Most of the Company’s assets and certain of its liabilities are measured at or based on their fair values. 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 significant inputs used to determine fair value. These levels are:

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 identified its MSRs, its mortgage servicing liabilities (“MSLs”) and all of its non-cash financial assets other than Assets purchased from PennyMac Mortgage Investment Trust under agreements to resell, to be accounted for at fair value so changes in fair value will be reflected in income as they occur and more timely reflect the results of the Company’s performance. The Company has also identified its ESS financing to be accounted for at fair value as a means of hedging the related MSRs’ fair value risk.

Following is a summary of assets and liabilities that are measured at fair value on a recurring basis:

As shown above, all or a portion of the Company’s loans held for sale, Interest Rate Lock Commitments (“IRLCs”), MSRs, ESS and MSLs are measured using Level 3 fair value inputs. Following are roll forwards of assets and liabilities measured at fair value using “Level 3” inputs at either the beginning or the end of the period presented:

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


	Quarter ended
Liabilities	June 30, 2021
	(in thousands)
Mortgage servicing liabilities:
Balance, March 31, 2021	$	46,026
Mortgage servicing liabilities resulting from loan sales		57,421
Changes in fair value included in income		(3,356)
Balance, June 30, 2021	$	100,091
Changes in fair value recognized during the quarter relating to liabilities still outstanding at June 30, 2021	$	(3,356)


	Quarter ended June 30, 2020
			Net interest		Repurchase		Mortgage
	Loans held		rate lock		agreement		servicing
Assets	for sale		commitments (1)		derivatives		rights			Total

	(in thousands)
Balance, March 31, 2020	$	806,587	$	315,194	$	8,187	$	2,193,697	$	3,323,665
Purchases and issuances, net		288,856		496,149		—		—		785,005
Capitalization of interest and advances		14,994		—		—		—		14,994
Sales and repayments		(60,364)		—		—		—		(60,364)
Mortgage servicing rights resulting from loan sales		—		—		—		225,534		225,534
Changes in fair value included in income arising from:
Changes in instrument-specific credit risk		1,132		—		—		—		1,132
Other factors		—		297,198		—		(205,692)		91,506
		1,132		297,198		—		(205,692)		92,638
Transfers from Level 3 to Level 2		(389,486)		—		—		—		(389,486)
Transfers to loans held for sale		—		(740,477)		—		—		(740,477)
Balance, June 30, 2020	$	661,719	$	368,064	$	8,187	$	2,213,539	$	3,251,509
Changes in fair value recognized during the quarter relating to assets still held at June 30, 2020	$	(717)	$	368,064	$	—	$	(205,692)	$	161,655

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


	Quarter ended June 30, 2020
	Excess
	servicing		Mortgage
	spread		servicing
Liabilities	financing		liabilities		Total

	(in thousands)
Balance, March 31, 2020	$	157,109	$	29,761	$	186,870
Issuance of excess servicing spread financing pursuant to a recapture agreement with PennyMac Mortgage Investment Trust		483		—		483
Accrual of interest		2,372		—		2,372
Repayments		(8,122)		—		(8,122)
Changes in fair value included in income		(636)		97		(539)
Balance, June 30, 2020	$	151,206	$	29,858	$	181,064
Changes in fair value recognized during the quarter relating to liabilities still outstanding at June 30, 2020	$	(636)	$	97	$	(539)


	Six months ended June 30, 2021
			Net interest		Mortgage
	Loans held		rate lock		servicing
Assets	for sale		commitments (1)		rights		Total

	(in thousands)
Balance, December 31, 2020	$	4,675,169	$	677,026	$	2,581,174	$	7,933,369
Purchases and issuances, net		11,056,535		829,867		—		11,886,402
Capitalization of interest and advances		78,844		—		—		78,844
Sales and repayments		(4,795,241)		—		—		(4,795,241)
Mortgage servicing rights resulting from loan sales		—		—		953,895		953,895
Changes in fair value included in income arising from:
Changes in instrument-specific credit risk		227,946		—		—		227,946
Other factors		—		152,822		(122,421)		30,401
		227,946		152,822		(122,421)		258,347
Transfers from Level 3 to Level 2		(7,424,910)		—		—		(7,424,910)
Transfers to real estate acquired in settlement of loans		(82)		—		—		(82)
Transfers to loans held for sale		—		(1,316,105)		—		(1,316,105)
Balance, June 30, 2021	$	3,818,261	$	343,610	$	3,412,648	$	7,574,519
Changes in fair value recognized during the period relating to assets still held at June 30, 2021	$	135,823	$	343,610	$	(122,421)	$	357,012

