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

Quarter ended

March 31, 2020

(in thousands)

Number of common shares issued

Gross proceeds

Net proceeds

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 March 31, 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	PMT/PB	New York Stock Exchange
Common Shares of Beneficial Interest, $0.01 Par Value	PMT	New York Stock Exchange

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

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

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

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

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

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

Class		Outstanding at May 6, 2021
Common Shares of Beneficial Interest, $0.01 par value		97,938,350

PENNYMAC MORTGAGE INVESTMENT TRUST

FORM 10-Q

March 31, 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 Operation	6
	Consolidated Statements of Changes in Shareholders’ Equity	7
	Consolidated Statements of Cash Flows	8
	Notes to Consolidated Financial Statements	10
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	58
	Our Company	58
	Results of Operations	61
	Net Investment Income	62
	Expenses	71
	Balance Sheet Analysis	74
	Asset Acquisitions	74
	Investment Portfolio Composition	75
	Cash Flows	78
	Liquidity and Capital Resources	79
	Off-Balance Sheet Arrangements and Aggregate Contractual Obligations	81
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	82
Item 4.	Controls and Procedures	83
PART II. OTHER INFORMATION		84
Item 1.	Legal Proceedings	84
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	84
Item 3.	Defaults Upon Senior Securities	84
Item 4.	Mine Safety Disclosures	84
Item 5.	Other Information	84
Item 6.	Exhibits	85

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

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

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

•

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

•

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

•

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

•

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

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

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

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

•

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

•

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 (“CFPB”) and its issued and future rules and the enforcement thereof;

•

changes in government support of homeownership;

•

changes in government or government-sponsored home affordability programs;

•

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)

	March 31,			December 31,
	2021			2020
	(in thousands, except share information)
ASSETS
Cash	$	92,842		$	57,704
Short-term investments at fair value		108,375			127,295
Mortgage-backed securities at fair value pledged to creditors		1,916,485			2,213,922
Loans acquired for sale at fair value ($4,590,193 and $3,501,847 pledged to creditors, respectively)		4,646,761			3,551,890
Loans at fair value ($111,228 and $147,410 pledged to creditors, respectively)		117,647			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 and credit risk transfer strip assets ($58,134 and $58,699 pledged to creditors, respectively)		182,969			164,318
Deposits securing credit risk transfer arrangements pledged to creditors		2,664,420			2,799,263
Mortgage servicing rights at fair value ($2,423,063 and $1,742,905 pledged to creditors, respectively)		2,441,214			1,755,236
Servicing advances ($74,522 pledged to creditors at March 31, 2021)		150,160			121,820
Real estate acquired in settlement of loans ($10,250 and $15,365 pledged to creditors, respectively)		17,715			28,709
Due from PennyMac Financial Services, Inc.		7,521			8,152
Other		176,145			380,218
Total assets	$	12,522,254		$	11,492,011
LIABILITIES
Assets sold under agreements to repurchase	$	6,091,973		$	6,309,418
Mortgage loan participation purchase and sale agreements		68,176			16,851
Notes payable secured by credit risk transfer and mortgage servicing assets		2,897,794			1,924,999
Exchangeable senior notes		494,097			196,796
Asset-backed financing of a variable interest entity at fair value		101,238			134,726
Interest-only security payable at fair value		18,922			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		229,970			263,473
Accounts payable and accrued liabilities		122,837			124,809
Due to PennyMac Financial Services, Inc.		68,644			87,005
Income taxes payable		42,493			23,563
Liability for losses under representations and warranties		28,967			21,893
Total liabilities		10,165,111			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 12,400,000 shares, liquidation preference $310,000,000		299,707			299,707
Common shares of beneficial interest—authorized, 500,000,000 common shares of $0.01 par value; issued and outstanding, 97,938,350 and 97,862,625 common shares, respectively		979			979
Additional paid-in capital		2,137,933			2,096,907
Accumulated deficit		(81,476	)		(100,734	)
Total shareholders’ equity		2,357,143			2,296,859
Total liabilities and shareholders’ equity	$	12,522,254		$	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):

	March 31,		December 31,
	2021		2020
	(in thousands)
ASSETS
Loans at fair value	$	109,845	$	143,707
Derivative and credit risk transfer assets at fair value		58,134		58,699
Deposits securing credit risk transfer arrangements		2,664,420		2,799,263
Other—interest receivable		298		392
	$	2,832,697	$	3,002,061
LIABILITIES
Asset-backed financing at fair value	$	101,238	$	134,726
Derivative and credit risk transfer liabilities at fair value		123,028		229,696
Interest-only security payable at fair value		18,922		10,757
Accounts payable and accrued liabilities—interest payable		298		392
	$	243,486	$	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 March 31,
	2021			2020
	(in thousands, except common share amounts)
Net investment income (loss)
Net gains on loans acquired for sale:
From nonaffiliates	$	51,274		$	44,614
From PennyMac Financial Services, Inc.		1,738			4,161
		53,012			48,775
Loan origination fees		52,902			23,928
Net gains (losses) on investments:
From nonaffiliates		81,540			(800,990	)
From PennyMac Financial Services, Inc.		1,651			(14,141	)
		83,191			(815,131	)
Net loan servicing fees:
From nonaffiliates
Contractually specified		116,287			94,469
Other		16,245			7,191
		132,532			101,660
Change in fair value of mortgage servicing rights		278,282			(627,201	)
Mortgage servicing rights hedging results		(374,403	)		767,186
		36,411			241,645
From PennyMac Financial Services, Inc.		13,634			2,927
		50,045			244,572
Interest income:
From nonaffiliates		36,309			70,149
From PennyMac Financial Services, Inc.		1,280			1,974
		37,589			72,123
Interest expense:
To nonaffiliates		75,921			79,850
To PennyMac Financial Services, Inc.		387			1,218
		76,308			81,068
Net interest expense		(38,719	)		(8,945	)
Results of real estate acquired in settlement of loans		837			32
Other		129			252
Net investment income (loss)		201,397			(506,517	)
Expenses
Earned by PennyMac Financial Services, Inc.:
Loan fulfillment fees		60,835			41,940
Loan servicing fees		19,093			14,521
Management fees		8,449			9,055
Loan origination		9,308			4,249
Loan collection and liquidation		3,857			750
Professional services		2,224			1,496
Compensation		2,185			519
Safekeeping		1,941			1,658
Other		2,477			3,720
Total expenses		110,369			77,908
Income (loss) before provision for income taxes		91,028			(584,425	)
Provision for income taxes		19,425			10,248
Net income (loss)		71,603			(594,673	)
Dividends on preferred shares		6,234			6,234
Net income (loss) attributable to common shareholders	$	65,369		$	(600,907	)
Earnings (loss) per common share
Basic	$	0.67		$	(5.99	)
Diluted	$	0.67		$	(5.99	)
Weighted average common shares outstanding
Basic		97,892			100,245
Diluted		98,103			100,245
Dividends declared per common share	$	0.47		$	0.25

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 March 31, 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		—		—		—			—			—			71,603			71,603
Share-based compensation		—		—		75			—			1,040			—			1,040
Recognition of cash conversion option included in issuance of Exchangeable Notes		—		—		—			—			39,986			—			39,986
Dividends:
Preferred shares		—		—		—			—			—			(6,236	)		(6,236	)
Common shares ($0.47 per share)		—		—		—			—			—			(46,109	)		(46,109	)
Balance at March 31, 2021		12,400	$	299,707		97,938		$	979		$	2,137,933		$	(81,476	)	$	2,357,143

	Quarter ended March 31, 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		—		—		—			—			—			(594,673	)		(594,673	)
Share-based compensation		—		—		201			2			(1,445	)		—			(1,443	)
Issuance of common shares		—		—		241			2			5,652			—			5,654
Issuance costs relating to common shares		—		—		—			—			(57	)		—			(57	)
Dividends:
Preferred shares		—		—		—			—			—			(6,236	)		(6,236	)
Common shares ($0.25 per share)		—		—		—			—			—			(25,009	)		(25,009	)
Repurchase of common shares		—		—		(783	)		(8	)		(5,775	)		—			(5,783	)
Balance at March 31, 2020		12,400	$	299,707		99,841		$	998		$	2,126,264		$	(603,601	)	$	1,823,368

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

PENNYMAC MORTGAGE INVESTMENT TRUST AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

	Quarter ended March 31,
	2021			2020
	(in thousands)
Cash flows from operating activities
Net income (loss)	$	71,603		$	(594,673	)
Adjustments to reconcile net income to net cash (used in) provided by operating activities:
Net gains on loans acquired for sale at fair value		(53,012	)		(48,775	)
Net (gains) losses on investments		(83,191	)		815,131
Change in fair value of mortgage servicing rights		(278,282	)		627,201
Mortgage servicing rights hedging results		374,403			(767,186	)
Accrual of interest on excess servicing spread purchased from PennyMac Financial Services, Inc.		(1,280	)		(1,974	)
Capitalization of interest and fees on loans at fair value		(198	)		—
Accrual of unearned discounts and amortization of purchase premiums on mortgage-backed securities, loans at fair value, and asset-backed financing of a VIE		909			14,200
Amortization of debt issuance costs		7,384			3,127
Results of real estate acquired in settlement of loans		(837	)		(32	)
Share-based compensation expense		1,738			186
Purchase of loans acquired for sale at fair value from nonaffiliates		(53,234,735	)		(30,919,685	)
Purchase of loans acquired for sale at fair value from PennyMac Financial Services, Inc.		—			(2,246,127	)
Sale to nonaffiliates and repayment of loans acquired for sale at fair value		33,318,157			19,718,151
Sale of loans acquired for sale to PennyMac Financial Services, Inc.		18,420,614			14,509,209
Repurchase of loans subject to representation and warranties		(16,094	)		(9,919	)
(Increase) decrease in servicing advances		(28,686	)		9,661
Decrease (increase) in due from PennyMac Financial Services, Inc.		688			(750	)
(Increase) decrease in other assets		(366,695	)		607,581
Decrease in accounts payable and accrued liabilities		(1,988	)		(28,355	)
(Decrease) increase in due to PennyMac Financial Services, Inc.		(18,683	)		8,031
Increase in income taxes payable		18,930			10,248
Net cash (used in) provided by operating activities		(1,869,255	)		1,705,250
Cash flows from investing activities
Net decrease (increase) in short-term investments		18,920			(47,124	)
Purchase of mortgage-backed securities at fair value		(1,259,189	)		(1,615,486	)
Sale and repayment of mortgage-backed securities at fair value		1,482,986			611,664
Repurchase of loans at fair value		—			(1,058	)
Sale and repayment of loans at fair value		32,926			15,824
Repayment of excess servicing spread receivable from PennyMac Financial Services, Inc.		134,624			9,308
Net settlement of derivative financial instruments		4,820			(32,452	)
Distribution from credit risk transfer agreements		190,943			145,801
Sale of real estate acquired in settlement of loans		12,111			15,943
Decrease in margin deposits		312,741			293,620
Net cash provided by (used in) investing activities		930,882			(603,960	)

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

PENNYMAC MORTGAGE INVESTMENT TRUST AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

	Quarter ended March 31,
	2021			2020
	(in thousands)
Cash flows from financing activities
Sale of assets under agreements to repurchase		56,191,062			42,128,403
Repurchase of assets sold under agreements to repurchase		(56,410,371	)		(42,429,163	)
Issuance of mortgage loan participation purchase and sale agreements		1,305,282			1,222,959
Repayment of mortgage loan participation purchase and sale agreements		(1,253,957	)		(1,222,959	)
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		(130,387	)		(79,011	)
Advances under notes payable secured by mortgage servicing assets		887,971			—
Repayment under secured notes payable secured by mortgage servicing assets		(437,970	)		—
Issuance of Exchangeable Notes		345,000			—
Repayment of asset-backed financing of a variable interest entity at fair value		(31,798	)		(11,358	)
Repurchase of assets sold to PennyMac Financial Services, Inc. under agreement to repurchase		(80,862	)		(7,746	)
Payment of debt issuance costs		(16,588	)		(1,771	)
Payment of contingent underwriting fees		—			(76	)
Payment of dividends to preferred shareholders		(6,236	)		(6,236	)
Payment of dividends to common shareholders		(46,093	)		(47,193	)
Issuance of common shares		—			5,654
Payment of issuance costs related to common shares		—			(57	)
Payment of vested share-based compensation withholdings		(698	)		(1,629	)
Repurchase of common shares		—			(5,783	)
Net cash provided by (used in) financing activities		973,511			(105,966	)
Net increase in cash		35,138			995,324
Cash at beginning of quarter		57,704			104,056
Cash at end of quarter	$	92,842		$	1,099,380

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”), 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 (“ASC”) for interim financial information and with the Securities and Exchange Commission’s instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, these financial statements and notes do not include all of the information required by GAAP for complete financial statements. This interim consolidated information should be read together with the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 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 with early adoption allowed beginning in the quarter ending March 31, 2021 using either the modified retrospective or full retrospective method. The Company intends to adopt ASU 2020-06 beginning in the quarter ending March 31, 2022.

As detailed in Note 14 – Long-Term Debt, the Company has issued $555 million in unpaid principal balance of exchangeable senior notes that are exchangeable for 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 PennyMac Corp. (“PMC”). As a result of this feature and PMT’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 added to the carrying value of the Exchangeable Notes and the accumulated accrual of the exchange value 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.

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 (“Recourse Obligations”); 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 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 such credit risk.

CRT Agreements are structured such that loans that reach a specific number of days delinquent (including loans in forbearance which also includes those subject to the forbearance provided in the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”)) trigger losses chargeable to the CRT Agreements based on the size of the loan and a contractual schedule of loss severity. Therefore, the risks associated with delinquency and foreclosure may in some instances be greater than the risks associated with owning the related loans because the structure of the CRT Agreements provides that the Company may be required to absorb losses in the event of delinquency or foreclosure even when there is ultimately no loss realized with respect to such loans (e.g., as a result of a borrower’s re-performance). 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, 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, 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 March 31,
		2021		2020
	(in thousands)
Loan fulfillment fees earned by PLS		$	60,835	$	41,940

Sourcing fees received from PLS included in Net gain on loans acquired for sale		$	1,738	$	4,161
UPB of loans sold to PLS		$	17,559,575	$	13,870,280

Purchases of loans acquired for sale from PLS		$	—	$	2,246,127

Tax service fees paid to PLS		$	8,192	$	3,980

March 31, 2021

December 31, 2020

(in thousands)

Loans included in Loans acquired for sale at fair value

pending sale to PLS

327,881

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

To the extent that these non-distressed loans become delinquent, PLS is entitled to an additional servicing fee per loan ranging from $10 to $55 per month and based on the delinquency, bankruptcy and foreclosure status of the loan or $75 per month if the underlying mortgaged property becomes 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 whole mortgage loans are charged based on a monthly per-loan dollar amount, with the actual dollar amount for each loan based on the delinquency, bankruptcy and/or foreclosure status of such loan or whether the underlying mortgage property has become REO. The base servicing fee rates for distressed whole mortgage loans range from $30 per month for current loans up to $95 per month for loans where foreclosure proceedings have commenced. The base servicing fee rate for REO is $75 per month. To the extent that the Company rents its REO under its REO rental program, PLS is entitled to an REO rental fee of $30 per month per REO, an REO property lease renewal fee of $100 per lease renewal, and a property management fee in an amount equal to its cost if property management services and/or any related software costs are outsourced to a third-party property management firm or nine percent of gross rental income if PLS provides property management services directly.

