PennyMac Mortgage Investment Trust (PMT, NYSE)
Industry: Real Estate / REIT - Mortgage
Annual report, fiscal year 2019



# ANNUAL
REPORT
2019

10 YEARS of INVESTMENT EXCELLENCE



# Mortgage Investment Trust

PennyMac Mortgage Investment Trust (NYSE: PMT) is a specialty finance company that invests primarily in residential mortgage loans and mortgage-related assets. As a real estate investment trust (REIT), our objective is to provide attractive risk-adjusted returns to our shareholders over the long-term, primarily through dividends and secondarily through capital appreciation.

Our investment focus is on mortgage-related assets that we create through our industry-leading correspondent production activities, including mortgage servicing rights (MSRs). In correspondent production, we acquire, pool and securitize or sell newly originated prime credit quality loans. Our interest rate sensitive investments include the MSRs, mortgage-backed securities and related hedge instruments. Our credit sensitive investments primarily consist of credit risk transfer investments related to loans sourced through our correspondent production that were delivered to Fannie Mae.

PMT is managed by PNMAC Capital Management, LLC, a wholly-owned subsidiary of PennyMac Financial Services, Inc. (NYSE: PFSI), and an investment adviser registered with the Securities and Exchange Commission that specializes in mortgage assets. Our correspondent production operations are conducted on a fee-for-service basis by another PennyMac Financial subsidiary, PennyMac Loan Services, LLC, which also services most of the loans in our investment portfolio and the loans for which we retain the obligation to service.



# Mortgage Investment Trust

Dear Fellow Shareholders,

Last year, PMT celebrated 10 years as a public company. PMT was established in 2009 to invest in differentiated residential mortgage strategies made possible through the operational and investment management capabilities of our manager and services provider, PennyMac Financial Services, Inc. (NYSE: PFSI). Our initial strategies focused on distressed mortgage loans, in which PMT was a major investor helping to resolve legacy issues coming out of the Great Recession, and correspondent production, entering this segment of the market to acquire newly originated loans as large banks retreated. Since then, our investment strategies have evolved along with the mortgage market, but throughout our history our manager has been unwavering in its focus on risk management. In particular, our disciplined approach to liquidity and capital planning distinguishes PMT from other mortgage REITs and has been a hallmark of PMT’s success.

2019 was a great year for the company. PMT earned $201 million in net income attributable to common shareholders, an increase of 58 percent from the prior year and representing a return on average common equity of 12 percent. Diluted earnings were $2.42 per common share, up 22 percent from the prior year, and PMT declared dividends of $1.88 per common share for the year. Book value per common share increased to $21.37 from $20.61. Driven by these outstanding financial results, PMT was again among the best performing stocks in the mortgage REIT sector.

Low interest rates helped drive a strong mortgage origination market and PMT, through its leading correspondent production business, achieved record volumes in 2019. For the second half of the year, PMT was the largest correspondent aggregator in the U.S., according to Inside Mortgage Finance, facilitated by our ability to maintain fast turn times and high service levels. PMT’s acquisitions of newly originated conventional loans in the correspondent business totaled $56 billion in unpaid principal balance. PMT’s deliveries under credit risk transfer (CRT) transactions with Fannie Mae resulted in $1.8 billion of new CRT investments and PMT made over $800 million in new mortgage servicing rights (MSR) investments, all generated organically from its correspondent production business.



To support this robust pipeline for new investments, PMT raised $830 million in new common equity at attractive terms through four successfully underwritten offerings and its “at-the-market” offering program. PMT raised additional capital by issuing $210 million of exchangeable senior notes. Just as important for PMT’s capital structure, we successfully executed on an initiative to strengthen the financing for CRT, PMT’s largest investment strategy. In 2017, we implemented a securitization structure to finance our Fannie Mae MSRs using secured term notes whose duration aligned more closely with that of our MSR asset. In 2019, we accomplished the same goal for CRT, issuing over $1.3 billion in three- and four-year term notes to finance our CRT investments; we issued an additional $350 million of three-year notes in early 2020 to finance the remainder of our funded CRT investments. The CRT term notes do not have mark-to-market provisions, eliminating the margin call exposure typically associated with financing through repurchase agreements, which has proven critical during the recent stresses in financial markets.

The financial markets have experienced significant dislocations related to the spread of the novel coronavirus and the resulting economic interruption and slowdown. The strength of PMT’s liquidity and capital position is the result of the disciplined risk management we have employed throughout our history, including our continued success in hedging our MSR investments and our correspondent production pipeline. These market dislocations have resulted in credit spread widening that has driven fair value losses on our CRT investments, but because of their financing structure has had no impact on PMT’s liquidity. While we continue to assess the impact of different possible economic scenarios on our investments, and the situation remains fluid as of this writing, we believe that the fair value losses on our CRT investments are outsized compared to the additional credit losses we expect to incur over the life of these investments. In particular, we believe that PFSI, our manager and subservicer, is well positioned to refinance qualifying borrowers and successfully execute forbearance and other assistance programs to reduce the likelihood of borrower default and ultimate credit losses.

The recent market dislocations have also created opportunities to invest in higher-yielding assets. We reduced the dividend per common share for the first quarter in order to preserve elevated levels of liquidity and capital for investment opportunities in the current environment. While we have curtailed new investments in CRT, we see attractive returns in our core correspondent production business and the resulting MSR investments – with further decreases in interest rates driving a large mortgage origination market and certain competitors forced to reduce or limit their participation – and we are evaluating opportunities to deploy capital in other mortgage investments.



Looking to the rest of 2020 and beyond, we continue to remain optimistic in our ability to deliver attractive risk-adjusted returns to our shareholders. The two of us are working closely with the senior management team, as we always have, to advise and guide the company through these challenging times. We thank you for your continued trust and confidence in PMT.

Sincerely,



Stanford L. Kurland
Executive Chairman
March 31, 2020



David A. Spector
President and Chief Executive Officer
March 31, 2020



## SHARE PERFORMANCE GRAPH

The following graph and table describe certain information comparing the cumulative total return on our common shares of beneficial interest to the cumulative total return of the S&P 500 Index, the Russell 2000, and the SNL U.S. Finance REIT Index. The comparison period is from July 30, 2009, the day our common shares of beneficial interest commenced trading on the NYSE, to December 31, 2019, and the calculation assumes reinvestment of any dividends. The graph and table illustrate the value of a hypothetical investment in our common shares of beneficial interest and the three other indices on July 30, 2009.



<table><tr><td></td><td>7/30/09</td><td>12/31/09</td><td>12/31/10</td><td>12/31/11</td><td>12/31/12</td><td>12/31/13</td><td>12/31/14</td><td>12/31/15</td><td>12/31/16</td><td>12/31/17</td><td>12/31/18</td><td>12/31/19</td></tr><tr><td>PMT</td><td>100</td><td>90</td><td>99</td><td>101</td><td>171</td><td>172</td><td>180</td><td>148</td><td>180</td><td>196</td><td>251</td><td>328</td></tr><tr><td>S&amp;P 500</td><td>100</td><td>114</td><td>131</td><td>134</td><td>155</td><td>206</td><td>234</td><td>237</td><td>266</td><td>324</td><td>309</td><td>407</td></tr><tr><td>Russell 2000</td><td>100</td><td>113</td><td>143</td><td>137</td><td>160</td><td>221</td><td>232</td><td>222</td><td>269</td><td>309</td><td>275</td><td>345</td></tr><tr><td>SNL U.S. Finance REIT \( ^{(1)} \)</td><td>100</td><td>110</td><td>137</td><td>134</td><td>161</td><td>155</td><td>178</td><td>163</td><td>201</td><td>234</td><td>225</td><td>271</td></tr></table>

Source: S&P Global Market Intelligence

(1) The SNL U.S. Finance REIT Index includes all publicly traded (NYSE, NYSE MKT, NASDAQ, OTC) Investment Companies with the following primary focuses: MBS REIT, Mortgage REIT and Specialty Finance REIT in SNL's coverage universe.

The information in the performance graph and table has been obtained from sources believed to be reliable, but neither its accuracy nor its completeness can be guaranteed. The historical information set forth above is not necessarily indicative of future performance. Accordingly, we do not make or endorse any predictions as to future share performance. The share performance graph and table shall not be deemed, under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, to be (i) “soliciting material” or “filed” or (ii) incorporated by reference by any general statement into any filing made by us with the Securities and Exchange Commission, except to the extent that we specifically incorporate such share performance graph and table by reference.



## CORPORATE INFORMATION

Corporate Offices
3043 Townsgate Road
Westlake Village, CA 91361
(818) 224-7028
www.pennymac-reit.com

Independent Registered Public
Accounting Firm
Deloitte & Touche LLP
Los Angeles, CA

Transfer Agent
Computershare Shareowner Services LLC
Jersey City, NJ

2020 Annual Meeting \( ^{*} \) 
The 2020 Annual Meeting of Shareholders will be held at 11:00 a.m. PT on May 14, 2020, at 3043 Townsgate Road, Westlake Village, CA 91361.

Market Data of PennyMac Mortgage
Investment Trust
Common Shares
Traded: New York Stock Exchange
Symbol: PMT

*We intend to hold our Annual Meeting in person. However, we are monitoring developments regarding coronavirus disease 2019 (COVID-19) and are planning for the possibility that the Annual Meeting may be held solely by means of remote communication. If we take this step, we will issue a press release announcing such change in advance, file the announcement with the Securities and Exchange Commission as additional proxy material, and will provide details on how to access and participate in and vote at the Annual Meeting at www.proxyvote.com or on our Investor Relations website at www.pennymac-reit.com/2020AnnMtg.

Pursuant to Rule 303A.12 of the New York Stock Exchange Listed Companies Manual, each listed company CEO must certify to the NYSE each year that he or she is not aware of any violation by the company of NYSE corporate governance listing standards. David A. Spector’s annual CEO certification regarding the NYSE’s corporate governance listing standards was submitted to the NYSE on July 1, 2019.



# UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549

Form 10-K

(Mark One)
☒ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2019

□ 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
(State or other jurisdiction of incorporation or organization)

3043 Townsgate Road, Westlake Village, California
(Address of principal executive offices)

27-0186273

(IRS Employer Identification No.)

91361

(Zip Code)

(818) 224-7442
(Registrant's telephone number, including area code)

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

<table><tr><td>Title of Each Class</td><td>Trading Symbol (s)</td><td>Name of Each Exchange on Which Registered</td></tr><tr><td>Common Shares of Beneficial Interest, $0.01 Par Value</td><td>PMT</td><td>New York Stock Exchange</td></tr><tr><td>8.125% Series A Fixed-to-Floating Rate Cumulative Redeemable Preferred</td><td>PMT/PA</td><td>New York Stock Exchange</td></tr><tr><td>Shares of Beneficial Interest, $0.01 Par Value</td><td></td><td></td></tr><tr><td>8.00% Series B Fixed-to-Floating Rate Cumulative Redeemable Preferred</td><td>PMT/PB</td><td>New York Stock Exchange</td></tr><tr><td>Shares of Beneficial Interest, $0.01 Par Value</td><td></td><td></td></tr></table>

Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☒ No ☐

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐ No ☒

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, a 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

Non-accelerated filer

☒

□

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 ☒

As of June 28, 2019 the aggregate market value of the registrant’s common shares of beneficial interest, $0.01 par value (“common shares”), held by nonaffiliates was $1,679,283,823 based on the closing price as reported on the New York Stock Exchange on that date.

