PennyMac Mortgage Investment Trust - Quarter Report: 2021 September (Form 10-Q)

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 September 30, 2021

☐	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 6.75% Series C Cumulative Redeemable Preferred Shares of Beneficial Interest, $0.01 Par Value	PMT/PB PMT/PC	New York Stock Exchange 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 November 4, 2021
Common Shares of Beneficial Interest, $0.01 par value		97,006,694

PENNYMAC MORTGAGE INVESTMENT TRUST

FORM 10-Q

September 30, 2021

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 Operations	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	66
	Our Company	66
	Results of Operations	69
	Net Investment Income	71
	Expenses	82
	Balance Sheet Analysis	85
	Asset Acquisitions	85
	Investment Portfolio Composition	86
	Cash Flows	89
	Liquidity and Capital Resources	90
	Off-Balance Sheet Arrangements and Aggregate Contractual Obligations	92
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	93
Item 4.	Controls and Procedures	94
PART II. OTHER INFORMATION		95
Item 1.	Legal Proceedings	95
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	95
Item 3.	Defaults Upon Senior Securities	95
Item 4.	Mine Safety Disclosures	95
Item 5.	Other Information	95
Item 6.	Exhibits	96

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, 2020, filed with the Securities and Exchange Commission (“SEC”) on February 26, 2021.

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 the COVID-19 coronavirus pandemic (the “Pandemic” or “COVID-19”);

•

the impact to our CRT arrangements and agreements of increased borrower requests for forbearance under the Coronavirus Aid, Relief and Economic Security Act (“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;

•

the adequacy of our cash reserves and working capital;

•

our substantial amount of debt;

•

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 that impact the business, operations or governance of mortgage lenders and/or publicly-traded companies or such changes that increase the cost of doing business with such entities;

•

the Consumer Financial Protection Bureau 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;

•

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.

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

PENNYMAC MORTGAGE INVESTMENT TRUST AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS (UNAUDITED)

	September 30,			December 31,
	2021			2020
	(in thousands, except share information)
ASSETS
Cash	$	131,741		$	57,704
Short-term investments at fair value		116,130			127,295
Mortgage-backed securities at fair value pledged to creditors		2,471,033			2,213,922
Loans acquired for sale at fair value ($4,889,954 and $3,501,847 pledged to creditors, respectively)		4,979,256			3,551,890
Loans at fair value ($891,531 and $147,410 pledged to creditors, respectively)		895,880			151,734
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		—			131,750
Derivative assets ($35,938 and $58,699 pledged to creditors, respectively)		97,688			164,318
Deposits securing credit risk transfer arrangements pledged to creditors		1,962,800			2,799,263
Mortgage servicing rights at fair value ($2,797,165 and $1,742,905 pledged to creditors, respectively)		2,825,501			1,755,236
Servicing advances ($62,362 pledged to creditors at September 30, 2021)		115,961			121,820
Real estate acquired in settlement of loans ($7,490 and $15,365 pledged to creditors, respectively)		10,473			28,709
Due from PennyMac Financial Services, Inc.		19,162			8,152
Other		242,975			380,218
Total assets	$	13,868,600		$	11,492,011
LIABILITIES
Assets sold under agreements to repurchase	$	7,025,147		$	6,309,418
Mortgage loan participation purchase and sale agreements		45,044			16,851
Notes payable secured by credit risk transfer and mortgage servicing assets		2,633,228			1,924,999
Exchangeable senior notes		499,612			196,796
Asset-backed financing of variable interest entities at fair value		843,163			134,726
Interest-only security payable at fair value		12,000			10,757
Assets sold to PennyMac Financial Services, Inc. under agreements to repurchase		—			80,862
Derivative and credit risk transfer strip liabilities at fair value		68,185			263,473
Accounts payable and accrued liabilities		160,112			124,809
Due to PennyMac Financial Services, Inc.		49,993			87,005
Income taxes payable		11,880			23,563
Liability for losses under representations and warranties		40,909			21,893
Total liabilities		11,389,273			9,195,152

Commitments and contingencies ─ Note 16

SHAREHOLDERS’ EQUITY
Preferred shares of beneficial interest, $0.01 par value per share, authorized 100,000,000 shares, issued and outstanding 22,400,000 and 12,400,000, shares respectively, liquidation preference ($560,000,000 and $310,000,000, respectively)		541,482			299,707
Common shares of beneficial interest—authorized, 500,000,000 common shares of $0.01 par value; issued and outstanding, 97,006,694 and 97,862,625 common shares, respectively		970			979
Additional paid-in capital		2,120,457			2,096,907
Accumulated deficit		(183,582	)		(100,734	)
Total shareholders’ equity		2,479,327			2,296,859
Total liabilities and shareholders’ equity	$	13,868,600		$	11,492,011

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

PENNYMAC MORTGAGE INVESTMENT TRUST AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS (UNAUDITED)

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

	September 30,		December 31,
	2021		2020
	(in thousands)
ASSETS
Loans at fair value	$	891,104	$	143,707
Derivative assets at fair value		35,938		58,699
Deposits securing credit risk transfer arrangements		1,962,800		2,799,263
Other—interest receivable		2,054		392
	$	2,891,896	$	3,002,061
LIABILITIES
Asset-backed financing at fair value	$	843,163	$	134,726
Derivative and credit risk transfer liabilities at fair value		43,566		229,696
Interest-only security payable at fair value		12,000		10,757
Accounts payable and accrued liabilities—interest payable		2,054		392
	$	900,783	$	375,571

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

PENNYMAC MORTGAGE INVESTMENT TRUST AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)

	Quarter ended September 30,						Nine months ended September 30,
	2021			2020			2021			2020
	(in thousands, except per common share amounts)
Net investment income
Net gains on loans acquired for sale:
From nonaffiliates	$	14,659		$	96,753		$	92,029		$	300,257
From PennyMac Financial Services, Inc.		1,537			1,669			4,905			9,154
		16,196			98,422			96,934			309,411
Loan origination fees		44,189			38,547			142,805			87,683
Net gains (losses) on investments:
From nonaffiliates		57,306			22,207			267,251			(289,748	)
From PennyMac Financial Services, Inc.		—			(2,610	)		1,651			(16,852	)
		57,306			19,597			268,902			(306,600	)
Net loan servicing fees:
From nonaffiliates
Contractually specified		137,804			98,027			378,110			294,319
Other		13,960			18,660			55,107			37,738
		151,764			116,687			433,217			332,057
Change in fair value of mortgage servicing rights		(144,241	)		(66,473	)		(165,457	)		(864,522	)
Mortgage servicing rights hedging results		(73,841	)		962			(354,128	)		717,498
		(66,318	)		51,176			(86,368	)		185,033
From PennyMac Financial Services, Inc.		12,975			9,251			38,158			17,306
		(53,343	)		60,427			(48,210	)		202,339
Net interest (expense) income:
Interest income:
From nonaffiliates		58,284			58,553			138,279			167,142
From PennyMac Financial Services, Inc.		—			2,070			1,280			6,416
		58,284			60,623			139,559			173,558
Interest expense:
To nonaffiliates		75,489			58,341			230,612			198,447
To PennyMac Financial Services, Inc.		—			676			387			2,686
		75,489			59,017			230,999			201,133
Net interest (expense) income		(17,205	)		1,606			(91,440	)		(27,575	)
Results of real estate acquired in settlement of loans		540			2,259			1,352			5,147
Other		171			155			474			2,412
Net investment income		47,854			221,013			370,817			272,817
Expenses
Earned by PennyMac Financial Services, Inc.:
Loan fulfillment fees		43,922			54,839			158,777			149,594
Loan servicing fees		20,703			18,752			59,811			48,806
Management fees		8,520			8,508			28,882			25,851
Loan origination		6,594			7,234			23,888			15,951
Loan collection and liquidation		2,126			1,082			9,958			2,696
Safekeeping		2,306			1,075			6,839			4,638
Professional services		949			1,554			5,070			4,542
Compensation		(383	)		1,039			3,130			2,758
Other		3,773			4,733			10,293			12,146
Total expenses		88,510			98,816			306,648			266,982
(Loss) income before (benefit from) provision for income taxes		(40,656	)		122,197			64,169			5,835
(Benefit from) provision for income taxes		(4,701	)		22,650			(9,571	)		36,341
Net (loss) income		(35,955	)		99,547			73,740			(30,506	)
Dividends on preferred shares		7,969			6,234			20,438			18,703
Net (loss) income attributable to common shareholders	$	(43,924	)	$	93,313		$	53,302		$	(49,209	)
(Loss) earnings per common share
Basic	$	(0.45	)	$	0.94		$	0.54		$	(0.50	)
Diluted	$	(0.45	)	$	0.94		$	0.54		$	(0.50	)
Weighted average common shares outstanding
Basic		97,501			99,227			97,772			99,718
Diluted		97,501			99,424			97,879			99,718

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

PENNYMAC MORTGAGE INVESTMENT TRUST AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY (UNAUDITED)

	Quarter ended September 30, 2021
	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 June 30, 2021		12,400	$	299,707			97,911		$	979		$	2,138,422		$	(95,718	)	$	2,343,390
Net loss		—		—			—			—			—			(35,955	)		(35,955	)
Share-based compensation		—		—			—			—			(796	)		—			(796	)
Issuance of preferred shares		10,000		250,000			—			—			—			—			250,000
Issuance costs relating to preferred shares		—		(8,225	)		—			—			—			—			(8,225	)
Dividends:
Preferred shares		—		—			—			—			—			(6,236	)		(6,236	)
Common shares ($0.47 per share)		—		—			—			—			—			(45,673	)		(45,673	)
Repurchase of common shares		—		—			(904	)		(9	)		(17,169	)		—			(17,178	)
Balance at September 30, 2021		22,400	$	541,482			97,007		$	970		$	2,120,457		$	(183,582	)	$	2,479,327

	Quarter ended September 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 June 30, 2020		12,400	$	299,707			99,275		$	993		$	2,119,577		$	(185,000	)	$	2,235,277
Net income		—		—			—			—			—			99,547			99,547
Share-based compensation		—		—			6			—			545			—			545
Dividends:
Preferred shares		—		—			—			—			—			(6,239	)		(6,239	)
Common shares ($0.40 per share)		—		—			—			—			—			(39,591	)		(39,591	)
Repurchase of common shares		—		—			(492	)		(5	)		(8,268	)		—			(8,273	)
Balance at September 30, 2020		12,400	$	299,707			98,789		$	988		$	2,111,854		$	(131,283	)	$	2,281,266

PENNYMAC MORTGAGE INVESTMENT TRUST AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY (UNAUDITED)

	Nine months ended September 30, 2021
	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, 2020		12,400	$	299,707			97,863		$	979		$	2,096,907		$	(100,734	)	$	2,296,859
Net income		—		—			—			—			—			73,740			73,740
Share-based compensation		—		—			75			—			1,255			—			1,255
Recognition of cash conversion option included in issuance of Exchangeable Notes		—		—			—			—			39,986			—			39,986
Issuance of preferred shares		10,000		250,000			—			—			—			—			250,000
Issuance costs relating to preferred shares		—		(8,225	)		—			—			—			—			(8,225	)
Dividends:
Preferred shares		—		—			—			—			—			(18,708	)		(18,708	)
Common shares ($1.41 per share)		—		—			—			—			—			(137,880	)		(137,880	)
Repurchase of common shares		—		—			(931	)		(9	)		(17,691	)		—			(17,700	)
Balance at September 30, 2021		22,400	$	541,482			97,007		$	970		$	2,120,457		$	(183,582	)	$	2,479,327

	Nine months ended September 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		—		—			—			—			—			(30,506	)		(30,506	)
Share-based compensation		—		—			207			2			(30	)		—			(28	)
Issuance of common shares		—		—			241			2			5,652			—			5,654
Issuance costs relating to common shares		—		—			—			—			(57	)		—			(57	)
Dividends:
Preferred shares		—		—			—			—			—			(18,708	)		(18,708	)
Common shares ($1.05 per share)		—		—			—			—			—			(104,386	)		(104,386	)
Repurchase of common shares		—		—			(1,841	)		(18	)		(21,600	)		—			(21,618	)
Balance at September 30, 2020		12,400	$	299,707			98,789		$	988		$	2,111,854		$	(131,283	)	$	2,281,266

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

PENNYMAC MORTGAGE INVESTMENT TRUST AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

	Nine months ended September 30,
	2021			2020
	(in thousands)
Cash flows from operating activities
Net income (loss)	$	73,740		$	(30,506	)
Adjustments to reconcile net income (loss) to net cash (used in) provided by operating activities:
Net gains on loans acquired for sale at fair value		(96,934	)		(309,411	)
Net (gains) losses on investments		(268,902	)		306,600
Change in fair value of mortgage servicing rights		165,457			864,522
Mortgage servicing rights hedging results		354,128			(717,498	)
Accrual of interest on excess servicing spread purchased from PennyMac Financial Services, Inc.		(1,280	)		(6,416	)
Capitalization of interest and fees on loans at fair value		(251	)		—
Accrual of unearned discounts and amortization of purchase premiums on mortgage-backed securities, loans at fair value, and asset-backed financing of VIEs		6,080			18,750
Amortization of debt issuance costs		21,228			12,234
Results of real estate acquired in settlement of loans		(1,352	)		(5,147	)
Gain on early extinguishment of debt		—			(1,738	)
Share-based compensation expense		1,953			1,601
Purchase of loans acquired for sale at fair value from nonaffiliates		(147,356,267	)		(108,335,206	)
Purchase of loans acquired for sale at fair value from PennyMac Financial Services, Inc.		—			(2,248,896	)
Sale to nonaffiliates and repayment of loans acquired for sale at fair value		93,365,579			66,639,230
Sale of loans acquired for sale to PennyMac Financial Services, Inc.		51,471,399			43,721,458
Repurchase of loans subject to representation and warranties		(49,359	)		(53,925	)
Settlement of repurchase agreement derivative		—			5,328
Decrease in servicing advances		5,771			1,794
Increase in due from PennyMac Financial Services, Inc.		(10,953	)		(16,064	)
(Increase) decrease in other assets		(372,187	)		689,092
Increase in accounts payable and accrued liabilities		25,971			11,392
(Decrease) increase in due to PennyMac Financial Services, Inc.		(37,012	)		74,099
(Decrease) increase in income taxes payable		(11,683	)		31,345
Net cash (used in) provided by operating activities		(2,714,874	)		652,638
Cash flows from investing activities
Net decrease in short-term investments		11,165			9,212
Purchase of mortgage-backed securities at fair value		(1,932,083	)		(1,769,211	)
Sale and repayment of mortgage-backed securities at fair value		1,607,695			2,282,759
Purchase of subordinate mortgage pass-through securities associated with consolidated variable interest entities		(19,060	)		—
Sale and repayment of loans at fair value		73,838			72,803
Repurchase of loans at fair value		—			(1,058	)
Settlement and repayment of excess servicing spread receivable from PennyMac Financial Services, Inc.		134,624			25,112
Net settlement of derivative financial instruments		(7,891	)		(48,236	)
Distribution from credit risk transfer agreements		1,000,269			632,788
Sale of mortgage servicing rights		—			7
Sale of real estate acquired in settlement of loans		19,588			36,199
Decrease (increase) in margin deposits		207,294			(1,989	)
Net cash provided by investing activities		1,095,439			1,238,386

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

PENNYMAC MORTGAGE INVESTMENT TRUST AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

	Nine months ended September 30,
	2021			2020
	(in thousands)
Cash flows from financing activities
Sale of assets under agreements to repurchase		157,945,930			130,297,190
Repurchase of assets sold under agreements to repurchase		(157,234,576	)		(131,500,376	)
Issuance of mortgage loan participation purchase and sale agreements		3,339,846			3,941,053
Repayment of mortgage loan participation purchase and sale agreements		(3,311,653	)		(3,861,276	)
Issuance of notes payable secured by credit risk transfer and mortgage servicing assets		659,156			350,000
Repayment of notes payable secured by credit risk transfer and mortgage servicing assets		(722,027	)		(444,988	)
Issuance of exchangeable senior notes		345,000			—
Repayment of exchangeable notes		—			(248,262	)
Repayment of asset-backed financing of consolidated variable interest entities		(68,054	)		(66,654	)
Repurchase of assets sold to PennyMac Financial Services, Inc. under agreement to repurchase		(80,862	)		(20,554	)
Issuance of notes payable secured by mortgage servicing assets		1,312,971			—
Repayment of notes payable secured by mortgage servicing assets		(537,970	)		—
Payment of debt issuance costs		(20,654	)		(14,305	)
Payment of contingent underwriting fees payable to PennyMac Financial Services, Inc.		(4	)		(76	)
Payment of dividends to preferred shareholders		(18,708	)		(18,708	)
Payment of dividends to common shareholders		(138,300	)		(111,988	)
Issuance of common shares		—			5,654
Payment of issuance costs related to common shares		—			(57	)
Issuance of preferred shares		250,000			—
Payment of issuance costs related to preferred shares		(8,225	)		—
Payment of vested share-based compensation withholdings		(698	)		(1,629	)
Repurchase of common shares		(17,700	)		(21,618	)
Net cash provided by (used in) financing activities		1,693,472			(1,716,594	)
Net increase in cash		74,037			174,430
Cash at beginning of period		57,704			104,056
Cash at end of period	$	131,741		$	278,486

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

PENNYMAC MORTGAGE INVESTMENT TRUST AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Note 1—Organization

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”), a publicly-traded mortgage banking and investment management company, 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 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 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, 2020.

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.

Pending Accounting Change

In August 2020, the FASB issued Accounting Standards Update 2020-06, Debt – Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging – Contracts in Entity’s Own Equity (Subtopic 815-40) (“ASU 2020-06”). ASU 2020-06 simplifies the accounting for convertible instruments by removing certain separation models for convertible instruments in subtopic 470-20, Debt – Debt with Conversion and Other Options. Under the amendments in this update:

•

the embedded conversion features in debt instruments no longer are separated from the host contract for convertible instruments with conversion features that are not required to be accounted for as derivatives or that do not result in substantial premiums accounted for as paid-in capital. Consequently, a convertible debt instrument will generally be accounted for as a single liability measured at its amortized cost;

•

Diluted earnings per share guidance is changed to require that:

•

an entity is required to include shares issuable pursuant to conversion of convertible debt instruments in the determination of diluted earnings per share. Current guidance allows an entity to exclude such shares from the diluted earnings per share calculation if the company has a history and policy of cash settlement;

•

an average market price should be used to calculate the diluted EPS denominator in cases in which the exercise prices may change on the basis of an entity’s share price or changes in the entity’s share price may affect the number of shares that may be used to settle a financial instrument; and

•

an entity should use the weighted-average share count from each quarter when calculating the year-to-date weighted-average share count.

ASU 2020-06 is effective for the Company beginning in the quarter ending March 31, 2022 using either the modified retrospective or full retrospective method. The Company intends to adopt ASU 2020-06 using the modified retrospective method.

As detailed in Note 14 – Long-Term Debt, PennyMac Corp. (“PMC”) has issued $555 million in unpaid principal balance (“UPB”) of exchangeable senior notes that are exchangeable for PMT common shares of beneficial interest (“Common Shares”) (the “Exchangeable Notes”). The Exchangeable Notes will be subject to the guidance included in ASU 2020-06. Adoption of ASU 2020-06 will have the following effects on PMT:

•

The exchange feature included in the Exchangeable Notes can be settled either in cash or common shares at the option of PMC. As a result of this feature and PMC’s intent to cash settle the Exchangeable Notes, the Company presently excludes the effect of exchange of the Exchangeable Notes from diluted earnings per share as allowed under current accounting standards. Adoption of ASU 2020-06 will require the Company to include common shares issuable pursuant to exchange of the Exchangeable Notes in its determination of diluted earnings per share.

•

The Company recognized the fair value of the exchange feature as a component of Additional paid-in capital as of the date of issuance of the Exchangeable Notes as required by current guidance. The issuance discount charged to the Exchangeable Notes resulting from the allocation of the issuance discount to Additional paid-in capital is presently accrued to interest expense using the interest method. Upon adoption of ASU 2020-06, the value originally attributed to Additional paid-in capital as of the date of issuance of the Exchangeable Notes will be reclassified to the carrying value of the Exchangeable Notes and the accumulated accrual of the issuance discount to interest expense through the date of adoption of ASU 2020-06 will be credited to retained earnings net of income taxes as the cumulative effect of the adoption of ASU 2020-06.

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, MSRs and MBS. 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 activity and expectations, annual per-loan servicing costs and the returns demanded by market participants.

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 scheduled credit losses arising from such loans reaching a specific number of days delinquent; or

•

from June 2018 through 2020, entering into firm commitments to purchase and purchasing CRT securities and, upon purchase of such securities, holding CRT strips representing an IO ownership interest that absorbs realized credit losses arising from such loans. The obligation to absorb the losses for both CRT Agreements and CRT securities represent the Company’s recourse obligations relating to the arrangements (“Recourse Obligations”).

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 underlying loans, which is greater than the risk of loss associated with selling such loans to Fannie Mae without the retention of 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). In contrast, 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, CRT arrangements, and MBS:

•

MSRs are generally subject to loss in fair value when prepayment speeds increase as a result of decreasing mortgage interest rates, when estimates of cost to service the underlying loans increase or when the returns demanded by market participants increase.

•

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.

•

The fair value of MBS is sensitive to changes in market interest rates.

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, which, through June 30, 2020, ranged from two to three and one-half basis points of the UPB, generally based on the average number of calendar days loans are held by the Company prior to purchase by PLS.

Effective July 1, 2020, the fulfillment fees and sourcing fees were revised as follows:

•

Fulfillment fees shall not exceed the following:

(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 $355 for each pull-through adjusted loan commitment in excess of 16,500 per quarter, plus

(ii)

$315 multiplied by the number of purchased loans up to and including 16,500 per quarter and $195 multiplied by the number of purchased loans in excess of 16,500 per quarter, plus

(iii)

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

•

Sourcing fees charged to PLS range from one to two basis points of the UPB, generally based on the average number of calendar days the 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 year per early purchase facility administered by PLS, and (ii) in the amount of $35 for each mortgage loan that the Company acquires.

The mortgage banking services 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.