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 unpaid principal balance of all recaptured loans, to (ii) the aggregate unpaid principal balance of all mortgage loans for which the Company held the MSRs and that were refinanced or otherwise paid off in such month. PFSI has further agreed to allocate sufficient resources to target a recapture rate of 15%.

The 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 March 31,
		2021		2020
	(in thousands)
Loan servicing fees:
Loans acquired for sale at fair value		$	543	$	536
Loans at fair value			137		300
MSRs			18,413		13,685
		$	19,093	$	14,521
Average investment in:
Loans acquired for sale at fair value		$	3,618,980	$	3,215,418
Loans at fair value:
Distressed		$	7,805	$	11,249
Held in a VIE		$	129,122	$	253,759
Average MSR portfolio UPB		$	177,161,626	$	136,687,324

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 Company’s Manager and the independent trustees and after approval by a majority of the Company’s independent trustees.

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

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

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

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

Following is a summary of management fee expenses:

		Quarter ended March 31,
		2021		2020
	(in thousands)
Base management		$	8,449	$	9,055
Performance incentive			—		—
		$	8,449	$	9,055
Average shareholders' equity amounts used to calculate base management fee expense		$	2,310,261	$	2,466,740

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 June 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 March 31,
		2021		2020
	(in thousands)
Reimbursement of:
Common overhead incurred by PCM and its affiliates		$	571	$	1,540
Compensation			165		120
Expenses incurred on the Company’s behalf, net			1,336		1,271
		$	2,072	$	2,931
Payments and settlements during the quarter (1)		$	112,741	$	33,683

(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 (as defined below).

To the extent PLS refinances any of the loans relating to the ESS the Company has acquired, the Spread Acquisition Agreement also contains recapture provisions requiring that PLS transfer to the Company, at no cost, the ESS relating to a certain percentage of the unpaid principal balance of the newly originated loans. However, under the Spread Acquisition Agreement, in any month where

the transferred ESS relating to newly originated Ginnie Mae loans is not equal to at least 90% of the product of the excess servicing fee rate and the unpaid principal balance of the refinanced loans, PLS is also required to transfer additional ESS or cash in the amount of such shortfall. Similarly, in any month where the transferred ESS relating to modified Ginnie Mae loans is not equal to at least 90% of the product of the excess servicing fee rate and the unpaid principal balance of the modified loans, the Spread Acquisition Agreement contains provisions that require PLS to transfer additional ESS or cash in the amount of such shortfall. To the extent the fair market value of the aggregate ESS to be transferred for the applicable month is less than $200,000, PLS may, at its option, settle its recapture liability to the Company in cash in an amount equal to such fair market value in lieu of transferring such ESS. 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 March 31,
		2021		2020
	(in thousands)
ESS:
Received pursuant to a recapture agreement		$	557	$	379
Repayments		$	134,624	$	9,308
Interest income		$	1,280	$	1,974
Net gain (loss) included in Net gains (losses) on investments:
Valuation changes		$	1,037	$	(14,522	)
Recapture income			614		381
		$	1,651	$	(14,141	)


		March 31, 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 March 31, 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.

In connection with the GNMA MSR Facility, PLS pledges and/or sells to the Issuer Trust participation certificates representing beneficial interests in MSRs and ESS pursuant to the terms of the PC Repurchase Agreement. In return, the Issuer Trust (a) has issued to PLS, pursuant to the terms of an indenture, the Series 2016-MSRVF1 Variable Funding Note, dated December 19, 2016, known as the “PNMAC GMSR ISSUER TRUST MSR Collateralized Notes, Series 2016-MSRVF1” (the “VFN”), and (b) may, from time to time pursuant to the terms of any supplemental indenture, issue to institutional investors additional term notes (“Term Notes”), in each case secured on a pari passu basis by the participation certificates relating to the MSRs and ESS. The maximum principal balance of the VFN is $1 billion.

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

		Quarter ended March 31,
		2021		2020
	(in thousands)
Net repayments of assets sold under agreements to repurchase		$	80,862	$	7,746
Interest expense		$	387	$	1,218

	March 31, 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:

	March 31, 2021		December 31, 2020
	(in thousands)
Due from PFSI:
MSR recapture	$	—	$	296
Other		7,521		7,856
	$	7,521	$	8,152
Due to PFSI:
Allocated expenses and expenses and costs paid by PFSI on PMT’s behalf	$	23,325	$	38,142
Fulfillment fees		17,347		20,873
Correspondent production fees		12,937		13,065
Management fees		8,449		8,686
Loan servicing fees		6,586		6,213
Interest on Assets sold to PFSI under agreement to repurchase		—		26
	$	68,644	$	87,005

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

Balance sheet line including advance amount	March 31, 2021		December 31, 2020
	(in thousands)
Loan servicing advances	$	150,160	$	121,820
Real estate acquired in settlement of loans		6,788		10,334
	$	156,948	$	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 March 31,
		2021		2020
	(in thousands)
Cash flows:
Proceeds from sales		$	33,318,157	$	19,718,151
Loan servicing fees received net of guarantee fees		$	116,287	$	94,469

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

	March 31, 2021		December 31, 2020
	(in thousands)
UPB of loans outstanding	$	183,271,774	$	170,502,361
Collection Status (UPB) (1)
Delinquency :
30-89 days delinquent	$	920,655	$	1,235,981
90 or more days delinquent:
Not in foreclosure	$	3,788,000	$	4,428,915
In foreclosure	$	24,647	$	27,494
Bankruptcy	$	154,197	$	148,866
Custodial funds managed by the Company (2)	$	6,571,084	$	6,086,724
Delinquent loans in COVID-19 pandemic-related forbearance:
30-89 days	$	511,015	$	530,353
90 days or more	$	3,364,821	$	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 transfers of loans subject to CRT arrangements were accounted for as sales. 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’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 different types of CRT arrangements. Under the new arrangements, the Company sold loans subject to agreements that required the Company to purchase securities that absorb incurred credit losses on such loans. The Company recognized these 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 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 included on the consolidated balance sheet in Derivative and credit risk transfer strip assets and 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 March 31,
		2021			2020
	(in thousands)
UPB of loans sold					$	14,683,055
Investments — Change in expected face amount of firm commitment to purchase CRT securities					$	554,690
Investment income (loss):
Net gains on loans acquired for sale — Fair value of firm commitment to purchase CRT securities recognized upon sale of loans		$	—		$	(26,649	)
Net gains (losses) on investments:
Derivative and CRT strips:
CRT derivatives
Realized			23,496			17,201
Valuation changes			12,874			(300,943	)
			36,370			(283,742	)
CRT strips
Realized			32,604			14,750
Valuation changes			93,222			(229,875	)
			125,826			(215,125	)
Interest-only security payable at fair value			(8,165	)		11,575
			154,031			(487,292	)
Firm commitments to purchase CRT securities			—			(492,513	)
			154,031			(979,805	)
Interest income — Deposits securing CRT arrangements			168			6,099
		$	154,199		$	(1,000,355	)

Net (recoveries received) payments made to settle (recoveries) losses on CRT arrangements		$	(13,343	)	$	1,517

	March 31, 2021			December 31, 2020
	(in thousands)
Carrying value of CRT arrangements:
Derivative and credit risk transfer strip assets (liabilities), net
CRT derivatives	$	44,676		$	31,795
CRT strips		(109,570	)		(202,792	)
	$	(64,894	)	$	(170,997	)

Deposits securing CRT arrangements	$	2,664,420		$	2,799,263
Interest-only security payable at fair value	$	18,922		$	10,757

CRT arrangement assets pledged to secure borrowings:
Derivative and credit risk transfer assets	$	58,134		$	58,699
Deposits securing CRT arrangements (1)	$	2,664,420		$	2,799,263

UPB of loans — funded CRT arrangements	$	48,403,684		$	58,697,942
Collection status (UPB):
Delinquency
Current	$	45,422,502		$	54,990,381
30-89 days delinquent	$	489,284		$	710,872
90-180 days delinquent	$	472,038		$	693,315
180 or more days delinquent	$	2,014,310		$	2,297,365
Foreclosure	$	5,550		$	6,009
Bankruptcy	$	77,362		$	75,700
Delinquent loans in COVID-19 pandemic-related forbearance:
30-89 days delinquent	$	245,592		$	383,028
90-180 days delinquent	$	353,422		$	546,344
180 or more days delinquent	$	1,614,170		$	1,944,663

(1)	Deposits securing credit risk transfer strip liabilities also secure $123.0 million and $229.7 million in CRT strip and CRT derivative liabilities at March 31, 2021 and December 31, 2020, respectively.

Jumbo Loan Financing

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

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

		Quarter ended March 31,
		2021		2020
	(in thousands)
Interest income		$	1,899	$	2,641
Interest expense		$	168	$	4,527

	March 31, 2021		December 31, 2020
	(in thousands)
Loans at fair value	$	109,845	$	143,707
Asset-backed financing at fair value	$	101,238	$	134,726
Certificates retained at fair value	$	8,607	$	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 and MSRs to be accounted for at fair value. The Company has elected to account for these assets at fair value so such changes in fair value will be reflected in 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 a VIE at fair value and Interest-only security payable at fair value to be accounted for at fair value to reflect the generally offsetting changes in fair value of these borrowings to changes in fair value of the assets at fair value collateralizing these financings. For other borrowings, the Company has determined that historical cost accounting is more appropriate because under this method debt issuance costs are amortized over the term of the debt facility, thereby matching the debt issuance cost to the periods benefiting from the availability of the debt.

Financial Statement Items Measured at Fair Value on a Recurring Basis

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

	March 31, 2021
	Level 1		Level 2		Level 3		Total
	(in thousands)
Assets:
Short-term investments	$	108,375	$	—	$	—	$	108,375
Mortgage-backed securities at fair value		—		1,916,485		—		1,916,485
Loans acquired for sale at fair value		—		4,612,527		34,234		4,646,761
Loans at fair value		—		109,845		7,802		117,647
Derivative and credit risk transfer strip assets:
Call options on interest rate futures purchase contracts		992		—		—		992
Put options on interest rate futures purchase contracts		18,938		—		—		18,938
Forward purchase contracts		—		6,687		—		6,687
Forward sale contracts		—		182,192		—		182,192
MBS put options		—		51,165		—		51,165
Swaption purchase contracts		—		29,034		—		29,034
CRT derivatives		—		—		58,134		58,134
Interest rate lock commitments		—		—		7,552		7,552
Total derivative assets before netting		19,930		269,078		65,686		354,694
Netting		—		—		—		(171,725	)
Total derivative and credit risk transfer strip assets after netting		19,930		269,078		65,686		182,969
Mortgage servicing rights at fair value		—		—		2,441,214		2,441,214
	$	128,305	$	6,907,935	$	2,548,936	$	9,413,451
Liabilities:
Asset-backed financing of a VIE at fair value	$	—	$	101,238	$	—	$	101,238
Interest-only security payable at fair value		—		—		18,922		18,922
Derivative and credit risk transfer strip liabilities:
Put options on interest rate futures sale contracts		—		6,064		—		6,064
Forward purchase contracts		—		89,312		—		89,312
Forward sales contracts		—		6,965		—		6,965
MBS put options		—		9,657		—		9,657
CRT derivatives		—		—		13,458		13,458
Interest rate lock commitments		—		—		72,410		72,410
Total derivative liabilities before netting		—		111,998		85,868		197,866
Netting		—		—		—		(77,466	)
Total derivative liabilities after netting		—		111,998		85,868		120,400
Credit risk transfer strips		—		—		109,570		109,570
Total derivative and credit risk transfer strips liabilities		—		111,998		195,438		229,970
	$	—	$	213,236	$	214,360	$	350,130

	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 a VIE 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 strips		—		—		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 quarters presented:

	Quarter ended March 31, 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		15,898			—			—			—			(9,704	)		—			—		6,194
Repayments and sales		(16,070	)		(584	)		(134,624	)		(23,489	)		—			(32,604	)		—		(207,371	)
Capitalization of interest and fees		—			198			1,280			—			—			—			—		1,478
ESS received pursuant to a recapture agreement with PFSI		—			—			557			—			—			—			—		557
Amounts received pursuant to sales of loans		—			—			—			—			—			—			407,696		407,696
Changes in fair value included in results of operations arising from:
Changes in instrument- specific credit risk		—			—			—			—			—			—			—		—
Other factors		531			95			1,037			36,370			(275,515	)		125,826			278,282		166,626
		531			95			1,037			36,370			(275,515	)		125,826			278,282		166,626
Transfers:
Loans from REO		—			66			—			—			—			—			—		66
Interest rate lock commitments to loans acquired for sale (2)		—			—			—			—			147,975			—			—		147,975
Balance, March 31, 2021	$	34,234		$	7,802		$	—		$	44,676		$	(64,858	)	$	(109,570	)	$	2,441,214	$	2,353,498
Changes in fair value recognized during the quarter relating to assets still held at March 31, 2021	$	337		$	81		$	—		$	12,874		$	(64,858	)	$	93,222		$	278,282	$	319,938

(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	Quarter ended March 31, 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		8,165
		8,165
Balance, March 31, 2021	$	18,922
Changes in fair value recognized during the quarter relating to liability outstanding at March 31, 2021	$	8,165