As of February 20, 2020, there were 100,339,851 common shares of the registrant outstanding.

Documents Incorporated By Reference

Document

Definitive Proxy Statement for 2020 Annual Meeting of Shareholders

Parts Into Which Incorporated

Part III



## PENNYMAC MORTGAGE INVESTMENT TRUST
FORM 10-K
December 31, 2019
TABLE OF CONTENTS

Special Note Regarding Forward-Looking Statements.....Page
PART I
Item 1 Business.....6
Item 1A Risk Factors.....6
Item 1B Unresolved Staff Comments.....15
Item 2 Properties.....43
Item 3 Legal Proceedings.....43
Item 4 Mine Safety Disclosures.....43
PART II
Item 5 Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.....44
Item 6 Selected Financial Data.....45
Item 7 Management's Discussion and Analysis of Financial Condition and Results of Operations.....46
Item 7A Quantitative and Qualitative Disclosures About Market Risk.....87
Item 8 Financial Statements and Supplementary Data.....91
Item 9 Changes in and Disagreements With Accountants on Accounting and Financial Disclosure.....91
Item 9A Controls and Procedures.....91
Item 9B Other Information.....94
PART III
Item 10 Directors, Executive Officers and Corporate Governance.....95
Item 11 Executive Compensation.....95
Item 12 Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.....95
Item 13 Certain Relationships and Related Transactions, and Director Independence.....95
Item 14 Principal Accounting Fees and Services.....96
PART IV
Item 15 Exhibits and Financial Statement Schedules.....97
Item 16 Form 10-K Summary.....101
Signatures



# SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Annual Report on Form 10-K (“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 any subsequent Quarterly Reports on Form 10-Q.

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

- changes in our investment objectives or investment or operational strategies, including any new lines of business or new products and services that may subject us to additional risks;

- volatility in our industry, the debt or equity markets, the general economy or the real estate finance and real estate markets specifically, whether the result of market events or otherwise;

- events or circumstances which undermine confidence in the financial 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 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;

- our exposure to risks of loss and disruptions in operations resulting from adverse weather conditions, man-made or natural disasters, the effects of climate change, or other events;

• technology failures, cybersecurity risks and incidents, and our ability to mitigate cybersecurity risks and cyber intrusions;

- our ability to obtain and/or maintain licenses and other approvals in those jurisdictions where required to conduct our business;

• our ability to detect misconduct and fraud;

• our ability to comply with various federal, state and local laws and regulations that govern our business;

• developments in the secondary markets for our loan products;

• legislative and regulatory changes that impact the loan industry or housing market;

- changes in regulations or the occurrence of other events that impact the business, operations or prospects of government agencies such as the Government National Mortgage Association (“Ginnie Mae”), the Federal Housing Administration (the “FHA”) or the Veterans Administration (the “VA”), the U.S. Department of Agriculture (“USDA”), or government-sponsored entities (“GSEs”) such as the Federal National Mortgage Association (“Fannie Mae”) or the Federal Home Loan Mortgage Corporation (“Freddie Mac”) (Fannie Mae, Freddie Mac and Ginnie Mae are each referred to as an “Agency” and, collectively, as the “Agencies”), or such changes that increase the cost of doing business with such entities;

- the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) and its implementing regulations and regulatory agencies, and any other legislative and regulatory changes that impact the business, operations or governance of mortgage lenders and/or publicly-traded companies;

• the Consumer Financial Protection Bureau (“CFPB”) and its issued and future rules and the enforcement thereof;

• changes in government support of homeownership;

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



- 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

## Item 1. Business

The following description of our business should be read in conjunction with the information included elsewhere in this Report. This description contains forward-looking statements that involve risks and uncertainties. Actual results could differ significantly from the projections and results discussed in the forward-looking statements due to the factors described under the caption “Risk Factors” and elsewhere in this Report. References in this Report to “we,” “our,” “us,” “PMT,” or the “Company” refer to PennyMac Mortgage Investment Trust and its consolidated subsidiaries, unless otherwise indicated.

## Our Company

We are a specialty finance company that invests primarily in mortgage-related assets. We were organized in Maryland and began operations in 2009. We conduct substantially all of our operations, and make substantially all of our investments, through PennyMac Operating Partnership, L.P. (our “Operating Partnership”) and its subsidiaries. A wholly-owned subsidiary of ours is the sole general partner, and we are the sole limited partner, of our Operating Partnership. Certain of the activities conducted or investments made by us that are described below are conducted or made through a wholly-owned subsidiary that is a taxable REIT subsidiary (“TRS”) of our Operating Partnership.

The management of our business and execution of our operations is performed on our behalf by subsidiaries of PennyMac Financial Services, Inc. (“PFSI” or “PennyMac”). PFSI is a specialty financial services firm focused on the production and servicing of loans and the management of investments related to the U.S. mortgage market. Specifically:

- We are managed by PNMAC Capital Management, LLC (“PCM” or our “Manager”), a wholly-owned subsidiary of PennyMac and an investment adviser registered with the United States Securities and Exchange Commission (“SEC”) that specializes in, and focuses on, U.S. mortgage assets.

- Our loan production and servicing activities (as described below) are performed on our behalf by another wholly-owned PennyMac subsidiary, PennyMac Loan Services, LLC (“PLS” or our “Servicer”).

Our investment focus is on residential mortgage-backed securities (“MBS”) and mortgage-related assets that we create through our correspondent production activities, including mortgage servicing rights (“MSRs”) and credit risk transfer (“CRT”) investments, including CRT agreements (“CRT Agreements”) and CRT securities (together, “CRT arrangements”). We have acquired these investments largely by purchasing, pooling and selling newly originated prime credit quality residential loans (“correspondent production”), retaining the MSRs relating to such loans and investing in CRT arrangements associated with certain of such loans.

Our business includes four segments: credit sensitive strategies, interest rate sensitive strategies, correspondent production, and corporate.

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

- The interest rate sensitive strategies segment represents the Company’s investments in MSRs, excess servicing spread (“ESS”), Agency and senior non-Agency MBS and the related interest rate hedging activities.

- The correspondent production segment represents the Company’s operations aimed at serving as an intermediary between mortgage lenders and the capital markets by purchasing, pooling and reselling newly originated prime credit quality residential loans either directly or in the form of MBS, using the services of PLS.

- The corporate segment includes management fee and corporate expense amounts and certain interest income.



Following is a summary of our segment results for the years presented:

<table><tr><td rowspan="2"></td><td colspan="6">Year ended December 31,</td></tr><tr><td>2019</td><td>2018</td><td>2017 (in thousands)</td><td>2016</td><td>2015</td><td></td></tr><tr><td>Net investment income:</td><td></td><td></td><td></td><td></td><td></td><td></td></tr><tr><td>Credit sensitive strategies</td><td>$ 191,865</td><td>$ 110,271</td><td>$ 133,400</td><td>$ 66,256</td><td>$ 108,315</td><td></td></tr><tr><td>Interest rate sensitive strategies</td><td>50,650</td><td>133,613</td><td>51,777</td><td>36,651</td><td>39,447</td><td></td></tr><tr><td>Correspondent production</td><td>242,762</td><td>105,606</td><td>131,981</td><td>168,530</td><td>100,400</td><td></td></tr><tr><td>Corporate</td><td>3,538</td><td>1,577</td><td>782</td><td>651</td><td>603</td><td></td></tr><tr><td></td><td>$ 488,815</td><td>$ 351,067</td><td>$ 317,940</td><td>$ 272,088</td><td>$ 248,765</td><td></td></tr><tr><td>Pretax income:</td><td></td><td></td><td></td><td></td><td></td><td></td></tr><tr><td>Credit sensitive strategies</td><td>$ 182,176</td><td>$ 87,251</td><td>$ 102,214</td><td>$ 17,288</td><td>$ 66,038</td><td></td></tr><tr><td>Interest rate sensitive strategies</td><td>1,148</td><td>98,432</td><td>22,683</td><td>14,041</td><td>20,516</td><td></td></tr><tr><td>Correspondent production</td><td>64,593</td><td>16,472</td><td>42,938</td><td>73,842</td><td>36,390</td><td></td></tr><tr><td>Corporate</td><td>(57,276)</td><td>(44,167)</td><td>(43,289)</td><td>(43,408)</td><td>(49,640)</td><td></td></tr><tr><td></td><td>$ 190,641</td><td>$ 157,988</td><td>$ 124,546</td><td>$ 61,763</td><td>$ 73,304</td><td></td></tr><tr><td>Total assets at year end:</td><td></td><td></td><td></td><td></td><td></td><td></td></tr><tr><td>Credit sensitive strategies</td><td>$ 2,364,749</td><td>$ 1,602,776</td><td>$ 1,791,447</td><td>$ 2,288,886</td><td>$ 2,787,064</td><td></td></tr><tr><td>Interest rate sensitive strategies</td><td>4,993,840</td><td>4,373,488</td><td>2,414,423</td><td>2,177,024</td><td>1,640,062</td><td></td></tr><tr><td>Correspondent production</td><td>4,216,806</td><td>1,698,656</td><td>1,302,245</td><td>1,734,290</td><td>1,298,968</td><td></td></tr><tr><td>Corporate</td><td>195,956</td><td>138,441</td><td>96,818</td><td>157,302</td><td>100,830</td><td></td></tr><tr><td></td><td>$ 11,771,351</td><td>$ 7,813,361</td><td>$ 5,604,933</td><td>$ 6,357,502</td><td>$ 5,826,924</td><td></td></tr></table>

In our correspondent production activities, we purchase Agency-eligible loans, jumbo loans and home equity lines of credit. A jumbo loan is a loan in an amount that exceeds the maximum loan amount for eligible loans under Agency guidelines. We then sell Agency-eligible loans meeting the guidelines of Fannie Mae and Freddie Mac on a servicing-retained basis whereby we retain the related MSRs; government loans (insured by the FHA or guaranteed by the VA), which we sell on a servicing-released basis to PLS, a Ginnie Mae approved issuer and servicer; and jumbo loans, which we generally sell on a servicing-retained basis.

Our correspondent production business involves purchases of loans from approved mortgage originators that meet specific criteria related to management experience, financial strength, risk management controls and loan quality. As of December 31, 2019, we had 799 approved sellers, primarily independent mortgage originators and small banks located across the United States. PLS also serves as a source of correspondent production to us. During 2019, we purchased $6.1 billion in UPB of mortgage loans and $5.2 million of home equity lines of credit from PLS. During 2019, we were the second largest correspondent aggregator in the United States as ranked by Inside Mortgage Finance.