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 September 30,				Nine months ended September 30,
	2021		2020		2021		2020
	(in thousands)
Loan fulfillment fees earned by PLS	$	43,922	$	54,839	$	158,777	$	149,594
UPB of loans fulfilled by PLS	$	28,605,098	$	27,351,435	$	92,846,231	$	62,403,674

Sourcing fees received from PLS included in Net gains on loans acquired for sale	$	1,537	$	1,669	$	4,905	$	9,154
UPB of loans sold to PLS	$	15,249,441	$	16,690,482	$	49,106,232	$	41,641,327

Purchases of loans acquired for sale from PLS	$	—	$	27	$	—	$	2,248,896

Tax service fees paid to PLS	$	6,559	$	6,077	$	21,879	$	14,345

September 30, 2021

December 31, 2020

(in thousands)

Loans included in Loans acquired for sale at fair value

pending sale to PLS

334,641

460,414

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 MSRs, loans held for sale and loans held in VIEs (prime servicing) and its portfolio of residential loans purchased with credit deterioration (distressed loans). The Servicing Agreement provides for servicing fees earned by PLS that are established at a fixed per loan monthly amount based on whether the loans are acquired as prime servicing or distressed loans.

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, as well as certain fees for COVID-19 pandemic-related forbearance and modification activities provided for under the CARES Act. The Servicing Agreement expires on June 30, 2025, subject to automatic renewal for additional 18-month periods, unless terminated earlier in accordance with its terms.

Prime Servicing

The base servicing fees for prime loans subserviced by PLS on the Company’s behalf are $7.50 per month for fixed-rate loans and $8.50 per month for adjustable-rate loans.

To the extent that these prime 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 real estate acquired in settlement of loans (“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.

Effective July 1, 2020, PLS also receives certain fees for COVID-19 pandemic-related forbearance and modification activities it provides as required by the CARES Act.

Special Servicing (Distressed Loans)

The base servicing fee rates for distressed loans range from $30 per month for current loans up to $95 per month for loans in foreclosure proceedings. The base servicing fee rate for REO is $75 per month. PLS also receives a supplemental servicing fee of $25 per month for each distressed loan.

PLS receives activity-based fees for modifications, foreclosures and liquidations that it facilitates with respect to distressed loans, as well as other market-based refinancing and loan disposition fees. PLS may also receive REO rental fees, property lease renewal fees, property management fees, tenant paid application fees, late rent fees, and third-party vendor fees.

MSR Recapture Agreement

The Company has an MSR recapture agreement with PFSI. Pursuant to the terms of the MSR recapture agreement, if PFSI refinances mortgage loans for which the Company previously held the MSRs, through June 30, 2020, 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 loans so originated.

Effective July 1, 2020, the 2020 MSR recapture agreement changed the recapture fee payable by PLS 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 UPB of all recaptured loans, to (ii) the aggregate UPB 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 at least 15%.

The 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:

	Quarter ended September 30,				Nine months ended September 30,
	2021		2020		2021		2020
	(in thousands)
Loan servicing fees:
Loans acquired for sale at fair value	$	698	$	452	$	1,871	$	1,595
Loans at fair value		89		187		306		675
MSRs		19,916		18,113		57,634		46,536
	$	20,703	$	18,752	$	59,811	$	48,806
Average investment in:
Loans acquired for sale at fair value	$	4,887,993	$	3,336,504	$	4,224,917	$	3,125,083
Loans at fair value	$	458,054	$	215,969	$	235,711	$	240,565
Average MSR portfolio UPB	$	205,181,714	$	148,412,625	$	191,351,860	$	142,872,909

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”.

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 calculated in accordance with GAAP, and adjusted to exclude one-time events pursuant to changes in GAAP and certain other non-cash charges after discussion between the Manager 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 “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 “net income” is lower than the target yield, the “high watermark” is increased by the difference. If “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 “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 before termination.

Following is a summary of management fee expenses:

	Quarter ended September 30,					Nine months ended September 30,
	2021			2020		2021		2020
	(in thousands)
Base management	$	8,778		$	8,508	$	25,875	$	25,851
Performance incentive (adjustment)		(258	)		—		3,007		—
	$	8,520		$	8,508	$	28,882	$	25,851
Average shareholders' equity amounts used to calculate base management fee expense	$	2,350,940		$	2,280,023	$	2,334,050	$	2,329,741

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 per fiscal quarter through September 30, 2020. Effective July 1, 2020, PMT’s reimbursement of PCM’s and its affiliates’ compensation expenses was increased from $120,000 to $165,000 per fiscal quarter, 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.

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

	Quarter ended September 30,				Nine months ended September 30,
	2021		2020		2021		2020
	(in thousands)
Reimbursement of:
Common overhead incurred by PCM and its affiliates	$	1,548	$	1,389	$	3,387	$	4,514
Compensation		165		165		495		405
Expenses incurred on the Company’s behalf, net		4,396		2,852		13,536		5,561
	$	6,109	$	4,406	$	17,418	$	10,480
Payments and settlements during the period (1)	$	51,020	$	58,479	$	238,202	$	228,514

(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 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 (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 UPB 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 UPB 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 UPB 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. The remaining balance of the ESS was repaid during the quarter ended March 31, 2021.

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

	Quarter ended			Nine months ended September 30,
	September 30, 2020			2021		2020
	(in thousands)
ESS:
Received pursuant to a recapture agreement	$	531		$	557	$	1,393
Repayments	$	7,682		$	134,624	$	25,112
Interest income	$	2,070		$	1,280	$	6,416
Net gain (loss) included in Net gains (losses) on investments:
Valuation changes	$	(3,135	)	$	1,037	$	(18,293	)
Recapture income		525			614		1,441
	$	(2,610	)	$	1,651	$	(16,852	)

September 30, 2021

December 31, 2020

(in thousands)

Excess servicing spread purchased from PennyMac Financial

Services, Inc. at fair value

—

131,750

Financing Activities

PFSI held 75,000 of the Company’s common shares at both September 30, 2021 and December 31, 2020.

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 the first quarter of 2021, PLS repurchased the ESS from PMH at fair market value, effectively terminating the borrowing arrangements allowing PMH to finance its participation certificates representing beneficial ownership in ESS.

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

	Quarter ended		Nine months ended September 30,
	September 30, 2020		2021		2020
	(in thousands)
Net repayments of assets sold under agreements to repurchase	$	3,143	$	80,862	$	20,554
Interest expense	$	676	$	387	$	2,686

	September 30, 2021		December 31, 2020
	(in thousands)
Assets sold to PFSI under agreement to repurchase	$	—	$	80,862

Amounts Receivable from and Payable to PFSI

Amounts receivable from and payable to PFSI are summarized below:

	September 30, 2021		December 31, 2020
	(in thousands)
Due from PFSI	$	19,162	$	8,152

Due to PFSI:
Allocated expenses and expenses and costs paid by PFSI on PMT’s behalf	$	12,493	$	38,142
Fulfillment fees		10,709		20,873
Management fees		8,778		8,686
Correspondent production fees		10,867		13,065
Loan servicing fees		7,146		6,213
Interest on Assets sold to PFSI under agreement to repurchase		—		26
	$	49,993	$	87,005

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

Balance sheet line including advance amount	September 30, 2021		December 31, 2020
	(in thousands)
Loan servicing advances	$	115,961	$	121,820
Real estate acquired in settlement of loans		3,054		10,334
	$	119,015	$	132,154

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:

	Quarter ended September 30,				Nine months ended September 30,
	2021		2020		2021		2020
	(in thousands)
Cash flows:
Proceeds from sales	$	29,865,473	$	26,748,508	$	93,365,579	$	66,639,230
Loan servicing fees received net of guarantee fees	$	137,804	$	98,027	$	378,110	$	294,319

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

	September 30, 2021		December 31, 2020
	(in thousands)
UPB of loans outstanding	$	211,951,309	$	170,502,361
Collection Status (UPB) (1)
Delinquency:
30-89 days delinquent	$	1,080,362	$	1,235,981
90 or more days delinquent:
Not in foreclosure	$	2,204,245	$	4,428,915
In foreclosure	$	23,497	$	27,494
Bankruptcy	$	147,052	$	148,866
Custodial funds managed by the Company (2)	$	5,373,992	$	6,086,724
Delinquent loans in COVID-19 pandemic-related forbearance:
30-89 days	$	252,609	$	530,353
90 days or more	$	1,395,601	$	3,123,288

(1)	Includes delinquent loans in COVID-19 pandemic-related forbearance plans that were requested by borrowers seeking payment relief in accordance with the CARES Act.

(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 Variable Interest Entities (“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, 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 Company placed 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 are the sole source of settlement of losses under the CRT Agreements. The Company recognizes its IO ownership interests and Recourse Obligations on the consolidated balance sheets as CRT Derivatives in Derivative assets and Derivative and credit risk transfer strip liabilities.

The Company’s exposure to losses under its Recourse Obligations was initially established at rates ranging from 3.5% to 4.0% of the UPB of the loans sold under the CRT arrangements. As the UPB of the underlying loans subject to each CRT arrangements is reduced through repayments, the percentage exposure of each CRT arrangement will increase to maximums ranging from 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 a different type of CRT arrangement. Under the new arrangement, the Company sold loans subject to agreements that required PMT to purchase securities that absorb incurred credit losses on such loans. The Company recognized these firm purchase commitments initially as a component of Net gains on loans acquired for sale; subsequent changes in fair value were recognized in Net gains (losses) on investments. The final sales of loans subject to this type of CRT arrangement were made during September 2020.

The Company purchased the securities subject to the firm commitments. Similar to the CRT Agreements, the Company accounts for the deposits collateralizing these securities as Deposits securing CRT arrangements and recognizes its IO ownership

interests and Recourse Obligations as CRT strips which are also included on the consolidated balance sheet in Derivative and credit risk transfer strip liabilities. Like CRT Agreements, the Deposits securing CRT arrangements relating to these arrangements represent the Company’s maximum contractual exposure to losses. 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 gains (losses) on investments in the consolidated statements of operations.

Following is a summary of the CRT arrangements:

	Quarter ended September 30,						Nine months ended September 30,
	2021			2020			2021			2020
	(in thousands)
UPB of loans sold				$	1,799,078					$	18,277,263
Investments — Change in expected face amount of firm commitment to purchase CRT securities				$	(95,033	)				$	197,481
Investment income (loss):
Net gains on loans acquired for sale — Fair value of firm commitment to purchase CRT securities recognized upon sale of loans				$	(3,933	)				$	(38,161	)
Net gains (losses) on investments:
Derivative and CRT strips:
CRT derivatives
Realized	$	21,337			11,480		$	73,464			42,231
Valuation changes		(3,345	)		(17,996	)		98			(196,404	)
		17,992			(6,516	)		73,562			(154,173	)
CRT strips
Realized		26,370			10,460			90,342			38,565
Valuation changes		28,327			8,635			163,273			(107,670	)
		54,697			19,095			253,615			(69,105	)
Interest-only security payable at fair value		1,185			2,041			(1,243	)		12,769
		73,874			14,620			325,934			(210,509	)
Firm commitments to purchase CRT securities		—			46,332			—			(220,146	)
		73,874			60,952			325,934			(430,655	)
Interest income — Deposits securing CRT arrangements		126			288			451			6,893
	$	74,000		$	57,307		$	326,385		$	(461,923	)

Net (recoveries received) payments made to settle (recoveries) losses on CRT arrangements	$	(14,321	)	$	2,935		$	(47,876	)	$	7,114

	September 30, 2021			December 31, 2020
	(in thousands)
Carrying value of CRT arrangements:
Derivative and credit risk transfer strip assets (liabilities), net
CRT derivatives	$	31,891		$	31,795
CRT strips		(39,519	)		(202,792	)
	$	(7,628	)	$	(170,997	)

Deposits securing CRT arrangements	$	1,962,800		$	2,799,263
Interest-only security payable at fair value	$	12,000		$	10,757

CRT arrangement assets pledged to secure borrowings:
Derivative assets	$	35,938		$	58,699
Deposits securing CRT arrangements (1)	$	1,962,800		$	2,799,263

UPB of loans underlying CRT arrangements	$	35,371,965		$	58,697,942
Collection status (UPB):
Delinquency (2)
Current	$	33,723,487		$	54,990,381
30-89 days delinquent	$	384,962		$	710,872
90-180 days delinquent	$	150,778		$	693,315
180 or more days delinquent	$	1,108,723		$	2,297,365
Foreclosure	$	4,015		$	6,009
Bankruptcy	$	76,277		$	75,700
Delinquent loans in COVID-19 pandemic-related forbearance:
30-89 days delinquent	$	117,381		$	383,028
90-180 days delinquent	$	90,500		$	546,344
180 or more days delinquent	$	665,066		$	1,944,663

(1)	Deposits securing credit risk transfer strip liabilities also secure $43.6 million and $229.7 million in CRT strip and CRT derivative liabilities at September 30, 2021 and December 31, 2020, respectively.

(2)	Includes delinquent loans in COVID-19 pandemic-related forbearance plans that were requested by borrowers seeking payment relief in accordance with the CARES Act.

Investments in Loan Securitizations

Investment in Securities Backed by Loans Secured by Investment Properties

Beginning in the quarter ended June 30, 2021, the Company purchased subordinate mortgage pass-through securities backed by loans secured by investment properties in transactions sponsored by Citigroup Global Markets Realty Corp (“CGMRC”). The Company has purchased securities relating to transactions with initial UPBs totaling approximately $796.0 million.

Cash inflows from these loans are distributed to investors and service providers in accordance with the contractual priority of payments and, as such, most of these inflows must be directed first to service and repay the senior certificates. The rights of holders of the subordinate certificates to receive distributions of principal and/or interest, as applicable, are subordinate to the rights of holders of the senior certificates. After the senior certificates are repaid, substantially all cash inflows will be directed to the subordinate certificates, including those held by the Company, until they are fully repaid.

The Company’s purchase of subordinate certificates expose PMT to the credit risk in the underlying loans because the Company’s beneficial interests are among the first beneficial interests to absorb credit losses on those assets.

The Company has concluded that the trusts holding the assets underlying the transactions sponsored by CGMRC are VIEs. The Company determined that it is the primary beneficiary of the VIEs. Therefore, PMT consolidates the VIEs. The Company concluded that it is the primary beneficiary of the VIEs as it has the power, as servicer of the loans, to direct the activities of the trusts that most significantly impact the trusts’ economic performance and, as a holder of subordinate securities, that it is exposed to losses that could potentially be significant to the VIEs.

For financial reporting purposes, the loans owned by the consolidated VIEs are included in Loans at fair value and the securities issued to third parties by the consolidated VIEs are included in Asset-backed financing of variable interest entities at fair value on the Company’s consolidated balance sheets. Both the Loans at fair value and the Asset-backed financing of variable interest entities at fair value included in the consolidated VIEs are also included in a separate statement following the Company’s consolidated balance sheets. The Company previously recognized MSRs relating to loans owned by the consolidated VIEs. Upon purchase of the subordinate securities and consolidation of the VIEs, the Company recombined the MSRs with the loans in the VIEs to Loans at fair value.

The Company recognizes the interest income earned on the loans owned by the VIEs and the interest expense attributable to the asset-backed securities issued to nonaffiliates by the VIEs on its consolidated statements of operations.

	Quarter ended September 30, 2021
	(in thousands)
Interest income	$	3,725
Interest expense	$	3,388

Following is a summary of the Company’s investment in loans secured by investment properties:

	September 30, 2021
	(in thousands)
Loans at fair value	$	811,727
Asset-backed financing at fair value	$	771,865
Subordinate mortgage pass-through securities held at fair value	$	39,862

Investment in Securities Backed by Jumbo Loans

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 variable interest entities 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 nonaffiliated holders of certificates in Interest Expense – to nonaffiliates in its consolidated statements of operations.

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

	Quarter ended September 30,				Nine months ended September 30,
	2021		2020		2021		2020
	(in thousands)
Interest income	$	1,048	$	2,763	$	4,315	$	8,117
Interest expense	$	884	$	2,561	$	3,048	$	9,558

	September 30, 2021		December 31, 2020
	(in thousands)
Loans at fair value	$	79,377	$	143,707
Asset-backed financing at fair value	$	71,298	$	134,726
Certificates retained at fair value	$	8,079	$	8,981

Note 7— Fair 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 used to determine 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, MSRs, and its Credit risk transfer strip liabilities, to be accounted for at fair value. The Company has elected to account for these assets and liabilities at fair value so such changes in fair value will be reflected in its results of operations as they occur and more timely reflect the results of the Company’s performance.

The Company has also identified its Asset-backed financing of variable interest entities 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:

	September 30, 2021
	Level 1		Level 2		Level 3		Total
	(in thousands)
Assets:
Short-term investments	$	116,130	$	—	$	—	$	116,130
Mortgage-backed securities at fair value		—		2,471,033		—		2,471,033
Loans acquired for sale at fair value		—		4,947,718		31,538		4,979,256
Loans at fair value		—		891,104		4,776		895,880
Derivative and credit risk transfer strip assets:
Call options on interest rate futures purchase contracts		375		—		—		375
Put options on interest rate futures purchase contracts		6,695		—		—		6,695
Forward purchase contracts		—		2,784		—		2,784
Forward sale contracts		—		52,773		—		52,773
MBS call options		—		425		—		425
MBS put options		—		16,007		—		16,007
Swaption purchase contracts		—		38,188		—		38,188
CRT derivatives		—		—		35,938		35,938
Interest rate lock commitments		—		—		7,573		7,573
Total derivative assets before netting		7,070		110,177		43,511		160,758
Netting		—		—		—		(63,070	)
Total derivative assets after netting		7,070		110,177		43,511		97,688
Mortgage servicing rights at fair value		—		—		2,825,501		2,825,501
	$	123,200	$	8,420,032	$	2,905,326	$	11,385,488
Liabilities:
Asset-backed financing of VIEs at fair value	$	—	$	843,163	$	—	$	843,163
Interest-only security payable at fair value		—		—		12,000		12,000
Derivative and credit risk transfer strip liabilities:
Forward purchase contracts		—		24,407		—		24,407
Forward sales contracts		—		4,717		—		4,717
CRT derivatives		—		—		4,047		4,047
Interest rate lock commitments		—		—		20,849		20,849
Total derivative liabilities before netting		—		29,124		24,896		54,020
Netting		—		—		—		(25,354	)
Total derivative liabilities after netting		—		29,124		24,896		28,666
Credit risk transfer strips		—		—		39,519		39,519
Total derivative and credit risk transfer strip liabilities		—		29,124		64,415		68,185
	$	—	$	872,287	$	76,415	$	923,348

	December 31, 2020
	Level 1		Level 2		Level 3		Total
	(in thousands)
Assets:
Short-term investments	$	127,295	$	—	$	—	$	127,295
Mortgage-backed securities at fair value		—		2,213,922		—		2,213,922
Loans acquired for sale at fair value		—		3,518,015		33,875		3,551,890
Loans at fair value		—		143,707		8,027		151,734
Excess servicing spread purchased from PFSI		—		—		131,750		131,750
Derivative and credit risk transfer strip assets:
Call options on interest rate futures		3,070		—		—		3,070
Put options on interest rate futures		4,742		—		—		4,742
Forward purchase contracts		—		72,526		—		72,526
Forward sale contracts		—		92		—		92
MBS put options		—		3,220		—		3,220
Swaption purchase contracts		—		8,505		—		8,505
CRT derivatives		—		—		58,699		58,699
Interest rate lock commitments		—		—		72,794		72,794
Total derivative assets before netting		7,812		84,343		131,493		223,648
Netting		—		—		—		(59,330	)
Total derivative assets after netting		7,812		84,343		131,493		164,318
Mortgage servicing rights at fair value		—		—		1,755,236		1,755,236
	$	135,107	$	5,959,987	$	2,060,381	$	8,096,145
Liabilities:
Asset-backed financing of VIEs at fair value	$	—	$	134,726	$	—	$	134,726
Interest-only security payable at fair value		—		—		10,757		10,757
Derivative liabilities:
Forward purchase contracts		—		17		—		17
Forward sales contracts		—		122,884		—		122,884
CRT derivatives		—		—		26,904		26,904
Interest rate lock commitments		—		—		408		408
Total derivative liabilities before netting		—		122,901		27,312		150,213
Netting		—		—		—		(89,532	)
Total derivative liabilities after netting		—		122,901		27,312		60,681
Credit risk transfer strip		—		—		202,792		202,792
Total derivative and credit risk transfer strips liabilities		—		122,901		230,104		263,473
	$	—	$	257,627	$	240,861	$	408,956

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 September 30, 2021
Assets (1)	Loans acquired for sale			Loans at fair value			CRT derivatives			Interest rate lock commitments			CRT strips			Mortgage servicing rights			Total
	(in thousands)
Balance, June 30, 2021	$	30,429		$	7,215		$	35,238		$	29,748		$	(67,846	)	$	2,551,373		$	2,586,157
Purchases and issuances		19,041			—			—			35,163			—			—			54,204
Repayments and sales		(18,356	)		(3,153	)		(21,339	)		—			(26,370	)		—			(69,218	)
Capitalization of interest and fees		—			53			—			—			—			—			53
Amounts received pursuant to sales of loans		—			—			—			—			—			424,912			424,912
Changes in fair value included in results of operations arising from:
Changes in instrument - specific credit risk		—			—			—			—			—			—			—
Other factors		424			652			17,992			25,886			54,697			(144,241	)		(44,590	)
		424			652			17,992			25,886			54,697			(144,241	)		(44,590	)
Transfers:
Loans from REO		—			9			—			—			—			—			9
Interest rate lock commitments to loans acquired for sale (2)		—			—			—			(104,073	)		—			—			(104,073	)
Recombination of MSRs with loans at fair value resulting from consolidation of VIEs		—			—			—			—			—			(6,543	)		(6,543	)
Balance, September 30, 2021	$	31,538		$	4,776		$	31,891		$	(13,276	)	$	(39,519	)	$	2,825,501		$	2,840,911
Changes in fair value recognized during the quarter relating to assets still held at September 30, 2021	$	185		$	(155	)	$	(3,345	)	$	(13,276	)	$	28,327		$	(144,241	)	$	(132,505	)

(1)	For the purpose of this table, CRT derivatives, interest rate lock commitments (“IRLCs”), and CRT strip 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 September 30, 2021
	(in thousands)
Interest-only security payable:
Balance, June 30, 2021	$	13,185
Changes in fair value included in income arising from:
Changes in instrument - specific credit risk		—
Other factors		(1,185	)
		(1,185	)
Balance, September 30, 2021	$	12,000
Changes in fair value recognized during the quarter relating to liability outstanding at September 30, 2021	$	(1,185	)