	Quarter ended March 31, 2020
Assets (1)	Loans acquired for sale			Loans at fair value			Excess servicing spread			CRT derivatives			Interest rate lock commitments			Repurchase agreement derivatives		CRT strips			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		$	5,275	$	54,930		$	109,513		$	1,535,705		$	2,044,019
Purchases and issuances		11,291			1,058			—			—			89,919			—		—			—			—			102,268
Repayments and sales		(7,557	)		(4,335	)		(9,308	)		(18,054	)		—			—		(14,750	)		—			—			(54,004	)
Capitalization of interest		—			—			1,974			—			—			—		—			—			—			1,974
ESS received pursuant to a recapture agreement with PFSI		—			—			379			—			—			—		—			—			—			379
Amounts (incurred) received pursuant to sales of loans		—			—			—			—			—			—		—			(26,649	)		248,822			222,173
Changes in fair value included in results of operations arising from:
Changes in instrument- specific credit risk		—			—			—			—			—			—		—			—			—			—
Other factors		240			(1,142	)		(14,522	)		(283,742	)		103,645			—		(215,125	)		(492,513	)		(627,201	)		(1,530,360	)
		240			(1,142	)		(14,522	)		(283,742	)		103,645			—		(215,125	)		(492,513	)		(627,201	)		(1,530,360	)
Transfers:
Loans to REO		—			(885	)		—			—			—			—		—			—			—			(885	)
Interest rate lock commitments to loans acquired for sale (2)		—			—			—			—			(125,334	)		—		—			—			—			(125,334	)
Balance, March 31, 2020	$	22,541		$	9,122		$	157,109		$	(185,933	)	$	79,384		$	5,275	$	(174,945	)	$	(409,649	)	$	1,157,326		$	660,230
Changes in fair value recognized during the quarter relating to assets still held at March 31, 2020	$	160		$	(841	)	$	(14,522	)	$	(300,944	)	$	79,384		$	—	$	(229,875	)	$	(492,513	)	$	(627,201	)	$	(1,586,352	)

(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 March 31, 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		(11,575	)
		(11,575	)
Balance, March 31, 2020	$	14,134
Changes in fair value recognized during the quarter relating to liability outstanding at March 31, 2020	$	(11,575	)

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

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

	March 31, 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	$	4,639,977	$	4,568,613	$	71,364		$	3,545,100	$	3,377,970	$	167,130
90 or more days delinquent:
Not in foreclosure		6,589		7,306		(717	)		6,591		8,006		(1,415	)
In foreclosure		195		235		(40	)		199		235		(36	)
		6,784		7,541		(757	)		6,790		8,241		(1,451	)
	$	4,646,761	$	4,576,154	$	70,607		$	3,551,890	$	3,386,211	$	165,679
Loans at fair value:
Loans held in a consolidated VIE:
Current through 89 days delinquent	$	107,468	$	101,015	$	6,453		$	140,052	$	128,787	$	11,265
90 or more days delinquent:
Not in foreclosure		2,377		2,885		(508	)		3,655		4,240		(585	)
In foreclosure		—		—		—			—		—		—
		2,377		2,885		(508	)		3,655		4,240		(585	)
		109,845		103,900		5,945			143,707		133,027		10,680
Distressed loans:
Current through 89 days delinquent		2,460		4,336		(1,876	)		2,071		4,099		(2,028	)
90 or more days delinquent:
Not in foreclosure		3,074		10,807		(7,733	)		3,714		12,357		(8,643	)
In foreclosure		2,268		5,634		(3,366	)		2,242		4,641		(2,399	)
		5,342		16,441		(11,099	)		5,956		16,998		(11,042	)
		7,802		20,777		(12,975	)		8,027		21,097		(13,070	)
	$	117,647	$	124,677	$	(7,030	)	$	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 March 31, 2021
		Net gains on loans acquired for sale			Net gains (losses) on investments			Net loan servicing fees		Net interest (expense) income			Total
	(in thousands)
Assets:
Mortgage-backed securities at fair value		$	—		$	(71,117	)	$	—	$	(2,523	)	$	(73,640	)
Credit risk transfer strips			—			125,826			—		—			125,826
Loans acquired for sale at fair value			(106,664	)		—			—		—			(106,664	)
Loans at fair value			—			(2,250	)		—		825			(1,425	)
ESS at fair value			—			1,037			—		1,280			2,317
MSRs at fair value			—			—			278,282		—			278,282
		$	(106,664	)	$	53,496		$	278,282	$	(418	)	$	224,696
Liabilities:
Interest-only security payable at fair value		$	—		$	(8,165	)	$	—	$	—		$	(8,165	)
Asset-backed financing of a VIE at fair value			—			900			—		789			1,689
		$	—		$	(7,265	)	$	—	$	789		$	(6,476	)

	Quarter ended March 31, 2020
		Net gains on loans acquired for sale			Net gains (losses) on investments			Net loan servicing fees			Net interest (expense) income			Total
	(in thousands)

Assets:
Mortgage-backed securities at fair value		$	—		$	115,967		$	—		$	(12,002	)	$	103,965
Loans acquired for sale at fair value			147,558			—			—			—			147,558
Loans at fair value			—			(4,010	)		—			293			(3,717	)
ESS at fair value			—			(14,522	)		—			1,974			(12,548	)
Credit risk transfer strips			—			(215,125	)		—			—			(215,125	)
Firm commitment to purchase CRT securities at fair value			(26,649	)		(492,513	)		—			—			(519,162	)
MSRs at fair value			—			—			(627,201	)		—			(627,201	)
		$	120,909		$	(610,203	)	$	(627,201	)	$	(9,735	)	$	(1,126,230	)
Liabilities:
Interest-only security payable at fair value		$	—		$	11,575		$	—		$	—		$	11,575
Asset-backed financing of a VIE at fair value			—			1,928			—			(2,491	)		(563	)
		$	—		$	13,503		$	—		$	(2,491	)	$	11,012

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 quarter based on fair value on a nonrecurring basis:


Real estate acquired in settlement of loans	Level 1		Level 2		Level 3		Total
	(in thousands)
March 31, 2021	$	—	$	—	$	11,161	$	11,161
December 31, 2020	$	—	$	—	$	12,656	$	12,656

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

	Quarter ended March 31,
	2021			2020
	(in thousands)
Real estate asset acquired in settlement of loans	$	(649	)	$	(1,191	)

The Company remeasures its REO based on fair value when it evaluates the REO for impairment. The Company evaluates its REO for impairment with reference to the respective properties’ fair values less cost to sell. REO may be revalued after acquisition due to the Company receiving greater access to the property, the property being held for an extended period or receiving indications that the property’s fair value may not be supported by developing market conditions. Any subsequent change in fair value to a level that is less than or equal to the property’s cost is recognized in Results of real estate acquired in settlement of loans in the Company’s consolidated statements of operations.

Fair Value of Financial Instruments Carried at Amortized Cost

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

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

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

	March 31, 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	$	2,897,794	$	2,803,523	$	1,924,999	$	1,871,276
Exchangeable senior notes	$	494,097	$	563,526	$	196,796	$	207,428

The fair value of the Notes payable secured by credit risk transfer and mortgage servicing assets and Exchangeable senior notes are based on non-affiliate broker indications of fair value.

Valuation Governance

Most of the Company’s assets, its Asset-backed financing of a VIE at fair value, Interest-only security payable at fair value and Derivative and credit risk transfer strip liabilities are carried at fair value with changes in fair value recognized in current period results of operations. A substantial portion of these items are “Level 3” fair value assets and liabilities which require the use of unobservable inputs that are significant to the estimation of the fair values of the assets and liabilities. Unobservable inputs reflect the Company’s own judgments about the factors that market participants use in pricing an asset or liability and are based on the best information available under the circumstances.

Due to the difficulty in estimating the fair values of “Level 3” fair value assets and liabilities, the Company has assigned responsibility for estimating the fair value of these assets and liabilities to specialized staff and subjects the valuation process to significant senior management oversight. PFSI’s Financial Analysis and Valuation group (the “FAV group”) is responsible for estimating the fair values of “Level 3” fair value assets and liabilities other than IRLCs and maintaining its valuation policies and procedures. The fair value of the Company’s IRLCs is developed by PFSI’s Capital Markets Risk Management staff and is reviewed by the PFSI’s Capital Markets Operations group.

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 a VIE, are categorized as “Level 2” fair value assets:

•

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

•

For the loans at fair value held in a VIE, the quoted indications of fair value of all of the individual securities issued by the securitization trust are used to derive a fair value for the loans. The Company obtains indications of fair value from nonaffiliated brokers based on comparable securities and validates the brokers’ indications of fair value using pricing models and inputs the Company believes are similar to the models and inputs used by other market participants.

•

Loans that are not saleable into active markets, comprised 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 pricing spread (discount rate) and prepayment speed. Significant changes to those inputs in isolation may result in a significant change in the ESS fair value measurement. Changes in these key inputs are not 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 for informational purposes.

Derivative and Credit Risk Transfer Strip Assets and Liabilities

CRT Derivatives

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

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 and 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 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:

	March 31, 2021		December 31, 2020
	(dollars in thousands)
Fair value
CRT derivatives:
Assets	$	58,134	$	58,699
Liabilities	$	13,458	$	26,904
UPB of loans in reference pools	$	11,539,702	$	13,854,426
Key inputs (1)
Discount rate
Range	6.0% – 7.3%		6.7% – 9.0%
Weighted average	7.1%		7.3%
Voluntary prepayment speed (2)
Range	13.0% – 13.6%		20.8% – 23.5%
Weighted average	13.1%		21.9%
Involuntary prepayment speed (3)
Range	(0.5)% – 1.2%		(0.8)% – 1.1%
Weighted average	(0.1)%		(0.2)%
Remaining loss expectation (4)
Range	(0.6)% – 0.6%		(0.6)% – 0.6%
Weighted average	(0.2)%		(0.3)%

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

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

(3)

Involuntary prepayment speed is measured using Life Involuntary CPR. The negative involuntary prepayment speed reflects the expectation for reinstatement to the reference pool of a significant portion of the loans that previously triggered losses due to delinquency while under CARES Act forbearance upon their projected 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 projected re-performance of a significant portion of the reference loans in the future.

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 MSR component of the Company’s estimate of the fair value of the loans it has committed to purchase. Significant changes in the pull-through rate or the MSR component of the IRLCs, in isolation, may result in a significant change in the IRLCs’ fair value. The financial effects of changes in these inputs are generally inversely correlated as increasing interest rates have a positive effect on the fair value of the MSR component of IRLC fair value, but also increase the pull-through rate for the loan principal and interest payment cash flow component that has decreased in fair value. Changes in fair value of IRLCs are included in Net 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:

	March 31, 2021			December 31, 2020
Fair value (in thousands) (1)	$	(64,858	)	$	72,386
Key inputs (2)
Pull-through rate
Range	42.0% – 100%			44.6% – 100%
Weighted average	92.9%			86.3%
MSR fair value expressed as
Servicing fee multiple
Range	1.2 – 6.5			2.0 – 5.3
Weighted average		5.0		4.4
Percentage of UPB
Range	0.3% – 2.1%			0.5% – 1.9%
Weighted average	1.3%			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 interest in the trust holding the CRT strips and Deposits securing CRT arrangements, the IO ownership interest and Recourse Obligations. Together, the Recourse Obligation and the IO Ownership interest comprise the CRT strip. 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. Fair value of the CRT strips is derived by deducting the balance of the Deposits securing CRT arrangements from the fair value of the certificates derived from indications provided by the nonaffiliated brokers.

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

	March 31, 2021		December 31, 2020
	(dollars in thousands)
Carrying value CRT strip liabilities	$	109,570	$	202,792
UPB of loans in the reference pools	$	36,863,982	$	44,843,516
Key inputs (1)
Discount rate
Range	6.4% – 8.0%		6.0% – 8.4%
Weighted average	7.8%		8.0%
Voluntary prepayment speed (2)
Range	15.7% – 18.6%		25.0% – 30.2%
Weighted average	16.2%		26.2%
Involuntary prepayment speed (3)
Range	0.5% – 1.1%		0.8% – 1.7%
Weighted average	0.6%		1.0%
Remaining loss expectation (4)
Range	0.3% – 0.7%		0.3% – 0.6%
Weighted average	0.4%		0.4%

(1)	Weighted average inputs are 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.

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 fair values received. 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.

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 outstanding principal balances 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 rates of the underlying loans (“prepayment speed”) and the annual per-loan cost to service loans, all of which are unobservable. Significant changes to any of those inputs in isolation could result in a significant change in the MSR fair value measurement. Changes in these key inputs are not 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 March 31,
		2021		2020
	(MSR recognized and UPB of underlying loans amounts in thousands)
MSR recognized		$	407,696	$	248,822
UPB of underlying loans		$	32,448,891	$	19,341,270
Weighted average annual servicing fee rate (in basis points)		26		30
Key inputs (1)
Pricing spread (2)
Range		8.0% – 8.0%		6.7% – 9.9%
Weighted average		8.0%		6.8%
Prepayment speed (3)
Range		6.0% – 9.3%		9.9% – 20.9%
Weighted average		7.5%		12.2%
Equivalent average life (in years)
Range		3.9 – 8.9		3.6 – 6.9
Weighted average		8.5		6.5
Annual per-loan cost of servicing
Range		$81 – $81		$78 – $78
Weighted average		$81		$78

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

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

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

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:

	March 31, 2021		December 31, 2020
	(Fair value, UPB of underlying loans and effect on fair value amounts in thousands)
Fair value	$	2,441,214	$	1,755,236
UPB of underlying loans	$	183,463,662	$	170,728,322
Weighted average annual servicing fee rate (in basis points)	27		28
Weighted average note interest rate	3.4%		3.6%
Key inputs (1):
Pricing spread (2)
Range	6.8% – 9.9%		8.0% – 11.1%
Weighted average	6.8%		8.0%
Effect on fair value of:
5% adverse change	$(38,465)		$(31,400)
10% adverse change	$(75,820)		$(61,718)
20% adverse change	$(147,372)		$(119,305)
Prepayment speed (3)
Range	8.5% – 24.2%		12.4% – 28.8%
Weighted average	8.8%		12.8%
Equivalent average life (in years)
Range	3.1 – 8.1		2.9 – 6.8
Weighted average	7.8		6.5
Effect on fair value of:
5% adverse change	$(48,777)		$(48,136)
10% adverse change	$(95,920)		$(94,244)
20% adverse change	$(185,623)		$(180,820)
Annual per-loan cost of servicing
Range	$78 – $149		$78 – $121
Weighted average	$80		$81
Effect on fair value of:
5% adverse change	$(15,709)		$(11,846)
10% adverse change	$(31,419)		$(23,692)
20% adverse change	$(62,838)		$(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 for informational purposes.

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

Note 8— Mortgage-Backed Securities

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

		Quarter ended March 31,
		2021			2020
	(in thousands)
Balance at beginning of quarter		$	2,213,922		$	2,839,633
Purchases			1,259,189			1,615,486
Sales			(1,300,653	)		(488,729	)
Repayments			(182,333	)		(122,935	)
Changes in fair value included in income arising from:
Amortization of net purchase premiums			(2,523	)		(12,002	)
Valuation adjustments			(71,117	)		115,967
			(73,640	)		103,965
Balance at end of quarter		$	1,916,485		$	3,947,420

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

	March 31, 2021									December 31, 2020
Agency: (1)	Principal balance		Unamortized net purchase premiums		Accumulated valuation changes			Fair value		Principal balance		Unamortized net purchase premiums		Accumulated valuation changes		Fair value
	(in thousands)
Freddie Mac	$	654,051	$	20,729	$	(21,741	)	$	653,039	$	1,253,755	$	32,414	$	24,867	$	1,311,036
Fannie Mae		1,263,614		40,262		(40,430	)		1,263,446		863,758		23,692		15,436		902,886
	$	1,917,665	$	60,991	$	(62,171	)	$	1,916,485	$	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 March 31, 2021 and December 31, 2020.

