$	0.50	$	1.00	$	1.00
			12,400	$	310,000	$	10,293	$	299,707

(1) Par value is $0.01 per share.

During March 2017, the Company issued 4.6 million of its 8.125% Series A Fixed-to-Floating Rate Cumulative Redeemable Preferred Shares of Beneficial Interest, $0.01 par value per share (the “Series A Preferred Shares”). From, and including, the date of original issuance to, but not including, March 15, 2024, the Company pays cumulative dividends on the Series A Preferred Shares at a fixed rate of 8.125% per annum based on the $25.00 per share liquidation preference. From, and including, March 15, 2024 and thereafter, the Company will pay cumulative dividends on the Series A Preferred Shares at a floating rate equal to three-month LIBOR as calculated on each applicable dividend determination date plus a spread of 5.831% per annum based on the $25.00 per share liquidation preference.

During July 2017, the Company issued 7.8 million of its 8.00% Series B Fixed-to-Floating Rate Cumulative Redeemable Preferred Shares of Beneficial Interest, $0.01 par value per share (the “Series B Preferred Shares” and, together with the Series A Preferred Shares, the “Preferred Shares”). From, and including, the date of original issuance to, but not including, June 15, 2024, the Company pays cumulative dividends on the Series B Preferred Shares at a fixed rate of 8.00% per annum based on the $25.00 per share liquidation preference. From, and including, June 15, 2024 and thereafter, the Company will pay cumulative dividends on the Series B Preferred Shares at a floating rate equal to three-month LIBOR as calculated on each applicable dividend determination date plus a spread of 5.99% per annum based on the $25.00 per share liquidation preference.

The Series A and Series B Preferred Shares will not be redeemable before March 15, 2024 and June 15, 2024, respectively, except in connection with the Company’s qualification as a REIT for U.S. federal income tax purposes or upon the occurrence of a change of control. On or after the date the Preferred Shares become redeemable, or 120 days after the first date on which such change of control occurred, the Company may, at its option, redeem any or all of the Preferred Shares at $25.00 per share plus any accumulated and unpaid dividends thereon to, but not including, the redemption date.

The Preferred Shares have no stated maturity, are not subject to any sinking fund or mandatory redemption and will remain outstanding indefinitely unless redeemed or repurchased by the Company or converted into common shares in connection with a change of control by the holders of the Preferred Shares.

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Common Shares of Beneficial Interest

“At-The-Market” (ATM) Equity Offering Program

During March 2019, the Company entered into separate equity distribution agreements to sell from time to time, through an ATM equity offering program under which the counterparties will act as sales agent and/or principal, the Company’s common shares of beneficial interest having an aggregate offering price of up to $200 million. Following is a summary of the activities under the ATM equity offering program:

	Quarter ended June 30,				Six months ended June 30
	2020		2019		2020		2019
	(in thousands)
Number of common shares issued		—		2,068		241		2,289
Gross proceeds	$	—	$	44,823	$	5,654	$	49,408
Net proceeds	$	—	$	44,374	$	5,597	$	48,914

At June 30, 2020, the Company had approximately $74.4 million of common shares of beneficial interest available for issuance under its ATM equity offering program.

Common Share Repurchases

During August 2015, the Company’s board of trustees authorized a common share repurchase program. Under the program, as amended, the Company may repurchase up to $300 million of its outstanding common shares of beneficial interest. 

The following table summarizes the Company’s share repurchase activity:

	Quarter ended June 30,				Six months ended June 30				Cumulative
	2020		2019		2020		2019		total (1)
	(in thousands)
Common shares repurchased		566		—		1,349		—		16,080
Cost of common shares repurchased	$	7,561	$	—	$	13,343	$	—	$	229,968

(1) Amounts represent the share repurchase program total from its inception in August 2015 through June 30, 2020.

Conditional Reimbursement of IPO Underwriting Costs

As more fully described in Note 4—Transactions with Related Parties, the Company has a Reimbursement Agreement, by and among the Company, the Operating Partnership and the Manager. The Reimbursement Agreement provides that, to the extent the Company is required to pay the Manager performance incentive fees under the management agreement, the Company will reimburse the Manager for underwriting costs it paid on the IPO offering date at a rate of $10 in reimbursement for every $100 of performance incentive fees earned. The Company made no payments and $211,000 in payments for the quarter and six months ended June 30, 2020, respectively, and $75,000 and $219,000 for the quarter and six months ended June 30, 2019, respectively.

The Reimbursement Agreement also provides for the payment to the IPO underwriters of the amount that the Company agreed to pay to them at the time of the IPO if the Company satisfied certain performance measures over a specified period. As the Manager earns performance incentive fees under the management agreement, the IPO underwriters will be paid at a rate of $20 of payments for every $100 of performance incentive fees earned by PCM. The Reimbursement Agreement was amended and now expires on February 1, 2023. The Company made no payments and $76,000 during the quarter and six months ended June 30, 2020, respectively, and $201,000 and $353,000 during the quarter and six months ended June 30, 2019, respectively.

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Note 22— Net Gain (Loss) on Investments

Net gain (loss) on investments is summarized below:

	Quarter ended June 30,						Six months ended June 30,
	2020			2019			2020			2019
	(in thousands)
From nonaffiliates:
Mortgage-backed securities	$	17,064		$	27,448		$	133,031		$	64,370
Loans at fair value:
Held in a VIE		795			3,359			(2,074	)		6,944
Distressed		(121	)		(5,451	)		(1,263	)		(4,966	)
CRT arrangements		262,163			26,639			(225,129	)		57,589
Firm commitment to purchase CRT securities		226,035			4,130			(266,478	)		26,320
Asset-backed financing of a VIE at fair value		(162	)		(2,341	)		1,766			(5,198	)
Hedging derivatives		(16,739	)		37,181			48,192			44,561
		489,035			90,965			(311,955	)		189,620
From PFSI—ESS		(101	)		(3,211	)		(14,242	)		(6,773	)
	$	488,934		$	87,754		$	(326,197	)	$	182,847

Note 23— Net Gain on Loans Acquired for Sale

Net gain on loans acquired for sale is summarized below:

	Quarter ended June 30,						Six months ended June 30,
	2020			2019			2020			2019
	(in thousands)
From nonaffiliates:
Cash loss:
Loans	$	21,842		$	(94,441	)	$	(47,112	)	$	(196,162	)
Hedging activities		(234,191	)		(36,055	)		(257,569	)		(50,370	)
		(212,349	)		(130,496	)		(304,681	)		(246,532	)
Non-cash gain:
Recognition of fair value of firm commitment to    purchase CRT securities		(7,579	)		20,396			(34,228	)		39,996
Receipt of MSRs in mortgage loan sale    transactions		203,127			152,986			451,949			284,854
Provision for losses relating to representations    and warranties provided in mortgage loan sales:
Pursuant to loans sales		(3,215	)		(713	)		(4,245	)		(1,433	)
Reduction in liability due to change in    estimate		211			596			1,555			1,124
		(3,004	)		(117	)		(2,690	)		(309	)
Change in fair value of loans and derivatives    held at end of period:
IRLCs		4,572			3,157			72,803			1,626
Loans		31,829			(6,648	)		(4,953	)		(998	)
Hedging derivatives		142,294			(8,189	)		25,304			(28,219	)
		178,695			(11,680	)		93,154			(27,591	)
		371,239			161,585			508,185			296,950
Total from nonaffiliates		158,890			31,089			203,504			50,418
From PFSI—cash gain		3,324			3,155			7,485			5,149
	$	162,214		$	34,244		$	210,989		$	55,567

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Note 24—Net Interest (Expense) Income

Net interest income is summarized below:

	Quarter ended June 30,					Six months ended June 30,
	2020			2019		2020			2019
	(in thousands)
Interest income:
From nonaffiliates:
Cash and short-term investments	$	892		$	1,240	$	2,519		$	1,911
Mortgage-backed securities		9,883			17,458		25,451			36,910
Loans acquired for sale at fair value		16,081			25,910		47,604			46,349
Loans at fair value:
Held in a VIE		2,712			2,952		5,353			5,876
Distressed		233			1,446		292			2,693
Deposits securing CRT arrangements		507			7,830		6,606			14,605
Placement fees relating to custodial funds		8,116			12,009		20,514			20,275
Other		16			181		250			422
		38,440			69,026		108,589			129,041
From PFSI—ESS		2,372			2,767		4,346			5,833
		40,812			71,793		112,935			134,874
Interest expense:
To nonaffiliates:
Assets sold under agreements to repurchase (1)		17,071			41,029		54,822			77,880
Mortgage loan participation purchase and sale    agreements		210			348		548			922
Notes payable secured by credit risk transfer and    mortgage servicing assets		15,449			11,194		35,067			17,017
Exchangeable Notes		4,343			3,666		11,609			7,327
Asset-backed financings of a VIE at fair value		2,470			3,557		6,997			6,825
Interest shortfall on repayments of loans serviced for    Agency securitizations		19,804			3,605		29,243			5,877
Interest on loan impound deposits		909			805		1,820			1,299
		60,256			64,204		140,106			117,147
To PFSI—Assets sold under agreement to repurchase		792			1,692		2,010			3,488
		61,048			65,896		142,116			120,635
Net interest (expense) income	$	(20,236	)	$	5,897	$	(29,181	)	$	14,239

(1) In 2017, the Company entered into a master repurchase agreement that provided the Company with incentives to finance loans approved for satisfying certain consumer relief characteristics as provided in the agreement. During the quarter and six months ended June 30, 2019, the Company recognized $2.3 million and $9.8 million, respectively, in such incentives as reductions of Interest expense. The master repurchase agreement expired on August 21, 2019.

Note 25—Share-Based Compensation Plans

The Company has adopted an equity incentive plan that provides for the issuance of equity based awards based on PMT’s common shares of beneficial interest that may be made by the Company to its officers and trustees, and the members, officers, trustees, directors and employees of PCM, PFSI, or their affiliates and to PCM, PFSI and other entities that provide services to PMT and the employees of such other entities.

The equity incentive plan is administered by the Company’s compensation committee, pursuant to authority delegated by the board of trustees, which has the authority to make awards to the eligible participants referenced above, and to determine what form the awards will take, and the terms and conditions of the awards.

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The Company’s equity incentive plan allows for grants of share-based awards up to an aggregate of 8% of PMT’s issued and outstanding shares on a diluted basis at the time of the award.

The shares underlying award grants will again be available for award under the equity incentive plan if:

• any shares subject to an award granted under the equity incentive plan are forfeited, canceled, exchanged or surrendered;

• an award terminates or expires without a distribution of shares to the participant; or

• shares are surrendered or withheld by PMT as payment of either the exercise price of an award and/or withholding taxes for an award.

Restricted share units have been awarded to trustees and officers of the Company and to other employees of PFSI and its subsidiaries at no cost to the grantees. Such awards generally vest over a one- to three-year period.

The following table summarizes the Company’s share-based compensation activity:

	Quarter ended June 30,				Six months ended June 30,
	2020		2019		2020		2019
	(in thousands)
Grants:
Restricted share units		—		—		92		96
Performance share units		—		37		112		116
Total share units granted		—		37		204		212
Grant date fair value:
Restricted share units	$	—	$	—	$	1,978	$	1,978
Performance share units		—		749		2,428		2,380
Total grant date value of share units	$	—	$	749	$	4,406	$	4,358
Vestings:
Restricted share units		—		—		123		226
Performance share units (1)		—		—		143		141
Total share units vested		—		—		266		367
Compensation expense relating to share-based grants	$	869	$	1,415	$	1,054	$	3,032

(1) The actual number of performance-based RSUs vested during the six months ended June 30, 2020 was 196,000 common shares, which is approximately 137% of the 143,000 originally granted performance-based RSUs, due to the Company exceeding the established performance targets.

	June 30, 2020
	Restricted share units		Performance share units
Shares expected to vest:
Number of units (in thousands)		198		204
Grant date average fair value per unit	$	20.50	$	19.70

Note 26—Other Expenses

Other expenses are summarized below:

	Quarter ended June 30,				Six months ended June 30,
	2020		2019		2020		2019
	(in thousands)
Common overhead allocation from PFSI	$	1,585	$	1,276	$	3,125	$	2,512
Bank service charges		466		575		1,007		1,143
Technology		331		352		760		725
Insurance		319		322		658		602
Other		992		1,647		1,863		2,656
	$	3,693	$	4,172	$	7,413	$	7,638

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Note 27—Income Taxes  

The Company’s effective tax rate was 0.7% and (11.8)% with consolidated pretax income of $468.1 million and pretax loss of $116.4 million for the quarter and six months ended June 30, 2020, respectively.  The Company’s taxable REIT subsidiary (“TRS”) recognized tax expense of $3.4 million on pretax income of $89.9 million and tax expense of $13.5 million on pretax income of $68.1 million for the quarter and six months ended June 30, 2020, respectively.  For the same periods in 2019, the TRS recognized tax benefit of $11.0 million on pretax loss of $42.4 million and tax benefit of $14.9 million on pretax loss of $59.8 million, respectively.  The Company’s reported consolidated pretax income for the quarter and six months ended June 30, 2019 was $33.4 million and $83.2 million, respectively. The primary difference between the Company’s effective tax rate and the statutory tax rate is attributable to nontaxable REIT income resulting from the dividends paid deduction.

The Company assesses the available positive and negative evidence to estimate whether sufficient future taxable income will be generated to permit use of the existing deferred tax assets. A significant piece of objective negative evidence evaluated was the cumulative loss incurred over the three-year period ended June 30, 2020. This objective evidence limits the ability to consider other subjective evidence, such as projections for future growth. On the basis of this evaluation, as of June 30, 2020, a valuation allowance of $4.7 million has been recorded at the TRS to recognize only the portion of the deferred tax asset that is more likely than not to be realized. The valuation allowance was reduced from the $27 million valuation allowance recorded at March 31, 2020 as the result of positive GAAP income at the TRS for the quarter ended June 30, 2020.  The amount of the deferred tax asset considered realizable could be adjusted further if estimates of future taxable income during the carryforward period are reduced or increased or if objective negative evidence in the form of cumulative losses is no longer present and additional weight is given to subjective evidence such as projections for growth.

The recently enacted CARES Act provides for carry back of losses from 2018, 2019 and 2020.  However, TRS does not have taxable income from 2019 or prior years to which the losses could be carried back.

In general, cash dividends declared by the Company will be considered ordinary income to the shareholders for income tax purposes. Some portion of the dividends may be characterized as capital gain distributions or a return of capital. For tax years beginning after December 31, 2017, the 2017 Tax Cuts and Jobs Act (subject to certain limitations) provides a 20% deduction from taxable income for ordinary REIT dividends.

Note 28—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 available to common shareholders (net income reduced by preferred dividends and 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 2020 Notes, by the weighted average common shares outstanding, assuming all dilutive securities were issued. During 2019, the Company issued the 2024 Notes. The 2024 Notes include a cash conversion option. The Company intends to cash settle the 2024 Notes. Therefore, the effect of conversion of the 2024 Notes is excluded from diluted earnings (loss) per share.

59

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

	Quarter ended June 30,						Six months ended June 30,
	2020			2019			2020			2019
	(in thousands except per share amounts)
Net income (loss)	$	464,620		$	44,233		$	(130,053	)	$	97,760
Dividends on preferred shares		(6,235	)		(6,234	)		(12,469	)		(12,469	)
Effect of participating securities—share-based    compensation awards		(903	)		(112	)		(123	)		(305	)
Net income (loss) attributable to common shareholders		457,482			37,887			(142,645	)		84,986
Interest on 2020 Notes, net of income taxes		715			2,713			—			5,422
Income attributable to participating securities		14			—			—			—
Diluted net income (loss) attributable to common    shareholders	$	458,211		$	40,600		$	(142,645	)	$	90,408
Weighted average basic shares outstanding		99,689			73,425			99,967			69,051
Dilutive securities:
Shares issuable under share-based compensation plan		198			—			—			—
Shares issuable pursuant to exchange of the    2020 Notes		1,705			8,467			—			8,467
Diluted weighted average number of shares    outstanding		101,592			81,892			99,967			77,518
Basic earnings (loss) per share	$	4.59		$	0.52		$	(1.43	)	$	1.23
Diluted earnings (loss) per share	$	4.51		$	0.50		$	(1.43	)	$	1.17

Calculation of diluted earnings per share requires certain potentially dilutive shares to be excluded when the inclusion of such shares in the diluted earnings per share calculation would be anti-dilutive. The following table summarizes the potentially dilutive shares excluded from the diluted earnings per share calculation as inclusion of such shares would have been antidilutive:

	Quarter ended June 30,				Six months ended June 30,
	2020		2019		2020		2019
	(in thousands)
Shares issuable under share-based compensation plan		142		168		236		156
Shares issuable pursuant to exchange of the 2020 Notes		—		—		5,086		—

Note 29—Segments

The Company operates in four segments: credit sensitive strategies, interest rate sensitive strategies, correspondent production, and corporate:

• The credit sensitive strategies segment represents the Company’s investments in CRT arrangements, firm commitments to purchase CRT securities, distressed loans, real estate and non-Agency subordinated bonds.