Following is a summary of our correspondent production activities:

<table><tr><td rowspan="2"></td><td colspan="6">Year ended December 31,</td></tr><tr><td>2019</td><td>2018</td><td>2017 (in thousands)</td><td>2016</td><td>2015</td><td></td></tr><tr><td>Correspondent loan purchases at fair value:</td><td></td><td></td><td></td><td></td><td></td><td></td></tr><tr><td>Agency-eligible</td><td>$ 63,989,938</td><td>$30,176,215</td><td>$23,742,999</td><td>$23,930,186</td><td>$14,360,888</td><td></td></tr><tr><td>Government-insured or guaranteed-for sale to PLS</td><td>50,499,641</td><td>37,764,019</td><td>42,087,007</td><td>42,171,914</td><td>31,945,396</td><td></td></tr><tr><td>Jumbo</td><td>12,839</td><td>67,501</td><td>—</td><td>10,227</td><td>117,714</td><td></td></tr><tr><td>Home equity lines of credit</td><td>5,182</td><td>—</td><td>—</td><td>—</td><td>—</td><td></td></tr><tr><td>Commercial</td><td>—</td><td>7,263</td><td>69,167</td><td>18,112</td><td>14,811</td><td></td></tr><tr><td></td><td>$114,507,600</td><td>$68,014,998</td><td>$65,899,173</td><td>$66,130,439</td><td>$46,438,809</td><td></td></tr><tr><td>Interest rate lock commitments issued</td><td>$114,895,643</td><td>$66,723,338</td><td>$65,926,958</td><td>$67,139,108</td><td>$48,138,062</td><td></td></tr><tr><td>Fair value of loans at year end pending sale to:</td><td></td><td></td><td></td><td></td><td></td><td></td></tr><tr><td>Nonaffiliates</td><td>$ 3,653,410</td><td>$ 1,557,649</td><td>$ 989,944</td><td>$ 868,496</td><td>$ 614,507</td><td></td></tr><tr><td>PLS</td><td>490,383</td><td>86,308</td><td>279,571</td><td>804,616</td><td>669,288</td><td></td></tr><tr><td></td><td>$ 4,143,793</td><td>$ 1,643,957</td><td>$ 1,269,515</td><td>$ 1,673,112</td><td>$ 1,283,795</td><td></td></tr><tr><td>Number of approved sellers at year-end</td><td>799</td><td>710</td><td>613</td><td>522</td><td>432</td><td></td></tr></table>



The sale of loans to nonaffiliates from our correspondent production activities serves as the source of our investments in MSRs and CRT arrangements, which are summarized below:

<table><tr><td rowspan="3"></td><td colspan="6">Year ended December 31,</td></tr><tr><td>2019</td><td>2018</td><td>2017</td><td>2016</td><td>2015</td><td></td></tr><tr><td colspan="6">(in thousands)</td></tr><tr><td>Sales of loans acquired for sale:</td><td></td><td></td><td></td><td></td><td></td><td></td></tr><tr><td>To nonaffiliates</td><td>$ 61,128,081</td><td>$29,369,656</td><td>$24,314,165</td><td>$23,525,952</td><td>$14,206,816</td><td></td></tr><tr><td>To PennyMac Financial Services, Inc.</td><td>50,110,085</td><td>37,967,724</td><td>42,624,288</td><td>42,051,505</td><td>31,490,920</td><td></td></tr><tr><td></td><td>$111,238,166</td><td>$67,337,380</td><td>$66,938,453</td><td>$65,577,457</td><td>$45,697,736</td><td></td></tr><tr><td>Net gain on loans acquired for sale</td><td>$ 170,164</td><td>$ 59,185</td><td>$ 74,516</td><td>$ 106,442</td><td>$ 51,016</td><td></td></tr><tr><td>Investment activities driven by correspondent production:</td><td></td><td></td><td></td><td></td><td></td><td></td></tr><tr><td>Receipt of MSRs as proceeds from sales of loans</td><td>$ 837,706</td><td>$ 356,755</td><td>$ 290,309</td><td>$ 275,092</td><td>$ 154,474</td><td></td></tr><tr><td>Investments in CRT arrangements:</td><td></td><td></td><td></td><td></td><td></td><td></td></tr><tr><td>Deposits securing CRT arrangements</td><td>$ 933,370</td><td>$ 596,626</td><td>$ 152,641</td><td>$ 306,507</td><td>$ 147,446</td><td></td></tr><tr><td>Recognition of firm commitment to purchase CRT securities (1)</td><td>99,305</td><td>30,595</td><td>—</td><td>—</td><td>—</td><td></td></tr><tr><td>Change in face amount of firm commitment to purchase CRT securities and commitment to fund Deposits securing CRT arrangements</td><td>897,151</td><td>122,581</td><td>390,362</td><td>92,109</td><td>—</td><td></td></tr><tr><td>Total investments in CRT arrangements</td><td>$ 1,929,826</td><td>$ 749,802</td><td>$ 543,003</td><td>$ 398,616</td><td>$ 147,446</td><td></td></tr></table>

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

We also invest in MBS and ESS on MSRs acquired by PLS. We historically invested in distressed mortgage assets (loans and real estate acquired in settlement of loans (“REO”)). We have substantially liquidated our investment in distressed loans and continue the liquidation of our investment in REO.

Following is a summary of our acquisitions of other mortgage-related investments:

<table><tr><td rowspan="3"></td><td colspan="6">Year ended December 31,</td></tr><tr><td>2019</td><td>2018</td><td>2017</td><td>2016</td><td>2015</td><td></td></tr><tr><td colspan="6">(in thousands)</td></tr><tr><td>MBS</td><td>$ 1,250,289</td><td>$ 1,810,877</td><td>$ 251,872</td><td>$ 765,467</td><td>$ 84,828</td><td></td></tr><tr><td>ESS</td><td>1,757</td><td>2,688</td><td>5,244</td><td>6,603</td><td>278,282</td><td></td></tr><tr><td>Distressed loans</td><td>—</td><td>—</td><td>—</td><td>—</td><td>241,981</td><td></td></tr><tr><td></td><td>$ 1,252,046</td><td>$ 1,813,565</td><td>$ 257,116</td><td>$ 772,070</td><td>$ 605,091</td><td></td></tr></table>



Our portfolio of mortgage investments was comprised of the following:

<table><tr><td rowspan="2"></td><td rowspan="2">2019</td><td rowspan="2">2018</td><td colspan="3">December 31,</td></tr><tr><td>2017</td><td>2016</td><td>2015</td></tr><tr><td>Credit sensitive assets:</td><td></td><td></td><td></td><td></td><td></td></tr><tr><td>CRT arrangements (1)</td><td>$ 2,085,647</td><td>$ 1,270,488</td><td>$ 687,507</td><td>$ 465,669</td><td>$ 147,593</td></tr><tr><td>Firm commitment to purchase credit risk transfer securities</td><td>109,513</td><td>37,994</td><td>—</td><td>—</td><td>—</td></tr><tr><td>Distressed loans at fair value</td><td></td><td></td><td></td><td></td><td></td></tr><tr><td>Performing</td><td>3,179</td><td>28,806</td><td>414,785</td><td>611,584</td><td>877,438</td></tr><tr><td>Nonperforming</td><td>11,247</td><td>88,926</td><td>353,648</td><td>742,988</td><td>1,222,956</td></tr><tr><td></td><td>14,426</td><td>117,732</td><td>768,433</td><td>1,354,572</td><td>2,100,394</td></tr><tr><td>REO and real estate held for investment</td><td>65,583</td><td>128,791</td><td>207,089</td><td>303,393</td><td>350,642</td></tr><tr><td>Subordinated interest in loans held in VIE</td><td>9,687</td><td>9,365</td><td>9,661</td><td>8,925</td><td>35,484</td></tr><tr><td>Other (2)</td><td>1,015</td><td>8,559</td><td>9,898</td><td>8,961</td><td>14,590</td></tr><tr><td></td><td>2,176,358</td><td>1,534,935</td><td>1,682,588</td><td>2,141,520</td><td>2,648,703</td></tr><tr><td>Interest rate sensitive assets:</td><td></td><td></td><td></td><td></td><td></td></tr><tr><td>MBS</td><td>2,839,633</td><td>2,610,422</td><td>989,461</td><td>865,061</td><td>322,473</td></tr><tr><td>MSRs</td><td>1,535,705</td><td>1,162,369</td><td>844,781</td><td>656,567</td><td>459,741</td></tr><tr><td>ESS received pursuant to recapture agreement</td><td>178,586</td><td>216,110</td><td>236,534</td><td>288,669</td><td>412,425</td></tr><tr><td>Interest rate hedges (3)</td><td>13,948</td><td>25,276</td><td>9,303</td><td>4,749</td><td>2,282</td></tr><tr><td>Loans held in a VIE, net of asset-backed financing and subordinated interest</td><td>3,320</td><td>4,709</td><td>3,960</td><td>4,346</td><td>172,220</td></tr><tr><td></td><td>4,571,192</td><td>4,018,886</td><td>2,084,039</td><td>1,819,392</td><td>1,369,141</td></tr><tr><td></td><td>$ 6,747,550</td><td>$ 5,553,821</td><td>$ 3,766,627</td><td>$ 3,960,912</td><td>$ 4,017,844</td></tr></table>

(1) Investments in CRT arrangements include deposits securing CRT arrangements, CRT strips and CRT derivatives.

(2) Comprised of small balance commercial loans.

(3) Derivative assets, net of derivative liabilities, excluding interest rate lock commitments (“IRLCs”), CRT derivatives and repurchase agreements derivatives.

Over time, our targeted asset classes may change as a result of changes in the opportunities that are available in the market, among other factors. We may not continue to invest in certain of the investments described above if we believe those types of investments will not provide us with suitable returns or if we believe other types of our targeted assets provide us with better returns.

## Investment Policies

Our board of trustees has adopted the policies set forth below for our investments and borrowings. PCM reviews its compliance with our investment policies regularly and reports periodically to our board of trustees regarding such compliance.

• No investment shall be made that would cause us to fail to qualify as a REIT for U.S. federal income tax purposes;

- No investment shall be made that would cause us to be regulated as an investment company under the Investment Company Act; and

- With the exception of real estate and housing, no single industry shall represent greater than 20% of the investments or total risk exposure in our portfolio.

These investment policies may be changed by a majority of our board of trustees without the approval of, or prior notice to, our shareholders.

We have not adopted a policy that expressly prohibits our trustees, officers, shareholders or affiliates from having a direct or indirect financial interest in any investment to be acquired or disposed of by us or in any transaction to which we are a party or have an interest. We do not have a policy that expressly prohibits any such persons from engaging for their own account in business activities of the types conducted by us. However, our code of business conduct and ethics contains a conflicts of interest policy that prohibits our trustees and officers, as well as employees of PennyMac and its subsidiaries who provide services to us, from engaging in any transaction that involves an actual or apparent conflict of interest with us without the appropriate approval. We also have written policies and procedures for the review and approval of related party transactions, including oversight by designated committees of our board of trustees and PFSI’s board of directors.



## Our Financing Activities

We have pursued growth of our investment portfolio by using a combination of equity and borrowings, primarily in the form of borrowings under agreements to repurchase. We use borrowings to finance our investments and not to speculate on changes in interest rates.