Note 9—Loans Acquired for Sale at Fair Value

Loans acquired for sale at fair value is comprised of recently originated loans purchased by the Company for resale. 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.

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

Loan type	March 31, 2021		December 31, 2020
	(in thousands)
Agency-eligible	$	4,284,646	$	3,057,601
Held for sale to PLS — Government insured or guaranteed		327,881		460,414
Home equity lines of credit		4,864		5,566
Commercial real estate		998		1,010
Repurchased pursuant to representations and warranties		28,372		27,299
	$	4,646,761	$	3,551,890
Loans pledged to secure:
Assets sold under agreements to repurchase	$	4,519,274	$	3,484,202
Mortgage loan participation purchase and sale agreements		70,919		17,645
	$	4,590,193	$	3,501,847

Note 10—Loans at Fair Value

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

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

Loan type	March 31, 2021		December 31, 2020
	(in thousands)
Fixed interest rate jumbo loans held in a VIE	$	109,845	$	143,707
Distressed loans		7,802		8,027
	$	117,647	$	151,734
Loans at fair value pledged to secure:
Asset-backed financing of a VIE at fair value	$	109,845	$	143,707
Assets sold under agreements to repurchase		1,383		3,703
	$	111,228	$	147,410

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

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

	March 31, 2021		December 31, 2020
	(in thousands)
Derivative assets	$	182,969	$	164,318
Credit risk transfer strip assets		—		—
	$	182,969	$	164,318
Derivative liabilities	$	120,400	$	60,681
Credit risk transfer strip liabilities		109,570		202,792
	$	229,970	$	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 and MBS financing activities due to changes in market interest rates as discussed below:

•

The Company is exposed to loss 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 a VIE, IRLCs, MSRs and MBS financing.

The Company records all derivative and CRT strip assets 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:

	March 31, 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)
Subject to master netting agreements─used for economic hedging purposes (2):
Call options on interest rate futures purchase contracts		2,550,000	$	992		$	—			1,450,000	$	3,070		$	—
Put options on interest rate futures purchase contracts		3,750,000		18,938			—			2,800,000		4,742			—
Put options on interest rate futures sale contracts		562,500		—			6,064			—		—			—
Forward purchase contracts		15,169,597		6,687			89,312			17,563,549		72,526			17
Forward sale contracts		24,946,663		182,192			6,965			26,615,716		92			122,884
MBS put options		3,600,000		51,165			9,657			3,625,000		3,220			—
Swaption purchase contracts		3,136,300		29,034			—			3,655,000		8,505			—
Swap futures		2,750,000		—			—			1,950,000		—			—
Bond futures		401,500		—			—			66,500		—			—
Not subject to master netting arrangements:
CRT derivatives		11,539,702		58,134			13,458			13,854,426		58,699			26,904
Interest rate lock commitments		8,525,688		7,552			72,410			10,588,208		72,794			408
Total derivative instruments before netting				354,694			197,866					223,648			150,213
Netting				(171,725	)		(77,466	)				(59,330	)		(89,532	)
			$	182,969		$	120,400				$	164,318		$	60,681
Margin deposits (received from) placed with derivatives counterparties, net			$	(94,258	)						$	30,197
Derivative assets pledged to secure:
Notes payable secured by credit risk transfer and mortgage servicing assets			$	58,134							$	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, IRLCs and repurchase agreement derivatives. As of March 31, 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:

	March 31, 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	$	992	$	—		$	992		$	3,070	$	—		$	3,070
Put options on interest rate futures purchase contracts		18,938		—			18,938			4,742		—			4,742
Forward purchase contracts		6,687		—			6,687			72,526		—			72,526
Forward sale contracts		182,192		—			182,192			92		—			92
MBS put options		51,165		—			51,165			3,220		—			3,220
Swaption purchase contracts		29,034		—			29,034			8,505		—			8,505
Netting		—		(171,725	)		(171,725	)		—		(59,330	)		(59,330	)
		289,008		(171,725	)		117,283			92,155		(59,330	)		32,825
Not subject to master netting arrangements:
CRT derivatives		58,134		—			58,134			58,699		—			58,699
Interest rate lock commitments		7,552		—			7,552			72,794		—			72,794
		65,686		—			65,686			131,493		—			131,493
	$	354,694	$	(171,725	)	$	182,969		$	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.

	March 31, 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	$	58,134	$	—	$	—	$	58,134	$	58,699	$	—	$	—	$	58,699
Interest rate lock commitments		7,552		—		—		7,552		72,794		—		—		72,794
Federal Home Loan Mortgage Corporation		31,652		—		—		31,652		—		—		—		—
J.P. Morgan Securities LLC		29,455		—		—		29,455		—		—		—		—
Wells Fargo Securities, LLC		16,087		—		—		16,087		—		—		—		—
RJ O’Brien & Associates, LLC		13,865		—		—		13,865		7,813		—		—		7,813
Bank of America, N.A.		13,191		—		—		13,191		15,406		—		—		15,406
Morgan Stanley & Co. LLC		7,949		—		—		7,949		—		—		—		—
Citigroup Global Markets Inc.		3,431		—		—		3,431		2,416		—		—		2,416
PNC Capital Markets LLC		13		—		—		13		3,138		—		—		3,138
Deutsche Bank Securities LLC		—		—		—		—		1,602		—		—		1,602
Mitsubishi UFJ Sec		—		—		—		—		1,070		—		—		1,070
Other		1,640		—		—		1,640		1,380		—		—		1,380
	$	182,969	$	—	$	—	$	182,969	$	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.

	March 31, 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:
Put options on interest rate futures sale contracts	$	6,064		$	—		$	6,064		$	—		$	—		$	—
Forward purchase contracts		89,312			—			89,312			17			—			17
Forward sales contracts		6,965			—			6,965			122,884			—			122,884
MBS put options		9,657			—			9,657			—			—			—
Netting		—			(77,466	)		(77,466	)		—			(89,532	)		(89,532	)
		111,998			(77,466	)		34,532			122,901			(89,532	)		33,369
Not subject to master netting arrangements
CRT derivatives		13,458			—			13,458			26,904			—			26,904
Interest rate lock commitments		72,410			—			72,410			408			—			408
		197,866			(77,466	)		120,400			150,213			(89,532	)		60,681
Assets sold under agreements to repurchase:
UPB		6,098,299			—			6,098,299			6,317,928			—			6,317,928
Unamortized debt issuance costs		(6,326	)		—			(6,326	)		(8,510	)		—			(8,510	)
		6,091,973			—			6,091,973			6,309,418			—			6,309,418
	$	6,289,839		$	(77,466	)	$	6,212,373		$	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.

	March 31, 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	$	72,410	$	—		$	—	$	72,410	$	408	$	—		$	—	$	408
CRT derivatives		13,458		—			—		13,458		26,904		—			—		26,904
Credit Suisse Securities (USA) LLC		1,230,324		(1,209,194	)		—		21,130		1,059,547		(1,054,636	)		—		4,911
Bank of America, N.A.		1,031,487		(1,031,487	)		—		—		414,044		(414,044	)		—		—
RBC Capital Markets, L.P.		750,308		(750,308	)		—		—		765,892		(765,892	)		—		—
J.P. Morgan Securities LLC		642,606		(642,606	)		—		—		359,573		(357,211	)		—		2,362
Daiwa Capital Markets		534,521		(534,032	)		—		489		728,207		(727,562	)		—		645
Barclays Capital Inc.		504,410		(504,410	)		—		—		922,959		(922,035	)		—		924
Morgan Stanley & Co. LLC		393,370		(393,370	)		—		—		367,493		(366,415	)		—		1,078
Citigroup Global Markets Inc.		261,628		(261,628	)		—		—		830,161		(830,161	)		—		—
Goldman Sachs & Co. LLC		264,058		(261,528	)		—		2,530		149,272		(144,883	)		—		4,389
BNP Paribas		227,034		(227,034	)		—		—		164,414		(163,548	)		—		866
Wells Fargo Securities, LLC		143,150		(143,150	)		—		—		148,854		(140,796	)		—		8,058
Amherst Pierpont Securities LLC		139,552		(139,552	)		—		—		153,224		(153,224	)		—		—
Mitsubishi UFJ Sec		4,788		—			—		4,788		—		—			—		—
Bank of Oklahoma		3,304		—			—		3,304		—		—			—		—
Mizuho Securities		1,059		—			—		1,059		279,321		(277,521	)		—		1,800
Federal Home Loan Mortgage Corporation		—		—			—		—		5,883		—			—		5,883
Other		1,232		—			—		1,232		2,453		—			—		2,453
	$	6,218,699	$	(6,098,299	)	$	—	$	120,400	$	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 March 31,
Derivative activity	Consolidated statement of operations line		2021			2020
		(in thousands)
Interest rate lock commitments	Net gains on loans acquired for sale (1)		$	(137,243	)	$	68,231
CRT derivatives	Net gains (losses) on investments		$	36,370		$	(215,125	)
Hedged item:
Interest rate lock commitments and loans acquired for sale	Net gains on loans acquired for sale		$	297,476		$	(140,368	)
Mortgage servicing rights	Net loan servicing fees		$	(374,403	)	$	767,186
Fixed-rate and prepayment sensitive assets and LIBOR-indexed repurchase agreements	Net gains (losses) on investments		$	(24	)	$	64,931

(1)

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

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)	March 31, 2021		December 31, 2020
	(in thousands)
Liabilities
Through December 4, 2021	$	26,910	$	168,539
To maturity		82,660		34,253
	$	109,570	$	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 March 31,
		2021			2020
	(in thousands)
Balance at beginning of quarter		$	1,755,236		$	1,535,705
MSRs resulting from loan sales			407,696			248,822
Changes in fair value:
Due to changes in valuation inputs used in valuation model (1)			337,667			(563,247	)
Other changes in fair value (2)			(59,385	)		(63,954	)
			278,282			(627,201	)
Balance at end of quarter		$	2,441,214		$	1,157,326

		March 31, 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		$	2,423,063		$	1,742,905

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

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

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

		Quarter ended March 31,
		2021		2020
	(in thousands)
Contractually-specified servicing fees		$	116,287	$	94,469
Ancillary and other fees:
Late charges			412		500
Other			15,833		6,691
		$	132,532	$	101,660

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 March 31, 2021.

Assets Sold Under Agreements to Repurchase

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

		Quarter ended March 31,
		2021			2020
	(dollars in thousands)
Weighted average interest rate (1)			1.60	%		2.31	%
Average balance		$	5,971,290		$	6,302,900
Total interest expense		$	28,659		$	37,750
Maximum daily amount outstanding		$	7,208,807		$	8,664,587

(1)	Excludes the effect of amortization of debt issuance costs of $5.2 million and $1.4 million for the quarters ended March 31, 2021 and 2020, respectively.

	March 31, 2021			December 31, 2020
	(dollars in thousands)
Carrying value:
Unpaid principal balance	$	6,098,299		$	6,317,928
Unamortized debt issuance costs		(6,326	)		(8,510	)
	$	6,091,973		$	6,309,418
Weighted average interest rate		1.65	%		1.36	%
Available borrowing capacity (1):
Committed	$	240,290		$	483,767
Uncommitted		3,416,352			4,151,905
	$	3,656,642		$	4,635,672
Margin deposits placed with counterparties included in Other assets	$	13,966		$	141,808
Assets securing agreements to repurchase:
Mortgage-backed securities	$	1,916,485		$	2,213,922
Loans acquired for sale at fair value	$	4,519,274		$	3,484,202
Loans at fair value	$	1,383		$	3,703
MSRs (2)	$	1,537,749		$	1,166,090
Real estate acquired in settlement of loans	$	10,250		$	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 March 31, 2021	Unpaid principal balance
	(in thousands)
Within 30 days	$	1,879,732
Over 30 to 90 days		3,468,259
Over 90 days to 180 days		750,308
	$	6,098,299
Weighted average maturity (in months)		1.9

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 March 31, 2021:

Loans, REO and MSRs

Counterparty	Amount at risk		Weighted average maturity	Facility maturity
	(in thousands)
Bank of America, N.A.	$	119,373	May 3, 2021	June 9, 2021
Credit Suisse First Boston Mortgage Capital LLC	$	75,611	April 23, 2021	April 23, 2021
RBC Capital Markets, L.P.	$	32,331	July 15, 2021	November 10, 2021
JPMorgan Chase & Co.	$	13,559	April 7, 2021	April 7, 2021
Barclays Capital Inc.	$	18,223	June 3, 2021	November 3, 2022
Morgan Stanley & Co. LLC	$	18,714	June 21, 2021	November 2, 2022
Citibank, N.A.	$	10,807	May 22, 2021	August 3, 2021
Goldman Sachs & Co. LLC	$	9,460	June 21, 2021	December 23, 2022
BNP Paribas	$	7,646	June 13, 2021	July 30, 2021
Wells Fargo Securities, LLC	$	5,141	June 21, 2021	October 6, 2022

Securities

Counterparty	Amount at risk		Weighted average maturity
	(in thousands)
Bank of America, N.A.	$	10,793	April 14, 2021
JPMorgan Chase & Co.	$	17,117	April 8, 2021
Barclays Capital Inc.	$	8,732	April 15, 2021
Daiwa Capital Markets America Inc.	$	14,961	April 16, 2021
Amherst Pierpont Securities LLC	$	4,488	April 16, 2021

Mortgage Loan Participation Purchase and Sale Agreements

Certain borrowing facilities secured by loans acquired for sale are in the form of mortgage loan participation purchase and sale agreements. Participation certificates, each of which represents an undivided beneficial ownership interest in a pool of 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 March 31,
		2021			2020
	(dollars in thousands)
Weighted average interest rate (1)			1.38	%		2.73	%
Average balance		$	39,162		$	41,301
Total interest expense		$	164		$	338
Maximum daily amount outstanding		$	82,571		$	94,387

(1)	Excludes the effect of amortization of debt issuance costs of $31,000 and $57,000 for the quarters ended March 31, 2021 and 2020, respectively.