• The interest rate sensitive strategies segment represents the Company’s investments in MSRs, ESS, Agency and senior non-Agency MBS and the related interest rate hedging 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 loans either directly or in the form of MBS, using the services of the Manager and PLS.

• The corporate segment includes management fees, corporate expense amounts and certain interest income.

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Financial highlights by operating segment are summarized below:

	Credit			Interest rate
	sensitive			sensitive			Correspondent
Quarter ended June 30, 2020	strategies			strategies			production		Corporate			Total
	(in thousands)
Net investment income:
Net gain on investments	$	472,269		$	16,665		$	—	$	—		$	488,934
Net gain on loans acquired for sale		(7,573	)		—			169,787		—			162,214
Net loan servicing fees		—			(102,660	)		—		—			(102,660	)
Net interest income (expense):
Interest income		1,133			23,585			15,957		137			40,812
Interest expense		8,796			38,093			13,502		657			61,048
		(7,663	)		(14,508	)		2,455		(520	)		(20,236	)
Other		3,014			—			25,318		1,737			30,069
		460,047			(100,503	)		197,560		1,217			558,321
Expenses:
Loan fulfillment and servicing fees    payable to PFSI		240			15,294			52,814		—			68,348
Management fees		—			—			—		8,288			8,288
Other		1,014			1,691			5,168		5,749			13,622
		1,254			16,985			57,982		14,037			90,258
Pretax income (loss)	$	458,793		$	(117,488	)	$	139,578	$	(12,820	)	$	468,063
Total assets at quarter end	$	1,743,620		$	4,307,113		$	2,412,751	$	620,235		$	9,083,719

	Credit			Interest rate
	sensitive			sensitive			Correspondent
Quarter ended June 30, 2019	strategies			strategies			production		Corporate			Total
	(in thousands)
Net investment income:
Net gain on investments	$	25,382		$	62,372		$	—	$	—		$	87,754
Net gain on loans acquired for sale (1)		11,447			—			22,797		—			34,244
Net loan servicing fees		—			(53,589	)		—		—			(53,589	)
Net interest income (expense):
Interest income		9,644			35,864			25,838		447			71,793
Interest expense		13,989			35,014			16,893		—			65,896
		(4,345	)		850			8,945		447			5,897
Other		3,307			—			17,652		1,136			22,095
		35,791			9,633			49,394		1,583			96,401
Expenses:
Loan fulfillment and servicing fees    payable to PFSI		617			10,951			29,590		—			41,158
Management fees		—			—			—		8,832			8,832
Other		2,159			582			3,638		6,662			13,041
		2,776			11,533			33,228		15,494			63,031
Pretax income (loss)	$	33,015		$	(1,900	)	$	16,166	$	(13,911	)	$	33,370
Total assets at quarter end	$	2,470,112		$	4,296,899		$	2,542,135	$	156,643		$	9,465,789

(1) During the quarter ended March 31, 2019, the chief operating decision maker began attributing a portion of the initial fair value the Company recognizes relating to its firm commitment to purchase CRT securities upon the sale of loans to the correspondent production segment in recognition of pricing changes in the correspondent production segment. Accordingly, the Company allocated a gain of $9.4 million of the initial firm commitment recognized in Net gain on loans acquired for sale in the correspondent production segment for the six months ended June 30, 2019.

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	Credit			Interest rate
	sensitive			sensitive			Correspondent
Six months ended June 30, 2020	strategies			strategies			production		Corporate			Total
	(in thousands)
Net investment income:
Net (loss) gain on investments	$	(446,841	)	$	120,644		$	—	$	—		$	(326,197	)
Net gain on loans acquired for sale (1)		(39,880	)		—			250,869		—			210,989
Net loan servicing fees		—			141,912			—		—			141,912
Net interest income (expense):
Interest income		7,689			56,827			47,364		1,055			112,935
Interest expense		23,362			79,701			37,811		1,242			142,116
		(15,673	)		(22,874	)		9,553		(187	)		(29,181	)
Other		3,180			—			49,305		1,796			54,281
		(499,214	)		239,682			309,727		1,609			51,804
Expenses:
Loan fulfillment and servicing fees    payable to PFSI		541			29,514			94,754		—			124,809
Management fees		—			—			—		17,343			17,343
Other		1,926			2,873			10,088		11,127			26,014
		2,467			32,387			104,842		28,470			168,166
Pretax (loss) income	$	(501,681	)	$	207,295		$	204,885	$	(26,861	)	$	(116,362	)
Total assets at period end	$	1,743,620		$	4,307,113		$	2,412,751	$	620,235		$	9,083,719

(1) During the quarter ended March 31, 2019, the chief operating decision maker began attributing a portion of the initial fair value the Company recognizes relating to its firm commitment to purchase CRT securities upon the sale of loans to the correspondent production segment in recognition of pricing changes in the correspondent production segment. Accordingly, the Company allocated a gain of $5.7 million of the initial firm commitment recognized in Net gain on loans acquired for sale in the correspondent production segment for the six months ended June 30, 2020.

	Credit			Interest rate
	sensitive			sensitive			Correspondent
Six months ended June 30, 2019	strategies			strategies			production		Corporate			Total
	(in thousands)
Net investment income:
Net gain on investments	$	79,189		$	103,658		$	—	$	—		$	182,847
Net gain on loans acquired for sale (1)		22,544			—			33,023		—			55,567
Net loan servicing fees		—			(84,669	)		—		—			(84,669	)
Net interest income (expense):
Interest income		17,900			69,942			46,154		878			134,874
Interest expense		26,012			68,068			26,555		—			120,635
		(8,112	)		1,874			19,599		878			14,239
Other		3,277			—			30,616		1,142			35,035
		96,898			20,863			83,238		2,020			203,019
Expenses:
Loan fulfillment and servicing fees    payable to PFSI		1,081			21,057			57,164		—			79,302
Management fees		—			—			—		16,080			16,080
Other		4,430			901			6,287		12,782			24,400
		5,511			21,958			63,451		28,862			119,782
Pretax income (loss)	$	91,387		$	(1,095	)	$	19,787	$	(26,842	)	$	83,237
Total assets at period end	$	2,470,112		$	4,296,899		$	2,542,135	$	156,643		$	9,465,789

(1) During the quarter ended March 31, 2019, the chief operating decision maker began attributing a portion of the initial fair value the Company recognizes relating to its firm commitment to purchase CRT securities upon the sale of loans to the correspondent production segment in recognition of pricing changes in the correspondent production segment. Accordingly, the Company allocated a gain of $18.0 million of the initial firm commitment recognized in Net gain on loans acquired for sale in the correspondent production segment for the six months ended June 30, 2019.

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Note 30—Supplemental Cash Flow Information

	Six months ended June 30,
	2020		2019
	(in thousands)
Payments:
Income taxes, net	$	60	$	130
Interest	$	168,941	$	122,937
Non-cash investing activities:
Transfer of loans and advances to real estate    acquired in settlement of loans	$	1,166	$	12,271
Transfer from real estate held for investment to real    estate acquired in settlement of loans	$	—	$	30,432
Receipt of mortgage servicing rights as proceeds from    sales of loans at fair value	$	451,949	$	284,854
Receipt of excess servicing spread pursuant to recapture    agreement with PennyMac Financial Services, Inc.	$	862	$	950
Capitalization of servicing advances pursuant to    mortgage loan modifications	$	—	$	1,151
Transfer of firm commitment to purchase CRT    securities to investment securities	$	—	$	56,804
Non-cash financing activities:
Dividends declared, not paid	$	39,789	$	37,053

Note 31—Regulatory Capital and Liquidity Requirements

The Company is subject to financial eligibility requirements established by the Federal Housing Finance Agency (“FHFA”) for sellers/servicers eligible to sell or service mortgage loans with Fannie Mae and Freddie Mac. The eligibility requirements include:

• A tangible net worth of $2.5 million plus 25 basis points of the UPB of the Company’s total 1-4 unit servicing portfolio, excluding mortgage loans subserviced for others;

• A tangible net worth/total assets ratio greater than or equal to 6%; and

• A liquidity requirement of:

o Before June 30, 2020, equal to 3.5 basis points of the aggregate UPB serviced for the Agencies plus 200 basis points of total nonperforming Agency servicing UPB (including nonperforming Agency loans that are in payment forbearance) in excess of 600 basis points

o Effective June 30, 2020, equal to 3.5 basis points of the aggregate UPB serviced for the Agencies plus 200 basis points of total nonperforming Agency servicing UPB less 70% of such nonperforming Agency servicing UPB in excess of 600 basis points where the underlying loans are in forbearance but were current at the time they entered forbearance.

On January 31, 2020, FHFA proposed changes to the eligibility requirements, which would increase the tangible net worth requirement to $2.5 million plus 35 basis points of the UPB of loans serviced for Ginnie Mae and 25 basis points of the UPB of all other 1-4 unit loans serviced, and increase the liquidity requirement to 4 basis points of the aggregate UPB serviced for Fannie Mae and Freddie Mac and 10 basis points of the UPB serviced for Ginnie Mae plus 300 basis points of total nonperforming Agency servicing UPB (including nonperforming Agency loans that are in payment forbearance) in excess of 400 basis points. On June 15, 2020, FHFA announced that it will be re-proposing changes to these requirements.

The Agencies’ capital and liquidity amounts and requirements, the calculations of which are defined by each entity, are summarized below:

	Net Worth (1)				Tangible Net Worth / Total Assets Ratio (1)						Liquidity (1)
Fannie Mae and Freddie Mac	Actual		Required		Actual			Required			Actual		Required
	(dollars in thousands)
June 30, 2020	$	1,031,803	$	371,719		20	%		6	%	$	202,042	$	50,092
December 31, 2019	$	627,144	$	341,009		8	%		6	%	$	128,806	$	44,970

(1) Calculated in accordance with the Agencies’ requirements.

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Noncompliance with the Agencies’ capital and liquidity requirements can result in the Agencies taking various remedial actions up to and including removing the Company’s ability to sell loans to and service loans on behalf of the Agencies.

Note 32—Subsequent Events

Management has evaluated all events and transactions through the date the Company issued these consolidated financial statements. During this period:

• All agreements to repurchase assets that matured before the date of this Report were extended or renewed.

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis of financial condition and results of operations should be read with the consolidated financial statements and the related notes of PennyMac Mortgage Investment Trust (“PMT”) included within this Quarterly Report on Form 10-Q.

Statements contained in this Quarterly Report on Form 10-Q may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements involve known and unknown risks, uncertainties and other factors, which may cause actual results to be materially different from those expressed or implied in such statements. You can identify these forward-looking statements by words such as “may,” “will,” “should,” “expect,” “anticipate,” “believe,” “estimate,” “intend,” “plan” and other similar expressions. You should consider our forward-looking statements in light of the risks discussed under the heading “Risk Factors,” as well as our consolidated financial statements, related notes, and the other financial information appearing elsewhere in this Quarterly Report on Form 10-Q and our other filings with the United States Securities and Exchange Commission (“SEC”). The forward-looking statements contained in this Quarterly Report on Form 10-Q are made as of the date hereof and we assume no obligation to update or supplement any forward-looking statements.

The following discussion and analysis provides information that we believe is relevant to an assessment and understanding of our consolidated results of operations and financial condition. Unless the context indicates otherwise, references in this Quarterly Report on Form 10-Q to the words “we,” “us,” “our” and the “Company” refer to PMT.

Our Company

We are a specialty finance company that invests primarily in mortgage-related assets. Our objective is to provide attractive risk-adjusted returns to our investors over the long-term, primarily through dividends and secondarily through capital appreciation. Our investment focus is on the mortgage-related assets that we create through our correspondent production activities, including mortgage servicing rights (“MSRs”) and credit risk transfer (“CRT”) arrangements, which include CRT Agreements and CRT strips that absorb credit losses on certain of the loans we sell. We also invest in mortgage-backed securities (“MBS”), and hold excess servicing spread (“ESS”) on MSRs acquired by PennyMac Loan Services, LLC (“PLS”). We have also historically invested in distressed mortgage assets (loans and real estate acquired in settlement of loans (“REO”)) as well as other credit sensitive assets, including loans that finance multifamily and other commercial real estate. We have substantially liquidated our holdings of distressed, multifamily and commercial real estate loans and continue to reduce our holdings of REO.

We are externally managed by PNMAC Capital Management, LLC (“PCM”), an investment adviser that specializes in and focuses on U.S. mortgage assets. Our loan portfolio and MSRs are serviced by PLS.

During the six months ended June 30, 2020, we purchased newly originated prime credit quality residential loans with fair values totaling $64.2 billion, as compared to $39.9 billion during the six months ended June 30, 2019, in furtherance of our correspondent production business. To the extent that we purchase loans that are insured by the U.S. Department of Housing and Urban Development (“HUD”) through the Federal Housing Administration (the “FHA”), or insured or guaranteed by the Veterans Administration (the “VA”) or U.S. Department of Agriculture (“USDA”), we and PLS have agreed that PLS will fulfill and purchase such loans, as PLS is a Ginnie Mae-approved issuer and we are not. This arrangement has enabled us to compete with other correspondent aggregators that purchase both government and conventional loans. We received a sourcing fee from PLS ranging from two to three and one-half basis points, generally based on the average number of calendar days that loans are held by us prior to purchase by PLS, on the unpaid principal balance (“UPB”) of each loan that we sell to PLS under such arrangement, and earn interest income on the loan for the period we hold it before the sale to PLS. During the periods ended June 30, 2020, we received sourcing fees totaling $3.3 million and $7.5 million, relating to $11.1 billion and $25.0 billion in UPB of loans that we sold to PLS, for the quarter and six months ended June 30, 2020, respectively, as compared to $3.2 million and $5.1 million in sourcing fees relating to $10.5 billion and $17.2 billion in UPB of loans that we sold to PLS during the same periods ended June 30, 2019, respectively.

Credit Sensitive Investments

CRT Arrangements

The Federal Housing Finance Agency (“FHFA”) has instructed the GSEs to gradually wind down new lender risk share transactions such as CRT investments by the end of 2020. During the six months ended June 30, 2020, we made commitments to purchase CRT securities with a face amount of $292.5 million under an existing agreement. During the six months ended June 30, 2020, we recognized investment loss of $300.7 million relating to our holdings of CRT securities and loss of $266.5 million related to our firm commitments to purchase the CRT securities. We held net CRT-related investments (comprised of deposits securing CRT arrangements, CRT derivatives, CRT strips, and firm commitment to purchase CRT securities) totaling $1.5 billion at June 30, 2020.

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Interest Rate Sensitive Investments

Our interest rate sensitive investments include:

• Mortgage servicing rights. During the six months ended June 30, 2020, we received $451.9 million of MSRs as proceeds from sales of loans acquired for sale. We held $1.2 billion of MSRs at fair value at June 30, 2020.

• REIT-eligible mortgage-backed or mortgage-related securities. We purchased $1.6 billion of MBS and sold $1.6 billion of MBS during the six months ended June 30, 2020. We held MBS with fair values totaling $2.6 billion at June 30, 2020. The purchases and sales during the period reflect a restructuring of our investment in MBS aimed at reducing prepayment and price risk relating to these assets.

• ESS relating to MSRs held by PFSI. We received ESS with fair value totaling $862,000 during the six months ended June 30, 2020 pursuant to a spread acquisition agreement with PLS. We held ESS with a fair value totaling $151.2 million at June 30, 2020.

Correspondent Production

Our correspondent production activities involve the acquisition and sale of newly originated prime credit quality residential loans. Correspondent production serves as the source of our investments in MSRs and CRT arrangements and are summarized below:

	Quarter ended June 30,						Six months ended June 30,
	2020			2019			2020			2019
	(in thousands)
Sales of loans acquired for sale:
To nonaffiliates	$	20,172,571		$	11,326,837		$	39,890,722		$	20,802,011
To PennyMac Financial Services, Inc.		11,603,280			10,997,581			26,112,489			17,956,971
	$	31,775,851		$	22,324,418		$	66,003,211		$	38,758,982
Net gain on loans acquired for sale	$	162,214		$	34,244		$	210,989		$	55,567
Investment activities resulting from    correspondent production:
Receipt of MSRs as proceeds from sales    of loans	$	203,127		$	152,986		$	451,949		$	284,854
Investments in CRT arrangements:
Deposits securing CRT arrangements		—			933,370			—			933,370
Recognition of firm commitment to    purchase CRT securities (1)		(7,579	)		20,396			(34,228	)		39,996
Change in face amount of firm    commitment to purchase CRT    securities and commitment to fund    Deposits securing CRT arrangements		(262,176	)		(562,710	)		292,514			(280,793	)
Total investments in CRT arrangements		(269,755	)		391,056			258,286			692,573
Total investments resulting from correspondent activities	$	(66,628	)	$	544,042		$	710,235		$	977,427

(1) Initial recognition of firm commitment upon sale of loans.