Equity financing

Preferred Shares of Beneficial Interest

Preferred shares of beneficial interest are summarized below:

<table><tr><td rowspan="2">Series</td><td rowspan="2">Description (1)</td><td rowspan="2">Number of shares</td><td rowspan="2">Liquidation preference</td><td rowspan="2">Issuance discount</td><td rowspan="2">Carrying value</td><td colspan="4">Dividends per share, year ended December 31,</td></tr><tr><td>2019</td><td>2018</td><td>2017</td><td></td></tr><tr><td>Fixed-to-floating rate cumulative redeemable preferred</td><td></td><td></td><td></td><td></td><td>(in thousands, except dividends per share)</td><td></td><td></td><td></td><td></td></tr><tr><td>A</td><td>8.125% Issued March 2017</td><td>4,600</td><td>$ 115,000</td><td>$ 3,828</td><td>$ 111,172</td><td>$ 2.03</td><td>$ 2.03</td><td>$ 2.03</td><td>$ 1.59</td></tr><tr><td>B</td><td>8.00% Issued July 2017</td><td>7,800</td><td>195,000</td><td>6,465</td><td>188,535</td><td>$ 2.00</td><td>$ 2.00</td><td>$ 0.89</td><td></td></tr><tr><td></td><td></td><td>12,400</td><td>$ 310,000</td><td>$ 10,293</td><td>$ 299,707</td><td></td><td></td><td></td><td></td></tr><tr><td></td><td></td><td></td><td></td><td></td><td></td><td></td><td></td><td></td><td></td></tr></table>

(1) Par value is $0.01 per share for both series.

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

During July 2017, we issued 7.8 million of our 8.00% Series B Fixed-to-Floating Rate Cumulative Redeemable Preferred Shares of Beneficial Interest, $0.01 par value per share (the “Series B Preferred Shares” and, together with the Series A Preferred Shares, the “Preferred Shares”). From, and including, the date of original issuance to, but not including, June 15, 2024, we pay cumulative dividends on the Series B Preferred Shares at a fixed rate of 8.00% per annum based on the $25.00 per share liquidation preference. From, and including, June 15, 2024 and thereafter, we 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.

We pay quarterly cumulative dividends on the Preferred Shares on the 15th day of each March, June, September and December, provided that if any dividend payment date is not a business day, then the dividend that would otherwise be payable on that dividend payment date may be paid on the following business day.

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 our 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 occurs, we may, at our 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 us or converted into common shares in connection with a change of control by the holders of the Preferred Shares.



## Common Shares of Beneficial Interest

Underwritten Equity Offerings

During 2019, we completed the following underwritten offerings of common shares:

<table><tr><td>Date</td><td>Number of common shares</td><td colspan="2">Average price per share</td><td>Gross proceeds</td><td>Net proceeds</td></tr><tr><td></td><td></td><td colspan="4">(Amounts in thousands, except average price per share)</td></tr><tr><td>February 14, 2019</td><td>7,000</td><td>$     20.64</td><td>$     144,480</td><td>$     142,470</td><td></td></tr><tr><td>May 9, 2019</td><td>8,127</td><td>$     21.15</td><td>171,877</td><td>169,605</td><td></td></tr><tr><td>August 8, 2019</td><td>9,200</td><td>$     21.75</td><td>200,100</td><td>197,773</td><td></td></tr><tr><td>December 13, 2019</td><td>9,200</td><td>$     22.10</td><td>203,320</td><td>200,904</td><td></td></tr><tr><td></td><td>33,527</td><td>$     21.47</td><td>$     719,777</td><td>$     710,752</td><td></td></tr></table>

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

On March 14, 2019, we 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, our common shares having an aggregate offering price of up to $200,000,000. Following is a summary of the activities under the ATM equity offering program:

<table><tr><td>Quarter ended</td><td>Number of common shares</td><td colspan="2">Average price per share</td><td>Gross proceeds</td><td>Net proceeds</td></tr><tr><td></td><td colspan="5">(Amounts in thousands, except average price per share)</td></tr><tr><td>March 31, 2019</td><td>221</td><td>$     20.76</td><td>$     4,588</td><td>$     4,542</td><td></td></tr><tr><td>June 30, 2019</td><td>2,068</td><td>$     21.68</td><td>$     44,844</td><td>$     44,395</td><td></td></tr><tr><td>September 30, 2019</td><td>2,537</td><td>$     22.17</td><td>$     56,256</td><td>$     55,694</td><td></td></tr><tr><td>December 31, 2019</td><td>637</td><td>$     22.32</td><td>$     14,217</td><td>$     14,074</td><td></td></tr><tr><td></td><td>5,463</td><td>$     21.95</td><td>$     119,905</td><td>$     118,705</td><td></td></tr></table>

## Common Share Repurchases

During August 2015, our board of trustees authorized a common share repurchase program. Under the program, as amended, we may repurchase up to $300 million of our outstanding common shares.

The following table summarizes our share repurchase activity:

<table><tr><td rowspan="3"></td><td colspan="5">Year ended December 31,</td><td rowspan="3">Cumulative total</td></tr><tr><td>2018</td><td>2017</td><td>2016</td><td>2015</td><td></td></tr><tr><td colspan="5">(in thousands, except per-share amounts)</td></tr><tr><td>Common shares repurchased</td><td>671</td><td>5,647</td><td>7,368</td><td>1,045</td><td>14,731</td><td></td></tr><tr><td>Cost of common shares repurchased</td><td>$ 10,719</td><td>$ 91,198</td><td>$ 98,370</td><td>$ 16,338</td><td>$ 216,625</td><td></td></tr><tr><td>Average cost per share</td><td>$ 15.96</td><td>$ 16.15</td><td>$ 13.35</td><td>$ 15.65</td><td>$ 14.71</td><td></td></tr></table>

The repurchased common shares were canceled upon settlement of the repurchase transactions and returned to the authorized but unissued common share pool.

## Debt financing

During 2013, our wholly-owned subsidiary, PennyMac Corp. (“PMC”), issued in a private offering $250 million principal amount of 5.375% Exchangeable Senior Notes due May 1, 2020 (the “2020 Notes”). The net proceeds were used to fund our business and investment activities, including the acquisition of distressed loans or other investments; the funding of the continued growth of our correspondent production business, including the purchase of jumbo loans; the repayment of other indebtedness; and general business purposes.



In December 2016, our wholly-owned subsidiary, PennyMac Holdings, LLC (“PMH”), entered into a master repurchase agreement with PLS, pursuant to which PMH sells to PLS participation certificates representing a beneficial interest in Ginnie Mae ESS under an agreement to repurchase. The purchase price is based upon a percentage of the market value of the ESS. Pursuant to the master repurchase agreement, PMH grants to PLS a security interest in all of its right, title and interest in, to and under the ESS and PLS, in turn, re-pledges such ESS along with its interest in all of its Ginnie Mae MSRs under a repurchase agreement to a special purpose entity, which issues variable funding notes and term notes that are secured by such Ginnie Mae assets. The notes are repaid through the cash flows received by the special purpose entity as the lender under its repurchase agreement with PLS, which, in turn, receives cash flows from us under our repurchase agreement secured by the Ginnie Mae ESS. The total unpaid principal balance (“UPB”) outstanding under this facility as of December 31, 2019 was $107.5 million.

During 2017, through PMC and PMH, we entered into a master repurchase agreement with a wholly-owned special purpose entity, PMT ISSUER TRUST-FMSR (“FMSR Issuer Trust”), which issues variable funding notes and term notes that are secured by participation certificates representing a beneficial interest in Fannie Mae MSRs and the related ESS. The notes are repaid through the cash flows received by FMSR Issuer Trust as the lender under the repurchase agreement, pursuant to which PMC grants to the special purpose entity a security interest in all of its right, title and interest in, to and under the MSRs and ESS.

During 2018, the Company, through FMSR Issuer Trust, 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 of 1933, as amended (the "Securities Act"). The 2018-FT1 Notes bear interest at a rate equal to one-month LIBOR plus 2.35% per annum, payable each month beginning in May 2018, on the 25th day of such month or, if such 25th day is not a business day, the next business day. The 2018-FT1 Notes mature on April 25, 2023 or, if extended pursuant to the terms of the related term note indenture supplement, April 25, 2025 (unless earlier redeemed in accordance with their terms).

The 2018-FT1 Notes rank pari passu with the Series 2017-VF1 Note dated December 20, 2017 (the “FMSR VFN”) pledged to Credit Suisse under an agreement to repurchase. The 2018-FT1 Notes and the FMSR VFN are secured by certain participation certificates relating to Fannie Mae MSRs and ESS relating to such MSRs. The total UPB outstanding under such agreement to repurchase as of December 31, 2019 was $446.7 million.

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

On March 29, 2019, we, through our indirect subsidiary, PMT CREDIT RISK TRANSFER TRUST 2019-1R, issued an aggregate principal amount of $295.7 million in secured term notes (the “2019-1R Notes”) to qualified institutional buyers under Rule 144A of the Securities Act. The 2019-1R Notes bear interest at a rate equal to one-month LIBOR plus 2.00% per annum, with an initial payment date that occurred on April 29, 2019 and, with respect to each calendar month thereafter, a payment date that shall occur on the second business day following the latest underlying payment date of all of the underlying series in that calendar month. The 2019-1R Notes mature on March 29, 2022 or, if extended pursuant to the terms of the related indenture, March 27, 2024 (unless earlier redeemed in accordance with their terms). The total UPB outstanding under these notes as of December 31, 2019 was $267.9 million.

On June 11, 2019, we, through our indirect subsidiary, PMT CREDIT RISK TRANSFER TRUST 2019-2R, issued an aggregate principal amount of $638.0 million in secured term notes (the “2019-2R Notes”) to qualified institutional buyers under Rule 144A of the Securities Act. The 2019-2R Notes bear interest at a rate equal to one-month LIBOR plus 2.75% per annum, with an initial payment date of June 27, 2019 and, with respect to each calendar month thereafter, a payment date that shall occur on the second business day following the latest underlying payment date of all of the underlying series in that calendar month. The 2019-2R Notes mature on May 29, 2023 or, if extended pursuant to the terms of the related indenture, June 28, 2025 (unless earlier redeemed in accordance with their terms). The total UPB outstanding under these notes as of December 31, 2019 was $629.5 million.

On October 16, 2019, we, through our indirect subsidiary, PMT CREDIT RISK TRANSFER TRUST 2019-3R, issued an aggregate principal amount of $375.0 million in secured term notes (the “2019-3R Notes”) to qualified institutional buyers under Rule 144A of the Securities Act. The 2019-3R Notes bear interest at a rate equal to one-month LIBOR plus 2.70% per annum, with an initial payment date of November 27, 2019 and, with respect to each calendar month thereafter, a payment date that shall occur on the second business day following the latest underlying payment date of all of the underlying series in that calendar month. The 2019-3R Notes mature on October 27, 2022 or, if extended pursuant to the terms of the related indenture, October 29, 2024 (unless earlier redeemed in accordance with their terms). The total UPB outstanding under these notes as of December 31, 2019 was $354.8 million.