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


	Six months ended June 30, 2021
	Excess
	servicing		Mortgage
	spread		servicing
Liabilities	financing		liabilities		Total

	(in thousands)
Balance, December 31, 2020	$	131,750	$	45,324	$	177,074
Issuance of excess servicing spread financing pursuant to a recapture agreement with PennyMac Mortgage Investment Trust		557		—		557
Accrual of interest		1,280		—		1,280
Repayments		(134,624)		—		(134,624)
Mortgage servicing liabilities resulting from loan sales		—		64,383		64,383
Changes in fair value included in income		1,037		(9,616)		(8,579)
Balance, June 30, 2021	$	—	$	100,091	$	100,091
Changes in fair value recognized during the period relating to liabilities still outstanding at June 30, 2021	$	—	$	(9,616)	$	(9,616)


	Six months ended June 30, 2020
			Net interest		Repurchase		Mortgage
	Loans held		rate lock		agreement		servicing
Assets	for sale		commitments (1)		derivatives		rights		Total

	(in thousands)
Balance, December 31, 2019	$	383,878	$	136,650	$	8,187	$	2,926,790	$	3,455,505
Purchases and issuances, net		1,930,087		838,129		—		25,760		2,793,976
Capitalization of interest and advances		33,021		—		—		—		33,021
Sales and repayments		(799,292)		—		—		—		(799,292)
Mortgage servicing rights resulting from loan sales		—		—		—		507,849		507,849
Changes in fair value included in income arising from:
Changes in instrument-specific credit risk		(6,391)		—		—		—		(6,391)
Other factors		—		497,116		—		(1,246,860)		(749,744)
		(6,391)		497,116		—		(1,246,860)		(756,135)
Transfers from Level 3 to Level 2		(878,893)		—		—		—		(878,893)
Transfers to real estate acquired in settlement of loans		(691)		—		—		—		(691)
Transfers of interest rate lock commitments to loans held for sale		—		(1,103,831)		—		—		(1,103,831)
Balance, June 30, 2020	$	661,719	$	368,064	$	8,187	$	2,213,539	$	3,251,509
Changes in fair value recognized during the period relating to assets still held at June 30, 2020	$	(563)	$	368,064	$	—	$	(1,246,860)	$	(879,359)

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


	Six months ended June 30, 2020
	Excess
	servicing		Mortgage
	spread		servicing
Liabilities	financing		liabilities		Total

	(in thousands)
Balance, December 31, 2019	$	178,586	$	29,140	$	207,726
Issuance of excess servicing spread financing pursuant to a recapture agreement with PennyMac Mortgage Investment Trust		862		—		862
Accrual of interest		4,346		—		4,346
Repayments		(17,430)		—		(17,430)
Mortgage servicing liabilities resulting from loan sales		—		6,576		6,576
Changes in fair value included in income		(15,158)		(5,858)		(21,016)
Balance, June 30, 2020	$	151,206	$	29,858	$	181,064
Changes in fair value recognized during the period relating to liabilities still outstanding at June 30, 2020	$	(15,158)	$	(5,858)	$	(21,016)

The Company had transfers among the fair value levels arising from the return to salability in the active secondary market of certain loans held for sale and from transfers of IRLCs to loans held for sale at fair value upon purchase or funding.

Assets and Liabilities Measured at Fair Value under the Fair Value Option

Net changes in fair values included in income for assets and liabilities carried at fair value as a result of management’s election of the fair value option by income statement line item are summarized below:


	Quarter ended June 30,
	2021						2020
	Net gains on		Net				Net gains on		Net
	loans held		loan				loans held		loan
	for sale at		servicing				for sale at		servicing
	fair value		fees		Total		fair value		fees		Total