Taxation

We believe that we qualify to be taxed as a REIT and as such will not be subject to federal income tax on that portion of our income that is distributed to shareholders as long as we meet applicable REIT asset, income and share ownership tests. If we fail to qualify as a REIT, and do not qualify for certain statutory relief provisions, our profits will be subject to income taxes and we may be precluded from qualifying as a REIT for the four tax years following the year we lose our REIT qualification. A portion of our activities, including our correspondent production business, is conducted in our taxable REIT subsidiary (“TRS”), which is subject to corporate federal and state income taxes. Accordingly, we make a provision for income taxes with respect to the operations of our TRS. We expect that the effective rate for the provision for income taxes may be volatile in future periods. Our goal is to manage the business to take full advantage of the tax benefits afforded to us as a REIT.

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We evaluate our deferred tax assets quarterly to determine if valuation allowances are required based on the consideration of all available positive and negative evidence using a “more-likely-than-not” standard with respect to whether deferred tax assets will be realized. Our evaluation considers, among other factors, taxable loss carryback availability, expectations of sufficient future taxable income, trends in earnings, existence of taxable income in recent years, the future reversal of temporary differences, and available tax planning strategies that could be implemented, if required.  The ultimate realization of our deferred tax assets depends primarily on our ability to generate future taxable income during the periods in which the related deferred tax assets become deductible.

Non-Cash Income

A substantial portion of our net investment income is comprised of non-cash items, including fair value adjustments, recognition of the fair value of assets created and liabilities incurred in loan sale transactions and the capitalization and amortization of certain assets and liabilities. Because we have elected, or are required by generally accepted accounting principles, to record certain of our financial assets (comprised of MBS, loans acquired for sale at fair value, loans at fair value and ESS), our firm commitment to purchase CRT securities, our derivatives, our MSRs, and our asset-backed financing and interest-only security payable at fair value, a substantial portion of the income or loss we record with respect to such assets and liabilities results from non-cash changes in fair value.

The amounts of non-cash income (loss) items included in net investment income are as follows:

	Quarter ended June 30,						Six months ended June 30,
	2020			2019			2020			2019
	(dollars in thousands)
Net gain (loss) on investments:
Mortgage-backed securities	$	17,064		$	27,448		$	133,031		$	64,370
Loans:
Held in a variable interest entity		795			3,359			(2,074	)		6,944
Distressed		(320	)		(6,102	)		(208	)		(5,179	)
ESS		(101	)		(3,211	)		(14,242	)		(6,773	)
CRT arrangements		236,105			(739	)		(294,713	)		5,721
Firm commitment to purchase CRT securities		226,035			4,130			(266,478	)		26,320
Interest-only security payable at fair value		(847	)		6,208			10,728			9,655
Asset-backed financing of a VIE		(162	)		(2,341	)		1,766			(5,198	)
		478,569			28,752			(432,190	)		95,860
Net gain on loans acquired for sale (1)		371,239			161,585			508,185			296,950
Net loan servicing fees—MSR valuation adjustments		(170,848	)		(183,467	)		(798,049	)		(320,796	)
Net interest income—Capitalization of interest    pursuant to loan modifications		—			1,166			—			1,928
	$	678,960		$	8,036		$	(722,054	)	$	73,942
Net investment income	$	558,321		$	96,401		$	51,804		$	203,019
Non-cash items as a percentage of net investment income		122	%		8	%		(1394	%)		36	%

(1) Amount represents MSRs received, fair value of firm commitment to purchase CRT securities recognized, representations and warranties incurred in loan sales transactions and changes in fair value of loans, IRLCs and hedging derivatives held at period end.

We receive or pay cash relating to:

• Our investments in mortgage-backed securities through monthly principal and interest payments from the issuer of such securities;

• Loan investments when the investments are paid down, paid off or sold, when payments of principal and interest occur on such loans or when the property securing the loan has been sold;

• ESS investments through monthly interest payments:

• CRT arrangements through a portion of both the interest payments collected on loans in the CRT arrangements’ reference pools and the release to us of the deposits securing the arrangements as principal on such loans is repaid;

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• Hedging instruments when we receive or make margin deposits as the fair value of respective instrument changes, when the instruments mature or when we effectively cancel the transactions through offsetting trades;

• Our liability for representations and warranties when we repurchase loans or settle loss claims from investors; and

• MSRs in the form of loan servicing fees and placement fees on related deposits.

Results of Operations

The following is a summary of our key performance measures:

	Quarter ended June 30,						Six months ended June 30,
	2020			2019			2020			2019
	(dollar amounts in thousands, except per common share amounts)
Net investment income	$	558,321		$	96,401		$	51,804		$	203,019
Expenses		90,258			63,031			168,166			119,782
Pretax income (loss)		468,063			33,370			(116,362	)		83,237
Provision for (benefit from) income taxes		3,443			(10,863	)		13,691			(14,523	)
Net income (loss)		464,620			44,233			(130,053	)		97,760
Dividends on preferred shares		6,235			6,234			12,469			12,469
Net income (loss) attributable to common    shareholders	$	458,385		$	37,999		$	(142,522	)	$	85,291
Pretax income (loss) by segment:
Credit sensitive strategies	$	458,793		$	33,015		$	(501,681	)	$	91,387
Interest rate sensitive strategies		(117,488	)		(1,900	)		207,295			(1,095	)
Correspondent production		139,578			16,166			204,885			19,787
Corporate		(12,820	)		(13,911	)		(26,861	)		(26,842	)
	$	468,063		$	33,370		$	(116,362	)	$	83,237
Annualized return on average common    shareholder's equity		103.0	%		9.8	%		(15.2	)%		11.7	%
Earnings (loss) per common share:
Basic	$	4.59		$	0.52		$	(1.43	)	$	1.23
Diluted	$	4.51		$	0.50		$	(1.43	)	$	1.17
Dividends per common share	$	0.40		$	0.47		$	0.65		$	0.94
	June 30, 2020			December 31, 2019
Total assets	$	9,083,719		$	11,771,351
Book value per common share	$	19.39		$	21.37
Closing price per common share	$	17.46		$	22.29

During the six months ended June 30, 2020, the United States was significantly impacted by the effects of the COVID-19 coronavirus pandemic (the “Pandemic” or “COVID-19”) and the effects of market and government responses to the Pandemic. These developments have triggered an economic recession in the United States.

The national unemployment rate has increased to 11.0% as of June 30, 2020. This sudden and significant increase in unemployment has created financial hardships for many existing borrowers. As part of its response to the Pandemic, the federal government included requirements in the Coronavirus Aid, Relief and Economic Security Act (“CARES Act”) that we provide borrowers with loans we service subject to Agency securitizations with substantial payment forbearance. As a result of this requirement, we have seen a large increase in delinquencies in our servicing portfolio which has increased our cost to service those loans and may require us to finance substantial amounts of advances of principal and interest payments to the holders of the securities holding those loans, as well as property tax and insurance costs to protect investor’s interest in the properties collateralizing the loans. As of June 30, 2020, 6% of the loans in our MSR portfolio were in COVID-19 forbearance plans and delinquent.

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The emergence of the Pandemic created significant disruption in the financial markets as well as changing market perceptions of future credit losses to be incurred on investments in mortgage loans. The primary effect of this disruption on the Company has been on our credit sensitive strategies. During the six months ended June 30, 2020, we recognized $491.6 million in fair value losses on our CRT arrangements and $39.9 million of losses on the initial recognition of firm commitments to purchase CRT securities in our credit sensitive strategies segment. We believe these fair value losses reflect expectations of both future credit losses to be incurred as well as the uncertainty surrounding such expectations. While the credit markets have recovered somewhat since the beginning of the Pandemic the recovery has not been complete as uncertainty about future mortgage loan credit performance persists.

Before the onset of the Pandemic, the mortgage origination market was experiencing healthy demand owing to historically low interest rates in the United States. The government’s response to the onset of the Pandemic, including fiscal stimulus and infusions of additional liquidity by the Federal Reserve into financial markets acted to further lower market mortgage interest rates. These developments have acted to sustain demand for new mortgage loans despite the slowdown in overall economic activity. The mortgage origination market for 2019 was estimated at $2.3 trillion; current forecasts estimate the origination market to approximate $3.0 trillion for 2020 and $2.3 trillion for 2021. However, the uncertainties and strains on many mortgage lenders introduced by the Pandemic and resulting disruptions in the financial markets have caused some market participants to scale back or exit mortgage loan production activities which, combined with constraints on mortgage industry origination capacity that existed before the Pandemic, has allowed us to realize higher gain-on sale margins in our correspondent production activities. In subsequent quarters, we expect gain-on-sale margins in our correspondent production activities to return to historically normal levels due to heightened competition.

We expect the Pandemic to have a negative effect on the future earnings of our interest rate sensitive strategies segment by reducing the income collected from our servicing portfolio, reducing the amount of placement fees we earn on custodial deposits related to the loans in our servicing portfolio, and increasing servicing expenses due to increasing delinquencies. Increasing delinquencies or declining economic conditions may also continue to have a negative effect on the fair value of our MSRs which may not be offset by our hedging activities, which typically seek to mitigate changes in fair value due to changes in interest rates. We expect these negative effects to be partially offset by increases in servicing fees arising from growth in our loan servicing portfolio. 

The current environment caused by the Pandemic in the United States is historically unprecedented and the source of much uncertainty surrounding future economic and market prospects and the ongoing effects of this ongoing situation on our future prospects are difficult to anticipate. For further discussion of the potential impacts of the Pandemic please also see “Risk Factors” in Part II. Item 1A.

Our net income during the quarter ended June 30, 2020 increased by $420.4 million as compared to the quarter ended June 30, 2019, reflecting the partial recovery in fair value of our credit sensitive assets supplemented by record gains on sale of loans in our correspondent production activities.

The increase in pretax results is summarized below:

• Our credit sensitive strategies segment reflects the effect of the market conditions on our investments in CRT arrangements; we recognized a $457.4 million increase in net gains on our CRT arrangements for the quarter ended June 30, 2020 as compared to the quarter ended June 30, 2019.

• Our interest rate sensitive strategies segment was negatively affected by a decrease in net servicing fees of $49.1 million caused by fair value adjustments to our investment in MSRs and a $15.4 million decrease in net interest income.

• Our correspondent production segment benefited from increases in loan production volume and gain on sale margins due to the increase in loan demand resulting from decreasing interest rates that prevailed throughout the quarter ended June 30, 2020, compounded by mortgage industry capacity constraints resulting in a $123.4 million increase in our pretax income for the quarter ended June 30, 2020, as compared to the same period in 2019.

Our results of operations decreased by $227.8 million during the six months ended June 30, 2020, as compared to the six months ended June 30, 2019, reflecting the effect of the Pandemic on the fair value of our CRT-related investments, partially offset by gains in our correspondent production and interest rate sensitive strategies segments.

The decrease in pretax results is summarized below:

• Our credit sensitive strategies segment reflects the severe impact of the market conditions on our investments in CRT arrangements; we recognized a $575.5 million reduction in the fair value of our CRT arrangements and initial recognition of firm commitment to purchase CRT securities.

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• Our interest rate sensitive strategies segment was positively affected by the decrease in interest rates. We recognized a $226.6 million increase in net servicing fees caused by our strong hedging results compounded by growth in servicing fees due to growth in our servicing portfolio and a $68.7 million increase in valuation gains on our investment in MBS as compared to the same period in 2019.

• Our correspondent production segment benefited from increases in loan production volume and gain on sale margins due to the increase in loan demand resulting from decreasing interest rates that prevailed throughout the six months ended June 30, 2020, compounded by existing mortgage industry capacity constraints, resulting in a $185.1 million increase in pretax income as compared to the same period in 2019.

• Our provision for income taxes reflects the establishment of valuation allowances relating to previously recognized deferred tax assets whose prospective realization has been affected by the prior period losses we incurred in our taxable REIT subsidiary.

Net Investment Income

Our net investment income is summarized below:

	Quarter ended June 30,						Six months ended June 30,
	2020			2019			2020			2019
	(in thousands)
Net gain (loss) on investments	$	488,934		$	87,754		$	(326,197	)	$	182,847
Net loan servicing fees		(102,660	)		(53,589	)		141,912			(84,669	)
Net gain on loans acquired for sale		162,214			34,244			210,989			55,567
Net loan origination fees		25,208			17,630			49,136			30,568
Net interest (expense) income		(20,236	)		5,897			(29,181	)		14,239
Results of real estate acquired in settlement of loans		2,856			2,075			2,888			595
Other		2,005			2,390			2,257			3,872
	$	558,321		$	96,401		$	51,804		$	203,019

Net Gain (Loss) on Investments

Net gain (loss) on investments is summarized below:

	Quarter ended June 30,						Six months ended June 30,
	2020			2019			2020			2019
	(in thousands)
From nonaffiliates:
Mortgage-backed securities	$	17,064		$	27,448		$	133,031		$	64,370
Loans at fair value:
Held in a VIE		795			3,359			(2,074	)		6,944
Distressed		(121	)		(5,451	)		(1,263	)		(4,966	)
CRT arrangements		262,163			26,639			(225,129	)		57,589
Firm commitment to purchase CRT securities		226,035			4,130			(266,478	)		26,320
Asset-backed financings of a VIE at fair value		(162	)		(2,341	)		1,766			(5,198	)
Hedging derivatives		(16,739	)		37,181			48,192			44,561
		489,035			90,965			(311,955	)		189,620
From PFSI—ESS		(101	)		(3,211	)		(14,242	)		(6,773	)
	$	488,934		$	87,754		$	(326,197	)	$	182,847

The increase in net gain on investments for the quarter ended June 30, 2020 as compared to the quarter ended June 30, 2019, primarily reflects the effects of the partial recovery of the credit markets following the disruption of those markets during the quarter ended March 31, 2020 on the fair value of our CRT investments. The shift in net gain on investments to a net loss for the six months ended June 30, 2020, as compared to the six months ended June 30, 2019, reflects the effect of the disruption in the credit markets on our CRT investments including expectations for increased losses to be absorbed by those investments as a result of the Pandemic. These negative results were partially offset by increased fair value gains on our investments in MBS, which reflect the effect of decreasing interest rates during the period on the fair values of our MBS holdings.

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Mortgage-Backed Securities

During the quarter and six months ended June 30, 2020 we recognized net valuation gains on MBS of $17.1 million and $133.0 million, respectively, as compared to $27.4 million and $64.4 million for the same periods in 2019, respectively. The gains we recorded during the quarter and six months ended June 30, 2020 reflect the influence of more significant decreases in interest rates during the periods as compared to the same periods in 2019, and the growth of our investment in MBS. Our average investment in MBS at fair value increased by $447.4 million and $699.4 million, or 17% and 27%, during the quarter and six months ended June 30, 2020, respectively, as compared to the same periods in 2019.

Loans at fair value – Held in a VIE

Loans at fair value held in a VIE incurred a gain of $795,000 and a loss of $2.1 million during the quarter and six months ended June 30, 2020, respectively, as compared to a gain of $3.4 million and $6.9 million during the quarter and six months ended June 30, 2019, respectively. The change from 2019 is attributable to the effect of uncertainties surrounding borrower credit performance experienced in the mortgage market as the result of the Pandemic discussed above. Unlike our investments in MBS which carry Agency guarantees of security payment performance, the loans held in a VIE are the sole source of repayment of the securities. Therefore, uncertainties about borrower performance are more directly reflected in the fair value of these loans and more than offset the positive effect of decreasing interest rates for the six months ended June 30, 2020.

Loans at Fair Value – Distressed

The net losses on our investment in distressed loans decreased by $5.3 million and $3.7 million for the quarter and six months ended June 30, 2020, respectively, as compared to the same periods in 2019. The decrease reflects the substantial liquidation of our remaining investment in distressed loans. Our investment in distressed loans was $8.4 million as of June 30, 2020.