On November 4, 2019, our wholly-owned subsidiary, PMC, issued in a private offering $210 million principal amount of Exchangeable Senior Notes due 2024 (the “2024 Notes”), bearing interest at a rate equal to 5.50% per year, payable semiannually in arrears on May 1 and November 1 of each year, beginning on May 1, 2020. The 2024 Notes will mature on November 1, 2024. The 2024 Notes are exchangeable into cash or common shares, or a combination of cash and common shares. The common shares are exchangeable at a rate of 40.1010 common shares per $1,000 principal amount of the 2024 Notes as of December 31, 2019. The proceeds are used for general corporate purposes, including funding investment activity, which may include investments in CRT arrangements, MSRs, MBS and new products such as home equity lines of credit or prime, non-qualified mortgage loans, as well as working capital.

During February 2020, through our indirect subsidiary, PMT CREDIT RISK TRANSFER TRUST 2020-1R, we issued an aggregate principal amount of $350.0 million in secured term notes (the “2020-1R Notes”) to qualified institutional buyers under Rule 144A of the Securities Act. The 2020-1R Notes bear interest at a rate equal to one-month LIBOR plus 2.35% per annum, with an initial payment date of March 27, 2020 and, with respect to each calendar month thereafter, a payment date that shall occur on the second business day following the latest underlying payment date of all of the underlying series in that calendar month. The 2020-1R Notes mature in February 2023 or, if extended pursuant to the terms of the related indenture, February 2025 (unless earlier redeemed in accordance with their terms).

We maintain multiple master repurchase agreements and mortgage loan participation and sale agreements with money center banks to fund newly originated prime loans purchased from correspondent sellers. The total unpaid principal balance (“UPB”) outstanding under the facilities in existence as of December 31, 2019 was $6.6 billion.

Our borrowings are made under agreements that include various covenants, including the maintenance of profitability and specified levels of cash, adjusted tangible net worth and overall leverage limits. Our ability to borrow under these facilities is limited by the amount of qualifying assets that we hold and that are eligible to be pledged to secure such borrowings and our ability to fund any applicable margin requirements. We are not otherwise required to maintain any specific debt-to-equity ratio, and we believe the appropriate leverage for the particular assets we finance depends on, among other things, the credit quality and risk of such assets. Our declaration of trust and bylaws do not limit the amount of indebtedness we can incur, and our board of trustees has discretion to deviate from or change our financing strategy at any time.

Subject to maintaining our qualification as a REIT and exclusion from registration under the Investment Company Act, we may hedge the interest rate risk associated with the financing of our portfolio.

## Our Manager and Our Servicer

We are externally managed and advised by PCM pursuant to a management agreement. PCM specializes in and focuses on investments in U.S. mortgage assets. PCM has also served as the investment manager to two private investment funds, which were liquidated during 2018.

PCM is responsible for administering our business activities and day-to-day operations, including developing our investment strategies, and sourcing and acquiring mortgage-related assets for our investment portfolio. Pursuant to the terms of the management agreement, PCM provides us with our senior management team, including our officers and support personnel. PCM is subject to the supervision and oversight of our board of trustees and has the functions and authority specified in the management agreement.

We also have a loan servicing agreement with PLS, pursuant to which PLS provides primary and special servicing for our portfolio of residential loans and MSRs. PLS' loan servicing activities include collecting principal, interest and escrow account payments, accounting for and remitting collections to investors in the loans, responding to customer inquiries, and default management activities, including managing loss mitigation, which may include, among other things, collection activities, loan workouts, modifications and refinancings, foreclosures, short sales and sales of REO. Servicing fee rates are based on the delinquency status, activities performed, and other characteristics of the loans serviced and total servicing compensation is established at levels that our Manager believes are competitive with those charged by other primary servicers and specialty servicers. PLS also provided special servicing to the private investment funds and the entities in which those funds invested. PLS acted as the servicer for loans with UPB totaling approximately $368.7 billion, of which $135.4 billion was subserviced for us as of December 31, 2019.



## Operating and Regulatory Structure

## Taxation – REIT Qualification

We have elected to be treated as a REIT under Sections 856 through 860 of the Internal Revenue Code of 1986 (the “Internal Revenue Code”) beginning with our taxable year ended December 31, 2009. Our qualification as a REIT depends upon our ability to meet on a continuing basis, through actual investment and operating results, various complex requirements under the Internal Revenue Code relating to, among other things, the sources of our gross income, the composition and values of our assets, our distribution levels and the diversity of ownership of our common shares. We believe that we are organized in conformity with the requirements for qualification and taxation as a REIT under the Internal Revenue Code, and that our manner of operation enables us to meet the requirements for qualification and taxation as a REIT.

As a REIT, we generally are not subject to U.S. federal income tax on the REIT taxable income we distribute to our shareholders. If we fail to qualify as a REIT in any taxable year and do not qualify for certain statutory relief provisions, we will be subject to U.S. federal income tax at regular corporate rates and may be precluded from qualifying as a REIT for the subsequent four taxable years following the year during which we lost our REIT qualification. Accordingly, our failure to qualify as a REIT could have a material adverse impact on our results of operations and amounts available for distribution to our shareholders.

Even though we have elected to be taxed as a REIT, we are subject to some U.S. federal, state and local taxes on our income or property. A portion of our business is conducted through, and a portion of our income is earned in, our TRS that is subject to corporate income taxation. In general, a TRS of ours may hold assets and engage in activities that we cannot hold or engage in directly and may engage in any real estate or non-real estate related business. A TRS is subject to U.S. federal, state and local corporate income taxes. To maintain our REIT election, at the end of each quarter no more than 20% of the value of a REIT’s assets may consist of stock or securities of one or more TRSs.

If our TRS generates net income, our TRS can declare dividends to us, which will be included in our taxable income and necessitate a distribution to our shareholders. Conversely, if we retain earnings at the TRS level, no distribution is required and we can increase shareholders' equity of the consolidated entity. As discussed in Section 1A of this Report entitled Risk Factors, the combination of the requirement to maintain no more than 20% of our assets in the TRS coupled with the effect of TRS dividends on our income tests creates compliance complexities for us in the maintenance of our qualified REIT status.

The dividends paid deduction of a REIT for qualifying dividends to its shareholders is computed using our taxable income as opposed to net income reported on our financial statements. Taxable income generally differs from net income reported on our financial statements because the determination of taxable income is based on tax laws and regulations and not financial accounting principles.

## Licensing

We and PLS are required to be licensed to conduct business in certain jurisdictions. PLS is, or is taking steps to become, licensed in those jurisdictions and for those activities where it believes it is cost effective and appropriate to become licensed. Through our wholly owned subsidiaries, we are also licensed, or are taking steps to become licensed, in those jurisdictions and for those activities where we believe it is cost effective and appropriate to become licensed. In jurisdictions in which neither we nor PLS is licensed, we do not conduct activity for which a license is required. Our failure or the failure by PLS to obtain any necessary licenses promptly, comply with applicable licensing laws or satisfy the various requirements or to maintain them over time could materially and adversely impact our business.

## Competition

In our correspondent production activities, we compete with large financial institutions and with other independent residential loan producers and servicers. We compete on the basis of product offerings, technical knowledge, and loan quality, speed of execution, rate and fees.

In acquiring mortgage assets, we compete with specialty finance companies, private funds, other mortgage REITs, thrifts, banks, mortgage bankers, insurance companies, mutual funds, institutional investors, investment banking firms, governmental bodies and other entities, which may also be focused on acquiring mortgage-related assets, and therefore may increase competition for the available supply of mortgage assets suitable for purchase.

Many of our competitors are significantly larger than we are and have stronger financial positions and greater access to capital and other resources than we have and may have other advantages over us. Such advantages include the ability to obtain lower-cost financing, such as deposits, and operational efficiencies arising from their larger size.



Some of our competitors may have higher risk tolerances or different risk assessments and may not be subject to the operating constraints associated with REIT tax compliance or maintenance of an exclusion from the Investment Company Act, any of which could allow them to consider a wider variety of investments and funding strategies and to establish more relationships with sellers of mortgage assets than we can.

Because the availability of pools of mortgage assets may fluctuate, the competition for assets and sources of financing may increase. Increased competition for assets may result in our accepting lower returns for acquisitions of residential loans and other assets or adversely influence our ability to bid for such assets at levels that allow us to acquire the assets. An increase in the competition for sources of funding could adversely affect the availability and terms of financing, and thereby adversely affect the market price of our common shares.

To address this competition, we have access to PCM’s professionals and their industry expertise, which we believe provides us with a competitive advantage and helps us assess investment risks and determine appropriate pricing for certain potential investments. We expect this relationship to enable us to compete more effectively for attractive investment opportunities. Furthermore, we believe that our access to PLS’s servicing expertise provides us with a competitive advantage over other companies with a similar focus. However, we can provide no assurance that we will be able to achieve our business goals or expectations due to the competitive and other risks that we face.

## Staffing

We have one employee. All of our officers are employees of PennyMac or its affiliates other than our Executive Chairman, who serves as PFSI's Chairman of the Board. We do not pay our officers any cash compensation under the terms of our management agreement.

## Available Information

Our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, proxy statements and amendments to those reports filed with or furnished to the SEC pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, are available free of charge at www.pennymacortgageinvestmenttrust.com through the investor relations section of our website as soon as reasonably practicable after electronically filing such material with the SEC. The SEC maintains an Internet site that contains reports, proxy and information statements and other information regarding our filings at www.sec.gov. The above references to our website and the SEC’s website do not constitute incorporation by reference of the information contained on those websites and should not be considered part of this document.

## Item 1A. Risk Factors

In addition to the other information set forth in this Report, you should carefully consider the following factors, which could materially affect our business, liquidity, financial condition, results of operations or ability to make distributions to our shareholders in future periods. The risks described below are not the only risks that we face. Additional risks not presently known to us or that we currently deem immaterial may also materially and adversely affect our business, financial condition or results of operations in future periods.

## Risks Related to Our Management and Relationship with Our Manager and Its Affiliates

We are dependent upon PCM and PLS and their resources and may not find suitable replacements if any of our service agreements with PCM or PLS are terminated.

In accordance with our management agreement, we are externally advised and managed by PCM, which makes all or substantially all of our investment, financing and risk management decisions, and has significant discretion as to the implementation of our operating policies and strategies. Under our loan servicing agreement with PLS, PLS provides primary servicing and special servicing for our portfolios of loans and MSRs, and under our mortgage banking services agreement with PLS, PLS provides fulfillment and disposition-related services in connection with our correspondent production business. The costs of these services increase our operating costs and may reduce our net income, but we rely on PCM and PLS to provide these services under these agreements because we have few employees and limited in-house capability to perform the activities independently.

No assurance can be given that the strategies of PCM, PLS or their affiliates under any of these agreements will be successful, that any of them will conduct complete and accurate due diligence or provide sound advice, or that any of them will act in our best interests with respect to the allocation of their resources to our business. The failure of any of them to do any of the above, conduct the business in accordance with applicable laws and regulations or hold all licenses or registrations necessary to conduct the business as currently operated would materially and adversely affect our ability to continue to execute our business plan.



In addition, the terms of these agreements extend until September 12, 2020, subject to automatic renewal for additional 18-month periods, but any of the agreements may be terminated earlier under certain circumstances or otherwise non-renewed. If any agreement is terminated or non-renewed and not replaced by a new agreement, it would materially and adversely affect our ability to continue to execute our business plan.