	(in thousands)
Assets:
Loans held for sale	$	761,841	$	—	$	761,841	$	739,797	$	—	$	739,797
Mortgage servicing rights		—		(339,624)		(339,624)		—		(205,692)		(205,692)
	$	761,841	$	(339,624)	$	422,217	$	739,797	$	(205,692)	$	534,105
Liabilities:
Excess servicing spread financing payable to PennyMac Mortgage Investment Trust	$	—	$	—	$	—	$	—	$	636	$	636
Mortgage servicing liabilities		—		3,356		3,356		—		(97)		(97)
	$	—	$	3,356	$	3,356	$	—	$	539	$	539


	Six months ended June 30,
	2021						2020
	Net gains on		Net				Net gains on		Net
	loans held		loan				loans held		loan
	for sale at		servicing				for sale at		servicing
	fair value		fees		Total		fair value		fees		Total

	(in thousands)
Assets:
Loans held for sale	$	1,411,960	$	—	$	1,411,960	$	1,138,515	$	—	$	1,138,515
Mortgage servicing rights		—		(122,421)		(122,421)		—		(1,246,860)		(1,246,860)
	$	1,411,960	$	(122,421)	$	1,289,539	$	1,138,515	$	(1,246,860)	$	(108,345)
Liabilities:
Excess servicing spread financing payable to PennyMac Mortgage Investment Trust	$	—	$	(1,037)	$	(1,037)	$	—	$	15,158	$	15,158
Mortgage servicing liabilities		—		9,616		9,616		—		5,858		5,858
	$	—	$	8,579	$	8,579	$	—	$	21,016	$	21,016

Following are the fair value and related principal amounts due upon maturity of loans held for sale:


	June 30, 2021						December 31, 2020
			Principal						Principal
			amount						amount
	Fair		due upon				Fair		due upon
Loans held for sale	value		maturity		Difference		value		maturity		Difference

	(in thousands)
Current through 89 days delinquent	$	10,526,148	$	10,079,813	$	446,335	$	11,304,308	$	10,743,814	$	560,494
90 days or more delinquent:
Not in foreclosure		330,472		327,869		2,603		275,419		280,595		(5,176)
In foreclosure		27,886		31,253		(3,367)		36,673		39,529		(2,856)
	$	10,884,506	$	10,438,935	$	445,571	$	11,616,400	$	11,063,938	$	552,462

Assets Measured at Fair Value on a Nonrecurring Basis

Following is a summary of assets that were measured at fair value on a nonrecurring basis:


Real estate acquired in settlement of loans	Level 1		Level 2		Level 3		Total

	(in thousands)
June 30, 2021	$	—	$	—	$	2,863	$	2,863
December 31, 2020	$	—	$	—	$	1,450	$	1,450

The following table summarizes the (losses) gains recognized on assets when they were remeasured at fair value on a nonrecurring basis:


	Quarter ended June 30,				Six months ended June 30,
	2021		2020		2021		2020

	(in thousands)
Real estate acquired in settlement of loans	$	(434)	$	(1,001)	$	(743)	$	(2,283)

Fair Value of Financial Instruments Carried at Amortized Cost

The Company’s Assets purchased from PennyMac Mortgage Investment Trust under agreements to resell pledged to creditors, Assets sold under agreements to repurchase, Mortgage loan participation purchase and sale agreements, Obligations under capital lease, Notes payable secured by mortgage servicing assets and Unsecured senior notes are carried at amortized cost.

These assets and liabilities are classified as “Level 3” fair value items due to the Company’s reliance on unobservable inputs to estimate their fair values. The Company has concluded that the fair values of these assets and liabilities other than the 2018-GTI Term Notes and 2018-GT2 Term Notes included in Notes payable secured by mortgage servicing assets and the Unsecured senior notes approximate their carrying values due to their short terms and/or variable interest rates.

The Company estimates the fair value of the Notes payable secured by mortgage servicing assets and the Unsecured senior notes based on non-affiliate broker indications of fair value. The fair value and carrying value of these notes are summarized below:


	June 30, 2021				December 31, 2020
	Fair value		Carrying value		Fair value		Carrying value

	(in thousands)
Notes payable secured by mortgage servicing assets	$	1,298,603	$	1,296,731	$	1,268,304	$	1,295,840
Unsecured senior notes	$	1,309,750	$	1,288,769	$	685,750	$	645,820

Valuation Governance

Most of the Company’s financial assets, and all of its MSRs, ESS, derivative liabilities and MSLs, are carried at fair value with changes in fair value recognized in current period income. Certain of the Company’s financial assets and derivative liabilities and all of its MSRs, ESS, and MSLs are “Level 3” fair value assets and liabilities which require use of unobservable inputs that are significant to the estimation of the items’ fair values. Unobservable inputs reflect the Company’s own judgments about the factors that market participants use in pricing an asset or liability, and are based on the best information available under the circumstances.