	Quarter ended September 30, 2020
Assets (1)	Loans acquired for sale			Loans at fair value			Excess servicing spread			CRT derivatives			Interest rate lock commitments			CRT strips			Repurchase agreement derivatives			Firm commitment to purchase CRT securities			Mortgage servicing rights			Total
	(in thousands)
Balance, June 30, 2020	$	29,313		$	8,411		$	151,206		$	(63,926	)	$	83,956		$	(61,375	)	$	5,275		$	(191,193	)	$	1,189,605		$	1,151,272
Purchases and issuances		24,089			—			—			—			31,217			—			—			—			—			55,306
Repayments and sales		(14,104	)		(470	)		(7,682	)		(11,562	)		—			(10,460	)		(5,328	)		—			(7	)		(49,613	)
Capitalization of interest		—			—			2,070			—			—			—			—			—			—			2,070
ESS received pursuant to a recapture agreement with PFSI		—			—			531			—			—			—			—			—			—			531
Amounts (incurred) received pursuant to sales of loans		—			—			—			—			—			—			—			(3,933	)		265,278			261,345
Changes in fair value included in results of operations arising from:
Changes in instrument - specific credit risk		—			—			—			—			—			—			—			—			—			—
Other factors		(51	)		193			(3,135	)		(6,516	)		197,440			19,095			53			46,332			(66,473	)		186,938
		(51	)		193			(3,135	)		(6,516	)		197,440			19,095			53			46,332			(66,473	)		186,938
Transfers:
Interest rate lock commitments to loans acquired for sale (2)		—			—			—			—			(240,496	)		—			—			—			—			(240,496	)
Balance, September 30, 2020	$	39,247		$	8,134		$	142,990		$	(82,004	)	$	72,117		$	(52,740	)	$	—		$	(148,794	)	$	1,388,403		$	1,367,353
Changes in fair value recognized during the quarter relating to assets still held at September 30, 2020	$	(198	)	$	59		$	(3,135	)	$	(17,996	)	$	72,117		$	8,635		$	—		$	46,332		$	(66,473	)	$	39,341

(1)	For the purpose of this table, CRT derivatives, IRLCs, CRT strips, 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 September 30, 2020
	(in thousands)
Interest-only security payable:
Balance, June 30, 2020	$	14,981
Changes in fair value included in income arising from:
Changes in instrument - specific credit risk		—
Other factors		(2,041	)
		(2,041	)
Balance, September 30, 2020	$	12,940
Changes in fair value recognized during the quarter relating to liability outstanding at September 30, 2020	$	(2,041	)

	Nine months ended September 30, 2021
Assets (1)	Loans acquired for sale			Loans at fair value			Excess servicing spread			CRT derivatives			Interest rate lock commitments			CRT strips			Mortgage servicing rights			Total
	(in thousands)
Balance, December 31, 2020	$	33,875		$	8,027		$	131,750		$	31,795		$	72,386		$	(202,792	)	$	1,755,236		$	1,830,277
Purchases and issuances		49,112			—			—			—			83,060			—			—			132,172
Repayments and sales		(52,215	)		(4,467	)		(134,624	)		(73,466	)		—			(90,342	)		—			(355,114	)
Capitalization of interest and fees		—			251			1,280			—			—			—			—			1,531
ESS received pursuant to a recapture agreement with PFSI		—			—			557			—			—			—			—			557
Amounts received pursuant to sales of loans		—			—			—			—			—			—			1,245,546			1,245,546
Changes in fair value included in results of operations arising from:
Changes in instrument - specific credit risk		—			—			—			—			—			—			—			—
Other factors		766			877			1,037			73,562			(144,056	)		253,615			(165,457	)		20,344
		766			877			1,037			73,562			(144,056	)		253,615			(165,457	)		20,344
Transfers:
Loans from REO		—			88			—			—			—			—			—			88
Interest rate lock commitments to loans acquired for sale (2)		—			—			—			—			(24,666	)		—			—			(24,666	)
Recombination of MSRs with loans at fair value resulting from consolidation of VIEs		—			—			—			—			—			—			(9,824	)		(9,824	)
Balance, September 30, 2021	$	31,538		$	4,776		$	—		$	31,891		$	(13,276	)	$	(39,519	)	$	2,825,501		$	2,840,911
Changes in fair value recognized during the period relating to assets still held at September 30, 2021	$	423		$	30		$	—		$	98		$	(13,276	)	$	163,273		$	(165,457	)	$	(14,909	)

(1)	For the purpose of this table, CRT derivatives, IRLCs, and CRT strips 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	Nine months ended September 30, 2021
	(in thousands)
Interest-only security payable:
Balance, December 31, 2020	$	10,757
Changes in fair value included in results of operations arising from:
Changes in instrument - specific credit risk		—
Other factors		1,243
		1,243
Balance, September 30, 2021	$	12,000
Changes in fair value recognized during the period relating to liability outstanding at September 30, 2021	$	1,243

	Nine months ended September 30, 2020
Assets (1)	Loans acquired for sale			Loans at fair value			Excess servicing spread			CRT derivatives			Interest rate lock commitments			CRT strips			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		$	115,863		$	11,154		$	54,930		$	5,275		$	109,513		$	1,535,705		$	2,044,019
Purchases and issuances		56,376			1,058			—			—			293,183			—			—			—			—			350,617
Repayments and sales		(35,136	)		(5,395	)		(25,112	)		(43,694	)		—			(38,565	)		(5,328	)		—			(7	)		(153,237	)
Capitalization of interest		—			—			6,416			—			—			—			—			—			—			6,416
ESS received pursuant to a recapture agreement with PFSI		—			—			1,393			—			—			—			—			—			—			1,393
Amounts (incurred) received pursuant to sales of loans		—			—			—			—			—			—			—			(38,161	)		717,227			679,066
Changes in fair value included in results of operations arising from:
Changes in instrument - specific credit risk		—			—			—			—			—			—			—			—			—			—
Other factors		(560	)		(1,070	)		(18,293	)		(154,173	)		397,138			(69,105	)		53			(220,146	)		(864,522	)		(930,678	)
		(560	)		(1,070	)		(18,293	)		(154,173	)		397,138			(69,105	)		53			(220,146	)		(864,522	)		(930,678	)
Transfers:
Loans to REO		—			(885	)		—			—			—			—			—			—			—			(885	)
Interest rate lock commitments to loans acquired for sale (2)		—			—			—			—			(629,358	)		—			—			—			—			(629,358	)
Balance, September 30, 2020	$	39,247		$	8,134		$	142,990		$	(82,004	)	$	72,117		$	(52,740	)	$	—		$	(148,794	)	$	1,388,403		$	1,367,353
Changes in fair value recognized during the period relating to assets still held at September 30, 2020	$	(787	)	$	(1,081	)	$	(18,293	)	$	(196,404	)	$	72,117		$	(107,670	)	$	—		$	(220,146	)	$	(864,522	)	$	(1,336,786	)

(1)	For the purpose of this table, CRT derivatives, IRLCs, CRT strips, 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	Nine months ended September 30, 2020
	(in thousands)
Interest-only security payable:
Balance, December 31, 2019	$	25,709
Changes in fair value included in income arising from:
Changes in instrument - specific credit risk		—
Other factors		(12,769	)
		(12,769	)
Balance, September 30, 2020	$	12,940
Changes in fair value recognized during the period relating to liability outstanding at September 30, 2020	$	(12,769	)

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 (comprised of loans acquired for sale, loans held in a consolidated VIE, and distressed loans):

	September 30, 2021							December 31, 2020
	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	$	4,974,254	$	4,815,312	$	158,942		$	3,545,100	$	3,377,970	$	167,130
90 or more days delinquent:
Not in foreclosure		4,770		5,548		(778	)		6,591		8,006		(1,415	)
In foreclosure		232		235		(3	)		199		235		(36	)
		5,002		5,783		(781	)		6,790		8,241		(1,451	)
	$	4,979,256	$	4,821,095	$	158,161		$	3,551,890	$	3,386,211	$	165,679
Loans at fair value:
Loans held in consolidated VIEs:
Current through 89 days delinquent	$	888,589	$	856,918	$	31,671		$	140,052	$	128,787	$	11,265
90 or more days delinquent:
Not in foreclosure		2,515		3,262		(747	)		3,655		4,240		(585	)
In foreclosure		—		—		—			—		—		—
		2,515		3,262		(747	)		3,655		4,240		(585	)
		891,104		860,180		30,924			143,707		133,027		10,680
Distressed loans:
Current through 89 days delinquent		1,249		2,058		(809	)		2,071		4,099		(2,028	)
90 or more days delinquent:
Not in foreclosure		1,836		4,292		(2,456	)		3,714		12,357		(8,643	)
In foreclosure		1,691		4,873		(3,182	)		2,242		4,641		(2,399	)
		3,527		9,165		(5,638	)		5,956		16,998		(11,042	)
		4,776		11,223		(6,447	)		8,027		21,097		(13,070	)
	$	895,880	$	871,403	$	24,477		$	151,734	$	154,124	$	(2,390	)

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 September 30, 2021
		Net gains on loans acquired for sale		Net gains (losses) on investments			Net loan servicing fees			Net interest expense			Total
	(in thousands)
Assets:
Mortgage-backed securities at fair value		$	—	$	(18,591	)	$	—		$	(2,415	)	$	(21,006	)
Loans acquired for sale at fair value			75,528		—			—			—			75,528
Loans at fair value			—		411			—			(664	)		(253	)
Credit risk transfer strips			—		54,697			—			—			54,697
MSRs at fair value			—		—			(144,241	)		—			(144,241	)
		$	75,528	$	36,517		$	(144,241	)	$	(3,079	)	$	(35,275	)
Liabilities:
Interest-only security payable at fair value		$	—	$	1,185		$	—		$	—		$	1,185
Asset-backed financing of VIEs at fair value			—		1,663			—			(531	)		1,132
		$	—	$	2,848		$	—		$	(531	)	$	2,317

	Quarter ended September 30, 2020
		Net gains on loans acquired for sale			Net gains (losses) on investments			Net loan servicing fees			Net interest expense		Total
	(in thousands)
Assets:
Mortgage-backed securities at fair value		$	—		$	(37,873	)	$	—		$	7,384	$	(30,489	)
Loans acquired for sale at fair value			231,934			—			—			—		231,934
Loans at fair value			—			(2,712	)		—			880		(1,832	)
ESS at fair value			—			(3,135	)		—			2,070		(1,065	)
Credit risk transfer strips			—			19,095			—			—		19,095
Firm commitment to purchase CRT securities at fair value			(3,933	)		46,332			—			—		42,399
MSRs at fair value			—			—			(66,473	)		—		(66,473	)
		$	228,001		$	21,707		$	(66,473	)	$	10,334	$	193,569
Liabilities:
Interest-only security payable		$	—		$	2,041		$	—		$	—	$	2,041
Asset-backed financing of VIEs at fair value			—			3,106			—			950		4,056
		$	—		$	5,147		$	—		$	950	$	6,097

	Nine months ended September 30, 2021
		Net gains on loans acquired for sale		Net gains (losses) on investments			Net loan servicing fees			Net interest expense			Total
	(in thousands)
Assets:
Mortgage-backed securities at fair value		$	—	$	(60,456	)	$	—		$	(6,821	)	$	(67,277	)
Loans acquired for sale at fair value			68,203		—			—			—			68,203
Loans at fair value			—		(2,373	)		—			665			(1,708	)
ESS at fair value			—		1,037			—			1,280			2,317
Credit risk transfer strips			—		253,615			—			—			253,615
MSRs at fair value			—		—			(165,457	)		—			(165,457	)
		$	68,203	$	191,823		$	(165,457	)	$	(4,876	)	$	89,693
Liabilities:
Interest-only security payable at fair value		$	—	$	(1,243	)	$	—		$	—		$	(1,243	)
Asset-backed financing of VIEs at fair value			—		4,146			—			(76	)		4,070
		$	—	$	2,903		$	—		$	(76	)	$	2,827

	Nine months ended September 30, 2020
		Net gains on loans acquired for sale			Net gains (losses) on investments			Net loan servicing fees			Net interest expense			Total
	(in thousands)
Assets:
Mortgage-backed securities at fair value		$	—		$	95,158		$	—		$	(16,477	)	$	78,681
Loans acquired for sale at fair value			636,962			—			—			—			636,962
Loans at fair value			—			(6,049	)		—			1,720			(4,329	)
ESS at fair value			—			(18,293	)		—			6,416			(11,877	)
Credit risk transfer strips			—			(69,105	)		—			—			(69,105	)
Firm commitment to purchase CRT securities at fair value			(38,161	)		(220,146	)		—			—			(258,307	)
MSRs at fair value			—			—			(864,522	)		—			(864,522	)
		$	598,801		$	(218,435	)	$	(864,522	)	$	(8,341	)	$	(492,497	)
Liabilities:
Interest-only security payable at fair value		$	—		$	12,769		$	—		$	—		$	12,769
Asset-backed financing of VIEs at fair value			—			4,872			—			(4,045	)		827
		$	—		$	17,641		$	—		$	(4,045	)	$	13,596

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)
September 30, 2021	$	—	$	—	$	3,874	$	3,874
December 31, 2020	$	—	$	—	$	12,656	$	12,656

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 September 30,					Nine months ended September 30,
	2021		2020			2021			2020
	(in thousands)
Real estate asset acquired in settlement of loans	$	605	$	(69	)	$	(669	)	$	(1,263	)

The Company remeasures its REO based on fair value when it evaluates the properties 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.

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

	September 30, 2021				December 31, 2020
Instrument	Carrying value		Fair value		Carrying value		Fair value
	(in thousands)
Notes payable secured by credit risk transfer and mortgage servicing assets	$	2,633,228	$	2,648,439	$	1,924,999	$	1,871,276
Exchangeable senior notes	$	499,612	$	567,708	$	196,796	$	207,428

The Company estimates the fair value of the Notes payable secured by credit risk transfer and mortgage servicing assets and Exchangeable senior notes using indications of fair value provided by nonaffiliate brokers.

Valuation Governance

Most of the Company’s assets, its Asset-backed financing of VIEs 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 PFSI’s Capital Markets Operations group.

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 monitors the models used for valuation of the Company’s “Level 3” fair value assets and liabilities other than IRLCs, 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 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 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 its current holdings of 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 gains (losses) on investments in the consolidated statements of operations.

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 VIEs, 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 VIEs, the quoted indications of fair value of all of the individual securities issued by the securitization trusts are used to derive fair values 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. The Company adjusts the fair values received from brokers to include the fair value of MSRs attributable to loans held by the Company included in the VIEs.

•

Loans that are not saleable into active markets, comprised of previously sold loans that the Company repurchased pursuant to the representation and warranties it provided to the purchaser and distressed loans, are categorized as “Level 3” fair value assets:

•

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

•

Distressed loan fair values are estimated based on the expected resolution to be realized from the individual asset’s disposition strategy. 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%.

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 discount rate (pricing spread) and prepayment rate (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 directly related. Changes in the fair value of ESS are included in Net gains (losses) on investments in the consolidated statements of operations. The remaining balance of the ESS was repaid during the quarter ended March 31, 2021.

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

	December 31, 2020
Fair value (in thousands)	$	131,750
UPB of underlying loans (in thousands)	$	15,833,050
Average servicing fee rate (in basis points)		34
Average ESS rate (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 life (in years)
Range	2.3 – 6.6
Weighted average	5.8

(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.

(3)	Prepayment speed is measured using Life Total Conditional Prepayment Rate (“CPR”). Equivalent life is provided as supplementary information.

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.

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 gains (losses) 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 derivatives:

	September 30, 2021		December 31, 2020
	(dollars in thousands)
Fair value
CRT derivatives:
Assets	$	35,938	$	58,699
Liabilities	$	4,047	$	26,904
UPB of loans in reference pools	$	8,472,767	$	13,854,426
Key inputs (1)
Discount rate
Range	4.6% – 5.4%		6.7% – 9.0%
Weighted average	5.3%		7.3%
Voluntary prepayment speed (2)
Range	13.3% – 13.7%		20.8% – 23.5%
Weighted average	13.4%		21.9%
Involuntary prepayment speed (3)
Range	(0.3)% – 0.4%		(0.8)% – 1.1%
Weighted average	(0.1)%		(0.2)%
Remaining loss (recovery) expectation (4)
Range	(0.3)% – 0.6%		(0.6)% – 0.6%
Weighted average	0.0%		(0.3)%

(1)	Weighted average inputs are based on fair value amounts of the CRT Agreements except for remaining loss expectation which is based on the UPB 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. The negative involuntary prepayment speed reflects the expectation for reinstatement to the reference pool of a portion of the loans that previously triggered losses due to delinquency while under CARES Act forbearance upon their expected re-performance, as contractually provided for in certain CRT Agreements.

(4)

Remaining loss expectation is measured as expected future contractual losses divided by the UPB of the reference loans. The negative remaining loss expectation reflects the expectation of contractual reversals of previously incurred contractual losses due to the expected re-performance of a portion of the loans that experienced delinquency while under CARES Act forbearance.

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.

The significant unobservable inputs used in the fair value measurement of the Company’s IRLCs are the pull-through rate and the estimated MSR attributed 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, 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 gains 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:

	September 30, 2021			December 31, 2020
Fair value (in thousands) (1)	$	(13,276	)	$	72,386
Key inputs (2)
Pull-through rate
Range	49.8% – 100%			44.6% – 100%
Weighted average	92.7%			86.3%
MSR fair value expressed as
Servicing fee multiple
Range	0.4 – 6.7			2.0 – 5.3
Weighted average		5.0		4.4
Percentage of UPB
Range	0.3% – 2.6%			0.5% – 1.9%
Weighted average	1.4%			1.2%

(1)	For purposes 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 acquired for sale, Net gains (losses) on investments, or Net loan servicing fees – from nonaffiliates – Mortgage servicing rights hedging results, 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 interests in the trust holding the Deposits securing CRT arrangements, the IO ownership interest and Recourse Obligation. Together, the IO ownership interest and the Recourse Obligation comprise the CRT strips. 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 Company applies adjustments to the fair value derived from these indications to account for contractual restrictions limiting PMT’s ability to sell certain of the certificates.

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 the 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 gains (losses) on investments.

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 strip liabilities:

	September 30, 2021		December 31, 2020
	(dollars in thousands)
Carrying value
CRT strips liabilities	$	39,519	$	202,792
UPB of loans in the reference pools	$	26,899,198	$	44,843,516
Key inputs (1)
Discount rate
Range	4.1% – 6.7%		6.0% – 8.4%
Weighted average	6.3%		8.0%
Voluntary prepayment speed (2)
Range	17.5% – 18.4%		25.0% – 30.2%
Weighted average	18.1%		26.2%
Involuntary prepayment speed (3)
Range	0.5% – 1.4%		0.8% – 1.7%
Weighted average	0.7%		1.0%
Remaining loss expectation (4)
Range	0.3% – 0.9%		0.3% – 0.6%
Weighted average	0.4%		0.4%

(1)	Weighted average inputs are based on fair value amounts of the CRT arrangements except for remaining loss expectation which is based on the UPB 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 loans in the reference pools.

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 agreements. The Company receives a servicing fee based on the remaining UPB of the loans subject to the servicing agreements. The Company generally has the right to receive other remuneration including 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 speeds of the underlying loans and the annual per-loan cost to service the 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 – From nonaffiliates – 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 increases, 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 September 30,				Nine months ended September 30,
	2021		2020		2021		2020
	(MSR recognized and UPB of underlying loans amounts in thousands)
MSR recognized	$	424,912	$	265,278	$	1,245,546	$	717,227
UPB of underlying loans	$	29,206,319	$	25,878,541	$	91,240,993	$	64,678,483
Weighted average annual servicing fee rate (in basis points)	30		27		28		28
Key inputs (1)
Pricing spread (2)
Range	6.0% – 8.0%		8.0% – 8.0%		6.0% – 8.0%		6.7% – 11.3%
Weighted average	6.8%		8.0%		7.2%		7.7%
Prepayment speed (3)
Range	6.7% – 12.5%		7.0% – 13.1%		6.0% – 12.5%		7.0% – 20.9%
Weighted average	8.9%		7.9%		8.1%		9.8%
Equivalent average life (in years)
Range	3.9 – 8.1		3.7 - 9.2		3.9 – 8.9		3.6 – 9.2
Weighted average	7.8		8.5		8.1		7.6
Annual per-loan cost of servicing
Range	$80 – $80		$80 – $80		$80 – $81		$78 – $80
Weighted average	$80		$80		$80		$79

(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 provided as supplementary information.

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

	September 30, 2021		December 31, 2020
	(Fair value, UPB of underlying loans and effect on fair value amounts in thousands)
Fair value	$	2,825,501	$	1,755,236
UPB of underlying loans	$	212,101,752	$	170,728,322
Weighted average annual servicing fee rate (in basis points)	28		28
Weighted average note interest rate	3.3%		3.6%
Key inputs (1)
Pricing spread (2)
Range	6.3% – 9.4%		8.0% – 11.1%
Weighted average	6.3%		8.0%
Effect on fair value of:
5% adverse change	$(40,345)		$(31,400)
10% adverse change	$(79,618)		$(61,718)
20% adverse change	$(155,098)		$(119,305)
Prepayment speed (3)
Range	9.1% – 24.2%		12.4% – 28.8%
Weighted average	9.8%		12.8%
Equivalent average life (in years)
Range	3.1 – 7.5		2.9 – 6.8
Weighted average	7.2		6.5
Effect on fair value of:
5% adverse change	$(60,976)		$(48,136)
10% adverse change	$(119,667)		$(94,244)
20% adverse change	$(230,689)		$(180,820)
Annual per-loan cost of servicing
Range	$78 – $80		$78 – $121
Weighted average	$80		$81
Effect on fair value of:
5% adverse change	$(17,276)		$(11,846)
10% adverse change	$(34,552)		$(23,692)
20% adverse change	$(69,103)		$(47,385)

(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 provided as supplementary information.

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.

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.

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 indications of fair value. PLS staff appraisers will attempt to resolve the difference between the indications of fair value. In circumstances where the staff appraisers are not able to generate adequate data to support a fair value conclusion, the staff appraisers obtain 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.