If our management agreement or loan servicing agreement is terminated or not renewed, we will have to obtain the services from another service provider. We may not be able to replace these services in a timely manner or on favorable terms, or at all. With respect to our mortgage banking services agreement, the services provided by PLS are inherently unique and not widely available, if at all. This is particularly true because we are not a Ginnie Mae licensed issuer, yet we are able to acquire government loans from our correspondent sellers that we know will ultimately be purchased from us by PLS. While we generally have exclusive rights to these services from PLS during the term of our mortgage banking services agreement, in the event of a termination we may not be able to replace these services in a timely manner or on favorable terms, or at all, and we ultimately would be required to compete against PLS as it relates to our correspondent business activities.

## The management fee structure could cause disincentive and/or create greater investment risk.

Pursuant to our management agreement, PCM is entitled to receive a base management fee that is based on our shareholders' equity (as defined in our management agreement) at the end of each quarter. As a result, significant base management fees would be payable to PCM for a given quarter even if we experience a net loss during that quarter. PCM's right to non-performance-based compensation may not provide sufficient incentive to PCM to devote its time and effort to source and maximize risk-adjusted returns on our investment portfolio, which could, in turn, materially and adversely affect the market price of our shares and/or our ability to make distributions to our shareholders.

Conversely, PCM is also entitled to receive incentive compensation under our management agreement based on our performance in each quarter. In evaluating investments and other management strategies, the opportunity to earn incentive compensation based on our net income may lead PCM to place undue emphasis on higher yielding investments and the maximization of short-term income at the expense of other criteria, such as preservation of capital, maintenance of sufficient liquidity and/or management of market risk, in order to achieve higher incentive compensation. Investments with higher yield potential are generally riskier and more speculative.

## The servicing fee structure could create a conflict of interest.

For its services under our loan servicing agreement, PLS is entitled to servicing fees that we believe are competitive with those charged by primary servicers and specialty servicers and include fixed per-loan monthly amounts based on the delinquency, bankruptcy and/or foreclosure status of the serviced loan or the REO, as well as activity fees that generally are fixed dollar amounts. PLS is also entitled to customary ancillary income and certain market-based fees and charges, including boarding and deboarding fees, liquidation and disposition fees, and assumption, modification and origination fees. Because certain of these fees are earned upon reaching a specific milestone, this fee structure may provide PLS with an incentive to foreclose more aggressively or liquidate assets for less than their fair value.

On our behalf, PLS also refinances performing loans and originates new loans to facilitate the disposition of real estate that we acquire through foreclosure. In order to provide PLS with an incentive to produce such loans, PLS is entitled to receive origination fees and other compensation based on market-based pricing and terms that are consistent with the pricing and terms offered by PLS to unaffiliated third parties on a retail basis. This may provide PLS with an incentive to refinance a greater proportion of our loans than it otherwise would and/or to refinance loans on our behalf instead of arranging the refinancings with a third party lender, either of which might give rise to a potential or perceived conflict of interest.

## Termination of our management agreement is difficult and costly.

It is difficult and costly to terminate, without cause, our management agreement. Our management agreement provides that it may be terminated by us without cause under limited circumstances and the payment to PCM of a significant termination fee. The cost to us of terminating our management agreement may adversely affect our desire or ability to terminate our management agreement with PCM without cause. PCM may also terminate our management agreement upon at least 60 days' prior written notice if we default in the performance of any material term of our management agreement and the default continues for a period of 30 days after written notice to us, or where we terminate our loan servicing agreement, our mortgage banking services agreement or certain other of our related party agreements with PCM or PLS without cause (at any time other than at the end of the current term or any automatic renewal term), whereupon in any case we would be required to pay to PCM a significant termination fee. As a result, our desire or ability to terminate any of our related party agreements may be adversely affected to the extent such termination would trigger the right of PCM to terminate the management agreement and our obligation to pay PCM a significant termination fee.



Existing or future entities or accounts managed by PCM may compete with us for, or may participate in, investments, any of which could result in conflicts of interest.

Although our agreements with PCM and PLS provide us with certain exclusivity and other rights and we and PCM have adopted an allocation policy to specifically address some of the conflicts relating to our investment opportunities, there is no assurance that these measures will be adequate to address all of the conflicts that may arise or will address such conflicts in a manner that is favorable to us. Certain of the funds that PCM may advise in the future may have investment objectives that overlap with ours, including funds which have different fee structures, and potential conflicts may arise with respect to decisions regarding how to allocate investment opportunities among those funds and us. We are also limited in our ability to acquire assets that are not qualifying real estate assets and/or real estate related assets, whereas other entities or accounts that PCM may manage in the future may not be so limited. In addition, PCM and the other entities or accounts managed by PCM in the future may participate in some of our investments, which may not be the result of arm’s length negotiations and may involve or later result in potential conflicts between our interests in the investments and those of PCM or such other entities.

We may encounter conflicts of interest in our Manager’s efforts to appropriately allocate its time and services between its own activities and the management of us, and the loss of the services of our Manager’s management team could adversely affect us.

Pursuant to our management agreement, PCM is obligated to provide us with the services of its senior management team, and the members of that team are required to devote such time to us as is necessary and appropriate, commensurate with our level of activity. The members of PCM’s senior management team may have conflicts in allocating their time and services between the operations of PFSI and our activities, and other entities or accounts that they may manage in the future.

Our failure to deal appropriately with various issues that may give rise to reputational risk could cause harm to our business and adversely affect our business, financial condition and results of operations.

Our business is subject to significant reputational risks. If we fail, or appear to fail, to address various issues that may give rise to reputational risk, we could significantly harm our business. Such issues include, but are not limited to, actual or perceived conflicts of interest, violations of legal or regulatory requirements, and any of the other risks discussed in this Item 1A. Similarly, market rumors and actual or perceived association with counterparties who own reputations are under question could harm our business.

As we expand the scope of our businesses, we confront potential conflicts of interest relating to our investment activities that are managed by PCM. The SEC and certain other regulators have increased their scrutiny of potential conflicts of interest, and as we expand the scope of our business, we continue to monitor and address any conflicts between our interests and those of PFSI. We have implemented procedures and controls to be followed when real or potential conflicts of interest arise, but it is possible that potential or perceived conflicts could give rise to the dissatisfaction of, or litigation by, our investors or regulatory enforcement actions.

Appropriately dealing with conflicts of interest is complex and difficult, and our reputation could be damaged if we fail, or appear to fail, to deal appropriately with one or more potential or actual conflicts of interest. Regulatory scrutiny, litigation or reputational risk incurred in connection with conflicts of interest would adversely affect our business in a number of ways and may adversely affect our results of operations. Reputational risk incurred in connection with conflicts of interest could negatively affect our financial condition and business, strain our working relationships with regulators and government agencies, expose us to litigation and regulatory action, impact our ability to attract and retain customers, trading counterparties, investors and employees and adversely affect our business, financial condition, liquidity, results of operations and our ability to make distributions to our shareholders.

Reputational damage can also result from social media and media coverage, whether accurate or not. These factors could impair our working relationships with regulators and government agencies, expose us to litigation and regulatory action, negatively affect our ability to attract and retain customers, trading and financing counterparties and employees, significantly harm our ability to raise capital, and adversely affect our business, financial condition, liquidity, results of operations and our ability to make distributions to our shareholders.

## PCM and PLS both have limited liability and indemnity rights.

Our agreements with PCM and PLS provide that PCM and PLS will not assume any responsibility other than to provide the services specified in the applicable agreements. Our management agreement further provides that PCM will not be responsible for any action of our board of trustees in following or declining to follow its advice or recommendations. In addition, each of PCM and PLS and their respective affiliates, including each such entity’s managers, officers, trustees, directors, employees and members, will be held harmless from, and indemnified by us against, certain liabilities on customary terms. As a result, to the extent we are damaged through certain actions or inactions of PCM or PLS, our recourse is limited and we may not be able to recover our losses.



## Regulatory Risks

We operate in a highly regulated industry and the continually changing federal, state and local laws and regulations could materially and adversely affect our business, financial condition and results of operations.

We are required to comply with a wide array of federal, state and local laws and regulations that regulate, among other things, the manner in which we conduct our loan production and servicing businesses. These regulations directly impact our business and require constant compliance, monitoring and internal and external audits. PLS and the service providers it uses, including outside counsel retained to process foreclosures and bankruptcies, must also comply with some of these legal requirements.

Our failure or the failure of PLS to operate effectively and in compliance with these laws, regulations and rules could subject us to lawsuits or governmental actions and damage our reputation, which could materially and adversely affect our business, financial condition and results of operations. In addition, our failure or the failure of PLS to comply with these laws, regulations and rules may result in increased costs of doing business, reduced payments by borrowers, modification of the original terms of loans, permanent forgiveness of debt, delays in the foreclosure process, increased servicing advances, litigation, reputational damage, enforcement actions, and repurchase and indemnification obligations.

The failure of our correspondent sellers to comply with any applicable laws, regulations and rules may also result in these adverse consequences. PLS has in place a due diligence program designed to assess areas of risk with respect to loans we acquire from such correspondent sellers. However, we may not detect every violation of law and, to the extent any correspondent sellers or other third party originators or servicers with whom we do business fail to comply with applicable laws or regulations and any of their loans or MSRs become part of our assets, it could subject us, as an assignee or purchaser of the related loans or MSRs, to monetary penalties or other losses. While we may have contractual rights to seek indemnity or repurchase from certain of these lenders and third party originators and servicers, if any of them is unable to fulfill its indemnity or repurchase obligations to us to a material extent, our business, financial condition, liquidity, results of operations and ability to make distributions to our shareholders could be materially and adversely affected. Our service providers and vendors are also required to operate in compliance with applicable laws, regulations and rules. Our failure to adequately manage service providers and vendors to mitigate risks of noncompliance with applicable laws may also have these negative results.

The outcome of the 2020 U.S. Presidential and Congressional elections could result in significant policy changes or regulatory uncertainty in our industry. While it is not possible to predict when and whether significant policy or regulatory changes would occur, any such changes on the federal, state or local level could significantly impact, among other things, our operating expenses, the availability of mortgage financing, interest rates, consumer spending, the economy and the geopolitical landscape. To the extent that the new government administration takes action by proposing and/or passing regulatory policies that could have a negative impact on our industry, such actions may have a material adverse effect on our business, financial condition, results of operations and our ability to make distributions to our shareholders.

New rules and regulations and more stringent enforcement of existing rules and regulations by the CFPB or state regulators could result in enforcement actions, fines, penalties and the inherent reputational harm that results from such actions.

Under the Dodd-Frank Act, the CFPB has regulatory authority over certain aspects of our business as a result of our and PLS' residential mortgage banking activities, including, without limitation, the authority to conduct investigations, bring enforcement actions, impose monetary penalties, require remediation of practices, pursue administrative proceedings or litigation and obtain cease and desist orders for violations of applicable federal consumer financial laws. Rules and regulations promulgated under the Dodd-Frank Act or by the CFPB, uncertainty regarding recent changes in leadership (including interim leadership) or authority levels within the CFPB, and actions taken or not taken by the CFPB could result in heightened federal and state regulation and oversight of our business activities, materially and adversely affect the manner in which we conduct our business, and increase costs and potential litigation associated with our or PLS' business activities. Although there has been a decline in enforcement actions by the CFPB under the current government administration, examinations by state regulators and enforcement actions by state attorneys general have increased and may continue to increase in the residential mortgage and servicing sectors.