Due to the difficulty in estimating the fair values of “Level 3” fair value assets and liabilities, the Company has assigned the responsibility for estimating the fair value of these items to specialized staff and subjects the valuation process to significant senior management oversight. The Company’s Financial Analysis and Valuation group (the “FAV group”) is the Company’s specialized staff responsible for estimating the fair values of “Level 3” fair value assets and liabilities other than IRLCs.

With respect to the non-IRLC “Level 3” valuations, the FAV group reports to the Company’s senior management valuation committee, which oversees the valuations. 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 the Company’s senior management valuation committee. The Company’s senior management valuation committee includes the Company’s chief operating, financial, investment and risk officers as well as other senior members of the Company’s finance, capital markets and risk management staffs.

The FAV group is responsible for reporting to the Company’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.

The Company has assigned responsibility for developing the fair values of IRLCs to its Capital Markets Risk Management staff. The fair values developed by the Capital Markets Risk Management staff are reviewed by the Company’s Capital Markets Operations group.

Valuation Techniques and Inputs

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:

Loans Held for Sale

Most of the Company’s loans held for sale at fair value are saleable into active markets and are therefore categorized as “Level 2” fair value assets. The fair values of “Level 2” fair value loans are determined using their contracted selling price or quoted market price or market price equivalent.

Certain of the Company’s loans held for sale are not saleable into active markets and are therefore categorized as “Level 3” fair value assets. Loans held for sale categorized as “Level 3” fair value assets include:

●

Government guaranteed or insured loans purchased by the Company from Ginnie Mae guaranteed pools in its loan servicing portfolio. The Company’s right to purchase government guaranteed or insured loans arises as the result of the loan being at least three months delinquent on the date of purchase by the Company and provides an alternative to the Company’s obligation to continue advancing principal and interest at the coupon rate of the related Ginnie Mae security. Such loans may be resold to investors and thereafter may be repurchased to the extent eligible for resale into a new Ginnie Mae guaranteed security.

Loans become eligible for resale into a new Ginnie Mae security when the loans become current either through completion of a modification of the loan’s terms or after six months of timely payments following either the completion of certain types of payment deferral programs or borrower reperformance and when the issuance date of the new security is at least 210 days after the date the loan was last delinquent.

●

Loans that are not saleable into active markets due to identification of a defect by the Company or to the repurchase by the Company of a loan with an identified defect.

The Company uses a discounted cash flow model to estimate the fair value of its “Level 3” fair value loans held for sale. The significant unobservable inputs used in the fair value measurement of the Company’s “Level 3” fair value loans held for sale are discount rates, home price projections, voluntary prepayment/resale and total prepayment speeds. Significant changes in any of those inputs in isolation could result in a significant change to the loans’ fair value measurement. Increases in home price projections are generally accompanied by an increase in voluntary prepayment speeds.

Following is a quantitative summary of key “Level 3” fair value inputs used in the valuation of loans held for sale:



	June 30, 2021		December 31, 2020
Fair value (in thousands)	$	3,818,261	$	4,675,169
Key inputs (1):
Discount rate:
Range		2.0% – 9.2%		2.8% – 9.2%
Weighted average		2.0%		2.8%
Twelve-month projected housing price index change:
Range		4.8% – 5.3%		2.7% – 3.5%
Weighted average		5.1%		3.0%
Voluntary prepayment/resale speed (2):
Range		0.4% – 26.8%		0.4% – 31.3%
Weighted average		22.0%		21.9%
Total prepayment speed (3):
Range		0.4% – 37.6%		0.5% – 42.9%
Weighted average		28.8%		29.2%

(1)	Weighted average inputs are based on the fair value of the “Level 3” loans.

(2)	Voluntary prepayment/resale speed is measured using Life Voluntary Conditional Prepayment Rate (“CPR”).

(3)	Total prepayment speed is measured using Life Total CPR, which includes both voluntary and involuntary prepayment and resale rates.