Note 8— Mortgage-Backed Securities

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

	Quarter ended September 30,						Nine months ended September 30,
	2021			2020			2021			2020
	(in thousands)
Balance at beginning of period	$	2,309,864		$	2,612,986		$	2,213,922		$	2,839,633
Purchases		249,234			153,725			1,932,083			1,769,211
Sales		—			—			(1,300,653	)		(1,601,490	)
Repayments		(67,059	)		(331,456	)		(307,042	)		(681,269	)
Changes in fair value included in income arising from:
(Amortization) accrual of net purchase premiums		(2,415	)		7,384			(6,821	)		(16,477	)
Valuation adjustments		(18,591	)		(37,873	)		(60,456	)		95,158
		(21,006	)		(30,489	)		(67,277	)		78,681
Balance at end of period	$	2,471,033		$	2,404,766		$	2,471,033		$	2,404,766

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

	September 30, 2021
										Coupon
Agency (1)	Principal balance		Unamortized net purchase premiums		Accumulated valuation changes			Fair value		Minimum		Maximum		Weighted average
	(dollars in thousands)
Freddie Mac	$	858,835	$	28,910	$	(18,764	)	$	868,981		2.0		2.5		2.1
Fannie Mae		1,583,741		51,058		(32,747	)		1,602,052		2.0		2.5		2.1
	$	2,442,576	$	79,968	$	(51,511	)	$	2,471,033

	December 31, 2020
									Coupon
Agency (1)	Principal balance		Unamortized net purchase premiums		Accumulated valuation changes		Fair value		Minimum		Maximum		Weighted average
	(dollars in thousands)
Freddie Mac	$	1,253,755	$	32,414	$	24,867	$	1,311,036		2.0		3.0		2.7
Fannie Mae		863,758		23,692		15,436		902,886		2.0		3.0		2.5
	$	2,117,513	$	56,106	$	40,303	$	2,213,922

(1)	All MBS are fixed-rate pass-through securities with maturities of more than ten years and are pledged to secure Assets sold under agreements to repurchase at September 30, 2021 and December 31, 2020.

Note 9—Loans Acquired for Sale at Fair Value

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

Loan type	September 30, 2021		December 31, 2020
	(in thousands)
Agency-eligible (1)	$	4,613,077	$	3,057,601
Held for sale to PLS — Government insured or guaranteed (2)		334,641		460,414
Home equity lines of credit		3,917		5,566
Commercial real estate		977		1,010
Repurchased pursuant to representations and warranties		26,644		27,299
	$	4,979,256	$	3,551,890
Loans pledged to secure:
Assets sold under agreements to repurchase	$	4,843,261	$	3,484,202
Mortgage loan participation purchase and sale agreements		46,693		17,645
	$	4,889,954	$	3,501,847

(1)	Agency eligibility refers to loans’ eligibility for sale to Agencies. The Company sells or finances a portion of its Agency-eligible loan production to other investors.

(2)

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 sells 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 as described in Note 4 – Transactions with Related Parties – Correspondent Production Activities.

Note 10—Loans at Fair Value

Loans at fair value are comprised primarily of loans held in VIEs securing asset-backed financings as discussed in Note 6 –Variable Interest Entities – Investments in Loan Securitizations as well as distressed loans.

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

Loan type	September 30, 2021		December 31, 2020
	(in thousands)
Loans in VIEs:
Secured by investment properties	$	811,727	$	—
Fixed interest rate jumbo loans		79,377		143,707
		891,104		143,707
Distressed loans		4,776		8,027
	$	895,880	$	151,734
Loans at fair value pledged to secure:
Asset-backed financings of VIEs at fair value	$	891,104	$	143,707
Assets sold under agreements to repurchase		427		3,703
	$	891,531	$	147,410

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

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

	September 30, 2021		December 31, 2020
	(in thousands)
Derivative assets	$	97,688	$	164,318
	$	97,688	$	164,318
Derivative liabilities	$	28,666	$	60,681
Credit risk transfer strip liabilities		39,519		202,792
	$	68,185	$	263,473

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.

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 acquired for sale;

•

CRT Agreements whereby the Company retained a Recourse Obligation relating to certain loans it sold 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 that 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 assets 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 MBS, 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 and ESS to decrease.

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 VIEs, 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:

	September 30, 2021								December 31, 2020
			Fair value								Fair value
	Notional		Derivative			Derivative			Notional		Derivative			Derivative
Instrument	amount (1)		assets			liabilities			amount (1)		assets			liabilities
	(in thousands)
Hedging derivatives subject to master netting agreements (2):
Call options on interest rate futures purchase contracts		1,200,000	$	375		$	—			1,450,000	$	3,070		$	—
Put options on interest rate futures purchase contracts		600,000		6,695			—			2,800,000		4,742			—
Forward purchase contracts		7,979,384		2,784			24,407			17,563,549		72,526			17
Forward sale contracts		13,578,730		52,773			4,717			26,615,716		92			122,884
MBS call options		2,700,000		425			—			—		—			—
MBS put options		3,300,000		16,007			—			3,625,000		3,220			—
Swaption purchase contracts		2,532,000		38,188			—			3,655,000		8,505			—
Swap futures		4,800,000		—			—			1,950,000		—			—
Bond futures		83,500		—			—			66,500		—			—
Other derivatives not subject to master netting arrangements:
CRT derivatives		8,472,767		35,938			4,047			13,854,426		58,699			26,904
Interest rate lock commitments		5,756,526		7,573			20,849			10,588,208		72,794			408
Total derivative instruments before netting				160,758			54,020					223,648			150,213
Netting				(63,070	)		(25,354	)				(59,330	)		(89,532	)
			$	97,688		$	28,666				$	164,318		$	60,681
Margin deposits (received from) placed with derivative counterparties, net			$	(37,715	)						$	30,197
Derivative assets pledged to secure:
Notes payable secured by credit risk transfer and mortgage servicing assets			$	35,938							$	58,699

(1)	Notional amounts provide an indication of the volume of the Company’s derivative activity.

(2)	All hedging derivatives are interest rate derivatives that are used as economic hedges.

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 and IRLCs. As of September 30, 2021 and December 31, 2020, 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.

Offsetting of Derivative Assets

Following is a summary of net derivative assets:

	September 30, 2021								December 31, 2020
	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 purchase contracts	$	375	$	—		$	375		$	3,070	$	—		$	3,070
Put options on interest rate futures purchase contracts		6,695		—			6,695			4,742		—			4,742
Forward purchase contracts		2,784		—			2,784			72,526		—			72,526
Forward sale contracts		52,773		—			52,773			92		—			92
MBS call options		425		—			425			—		—			—
MBS put options		16,007		—			16,007			3,220		—			3,220
Swaption purchase contracts		38,188		—			38,188			8,505		—			8,505
Netting		—		(63,070	)		(63,070	)		—		(59,330	)		(59,330	)
		117,247		(63,070	)		54,177			92,155		(59,330	)		32,825
Not subject to master netting arrangements:
CRT derivatives		35,938		—			35,938			58,699		—			58,699
Interest rate lock commitments		7,573		—			7,573			72,794		—			72,794
		43,511		—			43,511			131,493		—			131,493
	$	160,758	$	(63,070	)	$	97,688		$	223,648	$	(59,330	)	$	164,318

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.

	September 30, 2021								December 31, 2020
	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	$	35,938	$	—	$	—	$	35,938	$	58,699	$	—	$	—	$	58,699
Interest rate lock commitments		7,573		—		—		7,573		72,794		—		—		72,794
Citigroup Global Markets Inc.		13,176		—		—		13,176		2,416		—		—		2,416
Bank of America, N.A.		10,055		—		—		10,055		15,406		—		—		15,406
RJ O’Brien & Associates, LLC		7,070		—		—		7,070		7,813		—		—		7,813
Goldman Sachs & Co. LLC		5,825		—		—		5,825		—		—		—		—
Wells Fargo Securities, LLC		5,409		—		—		5,409		—		—		—		—
Morgan Stanley & Co. LLC		5,147		—		—		5,147		—		—		—		—
J.P. Morgan Securities LLC		4,845		—		—		4,845		—		—		—		—
PNC Capital Markets LLC		—		—		—		—		3,138		—		—		3,138
Deutsche Bank Securities LLC		—		—		—		—		1,602		—		—		1,602
Mitsubishi UFJ Sec		—		—		—		—		1,070		—		—		1,070
Other		2,650		—		—		2,650		1,380		—		—		1,380
	$	97,688	$	—	$	—	$	97,688	$	164,318	$	—	$	—	$	164,318

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.

	September 30, 2021									December 31, 2020
	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	$	24,407		$	—		$	24,407		$	17		$	—		$	17
Forward sales contracts		4,717			—			4,717			122,884			—			122,884
Netting		—			(25,354	)		(25,354	)		—			(89,532	)		(89,532	)
		29,124			(25,354	)		3,770			122,901			(89,532	)		33,369
Not subject to master netting arrangements
CRT derivatives		4,047			—			4,047			26,904			—			26,904
Interest rate lock commitments		20,849			—			20,849			408			—			408
		54,020			(25,354	)		28,666			150,213			(89,532	)		60,681
Assets sold under agreements to repurchase:
UPB		7,028,012			—			7,028,012			6,317,928			—			6,317,928
Unamortized debt issuance costs		(2,865	)		—			(2,865	)		(8,510	)		—			(8,510	)
		7,025,147			—			7,025,147			6,309,418			—			6,309,418
	$	7,079,167		$	(25,354	)	$	7,053,813		$	6,459,631		$	(89,532	)	$	6,370,099

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.

	September 30, 2021									December 31, 2020
	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)
Interest rate lock commitments	$	20,849	$	—		$	—	$	20,849	$	408	$	—		$	—	$	408
CRT derivatives		4,047		—			—		4,047		26,904		—			—		26,904
Bank of America, N.A.		1,194,100		(1,194,100	)		—		—		414,044		(414,044	)		—		—
RBC Capital Markets, L.P.		1,128,035		(1,128,035	)		—		—		765,892		(765,892	)		—		—
Credit Suisse Securities (USA) LLC		1,024,283		(1,023,703	)		—		580		1,059,547		(1,054,636	)		—		4,911
Barclays Capital Inc.		1,011,522		(1,010,794	)		—		728		922,959		(922,035	)		—		924
J.P. Morgan Securities LLC		718,441		(718,441	)		—		—		359,573		(357,211	)		—		2,362
Daiwa Capital Markets		507,523		(507,523	)		—		—		728,207		(727,562	)		—		645
BNP Paribas		393,709		(393,709	)		—		—		164,414		(163,548	)		—		866
Wells Fargo Securities, LLC		339,937		(339,937	)		—		—		148,854		(140,796	)		—		8,058
Morgan Stanley & Co. LLC		311,198		(311,198	)		—		—		367,493		(366,415	)		—		1,078
Goldman Sachs & Co. LLC		149,416		(149,416	)		—		—		149,272		(144,883	)		—		4,389
Amherst Pierpont Securities LLC		130,000		(130,000	)		—		—		153,224		(153,224	)		—		—
Citigroup Global Markets Inc.		121,156		(121,156	)		—		—		830,161		(830,161	)		—		—
Mizuho Securities		—		—			—		—		279,321		(277,521	)		—		1,800
Federal Home Loan Mortgage Corporation		—		—			—		—		5,883		—			—		5,883
Other		2,462		—			—		2,462		2,453		—			—		2,453
	$	7,056,678	$	(7,028,012	)	$	—	$	28,666	$	6,378,609	$	(6,317,928	)	$	—	$	60,681

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 September 30,						Nine months ended September 30,
Derivative activity	Consolidated statement of operations line	2021			2020			2021			2020
		(in thousands)
Interest rate lock commitments	Net gains on loans acquired for sale (1)	$	(43,024	)	$	(11,839	)	$	(85,662	)	$	60,964
CRT derivatives	Net gains (losses) on investments	$	17,992		$	(6,516	)	$	73,562		$	(154,173	)
Hedged item:
Interest rate lock commitments and loans acquired for sale	Net gains on loans acquired for sale	$	(19,150	)	$	(117,926	)	$	112,226		$	(350,191	)
Mortgage servicing rights	Net loan servicing fees	$	(73,841	)	$	962		$	(354,128	)	$	717,498
Fixed-rate and prepayment sensitive assets and LIBOR-indexed repurchase agreements	Net gains (losses) on investments	$	(51	)	$	(1,266	)	$	—		$	46,926

(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 or cancellation of

the commitment 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.

Credit Risk Transfer Strips

Following is a summary of the Company’s holdings of CRT strips:

Credit risk transfer strips contractually restricted from sale (1)	September 30, 2021			December 31, 2020
	(in thousands)
Currently unrestricted	$	21		$	—
Through December 4, 2021		8,792			(168,539	)
To maturity		(48,332	)		(34,253	)
	$	(39,519	)	$	(202,792	)

(1)	The terms of the agreement underlying the CRT securities restricts sales of the securities, other than 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 September 30,						Nine months ended September 30,
	2021			2020			2021			2020
	(in thousands)
Balance at beginning of period	$	2,551,373		$	1,189,605		$	1,755,236		$	1,535,705
Sales		—			(7	)		—			(7	)
MSRs resulting from loan sales		424,912			265,278			1,245,546			717,227
Changes in fair value:
Due to changes in valuation inputs used in valuation model (1)		(62,843	)		(13,054	)		44,939			(687,950	)
Other changes in fair value (2)		(81,398	)		(53,419	)		(210,396	)		(176,572	)
		(144,241	)		(66,473	)		(165,457	)		(864,522	)
Recombination with loans at fair value resulting from consolidation of VIEs (3)		(6,543	)		—			(9,824	)		—
Balance at end of period	$	2,825,501		$	1,388,403		$	2,825,501		$	1,388,403

September 30, 2021

December 31, 2020

(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

2,797,165

1,742,905

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

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

(3)

As discussed in Note 6 ‒ Variable Interest Entities – Investment in Securities Backed by Loans Secured by Investment Properties, the Company consolidated VIEs holding certain loans for which it had previously recognized MSRs. Upon initial consolidation of the VIEs, the Company recombined the MSRs with the loans in the consolidated VIEs to Loans at fair value.

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 September 30,				Nine months ended September 30,
	2021		2020		2021		2020
	(in thousands)
Contractually-specified servicing fees	$	137,804	$	98,027	$	378,110	$	294,319
Ancillary and other fees:
Late charges		436		194		1,199		1,093
Other		13,524		18,466		53,908		36,645
		13,960		18,660		55,107		37,738
	$	151,764	$	116,687	$	433,217	$	332,057
Average MSR servicing portfolio	$	205,181,714	$	148,412,625	$	191,351,860	$	142,872,909

Note 13— Short-Term Borrowings

The borrowing facilities described throughout these Notes 13 and 14 contain various covenants, including financial covenants governing the Company’s net worth, debt-to-equity ratio, profitability and liquidity. Management believes that the Company was in compliance with these covenants as of September 30, 2021.

Assets Sold Under Agreements to Repurchase

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

	Quarter ended September 30,						Nine months ended September 30,
	2021			2020			2021			2020
	(dollars in thousands)
Weighted average interest rate (1)		1.29	%		1.49	%		1.40	%		1.77	%
Average balance	$	6,796,525		$	4,054,686		$	6,177,250		$	4,986,701
Total interest expense	$	24,047		$	19,259		$	75,988		$	74,081
Maximum daily amount outstanding	$	7,776,643		$	7,170,860		$	8,725,300		$	8,664,587

(1)	Excludes the effect of amortization of debt issuance costs of $1.9 million and $11.2 million for the quarter and nine months ended September 30, 2021, respectively, and $4.1 million and $7.9 million for the quarter and nine months ended September 30, 2020, respectively.

	September 30, 2021			December 31, 2020
	(dollars in thousands)
Carrying value:
Unpaid principal balance	$	7,028,012		$	6,317,928
Unamortized debt issuance costs		(2,865	)		(8,510	)
	$	7,025,147		$	6,309,418
Weighted average interest rate		1.26	%		1.36	%
Available borrowing capacity (1):
Committed	$	104,236		$	483,767
Uncommitted		4,679,890			4,151,905
	$	4,784,126		$	4,635,672
Margin deposits placed with counterparties included in Other assets	$	22,096		$	141,808
Assets securing agreements to repurchase:
Mortgage-backed securities	$	2,471,033		$	2,213,922
Loans acquired for sale at fair value	$	4,843,261		$	3,484,202
Loans at fair value	$	427		$	3,703
MSRs (2)	$	1,608,320		$	1,166,090
Servicing advances	$	62,362		$	—
Real estate acquired in settlement of loans	$	7,490		$	15,365
Deposits securing CRT arrangements	$	—		$	2,799,263

(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 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 September 30, 2021	Unpaid principal balance
	(in thousands)
Within 30 days	$	2,951,938
Over 30 to 90 days		2,898,039
Over 90 days to 180 days		1,128,035
Over 180 days to 1 year		—
Over one year to two years		50,000
	$	7,028,012
Weighted average maturity (in months)		2.0

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.

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 September 30, 2021:

Loans, REO and MSRs

			Weighted-average maturity
Counterparty	Amount at risk		Advances	Facility
	(in thousands)
RBC Capital Markets, L.P.	$	69,543	January 9, 2022	August 10, 2022
Credit Suisse First Boston Mortgage Capital LLC	$	61,885	December 7, 2021	March 31, 2023
Barclays Capital Inc.	$	55,281	December 24, 2021	November 3, 2022
Bank of America, N.A.	$	39,893	October 22, 2021	June 7, 2023
JPMorgan Chase & Co.	$	2,009	November 20, 2021	June 6, 2023
BNP Paribas Corporate and Institutional Banking	$	22,436	December 12, 2021	July 31, 2023
Wells Fargo Securities, LLC	$	16,406	December 23, 2021	October 6, 2022
Citibank, N.A.	$	11,839	November 18, 2021	August 10, 2023
Goldman Sachs & Co. LLC	$	7,826	December 16, 2021	December 23, 2022
Morgan Stanley & Co. LLC	$	16,706	December 19, 2021	November 2, 2022

Securities

Counterparty	Amount at risk		Weighted average maturity
	(in thousands)
Bank of America, N.A.	$	22,084	October 15, 2021
Barclays Capital Inc.	$	10,576	October 17, 2021
JPMorgan Chase & Co.	$	24,936	October 20, 2021
Daiwa Capital Markets America Inc.	$	15,387	October 20, 2021
Amherst Pierpont Securities LLC	$	3,897	October 15, 2021

Mortgage Loan Participation Purchase and Sale Agreements

One of the borrowing facilities secured by loans acquired for sale is 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 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.

Mortgage loan participation purchase and sale agreements are summarized below:

	Quarter ended September 30,						Nine months ended September 30,
	2021			2020			2021			2020
	(dollars in thousands)
Weighted average interest rate (1)		1.48	%		1.43	%		1.41	%		1.70	%
Average balance	$	35,984		$	40,117		$	35,754		$	45,484
Total interest expense	$	166		$	176		$	471		$	724
Maximum daily amount outstanding	$	82,116		$	96,508		$	89,072		$	96,570

(1)	Excludes the effect of amortization of debt issuance costs of $31,000 and $93,000 for the quarter and nine months ended September 30, 2021, respectively, and $31,000 and $145,000 for the quarter and nine months ended September 30, 2020, respectively.

	September 30, 2021			December 31, 2020
	(dollars in thousands)
Carrying value:
Amount outstanding	$	45,044		$	16,851
Unamortized debt issuance costs		—			—
	$	45,044		$	16,851
Weighted average interest rate		1.46	%		1.39	%
Loans acquired for sale pledged to secure mortgage loan participation purchase and sale agreements	$	46,693		$	17,645

Note 14— Long-Term Debt

Notes Payable Secured By Credit Risk Transfer and Mortgage Servicing Assets

The Company, through its indirect subsidiary, PMT CREDIT RISK TRANSFER 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 Series 2017-VF1 Note dated December 20, 2017 (the "FMSR VFN") issued by another of the Company’s indirect subsidiaries.

Following is a summary of the secured CRT Term Notes issued:

Term notes	Issuance date	Issuance amount		Unpaid principal balance		Annual interest rate spread (1)			Maturity date (2)
Term notes	Issuance date	Issuance amount		Unpaid principal balance		Annual interest rate spread (1)			Stated	Optional extension
		(in thousands)
2021 1R	March 04, 2021	$	659,156	$	471,967		2.90	%	February 28, 2024	February 27, 2026
2020 2R	December 22, 2020	$	500,000		356,437		3.81	%	December 28, 2022		—
2020 1R	February 14, 2020	$	350,000		102,674		2.35	%	March 1, 2023	February 27, 2025
2019 3R	October 16, 2019	$	375,000		99,499		2.70	%	October 27, 2022	October 29, 2024
2019 2R	June 11, 2019	$	638,000		281,642		2.75	%	May 29, 2023	May 29, 2025
2019 1R	March 29, 2019	$	295,700		104,929		2.00	%	March 29, 2022	March 27, 2024
				$	1,417,148

(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 certain of the Term Notes under the conditions specified in the respective agreements.

PMC finances mortgage servicing rights through the issuance of FMSR VFN to institutional buyers under an agreement to repurchase. The FMSR VFN has a committed borrowing capacity of $700 million and matures on March 31, 2023.

On March 30, 2021, the Company, through its indirect subsidiary, PMT ISSUER TRUST—FMSR, issued an aggregate principal amount of $350 million in secured term notes (the “2021-FT1 Notes”) to qualified institutional buyers under Rule 144A of the Securities Act. The 2021-FT1 Notes are secured by certain participation certificates relating to Fannie Mae MSRs and excess servicing spread relating to such MSRs that are financed pursuant to a structured finance transaction. The 2021-FT1 Notes bear interest at a rate equal to one-month LIBOR plus 3.00% per annum and will mature on March 25, 2026 or, if extended pursuant to the terms of the 2021-FT1 Notes indenture supplement on March 27, 2028. The 2021-FT1 Notes rank pari passu with the Series 2018-FT1 Notes described below and the FMSR VFN.

During March 2021, the Company, through PMC and PMH, terminated a loan and security agreement entered into on February 1, 2018, 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, and entered into a similar borrowing arrangement with Citibank, N.A. The aggregate loan amount available under the loan and security agreement with Citibank, N.A. increased to $1billion from $700 million, bears interest at a rate equal to LIBOR plus 3.25%, with index replacement provisions related to the transition from LIBOR, and will mature on January 3, 2022.