Our or PLS’ failure to comply with the laws, rules or regulations to which we are subject, whether actual or alleged, would expose us or PLS to fines, penalties or potential litigation liabilities, including costs, settlements and judgments, any of which could have a material adverse effect on our or PLS’ business, liquidity, financial condition and results of operations and our ability to make distributions to our shareholders.



We are highly dependent on U.S. government-sponsored entities and government agencies, and any changes in these entities, their current roles or the leadership at such entities or their regulators could materially and adversely affect our business, liquidity, financial condition and results of operations.

Our ability to generate revenues through loan sales depends on programs administered by the Agencies and others that facilitate the issuance of MBS in the secondary market. Presently, almost all of the newly originated loans that we acquire from mortgage lenders through our correspondent production activities qualify under existing standards for inclusion in mortgage securities backed by the Agencies. We also derive other material financial benefits from these relationships, including the assumption of credit risk by these Agencies on loans included in such mortgage securities in exchange for our payment of guarantee fees, our retention of such credit risk on eligible loans through the purchase of credit risk transfer securities, and the ability to avoid certain loan inventory finance costs through streamlined loan funding and sale procedures.

A number of legislative proposals have been introduced in recent years that would wind down or phase out the GSEs, including a proposal by the current White House administration to end the conservatorship and privatize Fannie Mae and Freddie Mac. It is not possible to predict the scope and nature of the actions that the U.S. government, including the current administration, will ultimately take with respect to the GSEs. Any changes in laws and regulations affecting the relationship between Fannie Mae and Freddie Mac and their regulators or the U.S. federal government, and any changes in leadership at any of these entities could adversely affect our business and prospects. Any discontinuation of, or significant reduction in, the operation of Fannie Mae or Freddie Mac or any significant adverse change in their capital structure, financial condition, activity levels in the primary or secondary mortgage markets or underwriting criteria could materially and adversely affect our business, liquidity, financial condition, results of operations and our ability to make distributions to our shareholders.

Elimination of the traditional roles of Fannie Mae and Freddie Mac, or any changes to the nature or extent of the guarantees provided by Fannie Mae and Freddie Mac or the fees, terms and guidelines that govern our selling and servicing relationships with them could also materially and adversely affect our business, including our ability to sell and securitize loans that we acquire through our correspondent production activities, and the performance, liquidity and market value of our investments. Moreover, any changes to the nature of the GSEs or their guarantee obligations could redefine what constitutes an Agency MBS and could have broad adverse implications for the market and our business, financial condition, liquidity, results of operations and ability to make distributions to our shareholders.

Our ability to generate revenues from newly originated loans that we acquire through our correspondent production activities is also highly dependent on the fact that the Agencies have not historically acquired such loans directly from mortgage lenders, but have instead relied on banks and non-bank aggregators such as us to acquire, aggregate and securitize or otherwise sell such loans to investors in the secondary market. Certain of the Agencies have approved new and smaller lenders that traditionally may not have qualified for such approvals. To the extent that mortgage lenders choose to sell directly to the Agencies rather than through loan aggregators like us, this reduces the number of loans available for purchase, and it could materially and adversely affect our business, financial condition, liquidity, results of operations and ability to make distributions to our shareholders. Similarly, to the extent the Agencies increase the number of purchases and sales for their own accounts, our business and results of operations could be materially and adversely affected.

Our business prospects, financial condition, liquidity and results of operations could be adversely impacted if, and to the extent that, there is no longer a special exemption and qualified mortgage (“QM”) loan designation for certain GSE eligible loans and there are no offsetting changes to the ability to repay (“ATR”) rule.

The Dodd-Frank Act provides that a lender must make “a reasonable, good faith determination” of each borrower’s ability to repay a loan, but may presume that a borrower will be able to repay a loan if such loan has certain characteristics that meet the QM definition. The CFPB adopted its QM definition that establishes rigorous underwriting and product feature requirements for a loan to be deemed a QM. Within those regulations, the CFPB created a special exemption for the GSEs that is generally referred to as the “QM patch,” which allows any GSE-eligible loan to be deemed a QM. The QM patch effectively provides QM designation for GSE eligible loans that have a debt-to-income ratio in excess of 43%, which represents a meaningful portion of the loans currently purchased by the GSEs. Without the QM patch or an alternative, loans with debt-to-income ratios above 43% would not be designated as QMs unless they were insured by a federal agency such as the FHA or VA, which have each adopted their own QM definition that does not currently have a debt-to-income ratio limitation. The QM patch expires on the earlier of the end of the GSEs’ conservatorship or January 10, 2021.

On July 25, 2019, the CFPB released an Advanced Notice of Proposed Rulemaking (“ANPR”) regarding the expiration of the QM patch, specifically stating that the CFPB intends to allow the QM patch to expire in January 2021. In a letter to lawmakers on January 17, 2020, the CFPB signaled it plans to extend the QM patch for a short period until the effective date of a proposed alternative that would replace the 43% DTI requirement or until the end of the GSEs’ conservatorship, whichever comes first. The expiration of the QM patch or any action to modify the QM rule could have significant implications for the U.S. housing and mortgage



market. The GSEs would no longer be able to purchase or guarantee loans with DTIs above 43% and a portion of the type of loans currently originated under the QM patch could move away from the GSEs to other federal agencies or to the private market or not be originated at all. We may be unable to comply with Appendix Q of the ATR rule or to find comfort in the non-QM market, and our borrowers may be unable to meet the 43% DTI requirement. Also, a loan from another federal agency may not be attractive to all borrowers who otherwise would have found financing under the QM patch. The GSEs could also see a significant drop in their origination volumes if changes to the QM rule do not offset the impact of the expiration of the QM patch which may have a significant impact on our CRT arrangements. Further, we may also face operational changes and significant declines in origination volume if the QM patch expires without offsetting changes to the QM rule. Finally, the expiration of the QM patch may have an adverse impact on the volumes of future CRT transactions. All of these events could materially and adversely affect our business, financial condition, liquidity and results of operations.

We and/or PLS are required to have various Agency approvals and state licenses in order to conduct our business and there is no assurance we and/or PLS will be able to obtain or maintain those Agency approvals or state licenses.

Because we and PLS are not federally chartered depository institutions, neither we nor PLS benefits from exemptions to state mortgage lending, loan servicing or debt collection licensing and regulatory requirements. Accordingly, PLS is licensed, or is taking steps to become licensed, in those jurisdictions, and for those activities, where it is required to be licensed and believes it is cost effective and appropriate to become licensed.

Our failure or the failure by PLS to obtain any necessary licenses, comply with applicable licensing laws or satisfy the various requirements to maintain them over time could restrict our direct business activities, result in litigation or civil and other monetary penalties, or cause us to default under certain of our lending arrangements, any of which could materially and adversely impact our business, financial condition, liquidity, results of operations and ability to make distributions to our shareholders.

We and PLS are also required to hold the Agency approvals in order to sell loans to the Agencies and service such loans on their behalf. Our failure, or the failure of PLS, to satisfy the various requirements necessary to maintain such Agency approvals over time would also restrict our direct business activities and could adversely impact our business.

In addition, we and PLS are subject to periodic examinations by federal and state regulators, which can result in increases in our administrative costs, and we or PLS may be required to pay substantial penalties imposed by these regulators due to compliance errors, or we or PLS may lose our licenses. Negative publicity or fines and penalties incurred in one jurisdiction may cause investigations or other actions by regulators in other jurisdictions and could adversely impact our business.

Our or our Servicer’s inability to meet certain net worth and liquidity requirements imposed by the Agencies could have a material adverse effect on our business, financial condition and results of operation.

We and our servicers are subject to minimum financial eligibility requirements for Agency mortgage sellers/servicers and MBS issuers, as applicable. These eligibility requirements align the minimum financial requirements for mortgage sellers/servicers and MBS issuers to do business with the Agencies. These minimum financial requirements, which are described in Liquidity and Capital Resources, include net worth, capital ratio and/or liquidity criteria in order to set a minimum level of capital needed to adequately absorb potential losses and a minimum amount of liquidity needed to service Agency loans and MBS and cover the associated financial obligations and risks.

In order to meet these minimum financial requirements, we and our Servicer are required to maintain rather than spend or invest, cash and cash equivalents in amounts that may adversely affect our or its business, financial condition, liquidity, results of operations and ability to make distributions to our shareholders, and this could significantly impede us and our Servicer, as non-bank mortgage lenders, from growing our respective businesses and place us at a competitive disadvantage in relation to federally chartered banks and certain other financial institutions. To the extent that such minimum financial requirements are not met, the Agencies may suspend or terminate Agency approval or certain agreements with us or our Servicer, which could cause us or our Servicer to cross default under financing arrangements and/or have a material adverse effect on our business, financial condition, liquidity, results of operations and ability to make distributions to our shareholders.

Compliance with changing regulation of corporate governance and public disclosure has resulted, and will continue to result, in increased compliance costs and pose challenges for our Manager’s management team.

Changing federal and state laws, regulations and standards relating to corporate governance and public disclosure, including the Dodd-Frank Act and the rules, regulations and agencies promulgated thereunder, the Sarbanes-Oxley Act of 2002, or the Sarbanes-Oxley Act, and SEC regulations, have created uncertainty for public companies and significantly increased the compliance requirements, costs and risks associated with accessing the U.S. public markets. Our manager’s management team has and will continue to devote significant time and financial resources to comply with both existing and evolving standards for public companies; however, this will continue to lead to increased general and administrative expenses and a diversion of management time and attention from revenue generating activities to compliance activities.



We cannot predict whether there will be additional proposed laws or reforms that would affect us, whether or when such changes may be adopted, how such changes may be interpreted and enforced or how such changes may affect us. However, the costs of complying with any additional laws or regulations could have a material adverse effect on our business, financial condition, liquidity, results of operations and ability to make distributions to our shareholders.

## Market Risks

A prolonged economic slowdown, recession or declining real estate values could materially and adversely affect us.

The risks associated with our investments are more acute during periods of economic slowdown or recession, especially if these periods are accompanied by high unemployment and declining real estate values. A weakening economy, high unemployment and declining real estate values significantly increase the likelihood that borrowers will default on their debt service obligations and that we will incur losses on our investments in the event of a default on a particular investment because the fair value of any collateral we foreclose upon may be insufficient to cover the full amount of such investment or may require a significant amount of time to realize. These factors may also increase the likelihood of re-default rates even after we have completed loan modifications. Any period of increased payment delinquencies, foreclosures or losses could adversely affect the net interest income generated from our portfolio and our ability to make and finance future investments, which would materially and adversely affect our business, financial condition, liquidity, results of operations and our ability to make distributions to our shareholders.

Difficult conditions in the mortgage, real estate and financial markets and the economy generally may adversely affect the performance and fair value of our investments.