	March 31, 2021			December 31, 2020
	(dollars in thousands)
Carrying value:
Amount outstanding	$	68,176		$	16,851
Unamortized debt issuance costs		—			—
	$	68,176		$	16,851
Weighted average interest rate		1.36	%		1.39	%
Loans acquired for sale pledged to secure mortgage loan participation purchase and sale agreements	$	70,919		$	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 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:

									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	$	657,070		2.90	%	February 28, 2024	February 27, 2026
2020 2R	December 22, 2020	$	500,000		496,909		3.81	%	December 28, 2022		—
2020 1R	February 14, 2020	$	350,000		156,016		2.35	%	March 1, 2023	February 27, 2025
2019 3R	October 16, 2019	$	375,000		151,523		2.70	%	October 27, 2022	October 29, 2024
2019 2R	June 11, 2019	$	638,000		408,000		2.75	%	May 29, 2023	May 29, 2025
2019 1R	March 29, 2019	$	295,700		139,269		2.00	%	March 29, 2022	March 27, 2024
				$	2,008,787

(1)	Spread over 1-month LIBOR.

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

PMC finances mortgage servicing rights through the issuance of the FMSR VFN sold to institutional buyers under an agreement to repurchase. On August 4, 2020, PMC increased the committed borrowing capacity to $700 million and extended the VFN termination date to August 3, 2021.

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 Feburary 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 $700 million from $175 million, bears interest at a rate indexed to LIBOR plus a margin, with index replacement provisions related to the transition from LIBOR, and will mature on August 3, 2021. 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 the notes payable:

		Quarter ended March 31,
		2021			2020
	(dollars in thousands)
Weighted average interest rate (1)			3.14	%		4.10	%
Average balance		$	2,260,721		$	1,860,213
Total interest expense		$	18,599		$	19,618
Maximum daily amount outstanding		$	3,180,115		$	2,032,665

(1)	Excludes the effect of amortization of debt issuance costs of $1.1 million and $609,000 for the quarters ended March 31, 2021 and 2020, respectively.

	March 31, 2021			December 31, 2020
	(dollars in thousands)
Carrying value:
Amount outstanding	$	2,908,788		$	1,930,018
Unamortized debt issuance costs		(10,994	)		(5,019	)
	$	2,897,794		$	1,924,999
Weighted average interest rate		2.93	%		2.99	%
Assets securing notes payable:
MSRs (1)	$	2,423,063		$	1,742,905
CRT Agreements:
Deposits securing CRT arrangements	$	2,664,420		$	2,799,263
Derivative assets	$	58,134		$	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 in a private offering $345 million aggregate principal amount of exchangeable senior notes (the “2026 Exchangeable Notes”). 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. The 2026 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. The exchange rate initially equals 46.1063 common shares per $1,000 principal amount of the 2026 Exchangeable Notes and is subject to adjustment upon the occurrence of certain events, but will not be adjusted for any accrued and unpaid interest.

On November 7 and November 19, 2019, PMC issued $210 million in principal amount of 5.50% 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 are fully and unconditionally guaranteed by the Company and are exchangeable for PMT common shares, cash, or a combination thereof, at PMC’s election, at any time until the close of business on the second scheduled trading day immediately preceding the maturity date, subject to the satisfaction of certain conditions if the exchange occurs before August 1, 2024. The exchange rate equals 40.101 common shares per $1,000 principal amount of the 2024 Exchangeable Notes and is 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 March 31,
		2021		2020
	(in thousands)
Average balance		$	298,554	$	460,000
Total interest expense		$	5,542	$	7,266

	March 31, 2021			December 31, 2020
	(in thousands)
Carrying value:
UPB	$	555,000		$	210,000
Unamortized debt issuance costs and conversion option		(60,903	)		(13,204	)
	$	494,097		$	196,796

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

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

		Quarter ended March 31,
		2021			2020
	(dollars in thousands)
Average balance		$	120,415		$	240,765
Total interest expense		$	168		$	4,527
Weighted average interest rate			3.22	%		3.39	%

	March 31, 2021			December 31, 2020
	(dollars in thousands)
Fair value	$	101,238		$	134,726
UPB	$	100,036		$	131,835
Weighted average interest rate		3.57	%		3.56	%

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

Maturity of Long-Term Debt

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

			Twelve months ended March 31,
	Total		2022		2023		2024		2025		2026		Thereafter
	(in thousands)
Notes payable secured by credit risk transfer and mortgage servicing assets (1)	$	2,808,788	$	139,269	$	804,448	$	1,515,071	$	—	$	350,000	$	—
Exchangeable senior notes		555,000		—		—		—		210,000		345,000		—
Asset-backed financing of a variable interest entity at fair value (2)		100,036		—		—		—		—		—		100,036
Interest-only security payable at fair value (2)		18,922		—		—		—		—		—		18,922
Total	$	3,482,746	$	139,269	$	804,448	$	1,515,071	$	210,000	$	695,000	$	118,958

(1)	Based on stated maturity. Certain of the notes payable allow the Company to exercise an optional extension as discussed above.

(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 March 31,
		2021			2020
	(in thousands)
Balance, beginning of quarter		$	21,893		$	7,614
Provision for losses:
Pursuant to loan sales			8,513			1,030
Reduction in liability due to change in estimate			(1,424	)		(1,344	)
Losses incurred, net			(15	)		—
Balance, end of quarter		$	28,967		$	7,300
UPB of loans subject to representations and warranties at end of quarter		$	177,595,762		$	131,049,135

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:

	March 31, 2021
	(in thousands)
Commitments to purchase loans acquired for sale	$	8,525,688

Note 17—Shareholders’ Equity

Preferred Shares of Beneficial Interest

Preferred shares of beneficial interest are summarized below:

Preferred										Dividends per share quarter ended March 31,
Shared Series	Description (1)	Number of shares		Liquidation preference		Issuance discount		Carrying value		2021		2020
Fixed-to-floating rate cumulative redeemable preferred		(in thousands, except dividends per share)
A	8.125% Issued March 2017		4,600	$	115,000	$	3,828	$	111,172	$	0.51	$	0.51
B	8.00% Issued July 2017		7,800		195,000		6,465		188,535	$	0.50	$	0.50
			12,400	$	310,000	$	10,293	$	299,707

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

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

Common Shares of Beneficial Interest

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

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

At March 31, 2021, the Company had approximately $74.4 million of common shares of beneficial interest available for issuance under its ATM equity offering program.

Common Share Repurchase Program

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

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

		Quarter ended		Cumulative
		March 31, 2020		total (1)
	(in thousands)
Common shares repurchased			783		17,498
Cost of common shares repurchased		$	5,783	$	253,892

(1)	Amounts represent the share repurchase program total from its inception in August 2015 through March 31, 2021.

Note 18— Net Gains on Loans Acquired for Sale

Net gains on loans acquired for sale are summarized below:

		Quarter ended March 31,
		2021			2020
	(in thousands)
From nonaffiliates:
Cash loss:
Loans		$	(592,789	)	$	(68,954	)
Hedging activities			463,276			(23,378	)
			(129,513	)		(92,332	)
Non-cash gain:
Recognition of fair value of firm commitment to purchase CRT securities			—			(26,649	)
Receipt of MSRs in mortgage loan sale transactions			407,696			248,822
Provision for losses relating to representations and warranties provided in mortgage loan sales:
Pursuant to loans sales			(8,513	)		(1,030	)
Reduction of liability due to change in estimate			1,424			1,344
			(7,089	)		314
Change in fair value of loans and derivatives held at end of quarter:
IRLCs			(137,243	)		68,231
Loans			83,223			(36,782	)
Hedging derivatives			(165,800	)		(116,990	)
			(219,820	)		(85,541	)
			180,787			136,946
Total from nonaffiliates			51,274			44,614
From PFSI—cash gain			1,738			4,161
		$	53,012		$	48,775

Note 19— Net Gains (Losses) on Investments

Net gains (losses) on investments are summarized below:

		Quarter ended March 31,
		2021			2020
	(in thousands)
From nonaffiliates:
Mortgage-backed securities		$	(71,117	)	$	115,967
Loans at fair value:
Held in a VIE			(2,345	)		(2,869	)
Distressed			95			(1,142	)
CRT arrangements			154,031			(487,292	)
Firm commitment to purchase CRT securities			—			(492,513	)
Asset-backed financing of a VIE at fair value			900			1,928
Hedging derivatives			(24	)		64,931
			81,540			(800,990	)
From PFSI—ESS			1,651			(14,141	)
		$	83,191		$	(815,131	)

Note 20—Net Interest Expense

Net interest income is summarized below:

		Quarter ended March 31,
		2021			2020
	(in thousands)
Interest income:
From nonaffiliates:
Cash and short-term investments		$	225		$	1,627
Mortgage-backed securities			8,286			15,568
Loans acquired for sale at fair value			22,908			31,523
Loans at fair value:
Held in a VIE			1,899			2,641
Distressed			253			59
Deposits securing CRT arrangements			168			6,099
Placement fees relating to custodial funds			2,532			12,398
Other			38			234
			36,309			70,149
From PFSI—ESS			1,280			1,974
			37,589			72,123
Interest expense:
To nonaffiliates:
Assets sold under agreements to repurchase			28,659			37,750
Mortgage loan participation purchase and sale agreements			164			338
Notes payable secured by credit risk transfer and mortgage servicing assets			18,599			19,618
Exchangeable Notes			5,542			7,266
Asset-backed financings of a VIE at fair value			168			4,527
Interest shortfall on repayments of loans serviced for Agency securitizations			22,040			9,439
Interest on loan impound deposits			749			912
			75,921			79,850
To PFSI—Assets sold under agreement to repurchase			387			1,218
			76,308			81,068
Net interest expense		$	(38,719	)	$	(8,945	)

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

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

•

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

•

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

•

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

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

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

		Quarter ended March 31,
		2021		2020
	(in thousands)
Grants:
Restricted share units			101		92
Performance share units			84		112
Total share units granted			185		204
Grant date fair value:
Restricted share units		$	1,917	$	1,978
Performance share units			1,602		2,428
Total grant date value of share units		$	3,519	$	4,406
Vestings:
Restricted share units			100		123
Performance share units (1)			37		143
Total share units vested			137		266
Forfeitures:
Restricted share units			—		—
Performance share units			—		—
Total share units forfeited			—		—
Compensation expense relating to share-based grants		$	1,738	$	186

(1)	The actual number of performance-based RSUs that vested during the quarter ended March 31, 2021 was 37,000 common shares, which is 100% of the originally granted performance-based RSUs.

	March 31, 2021
	Restricted share units		Performance share units
Shares expected to vest:
Number of units (in thousands)		190		251
Grant date average fair value per unit	$	20.07	$	19.26

Note 22—Income Taxes

The Company’s effective tax rate was 21.3% with consolidated pretax income of $91.0 million for the quarter ended March 31, 2021. The Company’s taxable REIT subsidiary (“TRS”) recognized tax expense of $19.4 million on pretax income of $88.1 million for the quarter ended March 31, 2020. For the same period in 2020, the TRS recognized tax expense of $10.1 million on pretax loss of $21.8 million, while the Company’s reported consolidated pretax loss for the quarter ended March 31, 2020 was $584.4 million. 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 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 March 31, 2021, the valuation allowance was reduced to $0 from the $110,000 valuation allowance recorded at December 31, 2020 as the result of positive GAAP income at the TRS for the quarter ended March 31, 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—Earnings Per Share

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

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

Diluted earnings per share is determined by dividing net income attributable to diluted shareholders, which adds back to net income the interest expense, net of applicable income taxes, on the 2020 Notes, by the weighted average common shares outstanding, assuming all dilutive securities were issued. The Company 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 is excluded from diluted earnings (loss) per share.

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

		Quarter ended March 31,
		2021			2020
	(in thousands except per share amounts)
Net income (loss)		$	71,603		$	(594,673	)
Dividends on preferred shares			(6,234	)		(6,234	)
Effect of participating securities—share-based compensation awards			(120	)		(50	)
Net income (loss) attributable to common shareholders		$	65,249		$	(600,957	)
Weighted average basic shares outstanding			97,892			100,245
Dilutive securities-shares issuable under share-based compensation plan			211			—
Diluted weighted average number of shares outstanding			98,103			100,245
Basic earnings (loss) per share		$	0.67		$	(5.99	)
Diluted earnings (loss) per share		$	0.67		$	(5.99	)

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

		Quarter ended March 31,
		2021		2020
	(in thousands)
Shares issuable under share-based compensation plan			11		135
Shares issuable pursuant to exchange of the 2020 Notes			—		8,467

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
March 31, 2021	strategies			strategies			production		Corporate			Total
	(in thousands)
Net investment income:
Net (loss) gain on loans acquired for sale	$	(1	)	$	—		$	53,013	$	—		$	53,012
Net gain (loss) on investments		154,271			(71,080	)		—		—			83,191
Net loan servicing fees		—			50,045			—		—			50,045
Net interest expense:
Interest income		650			13,516			22,797		626			37,589
Interest expense		17,261			37,316			21,731		—			76,308
		(16,611	)		(23,800	)		1,066		626			(38,719	)
Other		888			—			52,980		—			53,868
		138,547			(44,835	)		107,059		626			201,397
Expenses:
Loan fulfillment and servicing fees payable to PFSI		137			18,955			60,836		—			79,928
Management fees		—			—			—		8,449			8,449
Other		4,150			812			10,646		6,384			21,992
		4,287			19,767			71,482		14,833			110,369
Pretax (loss) income	$	134,260		$	(64,602	)	$	35,577	$	(14,207	)	$	91,028
Total assets at quarter end	$	2,772,111		$	4,739,849		$	4,796,564	$	213,730		$	12,522,254

	Credit			Interest rate
	sensitive			sensitive			Correspondent
Quarter ended March 31, 2020	strategies			strategies			production		Corporate			Total
	(in thousands)
Net investment income:
Net (loss) gain on loans acquired for sale	$	(32,306	)	$	—		$	81,081	$	—		$	48,775
Net (loss) gain on investments		(919,109	)		103,978			—		—			(815,131	)
Net loan servicing fees		—			244,572			—		—			244,572
Net interest expense:
Interest income		6,556			33,241			31,407		919			72,123
Interest expense		14,566			41,608			24,309		585			81,068
		(8,010	)		(8,367	)		7,098		334			(8,945	)
Other		166			—			23,988		58			24,212
		(959,259	)		340,183			112,167		392			(506,517	)
Expenses:
Loan fulfillment and servicing fees payable to PFSI		301			14,220			41,940		—			56,461
Management fees		—			—			—		9,055			9,055
Other		911			1,182			4,918		5,381			12,392
		1,212			15,402			46,858		14,436			77,908
Pretax (loss) income	$	(960,471	)	$	324,781		$	65,309	$	(14,044	)	$	(584,425	)
Total assets at quarter end	$	1,947,153		$	5,664,991		$	3,068,163	$	1,238,181		$	11,918,488

Note 25—Supplemental Cash Flow Information

	Quarter ended March 31,
	2021		2020
	(in thousands)
Payments:
Income taxes, net	$	494	$	—
Interest	$	91,611	$	104,757
Non-cash investing activities:
Transfer of loans and advances to real estate acquired in settlement of loans	$	280	$	1,166
Receipt of mortgage servicing rights as proceeds from sales of loans at fair value	$	407,696	$	248,822
Receipt of excess servicing spread pursuant to recapture agreement with PennyMac Financial Services, Inc.	$	557	$	379
Non-cash financing activities:
Dividends declared, not paid	$	46,109	$	25,009

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

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)
March 31, 2021	$	1,170,013	$	473,294		14	%		6	%	$	155,419	$	63,664
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.