Advances under the loan and security agreement are secured by MSRs relating to loans serviced for Freddie Mac guaranteed securities.

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 will mature on April 25, 2023 or, if extended pursuant to the terms of the 2018-FT1 Notes indenture supplement, April 25, 2025 (unless earlier redeemed in accordance with their terms). The 2018-FT1 Notes rank pari passu with 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.

Following is a summary of financial information relating to notes payable secured by credit risk transfer and mortgage servicing assets:

	Quarter ended September 30,						Nine months ended September 30,
	2021			2020			2021			2020
	(dollars in thousands)
Weighted average interest rate (1)		3.04	%		2.69	%		3.10	%		3.31	%
Average balance	$	2,791,323		$	1,730,585		$	2,658,411		$	1,832,732
Total interest expense	$	22,890		$	12,407		$	65,664		$	47,474
Maximum daily amount outstanding	$	2,935,720		$	1,816,286		$	3,336,211		$	2,032,665

(1)	Excludes the effect of amortization of debt issuance costs of $1.5 million and $4.0 million for the quarter and nine months ended September 30, 2021, respectively, and $687,000 and $1.9 million for the quarter and nine months ended September 30, 2020, respectively.

	September 30, 2021			December 31, 2020
	(dollars in thousands)
Carrying value:
Amount outstanding	$	2,642,147		$	1,930,018
Unamortized debt issuance costs		(8,919	)		(5,019	)
	$	2,633,228		$	1,924,999
Weighted average interest rate		2.85	%		2.99	%
Assets securing notes payable:
MSRs (1)	$	2,797,165		$	1,742,905
CRT Agreements:
Deposits securing CRT arrangements	$	1,962,800		$	2,799,263
Derivative assets	$	35,938		$	58,699

(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.

Exchangeable Notes

On March 5 and March 9, 2021, PMC issued $345 million aggregate principal amount of exchangeable senior notes (the “2026 Exchangeable Notes”) in a private offering. The 2026 Exchangeable Notes will mature on March 15, 2026 unless repurchased or exchanged in accordance with their terms before such date. The 2026 Exchangeable Notes bear interest at a rate of 5.50% per year, payable semiannually.

On November 7 and November 19, 2019, PMC issued $210 million in principal amount of exchangeable senior notes due 2024 (the “2024 Exchangeable Notes”) in a private offering. The 2024 Exchangeable Notes will mature on November 1, 2024 unless repurchased or exchanged in accordance with their terms before such date. The 2024 Exchangeable Notes bear interest at 5.50% per year, payable semiannually.

The 2026 Exchangeable Notes and the 2024 Exchangeable 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 December 15, 2025 and August 1, 2024, respectively. The exchange rates are equal to 46.1063 and 40.101

common shares per $1,000 principal amount of the 2026 Exchangeable Notes and 2024 Exchangeable Notes, respectively, and are subject to adjustment upon the occurrence of certain events, but will not be adjusted for any accrued and unpaid interest.

Following is financial information relating to the Exchangeable Notes:

	Quarter ended September 30,				Nine months ended September 30,
	2021		2020		2021		2020
	(in thousands)
Average balance	$	497,770	$	195,579	$	426,353	$	293,736
Total interest expense (1)	$	10,446	$	3,613	$	26,298	$	15,222

(1)	Excludes the effect of amortization of debt issuance costs of $661,000 and $1.6 million for the quarter and nine months ended September 30, 2021, respectively, and $270,000 and $1.2 million for the quarter and nine months ended September 30, 2020, respectively.

	September 30, 2021			December 31, 2020
	(in thousands)
Carrying value:
UPB	$	555,000		$	210,000
Unamortized debt issuance costs and conversion option		(55,388	)		(13,204	)
	$	499,612		$	196,796

Asset-Backed Financing of Variable Interest Entities at Fair Value

Following is a summary of financial information relating to the asset-backed financings of VIEs at fair value described in Note 6 ‒ Variable Interest Entities ‒ Investments in Loan Securitizations:

	Quarter ended September 30,						Nine months ended September 30,
	2021			2020			2021			2020
	(dollars in thousands)
Average balance	$	424,744		$	197,743		$	214,524		$	219,951
Total interest expense	$	4,272		$	2,561		$	6,436		$	9,558
Weighted average interest rate		4.49	%		3.23	%		4.06	%		3.34	%

	September 30, 2021			December 31, 2020
	(dollars in thousands)
Fair value	$	843,163		$	134,726
UPB	$	817,019		$	131,835
Weighted average interest rate		2.98	%		3.56	%

The asset-backed financings of the VIEs are non-recourse liabilities and secured solely by the assets of the consolidated VIEs and not by any other assets of the Company. The assets of the VIEs are the only source of funds for repayment of the respective certificates.

Maturities of Long-Term Debt

Annual maturities of long-term debt obligations (based on final maturity dates) are as follows:

			Twelve months ended September 30,
	Total		2022		2023		2024		2025		2026		Thereafter
	(in thousands)
Notes payable secured by credit risk transfer and mortgage servicing assets (1)	$	2,642,148	$	529,929	$	1,290,252	$	471,967	$	—	$	350,000	$	—
Exchangeable senior notes		555,000		—		—		—		210,000		345,000		—
Asset-backed financing of variable interest entities at fair value (2)		817,019		—		—		—		—		—		817,019
Interest-only security payable at fair value (2)		12,000		—		—		—		—		—		12,000
Total	$	4,026,167	$	529,929	$	1,290,252	$	471,967	$	210,000	$	695,000	$	829,019

(1)	Based on stated maturity. As discussed above, certain of the notes payable secured by credit risk and mortgage servicing assets allow the Company to exercise optional extensions.

(2)	Contractual maturities do not reflect expected repayments as borrowers of the underlying loans generally have the right to repay their loans at any time.

Note 15—Liability for Losses Under Representations and Warranties

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

	Quarter ended September 30,						Nine months ended September 30,
	2021			2020			2021			2020
	(in thousands)
Balance, beginning of period	$	36,314		$	10,225		$	21,893		$	7,614
Provision for losses:
Pursuant to loan sales		6,297			5,953			23,282			10,198
Reduction in liability due to change in estimate		(1,636	)		(1,504	)		(4,155	)		(3,059	)
Losses incurred, net		(66	)		(33	)		(111	)		(112	)
Balance, end of period	$	40,909		$	14,641		$	40,909		$	14,641
UPB of loans subject to representations and warranties at end of period	$	208,686,249		$	143,875,403

Note 16—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.

Commitments

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

	September 30, 2021
	(in thousands)
Commitments to purchase loans acquired for sale	$	5,756,526

Note 17—Shareholders’ Equity

Preferred Shares of Beneficial Interest

Preferred shares of beneficial interest are summarized below:

										Dividends per share, period ended September 30,
Preferred										Quarter				Nine months
Share series	Description (1)	Number of shares		Liquidation preference		Issuance discount		Carrying value		2021		2020		2021		2020
		(in thousands, except dividends per share)
A	8.125% Issued March 2017		4,600	$	115,000	$	3,828	$	111,172	$	0.51	$	0.51	$	1.53	$	1.52
B	8.00% Issued July 2017		7,800		195,000		6,465		188,535	$	0.50	$	0.50	$	1.50	$	1.50
C	6.75% Issued August 2021		10,000		250,000		8,225		241,775		—		—		—		—
			22,400	$	560,000	$	18,518	$	541,482

(1)	Par value is $0.01 per share.

The Company’s Series A Fixed-to-Floating Rate Cumulative Redeemable Preferred Shares of Beneficial Interest (the “Series A Preferred Shares”) pay cumulative dividends at a fixed rate of 8.125% per annum based on the $25.00 per share liquidation preference to, but not including, March 15, 2024. 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.

The Company’s Series B Fixed-to-Floating Rate Cumulative Redeemable Preferred Shares of Beneficial Interest (the “Series B Preferred Shares”) pay cumulative dividends at a fixed rate of 8.00% per annum based on the $25.00 per share liquidation preference to, but not including, June 15, 2024. 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 Company’s Series C Fixed Rate Cumulative Redeemable Preferred Shares of Beneficial Interest (the “Series C Preferred Shares”) (together with the Series A Preferred Shares and Series B Preferred Shares, the “Preferred Shares”) pay cumulative dividends at a fixed rate of 6.75% per annum based on the $25.00 per share liquidation preference to, but not including, August 24, 2026. The first dividend on the Series C Preferred Shares shall be paid on December 15, 2021 in the amount of $0.52031 per share, and will represent accrual for more than the full quarterly period, covering the period from, and including August 24, 2021 to, but not including, December 15, 2021.

The Series A, Series B, and Series C Preferred Shares will not be redeemable before March 15, 2024, June 15, 2024 and August 24, 2026, 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 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.

Common Shares of Beneficial Interest

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

The Company periodically enters into ATM equity offering programs allowing it to offer and sell securities on an as-and-when-needed basis through designated broker-dealers. On June 15, 2021, the Company entered into a new ATM equity offering program allowing it to offer up to $200 million of its common shares of beneficial interest. Following is a summary of the Company’s activities under its prior ATM equity offering program:

	Nine months ended September 30, 2020
	(in thousands)
Number of common shares issued		241
Gross proceeds	$	5,654
Net proceeds	$	5,597

At September 30, 2021, the Company had $200 million of common shares of beneficial interest available for issuance under its ATM equity-offering program.

Common Share Repurchase Program

On June 11, 2021, the Company’s board of trustees approved an increase to the Company’s common shares of beneficial interest repurchase authorization from $300 million to $400 million. Under the program, as amended, the Company may repurchase up to $400 million of its outstanding common shares of beneficial interest.

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

	Quarter ended September 30,				Nine months ended September 30,				Cumulative
	2021		2020		2021		2020		total (1)
	(in thousands)
Common shares repurchased		904		492		931		1,841		18,430
Cost of common shares repurchased	$	17,178	$	8,273	$	17,700	$	21,618	$	271,592

(1)	Amounts represent the share repurchase program total from its inception in August 2015 through September 30, 2021.

Note 18— Net Gains on Loans Acquired for Sale

Net gains on loans acquired for sale are summarized below:

	Quarter ended September 30,						Nine months ended September 30,
	2021			2020			2021			2020
	(in thousands)
From nonaffiliates:
Cash loss:
Loans	$	(381,295	)	$	(23,860	)	$	(1,196,355	)	$	(70,972	)
Hedging activities		25,858			(103,361	)		196,908			(360,930	)
		(355,437	)		(127,221	)		(999,447	)		(431,902	)
Non-cash gain:
Recognition of fair value of firm commitment to purchase CRT securities		—			(3,933	)		—			(38,161	)
Receipt of MSRs in mortgage loan sale transactions		424,912			265,278			1,245,546			717,227
Provision for losses relating to representations and warranties provided in mortgage loan sales:
Pursuant to loans sales		(6,297	)		(5,953	)		(23,282	)		(10,198	)
Reduction of liability due to change in estimate		1,636			1,504			4,155			3,059
		(4,661	)		(4,449	)		(19,127	)		(7,139	)
Change in fair value of loans and derivatives
IRLCs		(43,024	)		(11,839	)		(85,662	)		60,964
Loans		37,877			(6,518	)		35,401			(11,471	)
Hedging derivatives		(45,008	)		(14,565	)		(84,682	)		10,739
		(50,155	)		(32,922	)		(134,943	)		60,232
		370,096			223,974			1,091,476			732,159
Total from nonaffiliates		14,659			96,753			92,029			300,257
From PFSI ‒ cash gain		1,537			1,669			4,905			9,154
	$	16,196		$	98,422		$	96,934		$	309,411

Note 19— Net Gains (Losses) on Investments

Net gains (losses) on investments are summarized below:

	Quarter ended September 30,						Nine months ended September 30,
	2021			2020			2021			2020
	(in thousands)
From nonaffiliates:
Mortgage-backed securities	$	(18,591	)	$	(37,873	)	$	(60,456	)	$	95,158
Loans at fair value:
Held in VIEs		(241	)		(2,905	)		(3,250	)		(4,979	)
Distressed		652			193			877			(1,070	)
CRT arrangements		73,874			14,620			325,934			(210,509	)
Firm commitment to purchase CRT securities		—			46,332			—			(220,146	)
Asset-backed financing of VIEs at fair value		1,663			3,106			4,146			4,872
Hedging derivatives		(51	)		(1,266	)		—			46,926
		57,306			22,207			267,251			(289,748	)
From PFSI ‒ ESS		—			(2,610	)		1,651			(16,852	)
	$	57,306		$	19,597		$	268,902		$	(306,600	)

Note 20—Net Interest (Expense) Income

Net interest expense is summarized below:

	Quarter ended September 30,					Nine months ended September 30,
	2021			2020		2021			2020
	(in thousands)
Interest income:
From nonaffiliates:
Cash and short-term investments	$	264		$	581	$	705		$	3,100
Mortgage-backed securities		9,833			24,411		25,925			49,861
Loans acquired for sale at fair value		39,076			26,158		94,597			73,762
Loans at fair value:
Held in VIEs		4,773			2,763		8,040			8,117
Distressed		85			50		377			342
Deposits securing CRT arrangements		126			288		451			6,893
Placement fees relating to custodial funds		4,481			4,286		8,485			24,800
Other		(354	)		16		(301	)		267
		58,284			58,553		138,279			167,142
From PFSI ‒ ESS		—			2,070		1,280			6,416
		58,284			60,623		139,559			173,558
Interest expense:
To nonaffiliates:
Assets sold under agreements to repurchase		24,047			19,259		75,988			74,081
Mortgage loan participation purchase and sale agreements		166			176		471			724
Notes payable secured by credit risk transfer and mortgage servicing assets		22,890			12,407		65,664			47,474
Exchangeable Notes		10,446			3,613		26,298			15,222
Asset-backed financings of VIEs at fair value		4,272			2,561		6,436			9,558
Interest shortfall on repayments of loans serviced for Agency securitizations		12,622			19,311		53,198			48,553
Interest on loan impound deposits		1,046			1,014		2,557			2,835
		75,489			58,341		230,612			198,447
To PFSI ‒ Assets sold under agreement to repurchase		—			676		387			2,686
		75,489			59,017		230,999			201,133
Net interest (expense) income	$	(17,205	)	$	1,606	$	(91,440	)	$	(27,575	)

Note 21—Share-Based Compensation

The Company has adopted an equity incentive plan which provides for the issuance of equity based awards based on PMT’s common shares 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 PMT’s 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.

The Company's equity incentive plan allows for the grant of restricted and performance-based share unit awards.

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 September 30,					Nine months ended September 30,
	2021			2020		2021		2020
	(in thousands)
Grants:
Restricted share units		—			—		105		92
Performance share units		—			—		126		112
		—			—		231		204
Grant date fair value:
Restricted share units	$	—		$	—	$	1,992	$	1,978
Performance share units		—			—		2,399		2,428
	$	—		$	—	$	4,391	$	4,406
Vestings:
Restricted share units		—			6		100		129
Performance share units (1)		—			—		37		143
		—			6		137		272
Forfeitures:
Restricted share units		—			4		—		4
Performance share units		—			—		—		—
		—			4		—		4
Compensation expense relating to share-based grants	$	(795	)	$	547	$	1,953	$	1,601

(1)	The actual number of performance-based RSUs that vested during the nine months ended September 30, 2021 was 37,000 common shares, which is 100% of the originally granted performance-based RSUs.

	September 30, 2021
	Restricted share units		Performance share units
Shares expected to vest:
Number of units (in thousands)		193		202
Grant date average fair value per unit	$	20.05	$	19.88

Note 22—Income Taxes

The Company’s effective tax rate was 11.6% and (14.9)% with consolidated pretax loss of $40.7 million and consolidated pretax income of $64.2 million for the quarter and nine months ended September 30, 2021, respectively. The Company’s taxable REIT subsidiary (“TRS”) recognized a tax benefit of $4.7 million on a pretax loss of $75.6 million for the quarter ended September 30, 2021 and tax benefit of $9.6 million on a pretax loss of $137.1 million for the nine months ended September 30, 2021. The TRS losses were primarily due to decreases in MSR fair values.

For the same periods in 2020, the TRS recognized a tax expense of $22.9 million on a pretax income of $118.5 million and a tax expense of $36.3 million on a pretax income of $186.6 million, respectively. The Company’s reported consolidated pretax income was $122.2 million and $5.8 million for the quarter and nine months ended September 30, 2020, respectively. The primary difference between the Company’s effective tax rate and the statutory tax rate is generally attributable to nontaxable REIT income resulting from the dividends paid deduction. The benefit from the dividends paid deduction was partially offset by a valuation allowance recorded at the TRS against its deferred tax assets, including a portion of its net operating losses and deferred interest expense.

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. On the basis of this evaluation, as of September 30, 2021, the valuation allowance was increased to $22.0 million from the $110,000 valuation allowance recorded at December 31, 2020 as the result of a GAAP loss at the TRS for the nine months ended September 30, 2021. The amount of deferred tax assets considered realizable could be adjusted in future periods based on future income.

The CARES Act, passed in March 2020, introduced a number of tax law changes which are generally taxpayer favorable and, in December 2020, the Taxpayer Certainty and Disaster Tax Relief Act was signed into law. No material changes in our effective income tax rates resulted from either Act. The CARES Act does provide for carry back of losses from 2018, 2019 and 2020. However, the TRS does not have taxable income from 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 23—(Loss) Earnings Per Common 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 5.375% exchangeable notes due May 1, 2020 (the “2020 Notes”), by the weighted average common shares outstanding, assuming all dilutive securities were issued.

As discussed in Note 2 ‒ Basis of Presentation and Accounting Change ‒ Pending Accounting Change, PMC issued the Exchangeable Notes. The Exchangeable Notes include cash conversion options. The Company intends to cash settle the Exchangeable Notes. Therefore, the effect of conversion of the Exchangeable Notes presently is excluded from diluted earnings (losses) per share. As further discussed in Note 2, effective for the quarter ending March 31, 2022, the Company will adopt ASU 2020-06, which will require inclusion of the common shares issuable pursuant to conversion of the Exchangeable Notes in the Company’s diluted earnings per share calculation.

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

	Quarter ended September 30,						Nine months ended September 30,
	2021			2020			2021			2020
	(in thousands except per share amounts)
Net (loss) income	$	(35,955	)	$	99,547		$	73,740		$	(30,506	)
Dividends on preferred shares		(7,969	)		(6,234	)		(20,438	)		(18,703	)
Effect of participating securities—share-based compensation awards		(80	)		(182	)		(238	)		(198	)
Net (loss) income attributable to common shareholders		(44,004	)		93,131			53,064			(49,407	)
Income attributable to participating securities		—			—			—			—
Diluted net (loss) income attributable to common shareholders	$	(44,004	)	$	93,131		$	53,064		$	(49,407	)
Weighted average basic shares outstanding		97,501			99,227			97,772			99,718
Shares issuable under share-based compensation plan		—			197			107			—
Diluted weighted average number of shares outstanding		97,501			99,424			97,879			99,718
Basic (loss) earnings per share	$	(0.45	)	$	0.94		$	0.54		$	(0.50	)
Diluted (loss) earnings per share	$	(0.45	)	$	0.94		$	0.54		$	(0.50	)

Calculation of diluted earnings per share requires certain potentially dilutive shares to be excluded when the inclusion of such shares 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 September 30,				Nine months ended September 30,
	2021		2020		2021		2020
	(in thousands)
Shares issuable under share-based compensation plan		128		116		51		181
Shares issuable pursuant to exchange of the Exchangeable Notes		24,328		—		20,627		3,378

Note 24—Segments

The Company operates in four segments as described in Note 1 ‒ Organization.