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CRT Arrangements

The activity in and balances relating to our CRT arrangements and firm commitments to purchase CRT securities are summarized below:

	Quarter ended June 30,						Six months ended June 30,
	2020			2019			2020			2019
	(in thousands)
UPB of loans sold	$	1,795,130		$	9,264,173		$	16,478,185		$	16,966,253
Investments:
Deposits securing CRT arrangements	$	—		$	933,370		$	—		$	933,370
Change in expected face amount of firm    commitment to purchase CRT securities		(262,176	)		(562,710	)		292,514			(280,793	)
	$	(262,176	)	$	370,660		$	292,514		$	652,577
Investment income (loss):
Net gain (loss) on investments:
Derivative and CRT strips:
CRT strips
Realized	$	13,355		$	5,675		$	28,105		$	5,675
Valuation changes		113,570			—			(116,305	)		—
		126,925			5,675			(88,200	)		5,675
CRT derivatives
Realized		13,550			21,170			30,751			42,213
Valuation changes		122,535			(6,414	)		(178,408	)		46
		136,085			14,756			(147,657	)		42,259
Interest-only security payable at fair value		(847	)		6,208			10,728			9,655
		262,163			26,639			(225,129	)		57,589
Firm commitments to purchase CRT securities		226,035			4,130			(266,478	)		26,320
		488,198			30,769			(491,607	)		83,909
Net gain on loans acquired for sale — Fair value    of firm commitment to purchase CRT securities    recognized upon sale of loans		(7,579	)		20,396			(34,228	)		39,996
Interest income — Deposits securing CRT    arrangements		507			7,830			6,606			14,605
	$	481,126		$	58,995		$	(519,229	)	$	138,510
Payments made to settle losses on credit risk    transfer arrangements	$	2,662		$	881		$	4,179		$	1,776

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	June 30, 2020			December 31, 2019
	(in thousands)
Carrying value of CRT arrangements:
Derivative and credit risk transfer strip assets
CRT strips	$	—		$	54,930
CRT derivatives		—			115,863
	$	—		$	170,793
Derivative and credit risk transfer strip liabilities
CRT strips	$	61,375		$	—
CRT derivatives		63,926			—
	$	125,301		$	—
Firm commitment to purchase credit risk transfer    securities at fair value	$	(191,193	)	$	109,513
Deposits securing CRT arrangements	$	1,666,449		$	1,969,784
Interest-only security payable at fair value	$	14,981		$	25,709
CRT arrangement assets pledged to secure borrowings:
Derivative and credit risk transfer strip assets	$	—		$	142,183
Deposits securing CRT arrangements (1)	$	1,666,449		$	1,969,784
Face amount of firm commitment to purchase CRT    securities	$	1,794,717		$	1,502,203
UPB of loans — funded credit risk transfer    arrangements	$	32,086,351		$	41,944,117
Collection status (UPB):
Delinquency (2)
Current	$	28,675,256		$	41,355,622
30-89 days delinquent	$	1,447,239		$	463,331
90-180 days delinquent	$	1,926,900		$	106,234
180 or more days delinquent	$	30,878		$	8,802
Foreclosure	$	6,078		$	10,128
Bankruptcy	$	66,209		$	55,452
UPB of loans — firm commitment to purchase CRT    securities	$	48,446,109		$	38,738,396
Collection status (UPB):
Delinquency (3)
Current	$	44,873,703		$	38,581,080
30-89 days delinquent	$	1,739,832		$	146,256
90-180 days delinquent	$	1,822,548		$	9,109
180 or more days delinquent	$	7,327		$	—
Foreclosure	$	2,699		$	1,951
Bankruptcy	$	12,190		$	2,980

(1) Deposits securing credit risk transfer strip liabilities also secure $125.3 million in CRT strip and CRT derivative liabilities at June 30, 2020.

(2) At June 30, 2020, delinquent loans include loans subject to forbearance agreements entered into under the CARES Act with UPBs totaling $1.1 billion in the 30-89 days delinquent category; $1.6 billion in 90-180 days delinquent category; and $1.7 million in the 180 or more days delinquent not in foreclosure category.

(3) At June 30, 2020, delinquent loans include loans subject to forbearance agreements entered into under the CARES Act with UPBs totaling $1.4 billion in the 30-89 days delinquent category; $1.5 billion in the 90-180 days delinquent category; $1.9 million in the 180 days or more delinquent not in foreclosure category; and $1.5 million in bankruptcy.

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As discussed above, the performance of our investments in CRT arrangements is attributable to the effects of the emergence of the Pandemic on perceptions of and prospects for the future performance of the loans in the reference pools that underlie the investments’ fair values as well as increased returns required for CRT investments in the marketplace.

The fair value estimates that the Company received from nonaffiliated brokers relating to its investments in scheduled loss CRT transactions as of June 30, 2020, appeared to reflect an assumption that not all delinquent loans subject to forbearance in these transactions will result in losses, either due to reduced delinquency from loss mitigation efforts before defaults are triggered or to the expectation that current contractual loss terms will be amended by the Agencies to exclude all or a portion of the losses that would otherwise be incurred by the securities due solely to the reference loans being in forbearance as a result of the Pandemic, as the Agencies have done during certain prior natural disasters. To the extent that these events do not occur, the fair value of such investments may be negatively impacted in future reporting periods.

ESS Purchased from PFSI

We recognized fair value losses relating to our investment in ESS totaling $101,000 and $14.2 million for the quarter and six months ended June 30, 2020, respectively, as compared to fair value losses of $3.2 million and $6.8 million, respectively, for the quarter and six months ended June 30, 2019. The change in valuation results during 2020 as compared to 2019 resulted from increased prepayment expectations for the loans underlying the ESS and the effect of uncertainties surrounding future cash flows relating to the servicing of the loans underlying this investment on the discount rate used to develop the assets’ fair value.

Net Loan Servicing Fees

Our correspondent production activity is the primary source of our loan servicing portfolio. When we sell loans, we generally enter into a contract to service those loans and we recognize the fair value of such contracts as MSRs. Under these contracts, we are required to perform loan servicing functions in exchange for fees and the right to other compensation.

The servicing functions, which are performed on our behalf by PLS, typically include, among other responsibilities, collecting and remitting loan payments; responding to borrower inquiries; accounting for the loan; holding and remitting custodial (impound) funds for payment of property taxes and insurance premiums; counseling delinquent mortgagors; and supervising foreclosures and property dispositions.

Net loan servicing fees are summarized below:

	Quarter ended June 30,						Six months ended June 30,
	2020			2019			2020			2019
	(in thousands)
From nonaffiliates:
Contractually specified  (1)	$	101,823		$	66,919		$	196,292		$	128,191
Other		11,887			6,408			19,078			9,616
Effect of changes of fair value of MSRs:
Realization of cashflows		(59,199	)		(46,580	)		(123,154	)		(87,401	)
Market changes		(111,649	)		(136,887	)		(674,895	)		(233,395	)
		(170,848	)		(183,467	)		(798,049	)		(320,796	)
Hedging results		(50,650	)		55,536			716,536			96,671
		(221,498	)		(127,931	)		(81,513	)		(224,125	)
Net servicing fees from non-affiliates		(107,788	)		(54,604	)		133,857			(86,318	)
From PFSI—MSR recapture income		5,128			1,015			8,055			1,649
Net loan servicing fees	$	(102,660	)	$	(53,589	)	$	141,912		$	(84,669	)
Average servicing portfolio	$	143,856,366		$	102,476,058		$	140,056,208		$	99,205,766

(1) Includes contractually specified servicing fees, net of guarantee fees.

Net loan servicing fees decreased by $49.1 million during the quarter ended June 30, 2020, compared to the quarter ended June 30, 2019, due primarily to the negative effect of heightened hedging costs during the quarter, reflecting the volatility in the interest rate markets caused by the Pandemic as well as a reduction in market-implied volatility over the quarter which reduced the fair value of our option-based hedges.

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Net loan servicing fees increased by $226.6 million during the six months ended June 30, 2020 due primarily to improved hedging results in relation to the fair value losses we recognized on our MSRs during 2020 as compared to 2019, compounded by increased servicing fees due to the growth in our loan servicing portfolio during the period from June 30, 2019 to June 30, 2020.

The fair value of our investment in MSRs was affected by increased prepayment experience and expectations as a result of the decrease in interest rates during the quarter and six months ended June 30, 2020, as well as increased market discount rates and servicing costs, which reflect projected impacts and investor uncertainties surrounding the cash flows to be generated by this asset as the result of the emergence of the Pandemic.

Net Gain on Loans Acquired for Sale

Our net gain on loans acquired for sale is summarized below:

	Quarter ended June 30,						Six months ended June 30,
	2020			2019			2020			2019
	(in thousands)
From non-affiliates:
Cash loss:
Loans	$	21,842		$	(94,441	)	$	(47,112	)	$	(196,162	)
Hedging activities		(234,191	)		(36,055	)		(257,569	)		(50,370	)
		(212,349	)		(130,496	)		(304,681	)		(246,532	)
Non-cash gain:
Receipt of MSRs in loan sale transactions		203,127			152,986			451,949			284,854
Provision for losses relating to representations    and warranties provided in loan sales:
Pursuant to loan sales		(3,215	)		(713	)		(4,245	)		(1,433	)
Reduction in liability due to change in estimate		211			596			1,555			1,124
		(3,004	)		(117	)		(2,690	)		(309	)
Recognition of fair value of commitment to purchase    credit risk transfer securities relating to loans sold		(7,579	)		20,396			(34,228	)		39,996
Change in fair value during the period of    financial instruments held at period end:
IRLCs		4,572			3,157			72,803			1,626
Loans		31,829			(6,648	)		(4,953	)		(998	)
Hedging derivatives		142,294			(8,189	)		25,304			(28,219	)
		178,695			(11,680	)		93,154			(27,591	)
		371,239			161,585			508,185			296,950
Total from non—affiliates		158,890			31,089			203,504			50,418
From PFSI—cash gain		3,324			3,155			7,485			5,149
	$	162,214		$	34,244		$	210,989		$	55,567
Interest rate lock commitments issued on loans    acquired for sale to nonaffiliates	$	24,804,113		$	13,133,614		$	49,913,197		$	22,394,034
Acquisition of loans for sale:
To nonaffiliates	$	20,321,497		$	11,030,305		$	37,161,332		$	19,287,175
To PFSI		11,360,777			10,726,774			25,247,691			17,553,340
	$	31,682,274		$	21,757,079		$	62,409,023		$	36,840,515

The changes in gain on loans acquired for sale during the quarter and six months ended June 30, 2020, as compared to the same periods in 2019, reflect both the effects of increasing demand in the mortgage market on our loan sales volume and of constraints in mortgage industry capacity on our gain on sale margins, partially offset by losses on the fair value of our commitment to invest in the credit risk assets created through our current loan sales. We included $7.6 million and $34.2 million in fair value losses related to our firm commitment to purchase CRT securities arising from loan sales during the quarter and six months ended June 30, 2020, respectively, as compared to gains of $20.4 million and $40.0 million during the quarter and six months ended June 30, 2019, respectively.

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Non-cash elements of gain on sale of loans

The MSRs and liability for representations and warranties we recognize represent our estimate of the fair value of future benefits and costs we will realize for years in the future. These estimates represented approximately 123% and 213% of our gain on sale of loans at fair value for the quarter and six months ended June 30, 2020, respectively, as compared to 446% and 512% for the quarter and six months ended June 30, 2019, respectively. These estimates change as circumstances change and changes in these estimates are recognized in our results of operations in subsequent periods. How we measure and update our measurements of MSRs is detailed in Note 7 – Fair value – Valuation Techniques and Inputs to the consolidated financial statements included in this Quarterly Report.

We recognize a liability for losses we expect to incur relating to representations and warranties created in our loan sales transactions. Our agreements with the purchasers include representations and warranties related to the loans we sell. The representations and warranties require adherence to purchaser and insurer origination and underwriting guidelines, including but not limited to the validity of the lien securing the loan, property eligibility, borrower credit, income and asset requirements, and compliance with applicable federal, state and local law.

We recorded a provision for losses relating to representations and warranties relating to current loan sales of $3.2 million and $4.2 million for the quarter and six months ended June 30, 2020, respectively, and $713,000 and $1.4 million for the quarter and six months ended June 30, 2019, respectively. The increase in the provision relating to current loan sales reflects the increase on our loan sales volume as well as a change in the mix of sales toward transactions with higher expected loss rates.

In the event of a breach of our representations and warranties, we may be required to either repurchase the loans with the identified defects or indemnify the investor or insurer against credit losses attributable to the loans with indemnified defects. In such cases, we bear any subsequent credit loss on the loans. Our credit loss may be reduced by any recourse we have to correspondent sellers that, in turn, had sold such loans to us and breached similar or other representations and warranties. In such event, we have the right to seek a recovery of those repurchase losses from that correspondent seller.

Following is a summary of the indemnification and repurchase activity of the loans subject to representations and warranties:

	Quarter ended June 30,				Six months ended June 30,
	2020		2019		2020		2019
	(in thousands)
Indemnification activity (UPB):
Loans indemnified at beginning of period	$	5,937	$	6,544	$	5,697	$	7,075
New indemnifications		—		370		450		466
Less: Indemnified loans repaid or refinanced		—		1,158		210		1,785
Loans indemnified at end of period	$	5,937	$	5,756	$	5,937	$	5,756
UPB of loans with deposits received from correspondent    sellers collateralizing prospective indemnification    losses at end of period	$	—	$	603	$	603	$	—
Repurchase activity (UPB):
Loans repurchased	$	13,829	$	2,277	$	30,111	$	5,966
Less:
Loans repurchased by correspondent sellers		10,499		955		16,652		3,433
Loans resold or repaid by borrowers		2,388		983		3,625		1,073
Net indemnified loans repurchased	$	942	$	339	$	9,834	$	1,460
Net losses charged to liability for representations and warranties	$	79	$	77	$	79	$	95
At end of period:
Loans subject to representations and warranties	$	135,538,011	$	94,378,938
Liability for representations and warranties	$	10,225	$	7,728

The losses on representations and warranties we have recorded to date have been moderated by our ability to recover most of the losses inherent in the repurchased loans from the correspondent sellers. As the outstanding balance of loans we purchase and sell subject to representations and warranties increases, as the loans sold season, as our investors’ and guarantors’ loss mitigation strategies change and as our correspondent sellers’ ability and willingness to repurchase loans change, we expect that the level of repurchase activity and associated losses may increase.

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The method we use to estimate the liability for representations and warranties is a function of our estimates of future defaults, loan repurchase rates, severity of loss in the event of default and the probability of reimbursement by the correspondent loan seller. We establish a liability at the time loans are sold and review our liability estimate on a periodic basis.

The amount of the liability for representations and warranties is difficult to estimate and requires considerable judgment. The level of loan repurchase losses is dependent on economic factors, investor loss mitigation strategies, our ability to recover any losses inherent in the repurchased loan from the correspondent seller and other external conditions that change over the lives of the underlying loans. We may be required to incur losses related to such representations and warranties for several periods after the loans are sold or liquidated.

We record adjustments to our liability for losses on representations and warranties as economic fundamentals change, as investor and Agency evaluations of their loss mitigation strategies (including claims under representations and warranties) change and as economic conditions affect our correspondent sellers’ ability or willingness to fulfill their recourse obligations to us. Such adjustments may be material to our financial position and income in future periods.

Adjustments to our liability for representations and warranties are included as a component of our Net gains on loans acquired for sale at fair value. We recorded a $211,000 and $1.6 million reduction in liability for representations and warranties during the quarter and six months ended June 30, 2020, respectively, due to the effects of certain loans reaching specified performance histories identified by the Agencies as sufficient to limit repurchase claims relating to such loans.

Loan Origination Fees

Loan origination fees represent fees we charge correspondent sellers relating to our purchase of loans from those sellers. The changes in fees during the quarter and six months ended June 30, 2020, as compared to the same periods in 2019, reflects an increase in our purchases of loans with delivery fees.

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Net Interest Income

Net interest income is summarized below:

	Quarter ended June 30, 2020
	Interest income/expense
				Discount/						Average		Interest
	Coupon			fees (1)			Total			balance		yield/cost %
	(dollars in thousands)
Assets:
Cash and short-term investments	$	892		$	—		$	892		$	1,039,623		0.34	%
Mortgage-backed securities		21,742			(11,859	)		9,883			3,053,494		1.28	%
Loans acquired for sale at fair value		16,081			—			16,081			2,047,202		3.11	%
Loans at fair value:
Held by variable interest entity		2,166			546			2,712			231,973		4.63	%
Distressed		233			—			233			8,919		10.33	%
		2,399			546			2,945			240,892		4.84	%
ESS from PFSI		2,372			—			2,372			154,745		6.06	%
Deposits securing CRT arrangements		507			—			507			1,802,182		0.11	%
		43,993			(11,313	)		32,680			8,338,138		1.55	%
Placement fees relating to custodial funds		8,116			—			8,116
Other		16			—			16
		52,125			(11,313	)		40,812		$	8,338,138		1.94	%
Liabilities:
Assets sold under agreements to repurchase	$	14,658		$	2,413		$	17,071		$	4,755,992		1.42	%
Mortgage loan participation purchase and sale    Agreements		153			57			210			39,048		2.13	%
Notes payable secured by credit risk transfer and mortgage servicing assets		14,829			620			15,449			1,934,476		3.16	%
Exchangeable senior notes		3,534			809			4,343			242,469		7.09	%
Asset-backed financings of a    variable interest entity at fair value		1,866			604			2,470			222,578		4.39	%
Assets sold to PFSI under agreement to repurchase		792			—			792			94,338		3.32	%
		35,832			4,503			40,335			7,288,901		2.19	%
Interest shortfall on repayments of loans serviced    for Agency securitizations		19,804			—			19,804
Interest on loan impound deposits		909			—			909
		56,545			4,503			61,048		$	7,288,901		3.31	%
Net interest expense	$	(4,420	)	$	(15,816	)	$	(20,236	)
Net interest margin													-0.84	%
Net interest spread													-1.38	%

(1) Amounts in this column represent capitalization of interest on delinquent loans, amortization of premiums and accrual of unearned discounts for assets and amortization of debt issuance costs and premiums for liabilities.