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

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

Our Company

We are a specialty finance company that invests primarily in mortgage-related assets. Our objective is to provide attractive risk-adjusted returns to our investors over the long-term, primarily through dividends and secondarily through capital appreciation. Our investment focus is on the mortgage-related assets that we create through our correspondent production activities, including mortgage servicing rights (“MSRs”) and credit risk transfer (“CRT”) arrangements, which include CRT Agreements and CRT strips that absorb credit losses on certain of the loans we 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 PLS.

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 quarter ended March 31, 2021, we recognized investment gain of $154.2 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 $2.6 billion at March 31, 2021.

Interest Rate Sensitive Investments

Our interest rate sensitive investments include:

•

Mortgage servicing rights. During the quarter ended March 31, 2021, we received $407.7 million of MSRs as proceeds from sales of loans acquired for sale. We held $2.4 billion of MSRs at fair value at March 31, 2021.

•

REIT-eligible mortgage-backed or mortgage-related securities. We purchased and sold $1.3 billion of MBS during the quarter ended March 31, 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 $1.9 billion at March 31, 2021.

Correspondent Production

Our correspondent production activities involve the acquisition and sale of newly originated prime credit quality residential loans. Correspondent production serves as the source of our investments in MSRs and, through 2020, CRT arrangements. Our correspondent production and resulting investment activity are summarized below:

		Quarter ended March 31,
		2021		2020
	(in thousands)
Sales of loans acquired for sale:
To nonaffiliates		$	33,318,157	$	19,718,151
To PennyMac Financial Services, Inc.			18,420,614		14,509,209
		$	51,738,771	$	34,227,360
Net gain on loans acquired for sale		$	53,012	$	48,775
Investment activities resulting from correspondent production:
Receipt of MSRs as proceeds from sales of loans		$	407,696	$	248,822
Investments in CRT arrangements:
Recognition of firm commitment to purchase CRT securities (1)			—		(26,649	)
Change in face amount of firm commitment to purchase CRT securities and commitment to fund Deposits securing CRT arrangements			—		554,690
Total investments in CRT arrangements			—		528,041
Total investments resulting from correspondent activities		$	407,696	$	776,863

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

Taxation

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

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

Non-Cash Income

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

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

		Quarter ended March 31,
		2021			2020
	(dollars in thousands)
Net gain (loss) on investments:
Mortgage-backed securities		$	(71,117	)	$	115,967
Loans:
Held in a variable interest entity			(2,345	)		(2,869	)
Distressed			84			(1,142	)
ESS			1,651			(14,141	)
CRT arrangements			106,096			(530,818	)
Firm commitment to purchase CRT securities			—			(492,513	)
Interest-only security payable at fair value			(8,165	)		11,575
Asset-backed financing of a VIE			900			1,928
			27,104			(912,013	)
Net gain on loans acquired for sale (1)			180,787			136,946
Net loan servicing fees—MSR valuation adjustments			278,282			(627,201	)
		$	486,173		$	(1,402,268	)
Net investment income (loss)		$	201,397		$	(506,517	)
Non-cash items as a percentage of net investment income			241	%		277	%

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

We receive or pay cash relating to:

•

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

•

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

•

ESS investments through 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 March 31,
		2021			2020
	(dollar amounts in thousands, except per common share amounts)
Net investment income (loss)		$	201,397		$	(506,517	)
Expenses			110,369			77,908
Pretax income (loss)			91,028			(584,425	)
Provision for income taxes			19,425			10,248
Net income (loss)			71,603			(594,673	)
Dividends on preferred shares			6,234			6,234
Net income (loss) attributable to common shareholders		$	65,369		$	(600,907	)
Pretax income (loss) by segment:
Credit sensitive strategies		$	134,260		$	(960,471	)
Interest rate sensitive strategies			(64,602	)		324,781
Correspondent production			35,577			65,309
Corporate			(14,207	)		(14,044	)
		$	91,028		$	(584,425	)
Annualized return on average common shareholder's equity			12.8	%		(118.9	)%
Earnings (loss) per common share:
Basic		$	0.67		$	(5.99	)
Diluted		$	0.67		$	(5.99	)
Dividends per common share		$	0.47		$	0.25
		March 31, 2021			December 31, 2020
Total assets		$	12,522,254		$	11,492,011
Book value per common share		$	20.90		$	20.30
Closing price per common share		$	19.60		$	17.59

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 and may require us to finance substantial amounts of advances of principal and interest payments to the holders of the securities holding those loans, as well as property tax and insurance costs to protect investor’s interest in the properties collateralizing the loans. As of December 31, 2020, 2.3% of the loans in our MSR portfolio were in COVID-19 pandemic related forbearance provided for under the CARES Act.

The emergence of the COVID-19 pandemic created significant disruption in the financial markets as well as changing market perceptions of future credit losses to be incurred on investments in mortgage loans. The primary effect of this disruption on the Company has been on our credit sensitive strategies. Since the first quarter of 2020, the credit markets have recovered somewhat, as reflected most recently in the $154.0 million in fair value gains we recognized during the quarter ended March 31, 2021.

The mortgage origination market for 2020 was estimated at $4.0 trillion. Current forecasts estimate the origination market to approximate $3.6 trillion for 2021. The uncertainties and strains on many mortgage lenders induced by the COVID-19 pandemic 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 COVID-19 pandemic, which, combined with constraints on mortgage industry origination capacity that existed before the COVID-19 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, our gain-on-sale margins in our correspondent production activities have moderated from 2020 levels.

The current environment caused by the COVID-19 pandemic in the United States is historically unprecedented and the source of much uncertainty surrounding future economic and market prospects and the ongoing effects of this continuing situation on our future

prospects are difficult to anticipate. For further discussion of this and other risks described in our Annual Report on Form 10-K for the year ended December 31, 2020 under the heading “Risk Factors.”

Our results of operations increased by $666.3 million during the quarter ended March 31, 2021, as compared to the quarter ended March 31, 2020, reflecting the effect of the improved the fair value performance of our CRT-related investments partially offset by declines in both MSR valuation performance net of hedging results and MBS fair values during the quarter ended March 31, 2021 as compared to the quarter ended March 31, 2020. The decrease in pretax results is summarized below:

•

Our credit sensitive strategies segment reflects the severe impact of the market conditions during the quarter ended March 31, 2020 on our investments in CRT arrangements; during the quarter ended March 31, 2021, we recognized a $1.1 billion increase in net gains on our CRT arrangements as compared to the quarter ended March 31, 2020.

•

Our interest rate sensitive strategies segment was negatively affected by a decrease in net servicing fees of $194.5 million caused by fair value adjustments net of hedging results to our investment in MSRs, a $187.1 million decrease in gains on MBS and a $15.4 million decrease in net interest income.

•

Growth in production volume in our correspondent production segment was more-than offset by reductions in our gain on sale margins during the quarter ended March 31, 2021, as industry capacity caught up with loan demand resulting in a $29.7 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 March 31,
		2021			2020
	(in thousands)
Net gains on loans acquired for sale		$	53,012		$	48,775
Net loan origination fees			52,902			23,928
Net gains (losses) on investments			83,191			(815,131	)
Net loan servicing fees			50,045			244,572
Net interest (expense) income			(38,719	)		(8,945	)
Other			966			284
		$	201,397		$	(506,517	)

Net Gains on Loans Acquired for Sale

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

		Quarter ended March 31,
		2021			2020
	(in thousands)
From non-affiliates:
Cash loss:
Loans		$	(592,789	)	$	(68,954	)
Hedging activities			463,276			(23,378	)
			(129,513	)		(92,332	)
Non-cash gain:
Receipt of MSRs in loan sale transactions			407,696			248,822
Provision for losses relating to representations and warranties provided in loan sales:
Pursuant to loan sales			(8,513	)		(1,030	)
Reduction in liability due to change in estimate			1,424			1,344
			(7,089	)		314
Recognition of fair value of commitment to purchase credit risk transfer securities relating to loans sold			—			(26,649	)
Change in fair value during the quarter of financial instruments held at quarter end:
IRLCs			(137,243	)		68,231
Loans			83,223			(36,782	)
Hedging derivatives			(165,800	)		(116,990	)
			(219,820	)		(85,541	)
			180,787			136,946
Total from nonaffiliates			51,274			44,614
From PFSI—cash			1,738			4,161
		$	53,012		$	48,775

Interest rate lock commitments issued on loans acquired for sale to nonaffiliates		$	33,997,819		$	19,109,084
Acquisition of loans for sale:
To nonaffiliates		$	36,486,241		$	16,839,835
To PFSI			18,412,062			13,886,914
		$	54,898,303		$	30,726,749

The changes in gain on loans acquired for sale during the quarter ended March 31, 2021, as compared to the same period in 2020, reflect both the effects of increasing demand in the mortgage market on our loan sales volume and of industry capacity catching up with demand on our gain on sale margins.

Non-cash elements of gain on sale of loans

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 MSRs and liability for representations and warranties we recognize represent our estimate of the fair value of future benefits and costs we will realize for years in the future. These estimates represented approximately 756% of our gain on sale of loans at fair value for the quarter ended March 31, 2021 as compared to 511% for the quarter ended March 31, 2020. 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. 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. How we measure and update our measurements of our firm commitment to purchase CRT securities and MSRs is detailed in Note 7 – Fair value – Valuation Techniques and Inputs to the consolidated financial statements included in this Quarterly Report.

We recognize a liability for losses we expect to incur relating to 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 $8.5 million and $1.0 million for the quarters ended March 31, 2021 and 2020, respectively. The increase in the provision relating to current loan sales reflects the increase on our loan sales volume as well as fewer loans being subject to credit risk transfer arrangements.

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 March 31,
	2021		2020
	(in thousands)
Indemnification activity (UPB):
Loans indemnified at beginning of quarter	$	4,583	$	5,697
New indemnifications		—		450
Less: Indemnified loans repaid or refinanced		887		210
Loans indemnified at end of quarter	$	3,696	$	5,937
UPB of loans with deposits received from correspondent sellers collateralizing prospective indemnification losses at end of quarter	$	213	$	603
Repurchase activity (UPB):
Loans repurchased	$	16,094	$	16,282
Less:
Loans repurchased by correspondent sellers		8,047		6,153
Loans resold or repaid by borrowers		6,264		1,237
Net loans repurchased	$	1,783	$	8,892
Net losses charged to liability for representations and warranties	$	15	$	—
At end of quarter:
Loans subject to representations and warranties	$	177,595,762	$	131,049,135
Liability for representations and warranties	$	28,967	$	7,300

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 $1.4 million reduction in liability for representations and warranties during the quarter ended March 31, 2021 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 ended March 31, 2021, as compared to the same period in 2020, reflects an increase in our purchases of loans with delivery fees.

Net Gains (Losses) on Investments

Net gains (losses) on investments is summarized below:

		Quarter ended March 31,
		2021			2020
	(in thousands)
From nonaffiliates:
Mortgage-backed securities		$	(71,117	)	$	115,967
Loans at fair value:
Held in a VIE			(2,345	)		(2,869	)
Distressed			95			(1,142	)
CRT arrangements			154,031			(487,292	)
Firm commitment to purchase CRT securities			—			(492,513	)
Asset-backed financings of a VIE at fair value			900			1,928
Hedging derivatives			(24	)		64,931
			81,540			(800,990	)
From PFSI—ESS			1,651			(14,141	)
		$	83,191		$	(815,131	)

The shift in net gain on investments from a net loss for the quarter ended March 31, 2020, as compared to a gain for the quarter ended March 31, 2021, reflects the effect of the disruption in the credit markets during 2020 on our CRT investments, which has partially reversed as reflected in the valuation gains recognized during the quarter ended March 31, 2021.

Mortgage-Backed Securities

During the quarter ended March 31, 2021, we recognized net valuation loss of $71.1 million as compared to gains of $116.0 million for the same period in 2020. The loss recognized during the quarter ended March 31, 2021 and 2020 reflect the substantial increase in interest rates during the quarter ended March 31, 2021 as compared to decreasing interest rates at the end of the quarter ended March 31, 2020.

Loans at fair value – Held in a VIE

Loans at fair value held in a VIE incurred a loss of $2.3 million during the quarter ended March 31, 2021, as compared to a loss of $2.9 million during the quarter ended March 31, 2020. The losses during the quarter ended March 31, 2021 reflect increasing interest rates during the quarter whereas the losses recognized during the quarter ended March 31, 2020 related to the uncertainty surrounding borrower performance at the onset of the COVID-19 pandemic.

Loans at Fair Value – Distressed

The results on our investment in distressed loans increased by $1.2 million during the quarter ended March 31, 2021, as compared to the same period in 2020. The increase in results reflects the substantial liquidation of our remaining investment in distressed loans. Our investment in distressed loans was $7.8 million as of March 31, 2021.

CRT Arrangements

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

		Quarter ended March 31,
		2021			2020
	(in thousands)
UPB of loans sold					$	14,683,055
Investments — Change in expected face amount of firm commitment to purchase CRT securities					$	554,690
Investment income (loss):
Net gains on loans acquired for sale — Fair value of firm commitment to purchase CRT securities recognized upon sale of loans		$	—		$	(26,649	)
Net gains (losses) on investments:
Derivative and CRT strips:
CRT derivatives
Realized			23,496			17,201
Valuation changes			12,874			(300,943	)
			36,370			(283,742	)
CRT strips
Realized			32,604			14,750
Valuation changes			93,222			(229,875	)
			125,826			(215,125	)
Interest-only security payable at fair value			(8,165	)		11,575
			154,031			(487,292	)
Firm commitments to purchase CRT securities			—			(492,513	)
			154,031			(979,805	)
Interest income — Deposits securing CRT arrangements			168			6,099
		$	154,199		$	(1,000,355	)

Net (recoveries received) payments made to settle (recoveries) losses on CRT arrangements		$	(13,343	)	$	1,517

	March 31, 2021			December 31, 2020
	(in thousands)
Carrying value of CRT arrangements:
Derivative and credit risk transfer strip assets (liabilities), net
CRT derivatives	$	44,676		$	31,795
CRT strips		(109,570	)		(202,792	)
	$	(64,894	)	$	(170,997	)

Deposits securing CRT arrangements	$	2,664,420		$	2,799,263
Interest-only security payable at fair value	$	18,922		$	10,757

CRT arrangement assets pledged to secure borrowings:
Derivative and credit risk transfer assets	$	58,134		$	58,699
Deposits securing CRT arrangements (1)	$	2,664,420		$	2,799,263

UPB of loans — funded CRT arrangements	$	48,403,684		$	58,697,942
Collection status (UPB):
Delinquency
Current	$	45,422,502		$	54,990,381
30-89 days delinquent	$	489,284		$	710,872
90-180 days delinquent	$	472,038		$	693,315
180 or more days delinquent	$	2,014,310		$	2,297,365
Foreclosure	$	5,550		$	6,009
Bankruptcy	$	77,362		$	75,700
Delinquent loans in COVID-19 pandemic-related forbearance:
30-89 days delinquent	$	245,592		$	383,028
90-180 days delinquent	$	353,422		$	546,344
180 or more days delinquent	$	1,614,170		$	1,944,663

(1)	Deposits securing credit risk transfer strip liabilities also secure $123.0 million and $229.7 million in CRT strip and CRT derivative liabilities at March 31, 2021 and December 31, 2020, respectively.