Changes in fair value of loans held for sale attributable to changes in the loan’s instrument-specific credit risk are measured with reference to the change in the respective loan’s delinquency status and performance history at period end from the later of the beginning of the period or acquisition date. Changes in fair value of loans held for sale are included in Net gains on loans held for sale at fair value in the Company’s consolidated statements of income.

Derivative Financial Instruments

Interest Rate Lock Commitments

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

The significant unobservable inputs used in the fair value measurement of the Company’s IRLCs are the pull-through rate and the estimated fair value of MSR attributable to the mortgage loans it has committed to purchase. Significant changes in the pull-through rate or the MSR component of the IRLCs, in isolation, could result in significant changes in the IRLCs’ fair value measurement. 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 increase the pull-through rate for the loan principal and interest payment cash flow component, which has decreased in fair value. Changes in fair value of IRLCs are included in Net gains on loans held for sale at fair value in the consolidated statements of income.

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



	June 30, 2021		December 31, 2020
Fair value (in thousands) (1)	$	343,610	$	677,026
Key inputs (2):
Pull-through rate:
Range		8.0% – 100%		10.1% – 100%
Weighted average		82.7%		82.7%
Mortgage servicing rights value expressed as:
Servicing fee multiple:
Range		(14.7) – 6.5		0.7 – 5.3
Weighted average		3.6		3.6
Percentage of loan commitment amount
Range		(2.1)% – 3.1%		0.1% – 2.6%
Weighted average		1.2%		1.2%

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

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

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 gains on loans held for sale at fair value, or Net loan servicing fees – Hedging results, as applicable, in the consolidated statements of income.

Mortgage Servicing Rights

MSRs are categorized as “Level 3” fair value assets. The Company uses a discounted cash flow approach to estimate the fair value of MSRs. The key inputs used in the estimation of the fair value of MSRs include the applicable pricing spread (discount rate), prepayment rates (prepayment speed), and annual per-loan cost to service the underlying 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 directly related. Changes in the fair value of MSRs are included in Net loan servicing fees—Change in fair value of mortgage servicing rights and mortgage servicing liabilities in the consolidated statements of income.

Following are the key inputs used in determining the fair value of MSRs received by the Company when it retains the obligation to service the mortgage loans it sells:


	Quarter ended June 30,				Six months ended June 30,
	2021		2020		2021		2020

	(Amount recognized and unpaid principal balance of underlying loans in thousands)
MSR and pool characteristics:
Amount recognized	$	483,362	$	225,534	$	953,895	$	507,849
Unpaid principal balance of underlying loans	$	36,830,098	$	20,066,302	$	71,773,352	$	38,396,686
Weighted average servicing fee rate (in basis points)		33		36		33		38
Key inputs (1):
Pricing spread (2):
Range		6.0% – 16.9%		8.1% – 18.1%		6.0% – 16.9%		6.8% – 18.1%
Weighted average		8.9%		9.9%		9.2%		9.1%
Annual total prepayment speed (3):
Range		6.7% – 17.7%		8.8% – 29.1%		6.2% – 16.7%		8.8% – 49.8%
Weighted average		8.5%		13.0%		8.1%		13.7%
Equivalent average life (in years):
Range		4.0 – 8.8		2.9 – 8.1		4.1 – 9.0		1.5 – 8.1
Weighted average		8.1		6.3		8.3		6.1
Per-loan annual cost of servicing:
Range		$80 – $117		$79 – $110		$81 – $117		$77 – $110
Weighted average		$104		$101		$104		$99

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

(2)

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

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

Following is a quantitative summary of key inputs used in the valuation of the Company’s MSRs and the effect on the fair value from adverse changes in those inputs:


	June 30, 2021	December 31, 2020

	(Fair value, unpaid principal balance of underlying
	loans and effect on fair value amounts in thousands)
Fair value	$ 3,412,648	$ 2,581,174
Pool characteristics:
Unpaid principal balance of underlying loans	$ 252,475,400	$ 238,410,809
Weighted average note interest rate	3.3%	3.6%
Weighted average servicing fee rate (in basis points)	34	35
Key inputs (1):
Pricing spread (2):
Range	6.3% – 16.1%	8.0% – 17.6%
Weighted average	8.4%	10.1%
Effect on fair value of:
5% adverse change	($56,330)	($46,356)
10% adverse change	($110,804)	($90,936)
20% adverse change	($214,519)	($175,137)
Annual total prepayment speed (3):
Range	7.9% – 29.1%	10.1% – 32.9%
Weighted average	10.5%	13.7%
Equivalent average life (in years):
Range	3.0 – 7.8	2.3 – 7.7
Weighted average	6.9	6.0
Effect on fair value of:
5% adverse change	($72,028)	($66,536)
10% adverse change	($141,434)	($130,253)
20% adverse change	($272,904)	($249,843)
Annual per-loan cost of servicing:
Range	$79 – $117	$79 – $117
Weighted average	$107	$107
Effect on fair value of:
5% adverse change	($31,198)	($25,482)
10% adverse change	($62,395)	($50,964)
20% adverse change	($124,790)	($101,929)

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

(2)	The Company applies a pricing spread to the United States Dollar LIBOR/swap curve for purposes of discounting cash flows relating to MSRs.

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

The preceding sensitivity analyses are limited in that they were performed as of a particular date; only contemplate the movements in the indicated inputs; do not incorporate changes 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 management to account for changing circumstances. For these reasons, the preceding estimates should not be viewed as earnings forecasts.

Excess Servicing Spread Financing at Fair Value

ESS is categorized as a “Level 3” fair value liability. Because ESS is a claim to a portion of the cash flows from MSRs, the fair value measurement of the ESS is similar to that of MSRs. The Company uses the same discounted cash flow approach to measuring the ESS as it uses to measure MSRs except that certain inputs relating to the cost to service the mortgage loans underlying the MSRs and certain ancillary income are not included as these cash flows do not accrue to the holder of the ESS.

The key inputs used in the estimation of ESS fair value include pricing spread and prepayment speed. Significant changes to either of those inputs in isolation could result in a significant change in the fair value of ESS. Changes in these key inputs are not directly related.

ESS is generally subject to fair value increases when mortgage interest rates increase. Increasing mortgage interest rates normally discourage mortgage refinancing activity. Decreased refinancing activity increases the life of the mortgage loans underlying the ESS, thereby increasing the fair value of this financing. Changes in the fair value of ESS are included in Net loan servicing fees—Change in fair value of excess servicing spread payable to PennyMac Mortgage Investment Trust. During the quarter ended March 31, 2021, the Company repaid its outstanding ESS financing payable to PMT.

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


		December 31,
		2020
Fair value (in thousands)		$ 131,750
Pool characteristics:
Unpaid principal balance of underlying loans (in thousands)		$ 15,833,050
Average servicing fee rate (in basis points)		34
Average excess servicing spread (in basis points)		19
Key inputs (1):
Pricing spread (2):
Range		4.9% – 5.3%
Weighted average		5.1%
Annual total prepayment speed (3):
Range		9.6% – 18.3%
Weighted average		11.7%
Equivalent average life (in years):
Range		2.3 – 6.6
Weighted average		5.8

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

(2)	The Company applies a pricing spread to the United States Dollar LIBOR/swap curve for purposes of discounting cash flows relating to ESS.

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

Mortgage Servicing Liabilities

MSLs are categorized as “Level 3” fair value liabilities. The Company uses a discounted cash flow approach to estimate the fair value of MSLs. The key inputs used in the estimation of the fair value of MSLs include the applicable pricing spread, prepayment speed, and the annual per-loan cost to service the underlying loans. Changes in the fair value of MSLs are included in Net servicing fees—Change in fair value of mortgage servicing rights and mortgage servicing liabilities in the consolidated statements of income.

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


		June 30,		December 31,
		2021		2020
Fair value (in thousands)	$	100,091	$	45,324
Pool characteristics:
Unpaid principal balance of underlying loans (in thousands)	$	6,135,249	$	2,857,492
Servicing fee rate (in basis points)		25		25
Key inputs:
Pricing spread (1)		7.7%		7.6%
Annual total prepayment speed (2)		31.8%		33.3%
Equivalent average life (in years)		3.5		3.2
Annual per-loan cost of servicing	$	278	$	305

(1)	The Company applies a pricing spread to the United States Dollar LIBOR/swap curve for purposes of discounting cash flows relating to MSLs.

(2)	Annual total prepayment speed is measured using Life Total CPR, which includes both voluntary and involuntary prepayments. Equivalent average life is provided for informational purposes.