Financial highlights by operating segment are summarized below:

	Credit			Interest rate
	sensitive			sensitive			Correspondent
Quarter ended September 30, 2021	strategies			strategies			production		Corporate			Total
	(in thousands)
Net investment income:
Net gains on loans acquired for sale	$	—		$	—		$	16,196	$	—		$	16,196
Net gains (losses) on investments		75,764			(18,458	)		—		—			57,306
Net loan servicing fees		—			(53,343	)		—		—			(53,343	)
Net interest (expense) income:
Interest income		617			18,260			38,975		432			58,284
Interest expense		13,857			41,482			20,150		—			75,489
		(13,240	)		(23,222	)		18,825		432			(17,205	)
Other		559			—			44,341		—			44,900
		63,083			(95,023	)		79,362		432			47,854
Expenses:
Loan fulfillment and servicing fees payable to PFSI		89			20,614			43,922		—			64,625
Management fees		—			—			—		8,520			8,520
Other		2,308			1,180			7,665		4,212			15,365
		2,397			21,794			51,587		12,732			88,510
Pretax income (loss)	$	60,686		$	(116,817	)	$	27,775	$	(12,300	)	$	(40,656	)
Total assets at end of quarter	$	2,078,237		$	6,392,726		$	5,138,051	$	259,586		$	13,868,600

	Credit			Interest rate
	sensitive			sensitive			Correspondent
Quarter ended September 30, 2020	strategies			strategies			production		Corporate			Total
	(in thousands)
Net investment income:
Net gains on loans acquired for sale	$	(3,934	)	$	—		$	102,356	$	—		$	98,422
Net gains (losses) on investments		60,011			(40,414	)		—		—			19,597
Net loan servicing fees		—			60,427			—		—			60,427
Net interest (expense) income:
Interest income		656			33,516			26,073		378			60,623
Interest expense		6,236			36,178			16,547		56			59,017
		(5,580	)		(2,662	)		9,526		322			1,606
Other		2,321			—			38,640		—			40,961
		52,818			17,351			150,522		322			221,013
Expenses:
Loan fulfillment and servicing fees payable to PFSI		187			18,564			54,840		—			73,591
Management fees		—			—			—		8,508			8,508
Other		2,603			270			8,786		5,058			16,717
		2,790			18,834			63,626		13,566			98,816
Pretax income (loss)	$	50,028		$	(1,483	)	$	86,896	$	(13,244	)	$	122,197
Total assets at end of quarter	$	1,486,230		$	4,298,530		$	4,287,765	$	382,542		$	10,455,067

	Credit			Interest rate
	sensitive			sensitive			Correspondent
Nine months ended September 30, 2021	strategies			strategies			production		Corporate			Total
	(in thousands)
Net investment income:
Net gains on loans acquired for sale	$	—		$	—		$	96,934	$	—		$	96,934
Net gains (losses) on investments		328,448			(59,546	)		—		—			268,902
Net loan servicing fees		—			(48,210	)		—		—			(48,210	)
Net interest (expense) income:
Interest income		1,668			41,839			94,290		1,762			139,559
Interest expense		47,295			117,935			65,769		—			230,999
		(45,627	)		(76,096	)		28,521		1,762			(91,440	)
Other		1,467			—			143,164		—			144,631
		284,288			(183,852	)		268,619		1,762			370,817
Expenses:
Loan fulfillment and servicing fees payable to PFSI		306			59,505			158,777		—			218,588
Management fees		—			—			—		28,882			28,882
Other		10,518			3,500			27,462		17,698			59,178
		10,824			63,005			186,239		46,580			306,648
Pretax (loss) income	$	273,464		$	(246,857	)	$	82,380	$	(44,818	)	$	64,169
Total assets at end of period	$	2,078,237		$	6,392,726		$	5,138,051	$	259,586		$	13,868,600

	Credit			Interest rate
	sensitive			sensitive			Correspondent
Nine months ended September 30, 2020	strategies			strategies			production		Corporate			Total
	(in thousands)
Net investment income:
Net gains on loans acquired for sale	$	(43,813	)	$	—		$	353,224	$	—		$	309,411
Net gains (losses) on investments		(386,829	)		80,229			—		—			(306,600	)
Net loan servicing fees		—			202,339			—		—			202,339
Net interest (expense) income:
Interest income		8,344			90,342			73,438		1,434			173,558
Interest expense		29,599			115,879			54,357		1,298			201,133
		(21,255	)		(25,537	)		19,081		136			(27,575	)
Other		5,501			—			87,945		1,796			95,242
		(446,396	)		257,031			460,250		1,932			272,817
Expenses:
Loan fulfillment and servicing fees payable to PFSI		728			48,078			149,594		—			198,400
Management fees		—			—			—		25,851			25,851
Other		4,529			3,143			18,874		16,185			42,731
		5,257			51,221			168,468		42,036			266,982
Pretax (loss) income	$	(451,653	)	$	205,810		$	291,782	$	(40,104	)	$	5,835
Total assets at end of period	$	1,486,230		$	4,298,530		$	4,287,765	$	382,542		$	10,455,067

Note 25—Supplemental Cash Flow Information

	Nine months ended September 30,
	2021		2020
	(in thousands)
Payments:
Income taxes, net	$	2,112	$	4,997
Interest	$	232,705	$	220,616
Non-cash investing activities:
Transfer of loans and advances to real estate acquired in settlement of loans	$	—	$	1,166
Receipt of mortgage servicing rights as proceeds from sales of loans at fair value	$	1,245,546	$	717,227
Receipt of excess servicing spread pursuant to recapture agreement with PennyMac Financial Services, Inc.	$	557	$	1,393
Unsettled purchase of subordinated mortgage pass-through securities associated with a consolidated variable interest entity	$	9,755	$	—
Recognition/Recombination of assets pursuant to initial consolidation of VIEs:
Recognition of mortgage loans	$	780,713	$	—
Recombination of MSRs with loans	$	9,824	$	—
Non-cash financing activities:
Dividends declared, not paid	$	45,673	$	39,591
Recognition of asset-backed secured financing	$	780,713	$	—

Note 26—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 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.

The Agencies’ capital and liquidity amounts and requirements, 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)
September 30, 2021	$	973,769	$	547,531		11	%		6	%	$	135,557	$	73,393
December 31, 2020	$	1,101,318	$	438,530		16	%		6	%	$	101,116	$	59,158

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

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 27—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.

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 (the “Report”).

Statements contained in this Quarterly Report 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 Report and our other filings with the United States Securities and Exchange Commission (“SEC”). The forward-looking statements contained in this Report 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 Report to the words “we,” “us,” “our” and the “Company” refer to PMT or its affiliates.

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 sold. We also invest in mortgage-backed securities (“MBS”). We have also historically invested in distressed mortgage assets (loans and real estate acquired in settlement of loans (“REO”)), which we have substantially liquidated.

We are externally managed by PNMAC Capital Management, LLC (“PCM”), an investment adviser that specializes in and focuses on U.S. mortgage assets. Our loans and MSRs are serviced by PennyMac Loan Services, LLC (“PLS”). PCM and PLS are both indirect controlled subsidiaries of PennyMac Financial Services, Inc. (“PFSI”), a publicly-traded mortgage banking and investment management company.

Our Investment Activities

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, private label securitizations, and, through 2020, CRT arrangements. Our correspondent production and resulting investment activity are summarized below:

	Quarter ended September 30,				Nine months ended September 30,
	2021		2020		2021		2020
	(in thousands)
Sales of loans acquired for sale:
To nonaffiliates	$	29,865,473	$	26,748,508	$	93,365,579	$	66,639,230
To PennyMac Financial Services, Inc.		15,996,702		17,608,969		51,471,399		43,721,458
	$	45,862,175	$	44,357,477	$	144,836,978	$	110,360,688
Net gain on loans acquired for sale	$	16,196	$	98,422	$	96,934	$	309,411
Investment activities resulting from correspondent production:
Receipt of MSRs as proceeds from sales of loans	$	424,912	$	265,278	$	1,245,546	$	717,227
Retention of interest in securitization of loans secured by investment properties, net of associated asset-backed financing	$	9,755	$	—	$	9,755	$	—

Interest Rate Sensitive Investments

Our interest rate sensitive investments include:

•

Mortgage servicing rights. During the nine months ended September 30, 2021, we received $1.2 billion of MSRs as proceeds from sales of loans acquired for sale. We held $2.8 billion of MSRs at fair value at September 30, 2021.

•

REIT-eligible mortgage-backed or mortgage-related securities. We purchased $1.9 billion and sold $1.3 billion of MBS during the nine months ended September 30, 2021. 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. We held MBS with fair values totaling $2.5 billion at September 30, 2021.

Credit Sensitive Investments

CRT Arrangements

At present, we are no longer creating new CRT investments as the Federal Housing Finance Agency (“FHFA”) instructed the Federal National Mortgage Association (“Fannie Mae”) and the Federal Home Loan Mortgage Corporation (“Freddie Mac”) to gradually wind down new front-end lender risk share transactions such as CRT investments as of the end of 2020. During the nine months ended September 30, 2021, we recognized investment gains of $325.9 million relating to our holdings of CRT securities. We held net CRT-related investments (comprised of deposits securing CRT arrangements, CRT derivatives, CRT strips and interest-only security payable) totaling $1.9 billion at September 30, 2021.

Investment in Securities Backed by Loans Secured by Investment Properties

Beginning in the quarter ended June 30, 2021, the Company purchased subordinate mortgage pass-through securities backed by loans secured by investment properties sourced from the Company’s conventional correspondent production activities in transactions sponsored by Citigroup Global Markets Realty Corp (“CGMRC”). These securities provide us with a higher yield than senior securities in exchange for being the first securities to absorb the credit losses relating to the underlying loans.

During the quarter ended September 30, 2021, the Company purchased subordinate mortgage pass-through securities created in the CGMRC-sponsored transaction with initial unpaid principal balances (“UPBs”) totaling $548.0 million. As the result of the Company’s consolidation of the variable interest entities as described in Note 6 – Variable Interest Entities – Investment in Securities Backed by Loans Secured by investment Properties to the consolidated financial statements included in this Report, we include loans underlying these and similar transactions with UPBs totaling approximately $788.7 million on its consolidated balance sheet as of September 30, 2021.

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.

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 Investment 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 and CRT strips, 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 investment income (loss) items included in net investment income are as follows:

	Quarter ended September 30,						Nine months ended September 30,
	2021			2020			2021			2020
	(dollars in thousands)
Net gains (losses) on investments:
Mortgage-backed securities	$	(18,591	)	$	(37,873	)	$	(60,456	)	$	95,158
Loans:
Held in a variable interest entities		(241	)		(2,905	)		(3,250	)		(4,979	)
Distressed		(63	)		59			96			(149	)
ESS		—			(2,610	)		1,651			(16,852	)
CRT arrangements		24,982			(9,361	)		163,371			(304,074	)
Firm commitment to purchase CRT securities		—			46,332			—			(220,146	)
Interest-only security payable at fair value		1,185			2,041			(1,243	)		12,769
Asset-backed financing of VIEs		1,663			3,106			4,146			4,872
		8,935			(1,211	)		104,315			(433,401	)
Net gains on loans acquired for sale (1)		370,096			223,974			1,091,476			732,159
Net loan servicing fees—MSR valuation adjustments		(144,241	)		(66,473	)		(165,457	)		(864,522	)
	$	234,790		$	156,290		$	1,030,334		$	(565,764	)
Net investment income	$	47,854		$	221,013		$	370,817		$	272,817
Non-cash items as a percentage of net investment income		491	%		71	%		278	%	N/M

(1)	Amount represents MSRs received, fair value of firm commitment to purchase CRT securities recognized, liability for 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 acquired in settlement of the loan has been sold;

•

ESS investments through a portion of the monthly interest payments collected on the loans in the ESS reference pool or from the sale of investment;

•

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;

•

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 the deposits we manage on behalf of the borrowers and investors in the loans we service.

Results of Operations

The following is a summary of our key performance measures:

	Quarter ended September 30,						Nine months ended September 30,
	2021			2020			2021			2020
	(dollar amounts in thousands, except per common share amounts)
Net investment income	$	47,854		$	221,013		$	370,817		$	272,817
Expenses		88,510			98,816			306,648			266,982
Pretax (loss) income		(40,656	)		122,197			64,169			5,835
(Benefit from) provision for income taxes		(4,701	)		22,650			(9,571	)		36,341
Net (loss) income		(35,955	)		99,547			73,740			(30,506	)
Dividends on preferred shares		7,969			6,234			20,438			18,703
Net (loss) income attributable to common shareholders	$	(43,924	)	$	93,313		$	53,302		$	(49,209	)
Pretax income (loss) by segment:
Credit sensitive strategies	$	60,686		$	50,028		$	273,464		$	(451,653	)
Interest rate sensitive strategies		(116,817	)		(1,483	)		(246,857	)		205,810
Correspondent production		27,775			86,896			82,380			291,782
Corporate		(12,300	)		(13,244	)		(44,818	)		(40,104	)
	$	(40,656	)	$	122,197		$	64,169		$	5,835
Annualized return on average common shareholder's equity		(8.8	)%		18.9	%		3.5	%		(3.3	)%
(Loss) earnings per common share:
Basic	$	(0.45	)	$	0.94		$	0.54		$	(0.50	)
Diluted	$	(0.45	)	$	0.94		$	0.54		$	(0.50	)
Dividends per common share	$	0.47		$	0.40		$	1.41		$	1.05

	September 30, 2021			December 31, 2020
Total assets	$	13,868,600		$	11,492,011
Book value per common share (1)	$	19.79		$	20.30
Closing price per common share	$	19.69		$	17.47

(1)

As described in Note 2 – Basis of Presentation and Accounting Change – Pending Accounting Change, beginning in 2022, the portion of PMT’s Exchangeable Notes originally allocated to additional paid-in capital will be reclassified to the carrying value of the Exchangeable Notes. Giving effect to this change on the pro forma basis, PMT’s book value as of September 30, 2021 would have been $19.40. This reclassification will also require inclusion of the common shares issuable pursuant to conversion of the Exchangeable Notes in the Company’s diluted earnings per share calculation.

During 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 resulted in continued economic uncertainty, financial hardships and unemployment 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. During the nine months ended September 30, 2021, the level of such delinquency has gradually decreased. As of September 30, 2021, 0.8% of the loans in our MSR portfolio were in COVID-19 pandemic related forbearance provided for under the CARES Act.

The emergence of COVID-19 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. Since the first quarter of 2020, the credit markets have recovered somewhat, as reflected most recently in the $325.9 million in fair value gains we recognized on our CRT arrangements during the nine months ended September 30, 2021.

The mortgage origination market for 2020 was estimated at $4.1 trillion. Current forecasts estimate the origination market ranges from $3.8 trillion to approximately $4.5 trillion for 2021. The uncertainties and strains on many mortgage lenders induced by

COVID-19 and resulting disruptions in the financial markets caused some market participants to scale back or exit mortgage loan production activities early in the course of the Pandemic, which, combined with constraints on mortgage industry origination capacity that existed before the Pandemic, allowed us to realize higher gain-on sale margins in our correspondent production activities during most of 2020. With the return of other market participants and moderating demand for mortgage loans, our gain-on-sale margins in our correspondent production activities have returned to historical levels and the correspondent lending market and gain on sale margins have become significantly more competitive.

The current environment caused by COVID-19 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 continuing situation on our future prospects are difficult to anticipate. For further discussion of this and other risks applicable to us, see our Annual Report on Form 10-K for the year ended December 31, 2020 under the heading “Risk Factors.”

Our net income decreased by $135.5 million during the quarter ended September 30, 2021, as compared to the quarter ended September 30, 2020, reflecting the lower gains in fair value of our credit investments and lower gain on sale margins in our correspondent production activities compared to the quarter ended September 30, 2020. The decrease in pretax results is summarized below:

•

Our credit sensitive strategies segment reflects a decrease in net gains on our CRT arrangements of $12.9 million as compared to the quarter ended September 30, 2020, when fair values of credit-related assets were experiencing continuing recovery from low levels experienced early in the Pandemic.

•

Our interest rate sensitive strategies segment’s results decreased during the quarter ended September 30, 2021 compared to the quarter ended September 30, 2020. We recognized a decrease in net servicing fees of $113.8 million caused by the effect on our MSRs of increasing expectations of prepayments and increased hedging losses. This decrease in net servicing fees, as well as a $20.6 million increase in net interest expense, was partially offset by growth in servicing fees due to growth in our servicing portfolio and a $19.3 million decrease in losses on MBS.

•

Reduced gains on loan sales in our correspondent production segment reflects the tighter gain on sale margins experienced in the market during the quarter ended September 30, 2021, compared to the elevated gain on sale margins experienced in the same period in 2020, resulting in a $59.1 million decrease in pretax income.

Our results of operations increased by $104.2 million during the nine months ended September 30, 2021, as compared to the nine months ended September 30, 2020, reflecting the effect of the improved fair value performance of our CRT-related investments partially offset by declines in MSR valuation, hedging performance, gain on loans held for sale and loan origination fees. The increase in pretax results is summarized below:

•

During the nine months ended September 30, 2021, we recognized a $756.6 million increase in net gains on our CRT arrangements as compared to the nine months ended September 30, 2020, which reflected the severe impact of the market disruption caused by the Pandemic on our investments in CRT arrangements.

•

Our interest rate sensitive strategies segment was negatively affected by a decrease in net servicing fees of $250.5 million caused by negative fair value changes in our investment in MSRs and hedging results, a $155.6 million decrease in gains on MBS and a $50.6 million increase in net interest expense.

•

Growth in production volume in our correspondent production segment was more than offset by reductions in our gain on sale margins during the nine months ended September 30, 2021, as industry capacity caught up with loan demand, resulting in a $209.4 million decrease in pretax income as compared to the same period in 2020.

Net Investment Income

Our net investment income is summarized below:

	Quarter ended September 30,					Nine months ended September 30,
	2021			2020		2021			2020
	(in thousands)
Net gains on loans acquired for sale	$	16,196		$	98,422	$	96,934		$	309,411
Net loan origination fees		44,189			38,547		142,805			87,683
Net gains (losses) on investments		57,306			19,597		268,902			(306,600	)
Net loan servicing fees		(53,343	)		60,427		(48,210	)		202,339
Net interest (expense) income		(17,205	)		1,606		(91,440	)		(27,575	)
Other		711			2,414		1,826			7,559
	$	47,854		$	221,013	$	370,817		$	272,817

Net Gains on Loans Acquired for Sale

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

	Quarter ended September 30,						Nine months ended September 30,
	2021			2020			2021			2020
	(in thousands)
From non-affiliates:
Cash loss:
Loans	$	(381,295	)	$	(23,860	)	$	(1,196,355	)	$	(70,972	)
Hedging activities		25,858			(103,361	)		196,908			(360,930	)
		(355,437	)		(127,221	)		(999,447	)		(431,902	)
Non-cash gain:
Receipt of MSRs in loan sale transactions		424,912			265,278			1,245,546			717,227
Provision for losses relating to representations and warranties provided in loan sales:
Pursuant to loan sales		(6,297	)		(5,953	)		(23,282	)		(10,198	)
Reduction in liability due to change in estimate		1,636			1,504			4,155			3,059
		(4,661	)		(4,449	)		(19,127	)		(7,139	)
Recognition of fair value of commitment to purchase credit risk transfer securities relating to loans sold		—			(3,933	)		—			(38,161	)
Change in fair value during the period of financial instruments:
IRLCs		(43,024	)		(11,839	)		(85,662	)		60,964
Loans		37,877			(6,518	)		35,401			(11,471	)
Hedging derivatives		(45,008	)		(14,565	)		(84,682	)		10,739
		(50,155	)		(32,922	)		(134,943	)		60,232
		370,096			223,974			1,091,476			732,159
Total from nonaffiliates		14,659			96,753			92,029			300,257
From PFSI—cash		1,537			1,669			4,905			9,154
	$	16,196		$	98,422		$	96,934		$	309,411

Interest rate lock commitments issued on loans acquired for sale to nonaffiliates	$	29,411,427		$	34,363,255		$	93,741,543		$	78,276,452
Acquisition of loans for sale:
To nonaffiliates	$	28,605,099		$	29,255,649		$	92,846,231		$	66,416,981
To PFSI		15,375,352			17,537,686			48,990,292			42,785,377
	$	43,980,451		$	46,793,335		$	141,836,523		$	109,202,358

The changes in gain on loans acquired for sale during the quarter and nine months ended September 30, 2021, as compared to the same periods in 2020, reflect the tightening of gain on sale margins, partially offset by increased loan acquisition volume.

Non-cash elements of gain on sale of loans

Interest Rate Lock Commitments

Our net gain on sale of loans includes our estimates of gains or losses we expect to realize upon the sale of mortgage loans we have committed to purchase but have not yet purchased or sold. Therefore, we recognize a substantial portion of our net gain on sale before we purchase the loans. This gain is reflected on our balance sheet as IRLC derivative assets and liabilities. We adjust the fair value of our IRLCs as the loan acquisition process progresses until we complete the acquisition or the commitment is canceled. Such adjustments are included in our gain on sale of loans. The fair value of our IRLCs become part of the carrying value of our loans when we complete the purchase of the loans. The methods and key inputs we use to measure the fair value of IRLCs are summarized in Note 7 – Fair value – Valuation Techniques and Inputs to the consolidated financial statements included in this Quarterly Report.

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 offset our cash losses on the sale of loans and exceed our total gain on sale of loans at fair value for the quarter and nine months ended September 30, 2021. These estimates change as circumstances change, and changes in these estimates are recognized in our results of operations in subsequent periods. Subsequent changes in the fair value of our MSRs significantly affect our results of operations.

Mortgage Servicing Rights

Our methods to measure and update the measurements of our MSRs are detailed in Note 7 – Fair value – Valuation Techniques and Inputs to the consolidated financial statements included in this Quarterly Report.

Firm Commitment to Purchase CRT Securities

During the time we were selling loans into CRT arrangements we recognized the fair value of our commitment to purchase CRT securities when we sold loans subject to CRT arrangements. This fair value represents the difference between the expected fair value of the CRT securities we committed to purchase and their contractual purchase price.

Liability for Losses Under Representations and Warranties

We recognize a liability for losses we expect to incur relating to the representations and warranties we provide to purchasers in our loan sales transactions. 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 $6.3 million and $23.3 million for the quarter and nine months ended September 30, 2021, respectively, and $6.0 million and $10.2 million for the quarter and nine months ended September 30, 2020, respectively. The increase in the provision relating to current loan sales reflects the increase of our loan sales volume as well as loan sales no longer being subject to credit risk transfer arrangements for which our representation and warranty loss estimates were less than for other loan sales.

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 September 30,				Nine months ended September 30,
	2021		2020		2021		2020
	(in thousands)
Indemnification activity UPB:
Loans indemnified at beginning of period	$	3,510	$	5,937	$	4,583	$	5,697
New indemnifications		345		—		345		450
Less: Indemnified loans repaid or refinanced		441		670		1,514		880
Loans indemnified at end of period	$	3,414	$	5,267	$	3,414	$	5,267
Loans indemnified by correspondent lenders at end of period	$	1,401	$	1,903
UPB of loans with deposits received from correspondent sellers collateralizing prospective indemnification losses at end of period	$	213	$	213
Repurchase activity (UPB):
Loans repurchased	$	19,082	$	23,856	$	49,359	$	53,967
Less:
Loans repurchased by correspondent sellers		11,525		9,233		34,224		25,885
Loans resold or repaid by borrowers		5,888		4,339		15,033		7,964
Net loans repurchased with losses chargeable to liability to representations and warranties	$	1,669	$	10,284	$	102	$	20,118
Net losses charged to liability for representations and warranties	$	66	$	33	$	111	$	112
At end of period:
Loans subject to representations and warranties	$	208,686,249	$	143,875,403
Liability for representations and warranties	$	40,909	$	14,641

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.

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 $1.6 million and $4.2 million reduction in liability for representations and warranties during the quarter and nine months ended September 30, 2021, 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 increase in fees during the quarter and nine months ended September 30, 2021, as compared to the same periods in 2020, reflects an increase in our purchases of loans with delivery fees.

Net Gains (Losses) on Investments

Net gains (losses) on investments are summarized below:

	Quarter ended September 30,						Nine months ended September 30,
	2021			2020			2021			2020
	(in thousands)
From nonaffiliates:
Mortgage-backed securities	$	(18,591	)	$	(37,873	)	$	(60,456	)	$	95,158
Loans at fair value:
Held in VIEs		(241	)		(2,905	)		(3,250	)		(4,979	)
Distressed		652			193			877			(1,070	)
CRT arrangements		73,874			14,620			325,934			(210,509	)
Firm commitment to purchase CRT securities		—			46,332			—			(220,146	)
Asset-backed financings of VIEs at fair value		1,663			3,106			4,146			4,872
Hedging derivatives		(51	)		(1,266	)		—			46,926
		57,306			22,207			267,251			(289,748	)
From PFSI—ESS		—			(2,610	)		1,651			(16,852	)
	$	57,306		$	19,597		$	268,902		$	(306,600	)

The increase in net gain on investments for the quarter and nine months ended September 30, 2021, as compared to the quarter and nine months ended September 30, 2020, was caused primarily by increased gains from our CRT arrangements during the quarter and nine months ended September 30, 2021, compared to the quarter and nine months ended September 30, 2020. The increase in gains from CRT arrangements reflects the recovery in fair value during the quarter and nine months ended September 30, 2021 from the dislocation in the credit markets experienced during the nine months ended September 30, 2020.