The performance of our investments in CRT arrangements during the quarter ended March 31, 2021 reflects a decrease in market discount rates as uncertainty regarding the potential future impacts of the COVID-19 pandemic decreased as compared to the quarter ended March 31, 2020 during which significant uncertainty about losses resulting from the COVID-19 pandemic affected the valuation of this investment.

ESS Purchased from PFSI

We recognized fair value gains relating to our investment in ESS totaling $1.7 million for the quarter ended March 31, 2021, as compared to fair value losses of $14.1 million for the quarter ended March 31, 2020. The gain was driven by the positive influence on expected future cash flows of the generally rising interest rates during the quarter ended March 31, 2021, as compared to the quarter ended March 31, 2020. The remaining balance of the ESS was repaid during the quarter ended March 31, 2021.

Net Loan Servicing Fees

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

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

Net loan servicing fees are summarized below:

		Quarter ended March 31,
		2021			2020
	(in thousands)
From nonaffiliates:
Contractually specified (1)		$	116,287		$	94,469
Other			16,245			7,191
Effect of changes of fair value of MSRs:
Realization of cashflows			(59,385	)		(63,955	)
Market changes			337,667			(563,246	)
			278,282			(627,201	)
Hedging results			(374,403	)		767,186
			(96,121	)		139,985
Net servicing fees from non-affiliates			36,411			241,645
From PFSI—MSR recapture income			13,634			2,927
Net loan servicing fees		$	50,045		$	244,572
Average servicing portfolio		$	177,161,626		$	136,687,324

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

Net loan servicing fees decreased $194.5 million during the quarter ended March 31, 2021, compared to the quarter ended March 31, 2020, due primarily to the change in valuation results, net of hedging results. We recognized appreciation in fair value of our servicing asset during the quarter ended March 31, 2021 as compared to a loss during the quarter ended March 31, 2020. This improvement was more-than offset by an increase in hedging losses.

Net Interest Expense

Net interest expense is summarized below:

	Quarter ended March 31, 2021								Quarter ended March 31, 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	$	225		$	274,857		0.33	%	$	1,627		$	417,663		1.54	%
Mortgage-backed securities		8,286			2,006,195		1.65	%		15,568			3,544,827		1.74	%
Loans acquired for sale at fair value		22,908			3,618,980		2.53	%		31,523			3,215,418		3.88	%
Loans at fair value:
Held by variable interest entity		1,899			129,122		5.88	%		2,641			253,759		4.12	%
Distressed		253			7,805		12.97	%		59			11,249		2.07	%
		2,152			136,927		6.29	%		2,700			265,008		4.03	%
ESS from PFSI		1,280			87,451		5.85	%		1,974			173,484		4.50	%
Deposits securing CRT arrangements		168			2,743,862		0.02	%		6,099			1,922,190		1.26	%
		35,019			8,868,272		1.58	%		59,491			9,538,590		2.47	%
Placement fees relating to custodial funds		2,532								12,398
Other		38								234
		37,589		$	8,868,272		1.70	%		72,123		$	9,538,590		2.99	%
Liabilities:
Assets sold under agreements to repurchase	$	28,659		$	5,971,290		1.92	%		37,750		$	6,302,900		2.37	%
Mortgage loan participation purchase and sale agreements		164			39,162		1.68	%		338			41,301		3.24	%
Notes payable secured by credit risk transfer and mortgage servicing assets		18,599			2,260,721		3.29	%		19,618			1,860,213		4.17	%
Exchangeable senior notes		5,542			298,554		7.43	%		7,266			460,000		6.25	%
Asset-backed financings of a variable interest entity at fair value		168			120,415		0.56	%		4,527			240,765		7.44	%
Assets sold to PFSI under agreement to repurchase		387			52,803		2.93	%		1,218			105,064		4.65	%
		53,519			8,742,945		2.45	%		70,717			9,010,243		3.10	%
Interest shortfall on repayments of loans serviced for Agency securitizations		22,040								9,439
Interest on loan impound deposits		749								912
		76,308		$	8,742,945		3.49	%		81,068		$	9,010,243		3.56	%
Net interest expense	$	(38,719	)						$	(8,945	)
Net interest margin							-1.75	%							-0.37	%
Net interest spread							-1.80	%							-0.57	%

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

		Quarter ended March 31, 2021
		vs.
		Quarter ended March 31, 2020
		Increase (decrease) due to changes in
								Total
		Rate			Volume			change
	(in thousands)
Assets:
Cash and short-term investments		$	(978	)	$	(424	)	$	(1,402	)
Mortgage-backed securities			(740	)		(6,542	)		(7,282	)
Loans acquired for sale at fair value			(12,075	)		3,460			(8,615	)
Loans at fair value:
Held by variable interest entity			850			(1,592	)		(742	)
Distressed			217			(23	)		194
			1,067			(1,615	)		(548	)
ESS from PFSI			469			(1,163	)		(694	)
Deposits securing CRT arrangements			(7,722	)		1,791			(5,931	)
			(19,979	)		(4,493	)		(24,472	)
Placement fees relating to custodial funds			—			(9,866	)		(9,866	)
Other			—			(196	)		(196	)
			(19,979	)		(14,555	)		(34,534	)
Liabilities:
Assets sold under agreements to repurchase			(7,118	)		(1,973	)		(9,091	)
Mortgage loan participation purchase and sale agreement			(157	)		(17	)		(174	)
Notes payable secured by credit risk transfer and mortgage servicing assets			(4,642	)		3,623			(1,019	)
Exchangeable senior notes			1,159			(2,883	)		(1,724	)
Asset-backed financings of a variable interest entity at fair value			(2,830	)		(1,529	)		(4,359	)
Assets sold to PFSI under agreement to repurchase			(349	)		(482	)		(831	)
			(13,937	)		(3,261	)		(17,198	)
Interest shortfall on repayments of loans serviced for Agency securitizations			—			12,601			12,601
Interest on loan impound deposits			—			(163	)		(163	)
			(13,937	)		9,177			(4,760	)
Net interest expense		$	(6,042	)	$	(23,732	)	$	(29,774	)

The decrease in net interest income during the quarter ended March 31, 2021, as compared to the same period in 2020, is due to:

•

An increase in interest shortfall on repayments of loans serviced for Agency securitizations resulting from the increased levels of prepayment activity in our MSR portfolio. In many cases, when a borrower repays a loan, we are responsible for paying the full month’s interest to the holders of the Agency securities that are backed by the loan regardless of when in the month the borrower repays the loan.

•

A decrease in earnings from placement fees relating to custodial funds managed for borrowers and investors and deposits securing CRT arrangements which reflect the effect of decreasing interest rates we earn on these assets.

Expenses

Our expenses are summarized below:

		Quarter ended March 31,
		2021		2020
	(in thousands)
Earned by PennyMac Financial Services, Inc.:
Loan fulfillment fees		$	60,835	$	41,940
Loan servicing fees			19,093		14,521
Management fees			8,449		9,055
Loan origination			9,308		4,249
Loan collection and liquidation			3,857		750
Safekeeping			1,941		1,658
Professional services			2,224		1,496
Compensation			2,185		519
Other			2,477		3,720
		$	110,369	$	77,908

Expenses increased $32.5 million, or 42%, during the quarter ended March 31, 2021, as compared to the same period in 2020. This increase is primarily due to increased loan fulfillment fees and loan origination costs attributable to increases in our production volumes during the quarter ended March 31, 2021, as compared to 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. The increase in loan fulfillment fees of $18.9 million during the quarter ended March 31, 2021 as compared to 2020, is primarily due to an increase in the volume of loans fulfilled for us by PFSI, partially offset by a change in the fulfillment fee structure described in Note 4 – Transactions with Related Parties.

Loan Servicing Fees

Loan servicing fees payable to PLS are summarized below:

		Quarter ended March 31,
		2021		2020
	(in thousands)
Loan servicing fees:
Loans acquired for sale at fair value		$	543	$	536
Loans at fair value			137		300
MSRs			18,413		13,685
		$	19,093	$	14,521
Average investment in:
Loans acquired for sale at fair value		$	3,618,980	$	3,215,418
Loans at fair value:
Distressed		$	7,805	$	11,249
Held in a VIE		$	129,122	$	253,759
Average MSR portfolio UPB		$	177,161,626	$	136,687,324

Loan servicing fees increased by $4.6 million during the quarter ended March 31, 2021, as compared to the same period in 2020. We incur loan servicing fees primarily in support of our MSR portfolio. The increase in loan servicing fees was due to growth in our portfolio of MSRs 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 March 31,
		2021		2020
	(in thousands)
Base		$	8,449	$	9,055
Performance incentive			—		—
		$	8,449	$	9,055
Average shareholders' equity amounts used to calculate base management fee expense		$	2,310,261	$	2,466,740

Management fees decreased by $606,000 during the quarter ended March 31, 2021 as compared to the same period in 2020. The decrease for the quarter ended March 31, 2021, as compared to the same period in 2020, is due to the decrease in base management fees. The decrease in base management fees reflects the decrease during 2021, as compared to 2020, in the adjusted average shareholders’ equity on which our base management fees are based. We did not recognize performance incentive fees for the quarter ended March 31, 2021 due to the effect of the losses we incurred during the quarter ended March 31, 2020 on our performance compared to the high watermark, which is required to be exceeded to earn quarterly performance incentive fees.

Loan origination

Loan origination expenses increased $5.1 million, or 119%, during the quarter ended March 31, 2021, as compared to the same period in 2020, primarily reflecting the increases in our loan originations produced through our correspondent production activities.

Loan collection and liquidation

Loan collection and liquidation expenses increased $3.1 million during the quarter ended March 31, 2021, as compared to the same period 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 COVID-19 pandemic as an alternative to incurring losses in the CRT arrangements.

Compensation

Compensation expense increased $1.7 million during the quarter ended March 31, 2021, as compared to 2020, primarily due to increased share-based compensation expense, reflecting the increase in expected future vestings of equity awards as a result of our projected earnings performance achieving the targets included in the outstanding performance-based awards.

Other Expenses

Other expenses are summarized below:

		Quarter ended March 31,
		2021		2020
	(in thousands)
Common overhead allocation from PFSI		$	571	$	1,540
Bank service charges			460		541
Technology			409		429
Insurance			435		339
Other			602		871
		$	2,477	$	3,720

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 21.3% with consolidated pretax income of $91 million for the quarter ended March 31, 2021. The Company’s taxable REIT subsidiary (“TRS”) recognized tax expense of $19.4 million on pretax income of $88.1 million for the quarter ended March 31, 2020. For the same period in 2020, the TRS recognized tax expense of $10.1 million on pretax loss of $21.8 million, while the Company’s reported consolidated pretax loss for the quarter ended March 31, 2020 was $584.4 million. 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 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 March 31, 2021, the valuation allowance was reduced to $0 from the $110,000 valuation allowance recorded at December 31, 2020 as the result of positive GAAP income at the TRS for the quarter ended March 31, 2021. The amount of the deferred tax asset 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. 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:

	March 31,		December 31,
	2021		2020
	(in thousands)
Assets
Cash	$	92,842	$	57,704
Investments:
Short-term		108,375		127,295
Mortgage-backed securities at fair value		1,916,485		2,213,922
Loans acquired for sale at fair value		4,646,761		3,551,890
Loans at fair value		117,647		151,734
ESS		—		131,750
Derivative and credit risk transfer strip assets		182,969		164,318
Deposits securing credit risk transfer arrangements		2,664,420		2,799,263
MSRs		2,441,214		1,755,236
REO		17,715		28,709
		12,095,586		10,924,117
Other		333,826		510,190
Total assets	$	12,522,254	$	11,492,011
Liabilities
Debt:
Short-term	$	6,160,149	$	6,326,269
Long-term		3,512,051		2,348,140
		9,672,200		8,674,409
Other		492,911		520,743
Total liabilities		10,165,111		9,195,152
Shareholders’ equity		2,357,143		2,296,859
Total liabilities and shareholders’ equity	$	12,522,254	$	11,492,011

Total assets increased by approximately $1.0 billion, or 9%, during the period from December 31, 2020 through March 31, 2021, primarily due to a $1.1 billion increase in loans acquired for sale at fair value and a $686.0 million increase in MSRs, partially offset by a $ 297.4 million decrease in MBS.

Asset Acquisitions

Our asset acquisitions are summarized below.

Correspondent Production

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

		Quarter ended March 31,
		2021		2020
	(in thousands)
Correspondent loan purchases:
Agency-eligible		$	34,953,955	$	18,926,679
Government-insured or guaranteed-for sale to PLS			18,288,791		14,237,403
Home equity lines of credit			36		1,003
		$	53,242,782	$	33,165,085

During the quarter ended March 31, 2021, we purchased for sale $53.2 billion in fair value of correspondent production loans as compared to $33.2 billion during the quarter ended March 31, 2020. Our ability to increase the level of correspondent production 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 March 31,
		2021			2020
	(in thousands)
Credit sensitive assets:
Change in firm commitment to purchase CRT securities
Fair value					$	(519,162	)
Expected face amount						554,690
						35,528
Interest rate sensitive assets:
MSRs received in loan sales and purchased		$	407,696			248,822
MBS (net of sales)			(41,464	)		1,126,757
ESS received pursuant to a recapture agreement			557			379
			366,789			1,375,958
		$	366,789		$	1,411,486

Our acquisitions during the quarter ended March 31, 2021 and 2020 were financed through the use of a combination of proceeds from borrowings, liquidations of existing investments and proceeds from equity issuances. We continue to identify additional means of increasing our investment portfolio through cash flow from our business activities, existing investments, borrowings, and transactions that minimize current cash outlays. However, we expect that, over time, our ability to continue our investment portfolio growth will depend on our ability to raise additional equity capital.