78

	Quarter ended June 30, 2019
	Interest income/expense
			Discount/					Average		Interest
	Coupon		fees (1)			Total		balance		yield/cost %
	(dollars in thousands)
Assets:
Cash and short-term investments	$	1,240	$	—		$	1,240	$	157,975		3.11	%
Mortgage-backed securities		23,672		(6,214	)		17,458		2,606,132		2.65	%
Loans acquired for sale at fair value		25,910		—			25,910		2,053,214		4.99	%
Loans at fair value:
Held by variable interest entity		2,721		231			2,952		286,188		4.08	%
Distressed		280		1,166			1,446		96,727		5.91	%
		3,001		1,397			4,398		382,915		4.54	%
ESS from PFSI		2,767		—			2,767		203,363		5.38	%
Deposits securing CRT arrangements		7,830		—			7,830		1,490,265		2.08	%
		64,420		(4,817	)		59,603		6,893,864		3.42	%
Placement fees relating to custodial funds		12,009		—			12,009
Other		181		—			181
		76,610		(4,817	)		71,793	$	6,893,864		4.12	%
Liabilities:
Assets sold under agreements to repurchase (2)		41,527		(498	)		41,029	$	4,911,964		3.30	%
Mortgage loan participation purchase and sale    agreements		315		33			348		34,516		3.99	%
Notes payable secured by credit risk transfer and    mortgage servicing assets		10,737		457			11,194		883,438		5.01	%
Exchangeable senior notes		3,359		307			3,666		250,000		5.80	%
Asset-backed financings of a    variable interest entity at fair value		2,373		1,184			3,557		272,231		5.17	%
Assets sold to PFSI under agreement to    repurchase		1,692		—			1,692		123,123		5.44	%
		60,003		1,483			61,486		6,475,272		3.76	%
Interest shortfall on repayments of loans serviced    for Agency securitizations		3,605		—			3,605
Interest on loan impound deposits		805		—			805
		64,413		1,483			65,896	$	6,475,272		4.03	%
Net interest income (expense)	$	12,197	$	(6,300	)	$	5,897
Net interest margin											0.24	%
Net interest spread											0.09	%

(1) Amounts in this column represent capitalization of interest on delinquent loans, amortization of premiums and accrual of unearned discounts for assets and amortization of debt issuance costs and premiums for liabilities.

(2) In 2017, we entered into a master repurchase agreement that provided us with incentives to finance loans approved for satisfying certain consumer relief characteristics as provided in the agreement. During the quarter ended June 30, 2019, we included $2.3 million of such incentives as a reduction to Interest expense. The master repurchase agreement expired on August 21, 2019.

79

	Six months ended June 30, 2020
	Interest income/expense
			Discount/						Average		Interest
	Coupon		fees (1)			Total			balance		yield/cost %
	(dollars in thousands)
Assets:
Cash and short-term investments	$	2,519	$	—		$	2,519		$	728,643		0.68	%
Mortgage-backed securities		49,312		(23,861	)		25,451			3,299,160		1.53	%
Loans acquired for sale at fair value		47,604		—			47,604			2,631,047		3.58	%
Loans at fair value:
Held by variable interest entity		4,514		839			5,353			242,866		4.36	%
Distressed		292		—			292			10,084		5.73	%
		4,806		839			5,645			252,950		4.41	%
ESS from PFSI		4,346		—			4,346			164,115		5.24	%
Deposits securing CRT arrangements		6,606		—			6,606			1,862,186		0.70	%
		115,193		(23,022	)		92,171			8,938,101		2.04	%
Placement fees relating to custodial funds		20,514		—			20,514
Other		250		—			250
		135,957		(23,022	)		112,935		$	8,938,101		2.50	%
Liabilities:
Assets sold under agreements to repurchase	$	50,969	$	3,853		$	54,822		$	5,529,446		1.96	%
Mortgage loan participation purchase and sale    agreements		435		113			548			40,174		2.70	%
Notes payable secured by credit risk transfer and mortgage servicing assets		33,838		1,229			35,067			1,897,344		3.66	%
Exchangeable senior notes		9,781		1,828			11,609			343,316		6.69	%
Asset-backed financings of a    variable interest entity at fair value		3,902		3,095			6,997			231,672		5.97	%
Assets sold to PFSI under agreement to repurchase		2,010		—			2,010			99,701		4.04	%
		100,935		10,118			111,053			8,141,653		2.70	%
Interest shortfall on repayments of loans serviced    for Agency securitizations		29,243		—			29,243
Interest on loan impound deposits		1,820		—			1,820
		131,998		10,118			142,116		$	8,141,653		3.45	%
Net interest income (expense)	$	3,959	$	(33,140	)	$	(29,181	)
Net interest margin												-0.65	%
Net interest spread												-0.95	%

(1) Amounts in this column represent capitalization of interest on delinquent loans, amortization of premiums and accrual of unearned discounts for assets and amortization of debt issuance costs and premiums for liabilities.

80

	Six months ended June 30, 2019
	Interest income/expense
			Discount/					Average		Interest
	Coupon		fees (1)			Total		balance		yield/cost %
	(dollars in thousands)
Assets:
Cash and short-term investments	$	1,911	$	—		$	1,911	$	132,631		2.87	%
Mortgage-backed securities		47,680		(10,770	)		36,910		2,599,779		2.82	%
Loans acquired for sale at fair value		46,349		—			46,349		1,845,847		4.99	%
Loans at fair value:
Held by variable interest entity		5,525		351			5,876		287,965		4.06	%
Distressed		906		1,787			2,693		105,818		5.06	%
		6,431		2,138			8,569		393,783		4.33	%
ESS from PFSI		5,833		—			5,833		205,380		5.65	%
Deposits securing CRT arrangements		14,605		—			14,605		1,317,481		2.20	%
		122,809		(8,632	)		114,177		6,494,901		3.50	%
Placement fees relating to custodial funds		20,275		—			20,275
Other		422		—			422
		143,506		(8,632	)		134,874	$	6,494,901		4.13	%
Liabilities:
Assets sold under agreements to repurchase (2)		83,885		-6,005			77,880	$	4,878,768		3.17	%
Mortgage loan participation purchase and sale    agreements		835		87			922		45,303		4.05	%
Notes payable secured by credit risk transfer and    mortgage servicing assets		16,304		713			17,017		672,818		5.03	%
Exchangeable senior notes		6,719		608			7,327		250,000		5.83	%
Asset-backed financings of a    variable interest entity at fair value		4,820		2,005			6,825		273,999		4.95	%
Assets sold to PFSI under agreement to repurchase		3,488		—			3,488		125,821		5.51	%
		116,051		(2,592	)		113,459		6,246,709		3.61	%
Interest shortfall on repayments of loans serviced    for Agency securitizations		5,877		—			5,877
Interest on loan impound deposits		1,299		—			1,299
		123,227		(2,592	)		120,635	$	6,246,709		3.84	%
Net interest income (expense)	$	20,279	$	(6,040	)	$	14,239
Net interest margin											0.44	%
Net interest spread											0.29	%

(1) Amounts in this column represent capitalization of interest on delinquent loans, amortization of premiums and accrual of unearned discounts for assets and amortization of debt issuance costs and premiums for liabilities.

(2) In 2017, we entered into a master repurchase agreement that provided us with incentives to finance loans approved for satisfying certain consumer relief characteristics as provided in the agreement. During the six months ended June 30, 2019, we included $9.8 million of such incentives as a reduction to Interest expense. The master repurchase agreement expired on August 21, 2019.

81

The effects of changes in the yields and costs and composition of our investments on our interest income are summarized below:

	Quarter ended June 30, 2020									Six months ended June 30, 2020
	vs.									vs.
	Quarter ended June 30, 2019									Six months ended June 30, 2019
	Increase (decrease) due to changes in									Increase (decrease) due to changes in
							Total									Total
	Rate			Volume			change			Rate			Volume			change
	(in thousands)
Assets:
Cash and short-term investments	$	(3,858	)	$	3,510		$	(348	)	$	(2,414	)	$	3,022		$	608
Mortgage-backed securities		(14,685	)		7,110			(7,575	)		(19,824	)		8,365			(11,459	)
Loans acquired for sale at fair value		(9,753	)		(76	)		(9,829	)		(15,352	)		16,607			1,255
Loans at fair value:
Held by variable interest entity		825			(1,065	)		(240	)		427			(950	)		(523	)
Distressed		1,823			(3,036	)		(1,213	)		317			(2,718	)		(2,401	)
		2,648			(4,101	)		(1,453	)		744			(3,668	)		(2,924	)
ESS from PFSI		779			(1,174	)		(395	)		(395	)		(1,092	)		(1,487	)
Deposits securing CRT    arrangements		(11,365	)		4,042			(7,323	)		(12,539	)		4,540			(7,999	)
		(36,234	)		9,311			(26,923	)		(49,780	)		27,774			(22,006	)
Placement fees relating to custodial    funds		—			(3,893	)		(3,893	)		—			239			239
Other		—			(165	)		(165	)		—			(172	)		(172	)
		(36,234	)		5,253			(30,981	)		(49,780	)		27,841			(21,939	)
Liabilities:
Assets sold under agreements to    repurchase		(22,694	)		(1,264	)		(23,958	)		(32,581	)		9,523			(23,058	)
Mortgage loan participation    purchase and sale agreement		(250	)		112			(138	)		(279	)		(95	)		(374	)
Notes payable secured by credit risk     transfer and mortgage servicing     assets		(11,621	)		15,876			4,255			(5,775	)		23,825			18,050
Exchangeable senior notes		985			(308	)		677			1,212			3,070			4,282
Asset-backed financings of a    variable interest entity at fair value		(492	)		(595	)		(1,087	)		1,310			(1,138	)		172
Assets sold to PFSI under agreement    to repurchase		(562	)		(338	)		(900	)		(845	)		(633	)		(1,478	)
		(34,634	)		13,483			(21,151	)		(36,958	)		34,552			(2,406	)
Interest shortfall on repayments of    loans serviced for Agency    securitizations		—			16,199			16,199			—			23,366			23,366
Interest on loan impound deposits		—			104			104			—			521			521
		(34,634	)		29,786			(4,848	)		(36,958	)		58,439			21,481
Net interest expense	$	(1,600	)	$	(24,533	)	$	(26,133	)	$	(12,822	)	$	(30,598	)	$	(43,420	)

The decrease in net interest income during the quarter and six months periods ended June 30, 2020, as compared to the same period in 2019 is due to an increase in interest shortfall on repayments of loans serviced for Agency securitizations resulting from the increased levels of prepayment activity in our MSR portfolio combined with a reduced net interest margin resulting from a shift in earning asset mix toward lower-yielding MBS and a shift in financing to longer-term debt to finance CRT arrangements and MSRs. Included in net interest income for the quarter and six months ended June 30, 2019 was $2.3 million and $9.8 million, respectively, of incentives we recognized relating to a master repurchase agreement that provided us with incentives to finance loans approved for satisfying certain consumer characteristics. The master repurchase agreement expired on August 21, 2019.

82

Results of Real Estate Acquired in Settlement of Loans

Results of REO includes the gains or losses we record upon sale of the properties as well as valuation adjustments we record during the period we hold those properties. During the quarter and six months ended June 30, 2020, we recorded net gains of $2.9 million and $2.9 million, respectively, as compared to gains of $2.1 million and $595,000, respectively, for the same periods in 2019, in Results of real estate acquired in settlement of loans. This improvement in results reflects the ongoing liquidation of our investments in distressed mortgage assets.

Results of REO are summarized below:

	Quarter ended June 30,					Six months ended June 30,
	2020			2019		2020			2019
	(dollars in thousands)
Proceeds from sales of REO	$	10,135		$	14,271	$	26,078		$	31,171
Results of real estate acquired in settlement of    loans:
Valuation adjustments, net		(68	)		146		(1,571	)		(3,415	)
Gain on sale, net		2,924			1,929		4,459			4,010
	$	2,856		$	2,075	$	2,888		$	595
Number of properties sold		48			74		133			154
Average carrying value of REO	$	47,386		$	83,299	$	52,867		$	82,374
At period end:
Carrying value	$	43,559		$	97,808
Number of properties		179			495

Expenses

Our expenses are summarized below:

	Quarter ended June 30,				Six months ended June 30,
	2020		2019		2020		2019
	(in thousands)
Earned by PennyMac Financial Services, Inc.:
Loan fulfillment fees	$	52,815	$	29,590	$	94,755	$	57,164
Loan servicing fees		15,533		11,568		30,054		22,138
Management fees		8,288		8,832		17,343		16,080
Safekeeping		1,905		1,000		3,563		1,736
Loan origination		4,468		3,118		8,717		5,395
Professional services		1,492		1,733		2,988		3,060
Loan collection and liquidation		864		1,247		1,614		2,831
Compensation		1,200		1,771		1,719		3,740
Other		3,693		4,172		7,413		7,638
	$	90,258	$	63,031	$	168,166	$	119,782

Expenses increased $27.2 million, or 43%, and $48.4 million, or 40%, during the quarter and six months ended June 30, 2020, respectively, as compared to the same periods in 2019, primarily due to increased loan fulfillment fees attributable to increases in our production volume during the quarter and six months ended June 30, 2020, as compared to the same periods in 2019.

83

Loan Fulfillment Fees

Loan fulfillment fees represent fees we pay to PLS for the services it performs on our behalf in connection with our acquisition, packaging and sale of loans. The fee is calculated as a percentage of the UPB of the loans purchased. Loan fulfillment fees are summarized below:

	Quarter ended June 30,				Six months ended June 30,
	2020		2019		2020		2019
	(dollars in thousands)
Fulfillment fee expense	$	52,815	$	29,590	$	94,755	$	57,164
UPB of loans fulfilled by PLS	$	18,899,695	$	10,741,078	$	35,052,238	$	18,876,630
Average fulfillment fee rate (in basis points)		28		28		27		30

The increase in loan fulfillment fees of $23.2 million and $37.6 million, respectively, during the quarter and six months ended June 30, 2020 as compared to the same periods in 2019, is primarily due to an increase in the volume of loans fulfilled for us by PFSI.

Loan Servicing Fees

Loan servicing fees payable to PLS are summarized below:

	Quarter ended June 30,				Six months ended June 30,
	2020		2019		2020		2019
	(in thousands)
Loan servicing fees:
Loans acquired for sale at fair value	$	607	$	385	$	1,143	$	624
Loans at fair value		188		617		488		1,080
MSRs		14,738		10,566		28,423		20,434
	$	15,533	$	11,568	$	30,054	$	22,138
Average investment in:
Loans acquired for sale at fair value	$	2,047,202	$	2,053,214	$	2,631,047	$	1,845,847
Loans at fair value:
Distressed	$	8,919	$	96,727	$	10,084	$	105,818
Held in a VIE	$	231,973	$	286,188	$	242,866	$	287,965
Average MSR portfolio UPB	$	143,856,366	$	102,476,058	$	140,056,208	$	99,205,766
MSR recapture income recognized included    in Net loan servicing fees —from    PennyMac Financial Services, Inc.	$	5,128	$	1,015	$	8,055	$	1,649

Loan servicing fees increased by $4.0 million and $7.9 million, respectively, during the quarter and six months ended June 30, 2020, as compared to the same periods in 2019. We incur loan servicing fees primarily in support of our MSR portfolio. The increase in loan servicing fees was due to growth in our portfolio of MSRs.

Management Fees

Management fees payable to PCM are summarized below:

	Quarter ended June 30,				Six months ended June 30,
	2020		2019		2020		2019
	(in thousands)
Base	$	8,288	$	6,839	$	17,343	$	12,948
Performance incentive		—		1,993		—		3,132
	$	8,288	$	8,832	$	17,343	$	16,080
Average shareholders' equity amounts used    to calculate base management fee expense	$	2,242,460	$	1,828,786	$	2,354,600	$	1,740,217

84

Management fees decreased by $544,000 and increased by $1.3 million during the quarter and six months ended June 30, 2020, respectively, as compared to the same periods in 2019. The decrease for the quarter ended June 30, 2020 compared to the same period in 2019 is due to the offsetting effects of an increase in base management fees and the recognition of no performance incentive fees. The increase in the base management fee for the six months ended June 30, 2020 compared to the same period in 2019, is due to increases in our average shareholders’ equity as the result of common share issuances during 2019. We did not recognize performance incentive fees for the quarter or six-month periods ended June 30, 2020 due to the effect of the losses we incurred during the quarter ended March 31, 2020 on our rolling twelve-month profitability which is the basis for our quarterly performance incentive fee.