Mortgage-Backed Securities

During the quarter and nine months ended September 30, 2021, we recognized net valuation losses of $18.6 million and $60.5 million, respectively, as compared to losses of $37.9 million and gains of $95.2 million for the same periods in 2020, respectively. The losses recognized during the quarter and nine months ended September 30, 2021, respectively, reflect the increasing interest rates during the periods as compared to the generally decreasing interest rates during the nine months ended September 30, 2020.

Loans at fair value – Held in VIEs

Loans at fair value held in VIEs incurred a loss of $241,000 and $3.3 million during the quarter and nine months ended September 30, 2021, respectively, as compared to a loss of $2.9 million and $5.0 million during the quarter and nine months ended September 30, 2020, respectively. The losses during the quarter and nine months ended September 30, 2021 reflect the effect of rising interest rates on our investment in jumbo loans and loans secured by investment properties. The losses recognized during the quarter and nine months ended September 30, 2020 were attributable to the effect of uncertainties surrounding borrower credit performance experienced in the mortgage market as a result of the Pandemic.

CRT Arrangements

The activity in and balances relating to our CRT arrangements are summarized below:

	Quarter ended September 30,						Nine months ended September 30,
	2021			2020			2021			2020
	(in thousands)
UPB of loans sold				$	1,799,078					$	18,277,263
Investments — Change in expected face amount of firm commitment to purchase CRT securities				$	(95,033	)				$	197,481
Investment income (loss):
Net gains on loans acquired for sale — Fair value of firm commitment to purchase CRT securities recognized upon sale of loans				$	(3,933	)				$	(38,161	)
Net gains (losses) on investments:
Derivative and CRT strips:
CRT derivatives
Realized	$	21,337			11,480		$	73,464			42,231
Valuation changes		(3,345	)		(17,996	)		98			(196,404	)
		17,992			(6,516	)		73,562			(154,173	)
CRT strips
Realized		26,370			10,460			90,342			38,565
Valuation changes		28,327			8,635			163,273			(107,670	)
		54,697			19,095			253,615			(69,105	)
Interest-only security payable at fair value		1,185			2,041			(1,243	)		12,769
		73,874			14,620			325,934			(210,509	)
Firm commitments to purchase CRT securities		—			46,332			—			(220,146	)
		73,874			60,952			325,934			(430,655	)
Interest income — Deposits securing CRT arrangements		126			288			451			6,893
	$	74,000		$	57,307		$	326,385		$	(461,923	)

Net (recoveries received) payments made to settle (recoveries) losses on CRT arrangements	$	(14,321	)	$	2,935		$	(47,876	)	$	7,114

	September 30, 2021			December 31, 2020
	(in thousands)
Carrying value of CRT arrangements:
Derivative and credit risk transfer strip assets (liabilities), net
CRT derivatives	$	31,891		$	31,795
CRT strips		(39,519	)		(202,792	)
	$	(7,628	)	$	(170,997	)

Deposits securing CRT arrangements	$	1,962,800		$	2,799,263
Interest-only security payable at fair value	$	12,000		$	10,757

CRT arrangement assets pledged to secure borrowings:
Derivative assets	$	35,938		$	58,699
Deposits securing CRT arrangements (1)	$	1,962,800		$	2,799,263

UPB of loans underlying CRT arrangements	$	35,371,965		$	58,697,942
Collection status (UPB):
Delinquency (2)
Current	$	33,723,487		$	54,990,381
30-89 days delinquent	$	384,962		$	710,872
90-180 days delinquent	$	150,778		$	693,315
180 or more days delinquent	$	1,108,723		$	2,297,365
Foreclosure	$	4,015		$	6,009
Bankruptcy	$	76,277		$	75,700
Delinquent loans in COVID-19 pandemic-related forbearance:
30-89 days delinquent	$	117,381		$	383,028
90-180 days delinquent	$	90,500		$	546,344
180 or more days delinquent	$	665,066		$	1,944,663

(1)	Deposits securing credit risk transfer strip liabilities also secure $43.6 million and $229.7 million in CRT strip and CRT derivative liabilities at September 30, 2021 and December 31, 2020, respectively.

(2)	Includes delinquent loans in COVID-19 pandemic-related forbearance plans that were requested by borrowers seeking payment relief in accordance with the CARES Act.

The performance of our investments in CRT arrangements during the quarter and nine months ended September 30, 2021 reflects a decrease in market discount rates as the credit markets continue to recover from the dislocation experienced during the first quarter of 2020 as a result of the onset of the Pandemic and continuing improvement in the performance of the loans underlying this investment.

ESS Purchased from PFSI

We recognized fair value gains relating to our investment in ESS totaling $1.7 million for the nine months ended September 30, 2021, as compared to fair value losses of $2.6 million and $16.9 million for the quarter and nine months ended September 30, 2020, respectively. The gains were driven by the positive influence on expected future cash flows of the generally rising interest rates during the portion of 2021 that the ESS was outstanding, as compared to the quarter and nine months ended September 30, 2020. The remaining balance of the ESS was sold to PLS during the quarter ended March 31, 2021.

Net Loan Servicing Fees

Our net loan servicing fee income (loss) has two primary components: fees earned for servicing the loans and the effects of MSR valuation changes, net of hedging results, as summarized below:

	Quarter ended September 30,						Nine months ended September 30,
	2021			2020			2021			2020
	(in thousands)
Loan servicing fees	$	151,764		$	116,687		$	433,217		$	332,057
Effect of MSRs		(205,107	)		(56,260	)		(481,427	)		(129,718	)
Net loan servicing fees	$	(53,343	)	$	60,427		$	(48,210	)	$	202,339

Following is a summary of our loan servicing fees:

	Quarter ended September 30,				Nine months ended September 30,
	2021		2020		2021		2020
	(in thousands)
Contractually-specified servicing fees	$	137,804	$	98,027	$	378,110	$	294,319
Ancillary and other fees:
Late charges		436		194		1,199		1,093
Other		13,524		18,466		53,908		36,645
		13,960		18,660		55,107		37,738
	$	151,764	$	116,687	$	433,217	$	332,057
Average MSR servicing portfolio	$	205,181,714	$	148,412,625	$	191,351,860	$	142,872,909

Loan servicing fees from non-affiliates relate to our MSRs which are primarily related to servicing we provide for loans included in Agency securitizations. These fees are contractually established at an annualized percentage of the UPB of the loans serviced and we collect these fees from borrower payments. Other loan servicing fees are comprised primarily of borrower-contracted fees such as late charges, and reconveyance fees as well as fees charged to correspondent lenders for loans repaid by the borrower shortly after purchase.

The changes in contractually-specified fees for the quarter and nine months ended September 30, 2021, as compared to the same periods ended September 30, 2020, are primarily due to growth of our loan servicing portfolio. The changes in other loan servicing fees for the same comparative periods is due primarily to variability in fees charged to correspondent lenders for loans repaid shortly after purchase during the quarter and nine months ended September 30, 2021, as compared to the same periods in 2020.

The Company has elected to carry its servicing assets at fair value. Changes in fair value have two components: changes due to realization of the contractual servicing fees and changes due to changes in inputs used to estimate the fair value of such items. We endeavor to moderate the effects of changes in fair value primarily by entering into derivatives transactions.

Changes in fair value of MSRs and hedging results are summarized below:

	Quarter ended September 30,						Nine months ended September 30,
	2021			2020			2021			2020
	(in thousands)
Realization of cash flows	$	(81,398	)	$	(53,419	)	$	(210,396	)	$	(176,572	)
Changes in valuation inputs used in valuation model		(62,843	)		(13,054	)		44,939			(687,950	)
		(144,241	)		(66,473	)		(165,457	)		(864,522	)
Hedging results		(73,841	)		962			(354,128	)		717,498
Total change in fair value of mortgage servicing rights net of hedging results		(218,082	)		(65,511	)		(519,585	)		(147,024	)
Recapture income from PFSI		12,975			9,251			38,158			17,306
	$	(205,107	)	$	(56,260	)	$	(481,427	)	$	(129,718	)
Average balance of mortgage servicing rights	$	2,612,708		$	1,255,371		$	2,399,383		$	1,260,463

Changes in realization of cash flows are influenced by changes in the level of servicing assets and liabilities and changes in estimates of remaining cash flows to be realized. During the quarter and nine months ended September 30, 2021 as compared to the quarter and nine months ended September 30, 2020, realization of cash flows decreased primarily due to the growth of our investment in MSRs.

Other changes in fair value during the quarter ended September 30, 2021, reflect the net effect of varying factors. The positive effects resulted from the increase in benchmark interest rates and projected income. These positive effects did not exceed the negative effects from elevated prepayment speeds and an increase in expected future prepayments, which included the anticipated impact of the removal by the Federal Housing Finance Agency (“FHFA”) of the adverse market refinance fee during the period. Removal of this fee, which FHFA first put in place in late 2020, is expected to reduce the cost to borrowers of refinancing their existing mortgages and is expected to increase refinancing activities in our MSR portfolio.

Hedging results produced a loss during the quarter and nine months ended September 30, 2021, as compared to the same periods ended September 30, 2020, due to the effect of interest rate increases on the fair value of our hedging instruments.

The increase in loan servicing fees from PFSI reflects the increase in refinancing activity in our MSR portfolio during the quarter and nine months ended September 30, 2021, as compared to the same periods in 2020. We have an agreement with PFSI that requires that when PFSI refinances a loan for which we held the MSRs, we receive a recapture fee. The MSR recapture agreement is summarized in Note 4 ‒ Transactions with Related Parties – Operating Activities to the consolidated financial statements included in this Quarterly Report.

Following is a summary of our loan servicing portfolio:

	September 30, 2021		December 31, 2020
	(in thousands)
UPB of loans outstanding	$	211,951,309	$	170,502,361
Collection Status (UPB) (1)
Delinquency:
30-89 days delinquent	$	1,080,362	$	1,235,981
90 or more days delinquent:
Not in foreclosure	$	2,204,245	$	4,428,915
In foreclosure	$	23,497	$	27,494
Bankruptcy	$	147,052	$	148,866
Custodial funds managed by the Company (2)	$	5,373,992	$	6,086,724
Delinquent loans in COVID-19 pandemic-related forbearance:
30-89 days	$	252,609	$	530,353
90 days or more	$	1,395,601	$	3,123,288

(1)	Includes delinquent loans in COVID-19 pandemic-related forbearance plans that were requested by borrowers seeking payment relief in accordance with the CARES Act.

(2)

Net Interest Expense

Net interest expense is summarized below:

	Quarter ended September 30, 2021								Quarter ended September 30, 2020
	Interest					Interest			Interest				Interest
	income/			Average		yield/			income/		Average		yield/
	expense			balance		cost %			expense		balance		cost %
	(dollars in thousands)
Assets:
Cash and short-term investments	$	264		$	351,623		0.29	%	$	581	$	703,290		0.32	%
Mortgage-backed securities		9,833			2,402,027		1.60	%		24,411		2,522,231		3.79	%
Loans acquired for sale at fair value		39,076			4,887,993		3.13	%		26,158		3,336,504		3.07	%
Loans at fair value:
Held by variable interest entity		4,773			451,136		4.14	%		2,763		207,780		5.20	%
Distressed		85			6,918		4.81	%		50		8,189		2.39	%
		4,858			458,054		4.15	%		2,813		215,969		5.10	%
ESS from PFSI		—			—					2,070		146,771		5.52	%
Deposits securing CRT arrangements		126			2,216,599		0.02	%		288		1,558,144		0.07	%
		54,157			10,316,296		2.05	%		56,321		8,482,909		2.60	%
Placement fees relating to custodial funds		4,481								4,286
Other		(354	)							16
		58,284		$	10,316,296		2.21	%		60,623	$	8,482,909		2.80	%
Liabilities:
Assets sold under agreements to repurchase	$	24,047		$	6,796,525		1.38	%	$	19,259	$	4,054,686		1.86	%
Mortgage loan participation purchase and sale agreements		166			35,984		1.81	%		176		40,117		1.72	%
Notes payable secured by credit risk transfer and mortgage servicing assets		22,890			2,791,323		3.21	%		12,407		1,730,585		2.81	%
Exchangeable senior notes		10,446			497,770		8.21	%		3,613		195,579		7.23	%
Asset-backed financings of variable interest entities at fair value		4,272			424,744		3.94	%		2,561		197,743		5.07	%
Assets sold to PFSI under agreement to repurchase		—			—		—			676		89,088		2.97	%
		61,821			10,546,346		2.29	%		38,692		6,307,798		2.40	%
Interest shortfall on repayments of loans serviced for Agency securitizations		12,622								19,311
Interest on loan impound deposits		1,046								1,014
		75,489		$	10,546,346		2.80	%		59,017	$	6,307,798		3.66	%
Net interest expense	$	(17,205	)						$	1,606
Net interest margin							-0.65	%						0.05	%
Net interest spread							-0.59	%						-0.86	%

	Nine months ended September 30, 2021								Nine months ended September 30, 2020
	Interest					Interest			Interest					Interest
	income/			Average		yield/			income/			Average		yield/
	expense			balance		cost %			expense			balance		cost %
	(dollars in thousands)
Assets:
Cash and short-term investments	$	705		$	266,689		0.35	%	$	3,100		$	722,644		0.56	%
Mortgage-backed securities		25,925			2,121,225		1.61	%		49,861			3,038,298		2.16	%
Loans acquired for sale at fair value		94,597			4,224,917		2.95	%		73,762			3,125,083		3.10	%
Loans at fair value:
Held by variable interest entity		8,040			228,404		4.64	%		8,117			231,196		4.61	%
Distressed		377			7,307		6.80	%		342			9,369		4.80	%
		8,417			235,711		4.71	%		8,459			240,565		4.62	%
ESS from PFSI		1,280			28,830		5.85	%		6,416			158,636		5.31	%
Deposits securing CRT arrangements		451			2,459,821		0.02	%		6,893			1,759,995		0.51	%
		131,375			9,337,193		1.86	%		148,491			9,045,221		2.16	%
Placement fees relating to custodial funds		8,485								24,800
Other		(301	)							267
		139,559		$	9,337,193		1.97	%		173,558		$	9,045,221		2.52	%
Liabilities:
Assets sold under agreements to repurchase	$	75,988		$	6,177,250		1.62	%	$	74,081		$	4,986,701		1.95	%
Mortgage loan participation purchase and sale agreements		471			35,754		1.74	%		724			45,484		2.09	%
Notes payable secured by credit risk transfer and mortgage servicing assets		65,664			2,658,411		3.26	%		47,474			1,832,732		3.40	%
Exchangeable senior notes		26,298			426,353		8.13	%		15,222			293,736		6.81	%
Asset-backed financings of variable interest entities at fair value		6,436			214,524		3.96	%		9,558			219,951		5.71	%
Assets sold to PFSI under agreement to repurchase		387			17,408		2.93	%		2,686			96,020		3.73	%
		175,244			9,529,700		2.42	%		149,745			7,474,624		2.63	%
Interest shortfall on repayments of loans serviced for Agency securitizations		53,198								48,553
Interest on loan impound deposits		2,557								2,835
		230,999		$	9,529,700		3.20	%		201,133		$	7,474,624		3.54	%
Net interest expense	$	(91,440	)						$	(27,575	)
Net interest margin							-1.29	%							-0.40	%
Net interest spread							-1.23	%							-1.01	%

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

	Quarter ended September 30, 2021									Nine months ended September 30, 2021
	vs.									vs.
	Quarter ended September 30, 2020									Nine months ended September 30, 2020
	Increase (decrease) due to changes in									Increase (decrease) due to changes in
	Rate			Volume			Total			Rate			Volume			Total
	(in thousands)
Assets:
Cash and short-term investments	$	(49	)	$	(268	)	$	(317	)	$	(902	)	$	(1,493	)	$	(2,395	)
Mortgage-backed securities		(13,466	)		(1,112	)		(14,578	)		(10,904	)		(13,032	)		(23,936	)
Loans acquired for sale at fair value		525			12,393			12,918			(3,702	)		24,537			20,835
Loans at fair value:
Held by variable interest entity		(663	)		2,673			2,010			41			(118	)		(77	)
Distressed		44			(9	)		35			121			(86	)		35
		(619	)		2,664			2,045			162			(204	)		(42	)
ESS from PFSI		—			(2,070	)		(2,070	)		589			(5,725	)		(5,136	)
Deposits securing CRT arrangements		(252	)		90			(162	)		(8,399	)		1,957			(6,442	)
		(13,861	)		11,697			(2,164	)		(23,156	)		6,040			(17,116	)
Placement fees relating to custodial funds		—			195			195			—			(16,315	)		(16,315	)
Other		—			(370	)		(370	)		—			(568	)		(568	)
		(13,861	)		11,522			(2,339	)		(23,156	)		(10,843	)		(33,999	)
Liabilities:
Assets sold under agreements to repurchase		(5,823	)		10,611			4,788			(13,813	)		15,720			1,907
Mortgage loan participation purchase and sale agreement		9			(19	)		(10	)		(112	)		(141	)		(253	)
Notes payable secured by credit risk transfer and mortgage servicing assets		1,992			8,491			10,483			(2,126	)		20,316			18,190
Exchangeable senior notes		553			6,280			6,833			3,336			7,740			11,076
Asset-backed financings of variable interest entities at fair value		(679	)		2,390			1,711			(2,890	)		(232	)		(3,122	)
Assets sold to PFSI under agreement to repurchase		—			(676	)		(676	)		(456	)		(1,843	)		(2,299	)
		(3,948	)		27,077			23,129			(16,061	)		41,560			25,499
Interest shortfall on repayments of loans serviced for Agency securitizations		—			(6,689	)		(6,689	)		—			4,645			4,645
Interest on loan impound deposits		—			32			32			—			(278	)		(278	)
		(3,948	)		20,420			16,472			(16,061	)		45,927			29,866
Net interest expense	$	(9,913	)	$	(8,898	)	$	(18,811	)	$	(7,095	)	$	(56,770	)	$	(63,865	)

The increase in net interest expense during the quarter and nine months ended September 30, 2021, as compared to the same periods in 2020, is due to:

•

A decrease in earnings from placement fees relating to custodial funds managed for borrowers, and investors, and deposits securing CRT arrangements.

•

An increase in long-term debt issued to finance our investments in CRT Agreements and MSRs as well as the issuance of long-term unsecured debt. These forms of debt bear higher interest costs as compared to the short-term debt they replace and do not finance interest-earning assets. Revenues relating to MSRs and CRT arrangements are reflected in Net loan servicing fees and Net gains (losses) on investments.

Expenses

Our expenses are summarized below:

	Quarter ended September 30,					Nine months ended September 30,
	2021			2020		2021		2020
	(in thousands)
Earned by PennyMac Financial Services, Inc.:
Loan fulfillment fees	$	43,922		$	54,839	$	158,777	$	149,594
Loan servicing fees		20,703			18,752		59,811		48,806
Management fees		8,520			8,508		28,882		25,851
Loan origination		6,594			7,234		23,888		15,951
Loan collection and liquidation		2,126			1,082		9,958		2,696
Safekeeping		2,306			1,075		6,839		4,638
Professional services		949			1,554		5,070		4,542
Compensation		(383	)		1,039		3,130		2,758
Other		3,773			4,733		10,293		12,146
	$	88,510		$	98,816	$	306,648	$	266,982

Expenses decreased $10.3 million or 10% and increased $39.7 million, or 15%, during the quarter and nine months ended September 30, 2021, respectively, as compared to the same periods in 2020. The decrease for the quarter ended September 30 2021, compared to the quarter ended September 30, 2020, is due primarily to reduced fulfillment fees relating to fulfillment activities performed by PFSI on our behalf.

The increase for the nine months ended September 30, 2021, compared to the same period in 2020, is primarily due to increased loan fulfillment fees and loan origination costs attributable to increases in our production volumes during the period, as compared to the same period in 2020, and to increased loan servicing fees, reflecting both the growth of our loan servicing portfolio and the fees we incur relating to CARES Act forbearance and modification activities.

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. Fulfillment fees decreased $10.9 million during the quarter ended September 30, 2021 compared to the same period in 2020. The decrease was primarily due to a decrease in loan commitment volume and an increase in discretionary reductions in the PFSI fee schedule, partially offset by an increase in our loan production volume. fulfillment fees increased $9.2 million during the nine months ended September 30, 2021 compared to the same period in 2020. The increase was primarily due to an increase in our loan production volume, partially offset by the effect of an amendment to the fulfillment fee as described in Note 4 – Transactions with Related Parties to the consolidated financial statements included in this Report.

Loan Servicing Fees

Loan servicing fees payable to PLS are summarized below:

	Quarter ended September 30,				Nine months ended September 30,
	2021		2020		2021		2020
	(in thousands)
Loan servicing fees:
Loans acquired for sale at fair value	$	698	$	452	$	1,871	$	1,595
Loans at fair value		89		187		306		675
MSRs		19,916		18,113		57,634		46,536
	$	20,703	$	18,752	$	59,811	$	48,806
Average investment in:
Loans acquired for sale at fair value	$	4,887,993	$	3,336,504	$	4,224,917	$	3,125,083
Loans at fair value	$	458,054	$	215,969	$	235,711	$	240,565
Average MSR portfolio UPB	$	205,181,714	$	148,412,625	$	191,351,860	$	142,872,909

Loan servicing fees increased by $2.0 million and $11.0 million during the quarter and nine months ended September 30, 2021, respectively, as compared to the same periods in 2020. We incur loan servicing fees primarily in support of our MSR portfolio. The

increase in loan servicing fees is due to growth in our portfolio of MSRs and the fees we incur relating to CARES Act loan forbearance and modification activities.