Investment Portfolio Composition

Mortgage-Backed Securities

Following is a summary of our MBS holdings:

	March 31, 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	$	653,039	$	654,051		9.9		2.0	%	$	1,311,036	$	1,253,755		4.4		2.7	%
Fannie Mae	$	1,263,446	$	1,263,614		10.0		2.0	%		902,886		863,758		5.3		2.5	%
	$	1,916,485	$	1,917,665						$	2,213,922	$	2,117,513

Credit Risk Transfer Transactions

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

CRT Arrangements

Following is a summary of our holding of CRT arrangements:

	March 31, 2021			December 31, 2020
	(in thousands)
Carrying value of CRT arrangements:
Derivative and credit risk transfer strip assets (liabilities), net
CRT strips	$	(109,570	)	$	(202,792	)
CRT derivatives		44,676			31,795
		(64,894	)		(170,997	)
Deposits securing CRT arrangements		2,664,420			2,799,263
Interest-only security payable at fair value		(18,922	)		(10,757	)
	$	2,580,604		$	2,617,509
UPB of loans subject to credit guarantee obligations	$	48,403,684		$	58,697,942

Following is a summary of the composition of the loans underlying our investment in CRT arrangements as of March 31, 2021:

		Year of origination
		2020		2019		2018		2017		2016		2015		Total
	(in millions)
UPB:
Outstanding		$	8,472	$	23,121	$	6,553	$	5,109	$	3,912	$	1,237	$	48,404
Cumulative defaults		$	1	$	15	$	201	$	449	$	154	$	35	$	853
Cumulative losses		$	—	$	0	$	23	$	65	$	20	$	4	$	111

		Year of origination
Original debt-to income ratio		2020			2019			2018			2017			2016			2015			Total
	(in millions)
<25%		$	1,615		$	3,234		$	602		$	629		$	559		$	150		$	6,789
25 - 30%			1,343			2,939			564			574			529			158			6,107
30 - 35%			1,518			3,611			801			794			660			211			7,595
35 - 40%			1,524			4,206			1,086			955			764			264			8,799
40 - 45%			1,503			5,057			1,512			1,314			1,050			373			10,809
>45%			969			4,074			1,988			843			350			81			8,305
		$	8,472		$	23,121		$	6,553		$	5,109		$	3,912		$	1,237		$	48,404
Weighted average			33.8	%		36.0	%		38.8	%		36.5	%		35.2	%		35.6	%		36.0	%

		Year of origination
Origination FICO credit score		2020		2019		2018		2017		2016		2015		Total
	(in millions)
600 - 649		$	68	$	330	$	135	$	52	$	36	$	22	$	643
650 - 699			471		2,285		1,292		785		497		239		5,569
700 - 749			2,171		7,079		2,369		1,786		1,287		409		15,101
750 or greater			5,751		13,364		2,743		2,479		2,092		567		26,996
Not available			11		63		14		7		-		-		95
		$	8,472	$	23,121	$	6,553	$	5,109	$	3,912	$	1,237	$	48,404
Weighted average			761		751		736		744		749		741		749

		Year of origination
Origination loan-to value ratio		2020			2019			2018			2017			2016			2015			Total
	(in millions)
<80%		$	3,877		$	7,845		$	2,073		$	1,591		$	1,533		$	478		$	17,397
80-85%			1,394			4,334			1,559			1,421			1,033			320			10,061
85-90%			567			1,387			313			265			215			67			2,814
90-95%			799			2,488			761			633			449			147			5,277
95-100%			1,835			7,067			1,847			1,199			682			225			12,855
		$	8,472		$	23,121		$	6,553		$	5,109		$	3,912		$	1,237		$	48,404
Weighted average			81.1	%		83.7	%		83.6	%		82.9	%		81.1	%		81.4	%		82.9	%

		Year of origination
Current loan-to value ratio (1)		2020			2019			2018			2017			2016			2015			Total
	(in millions)
<80%		$	6,047		$	16,685		$	5,744		$	4,961		$	3,887		$	1,232		$	38,556
80-85%			1,224			4,096			595			112			19			4			6,050
85-90%			948			1,959			168			29			5			-			3,109
90-95%			234			339			41			7			1			-			622
95-100%			18			37			4			-			-			-			59
>100%			1			5			1			-			-			1			8
		$	8,472		$	23,121		$	6,553		$	5,109		$	3,912		$	1,237		$	48,404
Weighted average			72.8	%		72.2	%		68.0	%		62.7	%		57.3	%		54.1	%		69.1	%

(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		$	999	$	2,438	$	810	$	571	$	763	$	220	$	5,801
FL			881		2,198		802		532		399		107		4,919
TX			1,009		1,923		496		417		492		204		4,541
VA			421		1,017		242		256		295		110		2,341
MD			306		896		268		291		256		74		2,091
Other			4,856		14,649		3,935		3,042		1,707		522		28,711
		$	8,472	$	23,121	$	6,553	$	5,109	$	3,912	$	1,237	$	48,404

		Year of origination
Regional geographic distribution (1)		2020		2019		2018		2017		2016		2015		Total
	(in millions)
Northeast		$	707	$	2,416	$	681	$	664	$	469	$	177	$	5,114
Southeast			2,758		7,867		2,358		1,785		1,234		379		16,381
Midwest			705		2,195		537		478		343		93		4,351
Southwest			2,310		5,359		1,275		997		742		272		10,955
West			1,992		5,284		1,702		1,185		1,124		316		11,603
		$	8,472	$	23,121	$	6,553	$	5,109	$	3,912	$	1,237	$	48,404

(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		$	8,282	$	21,898	$	5,972	$	4,811	$	3,756	$	1,192	$	45,911
90 - 179 Days			30		174		81		50		95		43		473
180+ Days			160		1,046		498		248		60		2		2,014
Foreclosure			—		3		2		—		1		—		6
		$	8,472	$	23,121	$	6,553	$	5,109	$	3,912	$	1,237	$	48,404
Bankruptcy		$	2	$	20	$	24	$	15	$	13	$	3	$	77

Cash Flows

Our cash flows for the quarter ended March 31, 2021 and 2020 are summarized below:

	Quarter ended March 31,
	2021			2020
	(in thousands)
Operating activities	$	(1,869,255	)	$	1,705,250
Investing activities		930,882			(603,960	)
Financing activities		973,511			(105,966	)
Net cash flows	$	35,138		$	995,324

Our cash flows resulted in a net increase in cash of $35.1 million during the quarter ended March 31, 2021, as discussed below.

Operating activities

Cash used in operating activities totaled $1.9 billion during the quarter ended March 31, 2021, as compared to cash provided in operating activities of $1.7 billion during the quarter ended March 31, 2020. Cash flows from operating activities primarily reflect cash flows from loans acquired for sale as shown below:

	Quarter ended March 31,
	2021			2020
	(in thousands)
Operating cash flows from:
Loans acquired for sale	$	(1,512,058	)	$	1,051,629
Other		(357,197	)		653,621
	$	(1,869,255	)	$	1,705,250

Cash flows from loans acquired for sale primarily reflect changes in the level of production inventory from the beginning to end of the quarters presented as well as cash flows relating to related hedging activities.

Investing activities

Net cash provided by our investing activities was $930.9 million for the quarter ended March 31, 2021, as compared to net cash used in our investing activities of $604.0 million for the quarter ended March 31, 2020, due primarily to a shift in investment cash flows relating to our investment in MBS. During the quarter ended March 31, 2020, we made net purchases of MBS totaling $1.0 billion; during the quarter ended March 31, 2021, we recorded net sales and repayments of MBS totaling $223.8 million. This shift was compounded by settlement of excess servicing spread payable from PFSI of $134.6 million.

Financing activities

Net cash provided by our financing activities was $973.5 million for the quarter ended March 31, 2021, as compared to net cash used by our financing activities of $106.0 million for the quarter ended March 31, 2020. This change reflects the increased borrowings to finance the growth in both our inventory of loans acquired for sale and MSRs.

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 described in 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 4.10 and 3.78 at March 31, 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 March 31,
Assets sold under agreements to repurchase			2021		2020
	(in thousands)
Average balance outstanding		$	5,971,290	$	6,302,900
Maximum daily balance outstanding		$	7,208,807	$	8,664,587
Ending balance		$	6,091,973	$	6,348,192

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 $9.8 billion at March 31, 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 $40 million in unrestricted cash and cash equivalents among the Company and/or our subsidiaries; a minimum of $40 million in unrestricted cash and cash equivalents among our Operating Partnership and its consolidated subsidiaries; a minimum of $25 million in unrestricted cash and cash equivalents between PMC and PMH; a minimum of $25 million in unrestricted cash and cash equivalents at PMC; and a minimum of $10 million in unrestricted cash and cash equivalents;

•

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

•

a maximum ratio of total liabilities to tangible net worth of less than 10:1 for PMC and PMH and 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:

•

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

•

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

•

a minimum tangible net worth of $1.25 billion;

•

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

•

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

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

•

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

•

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

•

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.

On August 7, 2020, PMC entered into a master repurchase agreement with Credit Suisse First Boston Mortgage Capital LLC, and Credit Suisse AG, Cayman Islands Branch providing PMC with the ability to finance servicing advances made to support monthly principal and interest to mortgage-backed securities holders as well as other corporate and escrow advances related to servicing delinquent loans. The committed amount available to PMC under the master repurchase agreement is $300 million.

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 March 31, 2021, we have not entered into any off-balance sheet arrangements.

All debt financing arrangements that matured between March 31, 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 March 31, 2021:

Counterparty	Amount at risk
	(in thousands)
Bank of America, N.A.	$	130,166
Credit Suisse First Boston Mortgage Capital LLC		75,611
Royal Bank of Canada		32,331
JPMorgan Chase & Co.		30,676
Barclays Capital Inc.		26,955
Morgan Stanley Bank, N.A.		18,714
Daiwa Capital Markets America Inc.		14,961
Citibank, N.A.		10,807
Goldman Sachs & Co. LLC		9,460
BNP Paribas Corporate & Institutional Banking		7,646
Wells Fargo Securities, LLC		5,141
Amherst Pierpont Securities LLC		4,488
	$	366,956

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 March 31, 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
	(dollar in thousands)
Change in fair value	$	94,475	$	72,615	$	52,209	$	(59,419	)	$	(89,852	)	$	(236,629	)

Mortgage Servicing Rights

The following tables summarize the estimated change in fair value of MSRs as of March 31, 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	$	165,887	$	80,440	$	39,619	$	(38,465	)	$	(75,820	)	$	(147,372	)
Prepayment speed	$	213,267	$	102,804	$	50,496	$	(48,777	)	$	(95,920	)	$	(185,623	)
Annual per-loan cost of servicing	$	62,838	$	31,419	$	15,709	$	(15,709	)	$	(31,419	)	$	(62,838	)

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	$	86,597	$	42,559	$	21,098	$	(20,744	)	$	(41,143	)	$	(80,934	)

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	$	(89,513	)	$	(51,991	)	$	(22,776	)	$	18,525	$	33,747	$	46,209

Loans at Fair Value

The following table summarizes the estimated change in fair value of our loans at fair value held by VIE as of March 31, 2021, net of the effect of changes in fair value of the related asset-backed financing of the VIE at fair value, given several hypothetical (instantaneous) changes in interest rates and parallel shifts in the yield curve:

Interest rate shift in basis points	-200		-75		-50		50			75			200
	(dollar in thousands)
Change in fair value	$	150	$	152	$	120	$	(195	)	$	(323	)	$	(1,105	)

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 March 31, 2021 that have 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 March 31, 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 ended March 31, 2021.

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

4.1	Third Supplemental Indenture, dated as of March 5, 2021, among the Issuer, the Company and the Bank of New York Mellon Trust Company, N.A., as trustee.	8-K	March 5, 2021

4.2	Form of 5.500% Exchangeable Senior Notes due 2026 (included in Exhibit 4.1).	8-K	March 5, 2021

4.3	Amendment No. 4, dated as of March 30, 2021, to the Base Indenture dated as of December 20, 2017, by and among PMT ISSUER TRUST – FMSR, Citibank, N.A., PennyMac Corp. and Credit Suisse First Boston Mortgage Capital LLC.	8-K	March 31, 2021

4.4	Series 2021-FT1 Indenture Supplement, dated as of March 30, 2021, to Base Indenture dated as of December 20, 2017, by and among PMT ISSUER TRUST – FMSR, Citibank, N.A., PennyMac Corp. and Credit Suisse First Boston Mortgage Capital LLC.	8-K	March 31, 2021

10.1† 10.2† 10.3† 10.4†	Amendment No. 1 to Fourth Amended and Restated Flow Servicing Agreement, dated as of March 9, 2021, by and between PennyMac Loan Services, LLC and PennyMac Operating Partnership, L.P. Form of Restricted Stock Award Agreement under the PennyMac Mortgage Investment Trust 2019 Equity Incentive Plan (Net Share Withholding) (2021). Form of Performance Stock Award Agreement under the PennyMac Mortgage Investment Trust 2019 Equity Incentive Plan (Net Share Withholding) (2021). Form of Restricted Stock Award Agreement under the PennyMac Mortgage Investment Trust 2019 Equity Incentive Plan (Non Employee Trustee) (2021).	* * * *

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 March 31, 2021 and December 31, 2020 (ii) the Consolidated Statements of Operation for the quarter ended March 31, 2021 and March 31, 2020, (iii) the Consolidated Statements of Changes in Stockholders’ Equity for the quarter ended March 31, 2021 and March 31, 2020, (iv) the Consolidated Statements of Cash Flows for the quarter ended March 31, 2021 and March 31, 2020 and (v) the Notes to the Consolidated Financial Statements.	*

101.INS	XBRL Instance Document – the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.
101.SCH	Inline XBRL Taxonomy Extension Schema Document
101.CAL	Inline XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF	Inline XBRL Taxonomy Extension Definition Linkbase Document
101.LAB	Inline XBRL Taxonomy Extension Label Linkbase Document
101.PRE	Inline XBRL Taxonomy Extension Presentation Linkbase Document
104	Cover Page Interactive Data File (embedded within the Inline XBRL document)

*	Filed herewith.

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

† Indicates management contract or compensatory plan or arrangement.

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: May 7, 2021	By:	/s/ David A. Spector
		David A. Spector
		Chairman and Chief Executive Officer (Principal Executive Officer)

Dated: May 7, 2021	By:	/s/ Daniel S. Perotti
		Daniel S. Perotti
		Senior Managing Director and Chief Financial Officer (Principal Financial Officer)