Loan origination

Loan origination expenses increased $1.4 million, or 43%, and $3.3 million, or 62%, respectively, during the quarter and six months ended June 30, 2020, as compared to the same periods in 2019 reflecting the increases in our loan originations produced through our correspondent production activities.

Compensation

Compensation expense decreased $571,000 and $2.0 million, respectively, during the quarter and six months ended June 30, 2020, as compared to 2019, primarily due to decreased share-based compensation expense, reflecting a decrease in expected future vestings of equity awards as a result of our projected earnings performance not achieving the targets included in the outstanding performance-based awards.

Safekeeping

Safekeeping expense increased by $905,000 and $1.8 million, respectively, during the quarter and six months ended June 30, 2020, as compared to the same periods in 2019, as a result of our increase in correspondent acquisition volume.

Loan collection and liquidation

Loan collection and liquidation expenses decreased $383,000 and $1.2 million, respectively, during the quarter and six months ended June 30, 2020, as compared to the same period in 2019, due to decreased investment in our portfolio of nonperforming loans, reflecting the ongoing wind-down of this investment.

Other Expenses

Other expenses are summarized below:

	Quarter ended June 30,				Six months ended June 30,
	2020		2019		2020		2019
	(in thousands)
Common overhead allocation from PFSI	$	1,585	$	1,276	$	3,125	$	2,512
Bank service charges		466		575		1,007		1,143
Technology		331		352		760		725
Insurance		319		322		658		602
Other		992		1,647		1,863		2,656
	$	3,693	$	4,172	$	7,413	$	7,638

Income Taxes

We have elected to treat PMC as a taxable REIT subsidiary (“TRS”). Income from a TRS is only included as a component of REIT taxable income to the extent that the TRS makes dividend distributions of income to us. A TRS is subject to corporate federal and state income tax. Accordingly, a provision for income taxes for PMC is included in the accompanying consolidated statements of operations.

Our effective tax rate was 0.7% and (11.8)% with consolidated pretax income of $468.1 million and pretax loss of $116.4 million for the quarter and six months ended June 30, 2020, respectively.  Our TRS recognized tax expense of $3.4 million on pretax income of $89.9 million and tax expense of $13.5 million on pretax income of $68.1 million for the quarter and six months ended June 30, 2020, respectively.  For the same periods in 2019, the TRS recognized tax benefit of $11.0 million on pretax loss of $42.4 million and tax benefit of $14.9 million on pretax loss of $59.8 million, respectively.  We reported consolidated pretax income for the quarter and six months ended June 30, 2019 of $33.4 million and $83.2 million, respectively. The primary difference between the Company’s effective tax rate and the statutory tax rate is attributable to nontaxable REIT income resulting from the dividends paid deduction.

85

Management assesses the available positive and negative evidence to estimate whether sufficient future taxable income will be generated to permit use of the existing deferred tax assets. A significant piece of objective negative evidence evaluated was the cumulative loss incurred by the TRS over the three-year period ended June 30, 2020. Such objective evidence limits the ability to consider other subjective evidence, such as our projections for future growth. On the basis of this evaluation, as of June 30, 2020, a valuation allowance of $4.7 million has been recorded at the TRS to recognize only the portion of the deferred tax asset that is more likely than not to be realized.  The valuation allowance was reduced from the $27 million valuation allowance recorded at March 31, 2020 as the result of positive GAAP income at the TRS for the quarter ended June 30, 2020.  The amount of the deferred tax asset considered realizable could be adjusted further if estimates of future taxable income during the carryforward period are reduced or increased or if objective negative evidence in the form of cumulative losses is no longer present and additional weight is given to subjective evidence such as our projections for growth.

In general, cash dividends declared by the Company will be considered ordinary income to the shareholders for income tax purposes. Some portion of the dividends may be characterized as capital gain distributions or a return of capital. For tax years beginning after December 31, 2017, the 2017 Tax Cuts and Jobs Act (the “Tax Act”) (subject to certain limitations) provides a 20% deduction from taxable income for ordinary REIT dividends.

Balance Sheet Analysis

Following is a summary of key balance sheet items as of the dates presented:

	June 30,		December 31,
	2020		2019
	(in thousands)
Assets
Cash	$	346,007	$	104,056
Investments:
Short-term		273,592		90,836
Mortgage-backed securities at fair value		2,612,986		2,839,633
Loans acquired for sale at fair value		2,179,962		4,148,425
Loans at fair value		230,660		270,793
ESS		151,206		178,586
Derivative and credit risk transfer strip assets		114,346		202,318
Firm commitment to purchase CRT securities		—		109,513
Deposits securing credit risk transfer arrangements		1,666,449		1,969,784
MSRs		1,189,605		1,535,705
REO		43,559		65,583
		8,462,365		11,411,176
Other		275,347		256,119
Total assets	$	9,083,719	$	11,771,351
Liabilities
Debt:
Short-term	$	4,164,979	$	7,005,986
Long-term		2,233,329		2,159,286
		6,398,308		9,165,272
Firm commitment to purchase CRT securities		191,193		—
Other		258,941		155,164
Total liabilities		6,848,442		9,320,436
Shareholders’ equity		2,235,277		2,450,915
Total liabilities and shareholders’ equity	$	9,083,719	$	11,771,351

Total assets decreased by approximately $2.7 billion, or 23%, during the period from December 31, 2019 through June 30, 2020, primarily due to a $2.0 billion decrease in loans acquired for sale, a $303.3 million decrease in Deposits securing credit risk transfer arrangements and a decrease of $109.5 million in Firm commitment to purchase CRT securities. The decrease in Loans acquired for sale reflect our efforts aimed at accelerating the settlement of our loan sale commitments. The decrease in Deposits securing credit risk transfer arrangements reflects the effects of rapid repayments in the reference pools whose losses the deposits secure and the reduction in the Firm commitment to purchase CRT securities reflects the Pandemic-induced impairment of the fair value of the commitment.

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Asset Acquisitions

Our asset acquisitions are summarized below.

Correspondent Production

Following is a summary of our correspondent production acquisitions at fair value: 

	Quarter ended June 30,				Six months ended June 30,
	2020		2019		2020		2019
	(in thousands)
Correspondent loan purchases:
Agency-eligible	$	19,559,676	$	10,217,164	$	38,486,355	$	19,504,796
Government-insured or guaranteed-for sale to PLS		11,509,272		11,056,775		25,746,675		18,123,667
Jumbo		—		4,232		—		9,686
Home equity lines of credit		1,237		1,581		2,240		2,031
	$	31,070,185	$	21,279,752	$	64,235,270	$	37,640,180

During the quarter and six months ended June 30, 2020, we purchased for sale $31.1 billion and $64.2 billion, respectively, in fair value of correspondent production loans as compared to $21.3 billion and $37.6 billion, respectively, during the quarter and six months ended June 30, 2019. This increase primarily reflects the continuing decrease in mortgage market interest rates to historic lows, which has increased demand in the mortgage origination market.

Other Investment Activities

Following is a summary of our acquisitions of mortgage-related investments held in our credit rate sensitive strategies and interest rate sensitive strategies segments:

	Quarter ended June 30,						Six months ended June 30,
	2020			2019			2020			2019
	(in thousands)
Credit sensitive assets:
Deposits and commitments to fund deposits relating to CRT arrangements	$	—		$	933,370		$	—		$	933,370
Change in firm commitment to purchase CRT securities
Fair value		218,456			24,526			(300,706	)		66,316
Expected face amount		(262,176	)		(562,710	)		292,514			(280,793	)
		(43,720	)		(538,184	)		(8,192	)		(214,477	)
Interest rate sensitive assets:
MSRs received in loan sales and purchased		203,127			152,986			451,949			284,854
MBS		—			81,202			1,615,486			81,202
ESS received pursuant to a recapture agreement		483			442			862			950
		203,610			234,630			2,068,297			367,006
	$	159,890		$	(303,554	)	$	2,060,105		$	152,529

Our acquisitions during the quarter and six months ended June 30, 2020 and 2019 were financed through the use of a combination of proceeds from borrowings, liquidations of existing investments and proceeds from equity issuances. We continue to identify additional means of increasing our investment portfolio through cash flow from our business activities, existing investments, borrowings, and transactions that minimize current cash outlays. However, we expect that, over time, our ability to continue our investment portfolio growth will depend on our ability to raise additional equity capital.

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Investment Portfolio Composition

Mortgage-Backed Securities

Following is a summary of our MBS holdings:

	June 30, 2020									December 31, 2019
					Average									Average
	Fair				Life					Fair				Life
	value		Principal		(in years)		Coupon			value		Principal		(in years)		Coupon
	(dollars in thousands)
Agency:
Fannie Mae	$	1,203,327	$	1,142,570		1.4		3.0	%	$	2,009,093	$	1,946,203		5.0		3.4	%
Freddie Mac		1,409,659		1,336,394		1.3		3.0	%		830,540		809,595		5.3		3.2	%
	$	2,612,986	$	2,478,964						$	2,839,633	$	2,755,798

Credit Risk Transfer Transactions

Following is a summary of the composition of the loans underlying our investment in funded CRT arrangements and our firm commitment to purchase CRT securities.

CRT Arrangements

Following is a summary of our holding of CRT arrangements:

	June 30, 2020			December 31, 2019
	(in thousands)
Carrying value of CRT arrangements:
Derivative and credit risk transfer assets
Credit risk transfer strips	$	—		$	54,930
Derivative assets		—			115,863
		—			170,793
Derivative and credit risk transfer liabilities
CRT strips		(61,375	)		—
CRT derivatives		(63,926	)		—
		(125,301	)		—
Deposits securing CRT arrangements		1,666,449			1,969,784
Interest-only security payable at fair value		(14,981	)		(25,709	)
	$	1,526,167		$	2,114,868
UPB of loans subject to credit guarantee obligations	$	32,086,351		$	41,944,117

Following is a summary of the composition of the loans underlying our investment in CRT arrangements as of June 30, 2020:

		Year of origination
		2019		2018		2017		2016		2015		Total
	(in millions)
UPB:
Outstanding		$	2,499	$	11,927	$	8,985	$	6,594	$	2,081	$	32,086
Cumulative defaults		$	—	$	32.6	$	48.2	$	39.2	$	28.1	$	148.1
Cumulative losses		$	—	$	1.5	$	4.8	$	3.9	$	2.8	$	13.0

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		Year of origination
Original debt-to income ratio		2019			2018			2017			2016			2015			Total
	(in millions)
<25%		$	234		$	1,169		$	1,125		$	939		$	268		$	3,735
25 - 30%			239			1,129			1,088			915			274			3,645
30 - 35%			326			1,586			1,449			1,153			371			4,885
35 - 40%			454			2,033			1,722			1,313			443			5,965
40 - 45%			620			2,712			2,231			1,718			603			7,884
>45%			626			3,298			1,370			556			122			5,972
		$	2,499		$	11,927		$	8,985		$	6,594		$	2,081		$	32,086
Weighted average			38.2	%		38.2	%		36.2	%		35.0	%		35.2	%		36.8	%

		Year of origination
Origination FICO credit score		2019		2018		2017		2016		2015		Total
	(in millions)
600 - 649		$	27	$	205	$	79	$	54	$	32	$	397
650 - 699			378		2,028		1,237		768		359		4,770
700 - 749			933		4,052		2,980		2,089		671		10,725
750 or greater			1,159		5,621		4,676		3,682		1,018		16,156
Not available			2		21		13		1		1		38
		$	2,499	$	11,927	$	8,985	$	6,594	$	2,081	$	32,086
Weighted average			742		741		747		751		743		745

		Year of origination
Origination loan-to value ratio		2019			2018			2017			2016			2015			Total
	(in millions)
<80%		$	684		$	3,705		$	2,769		$	2,591		$	781		$	10,530
80-85%			562			2,895			2,512			1,716			537			8,222
85-90%			136			594			459			390			114			1,693
90-95%			337			1,417			1,137			753			255			3,899
95-100%			780			3,316			2,108			1,144			394			7,742
		$	2,499		$	11,927		$	8,985		$	6,594		$	2,081		$	32,086
Weighted average			84.7	%		83.6	%		82.9	%		81.2	%		81.7	%		82.9	%

		Year of origination
Current loan-to value ratio (1)		2019			2018			2017			2016			2015			Total
	(in millions)
<80%		$	1,384		$	7,752		$	7,606		$	6,328		$	2,033		$	25,103
80-85%			380			1,828			953			207			34			3,402
85-90%			520			1,709			325			42			10			2,606
90-95%			192			549			82			13			2			838
95-100%			20			77			16			2			1			116
>100%			3			12			3			2			1			21
		$	2,499		$	11,927		$	8,985		$	6,594		$	2,081		$	32,086
Weighted average			77.6	%		74.9	%		69.3	%		63.2	%		60.2	%		70.2	%

(1) Based on current UPB compared to estimated fair value of the property securing the loan.

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		Year of origination
Geographic distribution		2019		2018		2017		2016		2015		Total
	(in millions)
CA		$	330	$	1,511	$	1,058	$	1,452	$	395	$	4,746
FL			341		1,350		844		584		162		3,281
TX			168		833		674		764		320		2,759
VA			90		491		486		525		206		1,798
MD			81		505		507		429		128		1,650
Other			1,489		7,237		5,416		2,840		870		17,852
		$	2,499	$	11,927	$	8,985	$	6,594	$	2,081	$	32,086

		Year of origination
Regional geographic distribution (1)		2019		2018		2017		2016		2015		Total
	(in millions)
Northeast		$	227	$	1,120	$	1,085	$	766	$	283	$	3,481
Southeast			963		4,265		3,055		1,997		637		10,917
Midwest			174		950		850		559		160		2,693
Southwest			503		2,358		1,729		1,208		439		6,237
West			632		3,234		2,266		2,064		562		8,758
		$	2,499	$	11,927	$	8,985	$	6,594	$	2,081	$	32,086

(1) Northeast consists of CT, DE, ME, MA, NH, NJ, NY, PA, PR, RI, VT, VI; Southeast consists of AL, DC, FL, GA, KY, MD, MS, NC, SC, TN, VA, WV; Midwest consists of IL, IN, IA, MI, MN, NE, ND, OH, SD, WI; Southwest consists of AZ, AR, CO, KS, LA, MO, NM, OK, TX, UT; and West consists of AK, CA, GU, HI, ID, MT, NV, OR, WA and WY.

		Year of origination
Collection status		2019		2018		2017		2016		2015		Total
	(in millions)
Delinquency
Current - 89 Days		$	2,306	$	11,053	$	8,500	$	6,278	$	1,985	$	30,122
90 - 179 Days			186		844		485		315		96		1,926
180+ Days			6		25		—		—		—		31
Foreclosure			1		5		—		1		—		7
		$	2,499	$	11,927	$	8,985	$	6,594	$	2,081	$	32,086
Bankruptcy		$	3	$	24	$	18	$	15	$	6	$	66

Firm commitment to purchase CRT securities

Following is a summary of our firm commitment to purchase CRT securities:

	June 30, 2020			December 31, 2019
	(in thousands)
Face amount of firm commitment to purchase CRT    securities	$	1,794,717		$	1,502,203
Fair value of firm commitment	$	(191,193	)	$	109,513

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Following is a summary of the composition of the loans underlying our firm commitment to purchase CRT securities as of June 30, 2020:

Original debt-to income ratio	June 30, 2020
	(in millions)
<25%	$	7,414
25 - 30%		6,850
30 - 35%		8,193
35 - 40%		8,938
40 - 45%		9,838
>45%		7,213
	$	48,446
Weighted average		35.2	%

Origination FICO credit score	June 30, 2020
	(in millions)
600 - 649	$	500
650 - 699		3,596
700 - 749		13,567
750 or greater		30,685
Not available		98
	$	48,446
Weighted average		757

Origination loan-to value ratio	June 30, 2020
	(in millions)
<80%	$	18,519
80-84%		8,908
85-89%		3,188
90-94%		5,014
95-100%		12,817
	$	48,446
Weighted average		82.7	%

Current loan-to value ratio (1)	June 30, 2020
	(in millions)
<80%	$	26,529
80-84%		4,398
85-89%		7,254
90-94%		8,591
95-100%		1,592
>100%		82
	$	48,446
Weighted average		79.4	%

(1) Based on current UPB compared to estimated fair value of the property securing the loan.