Management Fees

Management fees payable to PCM are summarized below:

	Quarter ended September 30,					Nine months ended September 30,
	2021			2020		2021		2020
	(in thousands)
Base	$	8,778		$	8,508	$	25,875	$	25,851
Performance incentive (adjustment)		(258	)		—		3,007		—
	$	8,520		$	8,508	$	28,882	$	25,851
Average shareholders' equity amounts used to calculate base management fee expense	$	2,350,940		$	2,280,023	$	2,334,050	$	2,329,741

Management fees increased by $3.0 million during the nine months ended September 30, 2021, as compared to the same period in 2020. This increase is primarily due to the recognition of a performance incentive resulting from our increased profitability during the rolling twelve-month periods ended September 30, 2021, on which the performance incentive fee was based, as compared to our profitability for the rolling twelve-month periods in the nine months ended September 30, 2020.

Loan origination

Loan origination expenses decreased $640 thousand and increased $7.9 million, or 9% and 50%, during the quarter and nine months ended September 30, 2021, respectively, as compared to the same periods in 2020, primarily reflecting a decrease in our loan originations during the quarter ended September 30, 2021, as compared to the quarter ended September 30, 2020, and an increase in our loan originations during the nine months ended September 30, 2021 compared to the same period in 2020.

Loan collection and liquidation

Loan collection and liquidation expenses increased $1.0 million and $7.3 million during the quarter and nine months ended September 30, 2021, respectively, as compared to the same periods in 2020, due to borrower assistance expenses we incurred relating to loans in our CRT reference pools. We incurred this expense to assist certain borrowers in mitigating loan delinquencies they incurred as a result of dislocations arising from the Pandemic as an alternative to incurring losses in the CRT arrangements.

Compensation

Compensation expense decreased $1.4 million and increased $372 thousand during the quarter and nine months ended September 30, 2021, respectively, as compared to the same periods in 2020, primarily due to changed expectations in achieving performance targets included in certain performance-based restricted share awards.

Other Expenses

Other expenses are summarized below:

	Quarter ended September 30,				Nine months ended September 30,
	2021		2020		2021		2020
	(in thousands)
Common overhead allocation from PFSI	$	1,548	$	1,389	$	3,387	$	4,514
Technology		333		284		1,260		1,044
Bank service charges		372		395		1,297		1,402
Insurance		501		354		1,320		1,012
Other		1,019		2,311		3,029		4,174
	$	3,773	$	4,733	$	10,293	$	12,146

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.

The Company’s effective tax rate was 11.6% and (14.9)% with consolidated pretax loss of $40.7 million and income of $64.2 million for the quarter and nine months ended September 30, 2021, respectively. The Company’s taxable REIT subsidiary (“TRS”) recognized a tax benefit of $4.7 million on a pretax loss of $75.6 million for the quarter ended September 30, 2021 and tax benefit of $9.6 million on a pretax loss of $137.1 million for the nine months ended September 30, 2021. The TRS losses were primarily due to fair market declines in MSR values. For the same periods in 2020, the TRS recognized a tax expense of $22.9 million on pretax income of $118.5 million and a tax expense of $36.3 million on pretax income of $186.6 million, respectively. The Company’s reported consolidated pretax income was $122.2 million and $5.8 million for the quarter and nine months ended September 30, 2020, respectively. The primary difference between the Company’s effective tax rate and the statutory tax rate is generally attributable to nontaxable REIT income resulting from the dividends paid deduction. The benefit from the dividends paid deduction was partially offset by a valuation allowance recorded at the TRS against its deferred tax assets, including a portion of its net operating losses and deferred interest expense.

The CARES Act, passed in March 2020, introduced a number of tax law changes which are generally taxpayer favorable and in December 2020, the Taxpayer Certainty and Disaster Tax Relief Act was signed into law. No material changes in our effective income tax rates resulted from either Act. While the CARES Act provides for carry back of losses from 2018, 2019 and 2020, the TRS does not have taxable income from 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 (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:

	September 30,		December 31,
	2021		2020
	(in thousands)
Assets
Cash	$	131,741	$	57,704
Investments:
Short-term		116,130		127,295
Mortgage-backed securities at fair value		2,471,033		2,213,922
Loans acquired for sale at fair value		4,979,256		3,551,890
Loans at fair value		895,880		151,734
ESS		—		131,750
Derivative and credit risk transfer strip assets		97,688		164,318
Deposits securing credit risk transfer arrangements		1,962,800		2,799,263
MSRs		2,825,501		1,755,236
REO		10,473		28,709
		13,358,761		10,924,117
Other		378,098		510,190
Total assets	$	13,868,600	$	11,492,011
Liabilities
Debt:
Short-term	$	7,070,191	$	6,407,131
Long-term		3,988,003		2,267,278
		11,058,194		8,674,409
Other		331,079		520,743
Total liabilities		11,389,273		9,195,152
Shareholders’ equity		2,479,327		2,296,859
Total liabilities and shareholders’ equity	$	13,868,600	$	11,492,011

Total assets increased by approximately $2.4 billion, or 21%, during the period from December 31, 2020 through September 30, 2021, primarily due to a $1.4 billion increase in Loans acquired for sale at fair value and a $1.1 billion increase in MSRs, partially offset by a $836.5 million decrease in Deposits securing credit risk transfer arrangements.

Asset Acquisitions

Our asset acquisitions are summarized below.

Correspondent Production

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

	Quarter ended September 30,				Nine months ended September 30,
	2021		2020		2021		2020
	(in thousands)
Correspondent loan purchases:
Agency-eligible (1)	$	29,590,782	$	28,520,876	$	96,012,537	$	67,007,231
Government-insured or guaranteed - for sale to PLS		16,128,254		17,908,020		51,343,908		43,654,695
Advances to home equity lines of credit		25		265		81		2,505
	$	45,719,061	$	46,429,161	$	147,356,526	$	110,664,431

(1)	Agency eligibility refers to the eligibility of loans for sale to Agencies. The Company sells or finances a portion of its Agency-eligible loan production to other investors.

During the quarter and nine months ended September 30, 2021, we purchased for sale $45.7 billion and $147.4 billion, respectively, in fair value of correspondent production loans as compared to $46.4 billion and $110.7 billion during the quarter and nine months ended September 30, 2020, respectively. Our ability to increase the level of correspondent production over the nine months ended September 30, 2021, compared to the same period in 2020, reflects the favorable interest rate environment along with continuing expansion of our correspondent seller network and our efforts aimed at maximizing the share of our correspondent sellers’ production that is sold to us.

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 September 30,					Nine months ended September 30,
	2021		2020			2021		2020
	(in thousands)
Credit sensitive assets:
Change in firm commitment to purchase CRT securities
Fair value			$	42,399				$	(258,307	)
Expected face amount				(95,033	)				197,481
				(52,634	)				(60,826	)

Loans secured by investment properties, net of associated asset-backed financing	$	19,203		—		$	28,815		—

Interest rate sensitive assets:
MSRs received in loan sales and purchased		424,912		265,278			1,245,546		717,227
MBS (net of sales)		249,234		153,725			631,430		167,721
ESS received pursuant to a recapture agreement		—		531			557		1,393
		674,146		419,534			1,877,533		886,341
	$	693,349	$	366,900		$	1,906,348	$	825,515

Our acquisitions during the quarter and nine months ended September 30, 2021 and 2020 were financed through the use of a combination of proceeds from borrowings, liquidations of existing investments and 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.

Investment Portfolio Composition

Mortgage-Backed Securities

Following is a summary of our MBS holdings:

	September 30, 2021									December 31, 2020
					Average									Average
	Fair				Life					Fair				Life
	value		Principal		(in years)		Coupon			value		Principal		(in years)		Coupon
	(dollars in thousands)
Agency:
Freddie Mac	$	868,981	$	858,835		8.8		2.1	%	$	1,311,036	$	1,253,755		4.4		2.7	%
Fannie Mae		1,602,052		1,583,741		8.8		2.1	%		902,886		863,758		5.3		2.5	%
	$	2,471,033	$	2,442,576						$	2,213,922	$	2,117,513

Credit Risk Transfer Transactions

Following is a summary of the composition of our holdings of CRT arrangements.

	September 30, 2021			December 31, 2020
	(in thousands)
Carrying value of CRT arrangements:
Derivative and credit risk transfer strip assets (liabilities), net
CRT strips	$	(39,519	)	$	(202,792	)
CRT derivatives		31,891			31,795
		(7,628	)		(170,997	)
Deposits securing CRT arrangements		1,962,800			2,799,263
Interest-only security payable at fair value		(12,000	)		(10,757	)
	$	1,943,172		$	2,617,509
UPB of loans subject to credit guarantee obligations	$	35,371,965		$	58,697,942

Following is a summary of the composition of the loans underlying our investment in CRT arrangements as of September 30, 2021:

		Year of origination
		2020		2019		2018		2017		2016		2015		Total
	(in millions)
UPB:
Outstanding		$	6,674	$	16,589	$	4,533	$	3,730	$	2,922	$	924	$	35,372
Cumulative defaults		$	12	$	136	$	251	$	488	$	181	$	46	$	1,114
Cumulative losses		$	—	$	1	$	13	$	44	$	15	$	5	$	78

		Year of origination
Original debt-to income ratio		2020			2019			2018			2017			2016			2015			Total
	(in millions)
<25%		$	1,317		$	2,436		$	417		$	452		$	420		$	114		$	5,156
25 - 30%			1,059			2,109			374			421			398			116			4,477
30 - 35%			1,191			2,570			537			577			501			163			5,539
35 - 40%			1,175			2,976			744			686			559			188			6,328
40 - 45%			1,179			3,591			1,055			970			781			280			7,856
>45%			753			2,907			1,406			624			263			63			6,016
		$	6,674		$	16,589		$	4,533		$	3,730		$	2,922		$	924		$	35,372
Weighted average			33.6	%		35.8	%		38.9	%		36.6	%		35.1	%		35.6	%		35.8	%

		Year of origination
Origination FICO credit score		2020		2019		2018		2017		2016		2015		Total
	(in millions)
600 - 649		$	52	$	237	$	98	$	42	$	30	$	17	$	476
650 - 699			359		1,617		934		585		372		180		4,047
700 - 749			1,657		4,981		1,634		1,294		948		296		10,810
750 or greater			4,597		9,707		1,856		1,803		1,572		431		19,966
Not available			9		47		11		6		—		—		73
		$	6,674	$	16,589	$	4,533	$	3,730	$	2,922	$	924	$	35,372
Weighted average			762		751		735		743		749		741		750

		Year of origination
Origination loan-to value ratio		2020			2019			2018			2017			2016			2015			Total
	(in millions)
<80%		$	3,082		$	5,804		$	1,475		$	1,189		$	1,171		$	362		$	13,083
80-85%			1,114			3,157			1,084			1,046			776			247			7,424
85-90%			436			946			211			188			163			50			1,994
90-95%			614			1,737			511			461			327			104			3,754
95-100%			1,428			4,945			1,252			846			485			161			9,117
		$	6,674		$	16,589		$	4,533		$	3,730		$	2,922		$	924		$	35,372
Weighted average			81.0	%		83.4	%		83.4	%		82.7	%		80.9	%		81.2	%		82.6	%

		Year of origination
Current loan-to value ratio (1)		2020			2019			2018			2017			2016			2015			Total
	(in millions)
<80%		$	5,891		$	14,987		$	4,342		$	3,695		$	2,916		$	923		$	32,754
80-85%			601			1,204			140			27			4			1			1,977
85-90%			152			329			40			6			1			—			528
90-95%			28			55			11			—			—			—			94
95-100%			2			12			—			1			—			—			15
>100%			—			2			—			1			1			—			4
		$	6,674		$	16,589		$	4,533		$	3,730		$	2,922		$	924		$	35,372
Weighted average			67.2	%		66.9	%		63.1	%		58.0	%		52.7	%		49.9	%		63.9	%

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

		Year of origination
Geographic distribution		2020		2019		2018		2017		2016		2015		Total
	(in millions)
CA		$	709	$	1,605	$	545	$	406	$	548	$	167	$	3,980
FL			733		1,641		572		394		316		84		3,740
TX			821		1,466		362		321		374		149		3,493
VA			335		726		166		183		212		86		1,708
MD			248		649		193		206		190		52		1,538
Other			3,828		10,502		2,695		2,220		1,282		386		20,913
		$	6,674	$	16,589	$	4,533	$	3,730	$	2,922	$	924	$	35,372

		Year of origination
Regional geographic distribution (1)		2020		2019		2018		2017		2016		2015		Total
	(in millions)
Northeast		$	587	$	1,855	$	503	$	511	$	360	$	132	$	3,948
Southeast			2,248		5,745		1,633		1,294		931		287		12,138
Midwest			594		1,657		364		348		257		67		3,287
Southwest			1,785		3,807		881		738		560		201		7,972
West			1,460		3,525		1,152		839		814		237		8,027
		$	6,674	$	16,589	$	4,533	$	3,730	$	2,922	$	924	$	35,372

(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		2020		2019		2018		2017		2016		2015		Total
	(in millions)
Delinquency
Current - 89 Days		$	6,572	$	15,977	$	4,221	$	3,573	$	2,857	$	908	$	34,108
90 - 179 Days			9		57		33		15		24		13		151
180+ Days			93		553		277		142		40		3		1,108
Foreclosure			—		2		2		—		1		—		5
		$	6,674	$	16,589	$	4,533	$	3,730	$	2,922	$	924	$	35,372
Bankruptcy		$	1	$	24	$	24	$	12	$	12	$	3	$	76

Cash Flows

Our cash flows for the nine months ended September 30, 2021 and 2020 are summarized below:

	Nine months ended September 30,
	2021			2020
	(in thousands)
Operating activities	$	(2,714,874	)	$	652,638
Investing activities		1,095,439			1,238,386
Financing activities		1,693,472			(1,716,594	)
Net cash flows	$	74,037		$	174,430

Our cash flows resulted in a net increase in cash of $74.0 million during the nine months ended September 30, 2021, as discussed below.

Operating activities

Cash used in operating activities totaled $2.7 billion during the nine months ended September 30, 2021, as compared to cash provided by our operating activities of $652.6 million during the nine months ended September 30, 2020. Cash flows from operating activities primarily reflect cash flows from loans acquired for sale as shown below:

	Nine months ended September 30,
	2021			2020
	(in thousands)
Operating cash flows from:
Loans acquired for sale	$	(2,568,648	)	$	(277,339	)
Other		(146,226	)		929,977
	$	(2,714,874	)	$	652,638

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 held for sale increased during the nine months ended September 30, 2021, as compared to September 30, 2020. Other operating cash flows reflect the change in our hedging results between the nine months ended September 30, 2021 and the nine months ended September 30, 2020.

Investing activities

Net cash provided by our investing activities was $1.1 billion for the nine months ended September 30, 2021, as compared to net cash provided by our investing activities of $1.2 billion for the nine months ended September 30, 2020, due primarily to the increase in net investments in MBS, partially offset by increased distributions from credit risk transfer agreements, reductions of margin deposits and the settlement of excess servicing spread payable from PFSI during the nine months ended September 30, 2021.

Financing activities

Net cash provided by our financing activities was $1.7 billion for the nine months ended September 30, 2021, as compared to net cash used in our financing activities of $1.7 billion for the nine months ended September 30, 2020. This change reflects the increased borrowings to finance our investment activities.

As discussed below in Liquidity and Capital Resources, our Manager continually evaluates and pursues 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 remains uncertain and difficult to predict. For further discussion of this and other risks applicable to us, see our Annual Report on Form 10-K for the year ended December 31, 2020 under the heading “Risk Factors.”

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 4.46 and 3.78 at September 30, 2021 and December 31, 2020, 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 September 30,				Nine months ended September 30,
Assets sold under agreements to repurchase		2021		2020		2021		2020
	(in thousands)
Average balance outstanding	$	6,796,525	$	4,054,686	$	6,177,250	$	4,986,701
Maximum daily balance outstanding	$	7,776,643	$	7,170,860	$	8,725,300	$	8,664,587
Ending balance	$	7,025,147	$	5,439,835

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 $11.8 billion at September 30, 2021.

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 to two years;

•

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:

•

a minimum of $75 million in unrestricted cash and cash equivalents among the Company and/or our subsidiaries; a minimum of $75 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 at PMH;

•

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 7:1 for the Company and our Operating Partnership; and

•

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

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:

•

a minimum in unrestricted cash and cash equivalents of $100 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%;

•

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 four 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 September 30, 2021, we have not entered into any off-balance sheet arrangements.

All debt financing arrangements that matured between September 30, 2021, 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 September 30, 2021:

Counterparty	Amount at risk
	(in thousands)
Royal Bank of Canada	$	69,543
Barclays Capital Inc.		65,857
Bank of America, N.A.		61,977
Credit Suisse First Boston Mortgage Capital LLC		61,885
JPMorgan Chase & Co.		26,945
BNP Paribas Corporate & Institutional Banking		22,436
Wells Fargo Securities, LLC		16,406
Daiwa Capital Markets America Inc.		15,387
Citibank, N.A.		11,839
Goldman Sachs & Co. LLC		7,826
Morgan Stanley Bank, N.A.		16,706
Amherst Pierpont Securities LLC		3,897
	$	380,704

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. Changes in interest rates are reflected in the prepayment speeds underlying these investments and in the pricing spread (an element of the discount rate) used in their valuation. 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 the loans underlying such arrangements.

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 September 30, 2021, 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
	(dollars in thousands)
Change in fair value	$	55,684	$	60,085	$	45,936	$	(62,572	)	$	(97,359	)	$	(281,952	)

Mortgage Servicing Rights

The following tables summarize the estimated change in fair value of MSRs as of September 30, 2021, given several shifts in pricing spread, prepayment speeds and annual per-loan cost of servicing:

Change in fair value attributable to shift in:	-20%		-10%		-5%		+5%			+10%			+20%
	(dollars in thousands)
Pricing spread	$	172,935	$	84,070	$	41,458	$	(40,345	)	$	(79,618	)	$	(155,098	)
Prepayment speed	$	269,677	$	129,367	$	63,398	$	(60,976	)	$	(119,667	)	$	(230,689	)
Annual per-loan cost of servicing	$	69,103	$	34,552	$	17,276	$	(17,276	)	$	(34,552	)	$	(69,103	)

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)
Change in fair value	$	66,870	$	32,812	$	16,220	$	(16,120	)	$	(31,880	)	$	(62,614	)

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)
Change in fair value	$	(60,516	)	$	(36,060	)	$	(16,398	)	$	13,640	$	24,956	$	34,382

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 changes in our internal control over financial reporting during the quarter ended September 30, 2021 that has materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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 September 30, 2021, we were not involved in any material legal actions, claims or proceedings.

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

There were no sales of unregistered equity securities during the quarter and nine months ended September 30, 2021.

The following table provides information about our common share of beneficial interest repurchases during the quarter ended September 30, 2021:

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)
July 1, 2021 – July 31, 2021		39	$	19.22		39	$	144,836
August 1, 2021 – August 30, 2021		793	$	18.93		793	$	129,825
September 1, 2021 – September 30, 2021		73	$	19.43		73	$	128,407

(1)

On June 11, 2021, the Company’s board of trustees approved an increase to the Company’s common share of beneficial interest repurchase authorization from $300 million to $400 million. Under the repurchase program, as amended, the Company may repurchase up to $400 million of its outstanding common shares of beneficial interest.

Item 3. Defaults Upon Senior Securities

None

Item 4. Mine Safety Disclosures

Not applicable

Item 5. Other Information

None

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

3.5	Articles Supplementary classifying and designating the 6.75% Series C Cumulative Redeemable Preferred Shares of Beneficial Interest.	8-A	August 20, 2021

4.1	Specimen Certificate for the 6.75% Series C Cumulative Redeemable Preferred Shares of Beneficial Interest.	8-A	August 20, 2021


10.1	Purchase Agreement, dated, August 17, 2021, among PennyMac Mortgage Investment Trust, PennyMac Operating Partnership, L.P., PNMAC Capital Management, LLC and Morgan Stanley & Co. LLC, BofA Securities, Inc., Goldman Sachs & Co. LLC, Keefe , Bruyette & Woods, Inc., RBC Capital Markets, LLC, UBS Securities LLC and Wells Fargo Securities, LLC.	8-K	August 24, 2021

10.2	Third Amendment to the Amended and Restated Limited Partnership Agreement of PennyMac Operating Partnership, L.P., as amended, dated as of August 24, 2021.	8-K	August 24, 2021

10.3	Amendment No. 3 to Fourth Amended and Restated Flow Servicing Agreement, dated as of September 29, 2021, by and between PennyMac Loan Services, LLC and PennyMac Operating Partnership, L.P.	*

10.4^	Amendment No. 3 to Series 2017-VF1 Indenture Supplement, dated as of August 9, 2021, by and among PMT ISSUER TRUST – FSMR, Citibank, N.A., PennyMac Corp. and Credit Suisse First Boston Mortgage Capital, LLC.	*

10.5^	Joint Amendment No. 2 to the Series 2017-VF1 Repurchase Agreement and Amendment No. 5 to the Pricing Side Letter, dated as of August 9, 2021 by and among Credit Suisse First Boston Mortgage Capital, LLC, Credit Suisse AG, Cayman Islands Branch, Citibank, N.A., PennyMac Corp. and PennyMac Mortgage Investment Trust.	*

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 Daniel S. Perotti 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.	**

32.2**	Certification of Daniel S. Perotti 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 September 30, 2021 and December 31, 2020 (ii) the Consolidated Statements of Operation for the quarter and nine months ended September 30, 2021 and September 30, 2020, (iii) the Consolidated Statements of Changes in Stockholders’ Equity for the quarter and nine months ended September 30, 2021 and September 30, 2020, (iv) the Consolidated Statements of Cash Flows for the nine months ended September 30, 2021 and September 30, 2020 and (v) the Notes to the Consolidated Financial Statements.	*
101.INS	Inline 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)

*	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, as amended except as shall be expressly set forth by specific reference in such filing.

˄	Portions of the exhibit have been redacted.

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: November 5, 2021	By:	/s/ David A. Spector
		David A. Spector
		Chairman and Chief Executive Officer (Principal Executive Officer)

Dated: November 5, 2021	By:	/s/ Daniel S. Perotti
		Daniel S. Perotti
		Senior Managing Director and Chief Financial Officer (Principal Financial Officer)