Geographic distribution	June 30, 2020
	(in millions)
CA	$	6,350
TX		3,878
FL		3,704
WA		2,358
VA		2,330
Other		29,826
	$	48,446

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Regional geographic distribution (1)	June 30, 2020
	(in millions)
Northeast	$	4,475
Southeast		14,952
Midwest		4,168
Southwest		12,106
West		12,745
	$	48,446

(1) Northeast consists of CT, DE, ME, MA, NH, NJ, NY, PA, PR, RI, VT, VI; Southeast consists of AL, DC, FL, GA, KY, MD, MS, NC, SC, TN, VA, WV; Midwest consists of IL, IN, IA, MI, MN, NE, ND, OH, SD, WI; Southwest consists of AZ, AR, CO, KS, LA, MO, NM, OK, TX, UT; West consists of AK, CA, GU, HI, ID, MT, NV, OR, WA and WY.

Collection status	June 30, 2020
	(in millions)
Delinquency
Current - 89 Days	$	46,614
90 - 179 Days		1,822
180+ Days		7
Foreclosure		3
	$	48,446
Bankruptcy	$	12

Cash Flows

Our cash flows for the six months ended June 30, 2020 and 2019 are summarized below:

	Six months ended June 30,
	2020			2019			Change
	(in thousands)
Operating activities		2,607,935		$	(915,047	)	$	3,522,982
Investing activities		490,847			(655,631	)	$	1,146,478
Financing activities		(2,856,831	)		1,588,509		$	(4,445,340	)
Net cash flows	$	241,951		$	17,831		$	224,120

Our cash flows resulted in a net increase in cash of $242.0 million during the six months ended June 30, 2020, as discussed below.

Operating activities

Cash provided by operating activities totaled $2.6 billion during the six months ended June 30, 2020, as compared to cash used in operating activities of $915.0 million during the six months ended June 30, 2019. Cash flows from operating activities primarily reflect cash flows from loans acquired for sale as shown below:

	Six months ended June 30,
	2020		2019
	(in thousands)
Operating cash flows from:
Loans acquired for sale	$	1,737,872	$	(1,099,972	)
Other		870,063		184,925
	$	2,607,935	$	(915,047	)

Cash flows from loans acquired for sale primarily reflect changes in the level of production inventory from the beginning to end of the periods presented. Our inventory of loans acquired for sale decreased during 2020 resulting in the cash inflow relating to sales of loans acquired for sale in excess of purchases.

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Investing activities

Net cash provided by our investing activities was $490.8 million for the six months ended June 30, 2020, as compared to net cash used in our investing activities of $655.6 million for the six months ended June 30, 2019, due primarily to the sales and repayments of our investments in MBS in excess of purchase of such assets, combined with increased levels of distribution from credit risk transfer agreements.

Financing activities

Net cash used in our financing activities was $2.9 billion for the six months ended June 30, 2020, as compared to net cash provided by our financing activities of $1.6 billion for the six months ended June 30, 2019. This change reflects the repayment of borrowings relating to reduced levels of inventory of loans held for sale, offset by increased levels of short-term investments in response to the emergence of the Pandemic.

As discussed below in Liquidity and Capital Resources, our Manager continues to evaluate and pursue additional sources of financing to provide us with future investing capacity. We do not raise equity or enter into borrowings for the purpose of financing the payment of dividends. We believe that the cash flows from the liquidation of our investments, which include accumulated gains recorded during the periods we hold those investments, along with our cash earnings, are adequate to fund our operating expenses and dividend payment requirements. However, we manage our liquidity in the aggregate and are reinvesting our cash flows in new investments as well as using such cash to fund our dividend requirements.

Liquidity and Capital Resources

Our liquidity reflects our ability to meet our current obligations (including the purchase of loans from correspondent sellers, our operating expenses and, when applicable, retirement of, and margin calls relating to, our debt and derivatives positions), make investments as our Manager identifies them, pursue our share repurchase program and make distributions to our shareholders. We generally need to distribute at least 90% of our taxable income each year (subject to certain adjustments) to our shareholders to qualify as a REIT under the Internal Revenue Code. This distribution requirement limits our ability to retain earnings and thereby replenish or increase capital to support our activities.

We expect our primary sources of liquidity to be cash flows from our investment portfolio, including cash earnings on our investments, cash flows from business activities, liquidation of existing investments and proceeds from borrowings and/or additional equity offerings. When we finance a particular asset, the amount borrowed is less than the asset’s fair value and we must provide the cash in the amount of such difference. Our ability to continue making investments is dependent on our ability to invest the cash representing such difference.

The impact of the Pandemic on our operations, liquidity and capital resources remain uncertain and difficult to predict, for further discussion of the potential impacts of the Pandemic please also see “Risk Factors” in Part II, Item 1A.

Our current debt financing strategy is to finance our assets where we believe such borrowing is prudent, appropriate and available. We make collateralized borrowings in the form of sales of assets under agreements to repurchase, loan participation purchase and sale agreements and notes payable, including secured term financing for our MSRs and our CRT arrangements which has allowed us to more closely match the term of our borrowings to the expected lives of the assets securing those borrowings. Our leverage ratio, defined as all borrowings divided by shareholders’ equity at the date presented, was 2.86 and 3.75 at June 30, 2020 and December 31, 2019, respectively.  

Our repurchase agreements represent the sales of assets together with agreements for us to buy back the assets at a later date. Following is a summary of the activities in our repurchase agreements financing:

	Quarter ended June 30,				Six months ended June 30,
Assets sold under agreements to repurchase		2020		2019		2020		2019
	(in thousands)
Average balance outstanding	$	4,755,992	$	4,911,964	$	5,529,446	$	4,878,768
Maximum daily balance outstanding	$	6,627,618	$	6,225,700	$	8,664,587	$	6,414,651
Ending balance	$	3,981,761	$	5,364,551

The difference between the maximum and average daily amounts outstanding is primarily due to timing of loan purchases and sales in our correspondent production business. The total facility size of our assets sold under agreements to repurchase was approximately $7.3 billion at June 30, 2020.

93

Because a significant portion of our current debt facilities consists of short-term borrowings, we expect to either renew these facilities in advance of maturity in order to ensure our ongoing liquidity and access to capital or otherwise allow ourselves sufficient time to replace any necessary financing.

As discussed above, all of our repurchase agreements, and mortgage loan participation purchase and sale agreements have short-term maturities:

• The transactions relating to loans and REO under agreements to repurchase generally provide for terms of approximately one year.

• The transactions relating to loans under mortgage loan participation purchase and sale agreements provide for terms of approximately one year; and

• The transactions relating to assets under notes payable provide for terms ranging from two to five years.

Our debt financing agreements require us and certain of our subsidiaries to comply with various financial covenants. As of the filing of this Report, these financial covenants include the following:

• profitability at the Company for at least one (1) of the previous two consecutive fiscal quarters;

• a minimum of $40 million in unrestricted cash and cash equivalents among the Company and/or our subsidiaries; a minimum of $40 million in unrestricted cash and cash equivalents among our Operating Partnership and its consolidated subsidiaries; a minimum of $25 million in unrestricted cash and cash equivalents between PMC and PMH; a minimum of $25 million in unrestricted cash and cash equivalents at PMC; and a minimum of $10 million in unrestricted cash and cash equivalents;

• a minimum tangible net worth for the Company of $1.25 billion; a minimum tangible net worth for our Operating Partnership of $1.25 billion; a minimum tangible net worth for PMH of $250 million; and a minimum tangible net worth for PMC of $300 million;

• a maximum ratio of total liabilities to tangible net worth of less than 10:1 for PMC and PMH and 5:1 for the Company and our Operating Partnership;

• at least two warehouse or repurchase facilities that finance amounts and assets similar to those being financed under our existing debt financing agreements; and

• a temporary $100 million liquidity requirement for the period of April 30, 2020, to the earliest of December 31, 2020 or settlement of the firm commitment to purchase CRT securities.

Although these financial covenants limit the amount of indebtedness we may incur and impact our liquidity through minimum cash reserve requirements, we believe that these covenants currently provide us with sufficient flexibility to successfully operate our business and obtain the financing necessary to achieve that purpose.

PLS is also subject to various financial covenants, both as a borrower under its own financing arrangements and as our servicer under certain of our debt financing agreements. The most significant of these financial covenants currently include the following:

• positive net income for at least one (1) of the previous two consecutive fiscal quarters;

• a minimum in unrestricted cash and cash equivalents of $40 million;

• a minimum tangible net worth of $1.25 billion;

• a maximum ratio of total liabilities to tangible net worth of 10:1; and

• at least one other warehouse or repurchase facility that finances amounts and assets that are similar to those being financed under certain of our existing secured financing agreements.

In addition to the financial covenants imposed upon us and PLS under our debt financing agreements, we and/or PLS, as applicable, are also subject to liquidity and net worth requirements established by FHFA for Agency sellers/servicers and Ginnie Mae for single-family issuers. FHFA and Ginnie Mae have established minimum liquidity and net worth requirements for approved non-depository single-family sellers/servicers in the case of FHFA, and for approved single-family issuers in the case of Ginnie Mae, as summarized below:

• A minimum net worth of a base of $2.5 million plus 25 basis points of UPB for total 1-4 unit residential loans serviced.

• A tangible net worth/total assets ratio greater than or equal to 6%.

94

• Effective June 30, 2020, FHFA liquidity requirement is equal to 0.035% (3.5 basis points) of total Agency servicing UPB plus an incremental 200 basis points of the amount by which total nonperforming Agency servicing UPB (reduced by 70% of the UPB of nonperforming Agency loans that are in COVID-19 payment forbearance and were current when they entered such forbearance) exceeds 6% of the applicable Agency servicing UPB; allowable assets to satisfy liquidity requirement include cash and cash equivalents (unrestricted), certain investment-grade securities that are available for sale or held for trading including Agency mortgage-backed securities, obligations of Fannie Mae or Freddie Mac, and U.S. Treasury obligations, and unused and available portions of committed servicing advance lines;

• In the case of PLS, liquidity equal to the greater of $1.0 million or 0.10% (10 basis points) of its outstanding Ginnie Mae single-family securities, which must be met with cash and cash equivalents; and

• In the case of PLS, net worth equal to $2.5 million plus 0.35% (35 basis points) of its outstanding Ginnie Mae single-family obligations.

On January 31, 2020, FHFA proposed changes to the eligibility requirements:

• A tangible net worth requirement of a base of $2.5 million plus 35 basis points of the UPB of loans serviced for Ginnie Mae and 25 basis points of the UPB of all other 1-4 unit loans serviced;

• Liquidity equal to or exceeding 4 basis points multiplied by the aggregate UPB of mortgages serviced for Fannie Mae and Freddie Mac plus 10 basis points multiplied by the aggregate UPB of mortgages serviced for Ginnie Mae plus 300 basis points multiplied by the sum of nonperforming Agency Mortgage Servicing that exceeds 4% of the UPB of total Agency Mortgage Servicing; and

• On June 15, 2020, FHFA announced that it will be re-proposing changes to these requirements.

Our debt financing agreements also contain margin call provisions that, upon notice from the applicable lender at its option, require us to transfer cash or, in some instances, additional assets in an amount sufficient to eliminate any margin deficit. A margin deficit will generally result from any decline in the market value (as determined by the applicable lender) of the assets subject to the related financing agreement, although in some instances we may agree with the lender upon certain thresholds (in dollar amounts or percentages based on the market value of the assets) that must be exceeded before a margin deficit will arise. Upon notice from the applicable lender, we will generally be required to satisfy the margin call on the day of such notice or within one business day thereafter, depending on the timing of the notice.

Our Manager continues to explore a variety of additional means of financing our growth, including debt financing through bank warehouse lines of credit, repurchase agreements, term financing, securitization transactions and additional equity offerings. However, there can be no assurance as to how much additional financing capacity such efforts will produce, what form the financing will take or that such efforts will be successful.

Off-Balance Sheet Arrangements and Aggregate Contractual Obligations

Off-Balance Sheet Arrangements

As of June 30, 2020, we have not entered into any off-balance sheet arrangements.

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Contractual Obligations

As of June 30, 2020, we had contractual obligations aggregating to $17.3 million comprised of borrowings, interest expense on long term debt from our Exchangeable Notes and asset-backed financing of a VIE, and commitments to purchase loans from correspondent sellers. Payment obligations under these agreements, including expected interest payments on long-term debt, are summarized below:

.	Payments due by period
Contractual obligations	Total		Less than 1 year		1 - 3 years		3 - 5 years		More than 5 years
	(in thousands)
Commitments to purchase loans from    correspondent sellers	$	8,725,812	$	8,725,812	$	—	$	—	$	—
Expected face amount of firm commitment to    purchase CRT securities		1,794,717		1,794,717		—		—		—
Short‒term debt		4,171,455		4,171,455		—		—		—
Long‒term debt		2,247,916		—		210,000		1,816,286		221,630
Interest expense on long term debt (1)		348,003		94,229		178,487		35,488		39,799
Total	$	17,287,903	$	14,786,213	$	388,487	$	1,851,774	$	261,429

(1) Interest expense on long term debt includes interest for the Asset-backed financing of a VIE at fair value, the Exchangeable Notes and the Term Notes.

All debt financing arrangements that matured between June 30, 2020 and the date of this Report have been renewed, extended or replaced.

The amount at risk (the fair value of the assets pledged plus the related margin deposit, less the amount advanced by the counterparty and accrued interest) relating to our assets sold under agreements to repurchase is summarized by counterparty below as of June 30, 2020:

Counterparty	Amount at risk
	(in thousands)
Bank of America, N.A.	$	35,445
Citibank, N.A.		33,381
Daiwa Capital Markets America Inc.		30,368
Mizuho Securities		29,684
Morgan Stanley Bank, N.A.		26,078
JPMorgan Chase & Co.		26,077
Royal Bank of Canada		24,905
Credit Suisse First Boston Mortgage Capital LLC		-
BNP Paribas Corporate & Institutional Banking		9,991
Amherst Pierpont Securities LLC		8,691
Barclays Capital Inc.		4,861
	$	229,481

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Item 3. Quantitative and Qualitative Disclosures About Market Risk

Market risk is the exposure to loss resulting from changes in interest rates, foreign currency exchange rates, commodity prices, equity prices, real estate values and other market-based risks. The primary market risks that we are exposed to are real estate risk, credit risk, interest rate risk, prepayment risk, inflation risk and market value risk. Our primary trading asset is our inventory of loans acquired for sale. We believe that such assets’ fair values respond primarily to changes in the market interest rates for comparable recently-originated loans. Our other market-risk assets are a substantial portion of our investments and are primarily comprised of MSRs, ESS, CRT arrangements and MBS. We believe that the fair values of MSRs, ESS and MBS also respond primarily to changes in the market interest rates for comparable loans or yields on MBS. We believe that the primary market risks to the fair values of our investment in CRT arrangements are changes in market credit spreads and the fair value of the real estate securing such loans.

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

Mortgage-backed securities at fair value

The following table summarizes the estimated change in fair value of our mortgage-backed securities as of June 30, 2020, given several hypothetical (instantaneous) changes in interest rates and parallel shifts in the yield curve:

Interest rate shift in basis points	-200			-75			-50			50			75			200
	(dollar in thousands)
Fair value	$	2,538,531		$	2,604,335		$	2,612,896		$	2,596,777		$	2,580,043		$	2,440,359
Change in fair value:
$	$	(74,455	)	$	(8,651	)	$	(90	)	$	(16,209	)	$	(32,943	)	$	(172,627	)
%		(2.8	)%		(0.3	)%	(0.0)%				(0.6	)%		(1.3	)%		(6.6	)%

Mortgage Servicing Rights

The following tables summarize the estimated change in fair value of MSRs as of June 30, 2020, given several shifts in pricing spread, prepayment speeds and annual per-loan cost of servicing:

Pricing spread shift in %	-20%			-10%			-5%			+5%			+10%			+20%
	(dollars in thousands)
Fair value	$	1,271,277		$	1,229,040		$	1,208,989		$	1,170,859		$	1,152,720		$	1,118,160
Change in fair value:
$	$	81,672		$	39,435		$	19,384		$	(18,746	)	$	(36,885	)	$	(71,445	)
%		6.9	%		3.3	%		1.6	%		(1.6	)%		(3.1	)%		(6.0	)%

Prepayment speed shift in %		-20%			-10%			-5%			+5%			+10%			+20%
	(dollars in thousands)
Fair value	$	1,389,185		$	1,283,803		$	1,235,404		$	1,146,229		$	1,105,115		$	1,029,084
Change in fair value:
$	$	199,580		$	94,198		$	45,799		$	(43,376	)	$	(84,491	)	$	(160,521	)
%		16.8	%		7.9	%		3.8	%		(3.6	)%		(7.1	)%		(13.5	)%

Per-loan servicing cost shift in %	-20%			-10%			-5%			+5%			+10%			+20%
	(dollars in thousands)
Fair value	$	1,224,488		$	1,207,047		$	1,198,326		$	1,180,884		$	1,172,164		$	1,154,722
Change in fair value:
$	$	34,883		$	17,442		$	8,721		$	(8,721	)	$	(17,442	)	$	(34,883	)
%		2.9	%		1.5	%		0.7	%		(0.7	)%		(1.5	)%		(2.9	)%

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Excess servicing spread

The following tables summarize the estimated change in fair value of our ESS as of June 30, 2020, given several shifts in pricing spreads and prepayment speed:

Pricing spread shift in %	-20%			-10%			-5%			+5%			+10%			+20%
	(dollars in thousands)
Fair value	$	157,902		$	154,484		$	152,828		$	149,617		$	148,061		$	145,041
Change in fair value:
$	$	6,695		$	3,278		$	1,622		$	(1,589	)	$	(3,145	)	$	(6,165	)
%		4.4	%		2.2	%		1.1	%		(1.1	)%		(2.1	)%		(4.1	)%

Prepayment speed shift in %		-20%			-10%			-5%			+5%			+10%			+20%
	(dollars in thousands)
Fair value	$	167,955		$	159,215		$	155,125		$	147,450		$	143,847		$	137,069
Change in fair value:
$	$	16,749		$	8,009		$	3,919		$	(3,756	)	$	(7,359	)	$	(14,137	)
%		11.1	%		5.3	%		2.6	%		(2.5	)%		(4.9	)%		(9.3	)%

CRT arrangements

Following is a summary of the effect on fair value of various changes to the pricing spread input used to estimate the fair value of our CRT arrangements given several shifts in pricing spread:

Pricing spread shift in basis points	-100			-50			-25			25			50			100
	(dollars in thousands)
Fair value	$	1,558,343		$	1,541,628		$	1,533,426		$	1,517,326		$	1,509,425		$	1,493,909
Change in fair value:
$	$	33,017		$	16,301		$	8,100		$	(8,000	)	$	(15,902	)	$	(31,418	)
%		2.2	%		1.1	%		0.5	%		(0.5	)%		(1.0	)%		(2.1	)%

Following is a summary of the effect on fair value of various instantaneous changes in home values from those used to estimate the fair value of our CRT arrangements given several shifts:

Property value shift in %	-15%			-10%			-5%			5%			10%			15%
	(dollars in thousands)
Fair value	$	1,423,727		$	1,469,273		$	1,502,775		$	1,540,431		$	1,553,053		$	1,563,013
Change in fair value:
$	$	(101,599	)	$	(56,053	)	$	(22,552	)	$	15,104		$	27,727		$	37,687
%		(6.7	)%		(3.7	)%		(1.5	)%		1.0	%		1.8	%		2.5	%

Firm commitment to purchase CRT securities

Following is a summary of the effect on fair value of various changes to the pricing spread input used to estimate the fair value of our firm commitment to purchase CRT securities given several shifts in pricing spread:

Pricing spread shift in basis points	-100			-50			-25			25			50			100
	(dollars in thousands)
Fair value	$	(136,032	)	$	(164,036	)	$	(177,718	)	$	(204,464	)	$	(217,537	)	$	(243,102	)
Change in fair value:
$	$	55,160		$	27,156		$	13,475		$	(13,272	)	$	(26,344	)	$	(51,909	)
%		(28.9	)%		(14.2	)%		(7.0	)%		6.9	%		13.8	%		27.2	%

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Following is a summary of the effect on fair value of various instantaneous changes in home values from those used to estimate the fair value of our Firm commitment to purchase CRT securities giving several shifts:

Property value shift in %	-15%			-10%			-5%			5%			10%			15%
	(dollars in thousands)
Fair value	$	(340,921	)	$	(282,467	)	$	(231,076	)	$	(162,512	)	$	(140,439	)	$	(122,950	)
Change in fair value:
$	$	(149,728	)	$	(91,274	)	$	(39,883	)	$	28,681		$	50,753		$	68,243
%		(78.3	)%		(47.7	)%		(20.9	)%		15.0	%		26.5	%		35.7	%

Item 4. Controls and Procedures

Disclosure Controls and Procedures

We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our reports filed under the Securities Exchange Act of 1934 (the “Exchange Act”) is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosures. However, no matter how well a control system is designed and operated, it can provide only reasonable, not absolute, assurance that it will detect or uncover failures within the Company to disclose material information otherwise required to be set forth in our periodic reports.

Our management has conducted an evaluation, with the participation of our Chief Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures as of the end of the period covered by this Report as required by paragraph (b) of Rules 13a-15 and 15d-15 under the Exchange Act. Based on our evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures were effective, as of the end of the period covered by this Report, to provide reasonable assurance that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the applicable rules and forms, and that it is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.

Changes in Internal Control over Financial Reporting

There have been no significant changes in our internal control over financial reporting during the quarter ended June 30, 2020 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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PART II. OTHER INFORMATION

Item 1. Legal Proceedings

From time to time, we may be involved in various legal actions, claims and proceedings arising in the ordinary course of business. As of June 30, 2020, we were not involved in any material legal actions, claims or proceedings.

Item 1A. Risk Factors

Our business, financial condition and results of operations have been, and will likely continue to be, adversely affected by the emergence of the COVID-19 pandemic.

The COVID-19 pandemic has created unprecedented economic, financial and public health disruptions that have adversely affected, and are likely to continue to adversely affect, our business, financial condition and results of operations. The extent to which COVID-19 continues to negatively affect our business, financial condition and results of operations will depend on future developments, which are highly uncertain and cannot be predicted, including the scope and duration of the pandemic and actions taken by governmental authorities and other third parties in response to COVID-19.

The federal government enacted the CARES Act, which allows borrowers with federally-backed loans to request temporary payment forbearance in response to the increased borrower hardships resulting from COVID-19. As a result of the CARES Act forbearance requirements, we expect to record additional increases in delinquencies in our servicing portfolio that may require us to finance substantial amounts of advances of principal and interest payments to the holders of the securities holding those loans, as well as advances of property taxes, insurance premiums and other expenses to protect investors’ interests in the properties securing the loans. We also expect the effects of the CARES Act forbearance requirements to reduce our servicing income and increase our servicing expenses due to the increased number of delinquent loans and significant levels of forbearance that we have granted and continue to grant, as well as the resolution of loans that we expect to ultimately default as the result of COVID-19.

Financial markets have experienced substantial volatility and reduced liquidity, resulting in unprecedented federal government intervention to lower the federal funds rate to near zero and support market liquidity by purchasing assets in many financial markets, including the mortgage-backed securities market. The CARES Act forbearance requirements and the decline in financial markets have negatively impacted the fair value of our servicing assets. In addition, the CARES Act forbearance requirements and the decline in financial markets have materially and negatively impacted the value of our CRT arrangements. Further market volatility may result in additional declines in the value of our credit assets and make it increasingly difficult to optimize our hedging activities. Also, our liquidity and/or regulatory capital could be adversely impacted by volatility and disruptions in the capital and credit markets. In addition, if we fail to meet or satisfy any of the covenants in our repurchase agreements or other financing arrangements as a result of the impact of the COVID-19 pandemic, we would be in default under these agreements, which could result in a cross-default or cross-acceleration under other financing arrangements, and our lenders could elect to declare outstanding amounts due and payable (or such amounts may automatically become due and payable), terminate their commitments, require the posting of additional collateral and enforce their respective interests against existing collateral.

We may also have difficulty accessing debt and equity capital on attractive terms, or at all, as a result of the impact of the COVID-19 pandemic, which may adversely affect our access to capital necessary to fund our operations or address maturing liabilities on a timely basis. This includes renewals of our existing credit facilities with our lenders who are also adversely impacted by the volatility and dislocations in the financial markets and may not be willing to continue to extend us credit on the same terms, or on favorable terms, or at all.

In addition, our business could be disrupted if our Manager is unable to operate due to changing governmental restrictions such as travel bans and quarantines placed on its employees or operations, including successfully operating its and our business from remote locations, ensuring the protection of its employees’ health, and maintaining its information technology infrastructure. 

Governmental authorities have taken additional measures to stabilize the financial markets and support the economy. The success of these measures are unknown and they may not be sufficient to address the current market dislocations or avert severe and prolonged reductions in economic activity. We may also face increased risks of disputes with our business partners, litigation and governmental and regulatory scrutiny as a result of the effects of COVID-19. The scope and duration of COVID-19 and the efficacy of the extraordinary measures put in place to address it are currently unknown. Even after COVID-19 subsides, the economy may not fully recover for some time and we may be materially and adversely affected by a prolonged recession or economic downturn.

To the extent the COVID-19 pandemic adversely affects our business, financial condition and results of operations, it may also have the effect of heightening many of the other risks described in our Annual Report on Form 10-K for the year ended December 31, 2019 under the heading “Risk Factors.”

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The COVID-19 pandemic and the CARES Act have significantly increased the number of borrowers who are requesting forbearance under the reference loans in our CRT Agreements and, to the extent such loans are deemed to be delinquent under our CRT Agreements, will result in significant future credit or fair value losses.

On March 27, 2020, the federal government enacted the Coronavirus Aid, Relief and Economic Security Act (“CARES Act”), which allows borrowers with federally-backed loans to request temporary payment forbearance if they attest that they are directly or indirectly experiencing any financial hardship resulting from COVID-19. The initial forbearance period is up to 180 days, subject to an additional extension of up to 180 days. The CARES Act also precludes loan servicers like us from reporting borrowers subject to forbearance plans as delinquent to the credit reporting agencies even though the federally-backed loans may still be characterized as delinquent for the purposes of our CRT Agreements with Fannie Mae. Our CRT Agreements are structured such that we retain a portion of the credit risk and an interest-only ownership interest in the reference loans and, under certain of such CRT Agreements, may be required to realize losses in the event of a loan delinquency of 180 days or more even where there is ultimately no loss realized with respect to such loan (e.g., as a result of a borrower’s re-performance).

Although these CRT Agreements were amended in 2018 to ensure that forbearances resulting from Hurricane Harvey and Hurricane Irma were not considered to be delinquent for the purposes of the 180 day delinquency fixed loss severity schedule, there can be no assurance that Fannie Mae or its regulator, the Federal Housing Finance Authority (the "FHFA"), will agree to further amendments to these CRT Agreements to ensure similar treatment for forbearances resulting from COVID-19. Given the federal government mandate to approve requested forbearances upon the request of a borrower and subject only to his or her attestation of COVID-19 impact, the number of forbearances requested and approved is expected to be material. If the FHFA and/or Fannie Mae do not amend the CRT Agreements in a manner consistent with the amendments relating to the hurricane forbearances, the reference loans in these CRT Agreements that are subject to COVID-19 forbearance plans will be deemed to be delinquent, and we expect that the resulting credit losses and fair value losses will be material and may require us to write down the value of the assets significantly. Any such losses we incur will be significant and may reduce distributions to our shareholders and may materially and adversely affect our results of operations, our financial condition, and the market value of our common shares.

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Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

There were no sales of unregistered equity securities during the quarter and six months ended June 30, 2020.

The following table provides information about our common share of beneficial interest repurchases during the quarter ended June 30, 2020:

Period	Total number of shares purchased		Average price paid per share		Total number of shares purchased as part of publicly announced plans or programs (1)		Amount available for future share repurchases under the plans or programs (1)
							(in thousands)
April 1, 2020 – April 30, 2020		—	$	—		—	$	77,592
May 1, 2020 – May 31, 2020		290	$	11.59		290	$	74,231
June 1, 2020 – June 30, 2020		276	$	15.22		276	$	70,031
		783	$	7.39		783

(1) During 2015, our board of trustees authorized a common share repurchase program. Under the program, as amended, we may repurchase up to $300 million of our outstanding common shares of beneficial interest. Under the program, we have discretion to determine the dollar amount of common shares of beneficial interest to be repurchased and the timing of any repurchases in compliance with applicable law and regulation. The program does not have an expiration date. Amounts presented reflect balances as of the end of the applicable period.

Item 3. Defaults Upon Senior Securities

None

Item 4. Mine Safety Disclosures

Not applicable

Item 5. Other Information

None

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Item 6. Exhibits

		Incorporated by Reference   from the Below-Listed Form (Each Filed under SEC File Number 14-64423)
Exhibit No.	Exhibit Description	Form	Filing Date
3.1	Declaration of Trust of PennyMac Mortgage Investment Trust, as amended and restated.	10-Q	November 6, 2009
3.2	Second Amended and Restated Bylaws of PennyMac Mortgage Investment Trust	8-K	March 16, 2018
3.3	Articles Supplementary classifying and designating the 8.125% Series A Fixed-to-Floating Rate Cumulative Redeemable Preferred Shares of Beneficial Interest.	8-A	March 7, 2017
3.4	Articles Supplementary classifying and designating the 8.00% Series B Fixed-to-Floating Rate Cumulative Redeemable Preferred Shares of Beneficial Interest.	8-A	June 30, 2017
10.1	Amendment No. 2 to Third Amended and Restated Master Repurchase Agreement, dated as of April 24, 2020, among Credit Suisse First Boston Mortgage Capital LLC, Credit Suisse AG, Cayman Islands Branch, Alpine Securitization LTD, PennyMac Holdings, LLC, PennyMac Corp., PennyMac Operating Partnership, L.P., PMC REO Financing Trust, PMC REO Trust 2015-1, and PennyMac Mortgage Investment Trust.	10-Q	May 8, 2020
10.2	Joint Amendment No. 2 to Loan and Security Agreement and Amendment No. 1 to Pricing Side Letter, dated as of April 24, 2020, among Credit Suisse First Boston Mortgage Capital LLC, Credit Suisse AG, Cayman Islands Branch, PennyMac Mortgage Investment Trust, PennyMac Corp., and PennyMac Holdings, LLC.	10-Q	May 8, 2020
10.3	Third Amended and Restated Management Agreement, dated as of June 30, 2020, by and among PennyMac Mortgage Investment Trust, PennyMac Operating Partnership, L.P. and PNMAC Capital Management, LLC.	8-K	July 2, 2020
10.4	Fourth Amended and Restated Flow Servicing Agreement, dated as of June 30, 2020, between PennyMac Operating Partnership, L.P. and PennyMac Loan Services, LLC.	8-K	July 2, 2020
10.5	Second Amended and Restated Mortgage Banking Services Agreement, dated as of June 30, 2020, between PennyMac Loan Services, LLC and PennyMac Corp.	8-K	July 2, 2020
10.6	Second Amended and Restated MSR Recapture Agreement, dated as of June 30, 2020, between PennyMac Loan Services, LLC and PennyMac Corp.	8-K	July 2, 2020
10.7	Amendment No. 2, dated as of July 31, 2020 to the Base Indenture dated as of December 20, 2017, by and among PMT ISSUER TRUST - FMSR, Citibank, N.A., PennyMac Corp., and Credit Suisse First Boston Mortgage Capital LLC.	*	July 31, 2020
31.1	Certification of David A. Spector pursuant to Rule 13a-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.	*
31.2	Certification of Andrew S. Chang pursuant to Rule 13a-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.	*
32.1**	Certification of David A. Spector pursuant to Rule 13a-14(b) and 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.	**

103

32.2**	Certification of Andrew S. Chang pursuant to Rule 13a-14(b) and 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.	**
101	Interactive data files pursuant to Rule 405 of Regulation S-T: (i) the Consolidated Balance Sheets as of June 30, 2020 and December 31, 2019 (ii) the Consolidated Statements of Operation for the quarter and six months ended June 30, 2020 and June 30, 2019, (iii) the Consolidated Statements of Changes in Stockholders’ Equity for the quarter and six months ended June 30, 2020 and June 30, 2019, (iv) the Consolidated Statements of Cash Flows for the six months ended June 30, 2020 and June 30, 2019 and (v) the Notes to the Consolidated Financial Statements.	*
101.INS	XBRL Instance Document – the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.
101.SCH	Inline XBRL Taxonomy Extension Schema Document
101.CAL	Inline XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF	Inline XBRL Taxonomy Extension Definition Linkbase Document
101.LAB	Inline XBRL Taxonomy Extension Label Linkbase Document
101.PRE	Inline XBRL Taxonomy Extension Presentation Linkbase Document
104	Cover Page Interactive Data File (embedded within the Inline XBRL document)

^ Portions of the exhibit have been redacted.

* Filed herewith.

** The certifications attached hereto as Exhibits 32.1 and 32.2 are furnished to the SEC pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and shall not be deemed filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, nor shall it be deemed incorporated by reference in any filing under the Securities Act of 1933, except as shall be expressly set forth by specific reference in such filing

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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

	Pennymac Mortgage Investment Trust (Registrant)
Dated: August 7, 2020	By:	/s/ David A. Spector
		David A. Spector
		President and Chief Executive Officer (Principal Executive Officer)
Dated: August 7, 2020	By:	/s/ Andrew S. Chang
		Andrew S. Chang
		Senior Managing Director and Chief Financial Officer (Principal Financial Officer)

105