The success of our business strategies and our results of operations are materially affected by current conditions in the mortgage markets, the financial markets and the economy generally. Continuing concerns over factors including inflation, deflation, unemployment, personal and business income taxes, healthcare, energy costs, domestic political issues, climate change, the availability and cost of credit, the mortgage markets and the real estate markets have contributed to increased volatility and unclear expectations for the economy and markets going forward. The mortgage markets have been and continue to be affected by changes in the lending landscape, defaults, credit losses and significant liquidity concerns. A destabilization of the real estate and mortgage markets or deterioration in these markets may adversely affect the performance and fair value of our investments, reduce our loan production volume, lower our margins, reduce the profitability of servicing mortgages or adversely affect our ability to sell loans that we acquire, either at a profit or at all. Any of the foregoing could materially and adversely affect our business, financial condition, liquidity, results of operations and ability to make distributions to our shareholders.

A disruption in the MBS market could materially and adversely affect our business, financial condition and results of operations.

In our correspondent production activities, we deliver newly originated Agency-eligible loans that we acquire to Fannie Mae or Freddie Mac to be pooled into Agency MBS securities or transfer government loans that we acquire to PLS, which pools them into Ginnie Mae MBS securities. Disruptions in the general MBS market have occurred in the past. Any significant disruption or period of illiquidity in the general MBS market would directly affect our liquidity because no existing alternative secondary market would likely be able to accommodate on a timely basis the volume of loans that we typically acquire and sell in any given period. Accordingly, if the MBS market experiences a period of illiquidity, we might be prevented from selling the loans that we acquire into the secondary market in a timely manner or at favorable prices or we may be required to repay a portion of the debt securing these assets, which could materially and adversely affect our business, financial condition, results of operations and our ability to make distributions to our shareholders.

We finance our investments with borrowings, which may materially and adversely affect our return on our investments and may reduce cash available for distribution to our shareholders.

We currently leverage and, to the extent available, intend to continue to leverage our investments through borrowings, the level of which may vary based on our investment portfolio characteristics and market conditions. We generally finance our investments with relatively short-term facilities until a sufficient portfolio is accumulated or longer-term financing becomes available. As a result, we are subject to the risks that we would not be able to obtain suitable non-recourse long-term financing or otherwise acquire, during the period that any short-term facilities are available, sufficient eligible assets or securities to maximize the efficiency of a securitization. We also bear the risk that we would not be able to obtain new short-term facilities or to renew any short-term facilities after they expire should we need more time to obtain long-term financing or seek and acquire sufficient eligible assets or securities for a securitization. If we are unable to obtain and renew short-term facilities or to consummate securitizations to finance our investments on a long-term basis, we may be required to seek other forms of potentially less attractive financing or to liquidate assets at an inopportune time or unfavorable price.



Specifically, we have financed certain of our investments through repurchase agreements, pursuant to which we sell securities (including securities we retain through our CRT investments) or loans to lenders (i.e., repurchase agreement counterparties) and receive cash from the lenders. We currently finance our CRT investments through a combination of term notes and repurchase agreements. Unlike MBS and other securities we finance under repurchase agreements, our CRT investment is illiquid in nature and may be subject to greater fluctuations in fair value. Further, the size of our CRT investment makes it a greater likelihood that any margin call could be material in nature, and our inability to satisfy any such margin call or liquidate the underlying collateral may result in significant losses to us.

We also currently finance certain of our MSRs and ESS under secured financing arrangements. Our Freddie Mac MSRs are pledged to secure borrowings under a loan and security agreement, while our Fannie Mae MSRs are pledged to a special purpose entity, which issues variable funding notes and term notes that are secured by such Fannie Mae MSRs and repaid through the cash flows received by the special purpose entity as the lender under a repurchase agreement with PMC. Our Ginnie Mae ESS is sold under a repurchase agreement to PLS as part of a structured finance transaction. PLS, in turn, pledges such ESS along with all of its Ginnie Mae MSRs under a repurchase agreement to a special purpose entity, which issues variable funding notes and term notes that are secured by such Ginnie Mae assets. The notes are repaid through the cash flows received by the special purpose entity as the lender under its repurchase agreement with PLS, which, in turn, receives cash flows from us under our repurchase agreement secured by the Ginnie Mae ESS. In each case, a decrease in the value of the pledged collateral can result in a margin call. Any such margin call may require that we liquidate assets at a disadvantageous time or provide that the secured parties may sell the collateral, either of which could result in significant losses to us. Each of the secured financing arrangements pursuant to which we finance MSRs and ESS is further subject to the terms of an acknowledgement agreement with Fannie Mae, Freddie Mac or Ginnie Mae, as applicable, pursuant to which our and the secured parties' rights are subordinate in all respects to the rights of the applicable Agency. Any extinguishment of our and the secured parties' rights in the related collateral could result in significant losses to us.

We may in the future utilize other sources of borrowings, including term loans, bank credit facilities and structured financing arrangements, among others. The amount of leverage we employ varies depending on the asset class being financed, our available capital, our ability to obtain and access financing arrangements with lenders and the lenders' and rating agencies' estimate of, among other things, the stability of our investment portfolio's cash flow.

Our return on our investments and cash available for distribution to our shareholders may be reduced to the extent that changes in market conditions increase the cost of our financing relative to the income that can be derived from the investments acquired. Our debt service payments also reduce cash flow available for distribution to shareholders. In the event we are unable to meet our debt service obligations, we risk the loss of some or all of our assets to foreclosure or sale to satisfy the obligations.

Our credit and financing agreements contain financial and restrictive covenants that could adversely affect our financial condition and our ability to operate our businesses.

The lenders under our repurchase agreements require us and/or our subsidiaries to comply with various financial covenants, including those relating to tangible net worth, profitability and our ratio of total liabilities to tangible net worth. Our lenders also require us to maintain minimum amounts of cash or cash equivalents sufficient to maintain a specified liquidity position. If we are unable to maintain these liquidity levels, we could be forced to sell additional investments at a loss and our financial condition could deteriorate rapidly.

Our existing credit and financing agreements also contain certain events of default and other financial and non-financial covenants and restrictions that impact our flexibility to determine our operating policies and investment strategies. If we default on our obligations under a credit or financing agreement, fail to comply with certain covenants and restrictions or breach our representations and are unable to cure, the lender may be able to terminate the transaction or its commitments, accelerate any amounts outstanding, require us to post additional collateral or repurchase the assets, and/or cease entering into any other credit transactions with us.

Because our credit and financing agreements typically contain cross-default provisions, a default that occurs under any one agreement could allow the lenders under our other agreements to also declare a default, thereby exposing us to a variety of lender remedies, such as those described above, and potential losses arising therefrom. Any losses that we incur on our credit and financing agreements could materially and adversely affect our business, financial condition, liquidity, results of operations and ability to make distributions to our shareholders.

As the servicer of the assets subject to our repurchase agreements, PLS is also subject to various financial covenants, including those relating to tangible net worth, liquidity, profitability and its ratio of total liabilities to tangible net worth. PLS' failure to comply with any of these covenants would generally result in a servicer termination event or event of default under one or more of our repurchase agreements. Thus, in addition to relying upon PCM to manage our financial covenants, we rely upon PLS to manage its own financial covenants in order to ensure our compliance with our repurchase agreements and our continued access to liquidity and capital. A servicer termination event or event of default resulting from PLS' breach of its financial or other covenants could materially and adversely impact our business, financial condition, liquidity, results of operations and our ability to make distributions to shareholders.



## We may not be able to raise the debt or equity capital required to finance our assets and grow our businesses.

The growth of our businesses requires continued access to debt and equity capital that may or may not be available on favorable terms or at the desired times, or at all. In addition, we invest in certain assets, including MSRs and ESS, for which financing has historically been difficult to obtain. Our inability to continue to maintain debt financing for MSRs and ESS could require us to seek equity capital that may be more costly or unavailable to us.

We are also dependent on a limited number of banking institutions that extend us credit on terms that we have determined to be commercially reasonable. These banking institutions are subject to their own regulatory supervision, liquidity and capital requirements, risk management frameworks and risk thresholds and tolerances, any of which may change materially and negatively impact their willingness to extend credit to us specifically or mortgage lenders and servicers generally. Such actions may increase our cost of capital and limit or otherwise eliminate our access to capital, in which case our business, financial condition, liquidity, results of operations and ability to make distributions to our shareholders would be materially and adversely affected.

In addition, our ability to finance ESS relating to Ginnie Mae MSRs is currently dependent on pass through financing we obtain through our Servicer, which retains the MSRs associated with the ESS we acquire. After our initial acquisition of ESS, we then finance the acquired ESS with our Servicer under a repurchase agreement, and our Servicer, in turn, re-pledges the ESS (along with the related MSRs it retains) under a master repurchase agreement with a special purpose entity, which issues variable funding notes and term notes that are secured by such Ginnie Mae MSRs and ESS and repaid through the cash received by the special purpose entity as the lender under a repurchase agreement with PLS. There can be no assurance this pass through financing will continue to be available to us.

This financing arrangement also subjects us to the credit risk of PLS. To the extent PLS does not apply our payments of principal and interest under the repurchase agreement to the allocable portion of its borrowings under the master repurchase agreement, or to the extent PLS otherwise defaults under the master repurchase agreement, our ESS would be at a risk of total loss. In addition, we provide a guarantee for the amount of borrowings under the master repurchase agreement that are allocable to the pass through financing of our ESS. In the event we are unable to satisfy our obligations under the guaranty following a default by PLS, this could cause us to default under other financing arrangements and/or have a material adverse effect on our business, financial condition, liquidity, results of operations and ability to make distributions to our shareholders.

We can provide no assurance that we will have access to any debt or equity capital on favorable terms or at the desired times, or at all. Our inability to raise such capital or obtain financing on favorable terms could materially and adversely impact our business, financial condition, liquidity, results of operations and our ability to make distributions to shareholders.

In addition, we have been authorized to repurchase up to $300 million of our common shares pursuant to a share repurchase program approved by our board of trustees. As of December 31, 2019, we had $83.4 million remaining under the current board authorization, and we may continue to repurchase shares to the extent we believe it is in the Company’s best interest to do so. Increased activity in our share repurchase program will have the effect of reducing our common shares outstanding, market value and shareholders’ equity, any or all of which could adversely affect the assessment by our lenders, credit providers or other counterparties regarding our net worth and, therefore, negatively impact our ability to raise new capital.

Future issuances of debt securities, which would rank senior to our common shares, and future issuances of equity securities, which would dilute the holdings of our existing shareholders and may be senior to our common shares, may materially and adversely affect the market price of our common shares.

In order to grow our business, we may rely on additional common and preferred equity issuances, which may rank senior and/or be dilutive to our current shareholders, or on less efficient forms of debt financing that rank senior to our shareholders and require a larger portion of our cash flow from operations, thereby reducing funds available for our operations, future business opportunities, cash distributions to our shareholders and other purposes.

During March 2017, we issued 4.6 million of 8.125% Series A Fixed-to-Floating Rate Cumulative Redeemable Preferred Shares and, in July 2017, we also issued 7.8 million of 8.00% Series B Fixed-to-Floating Rate Cumulative Redeemable Preferred Shares. Our outstanding preferred shares have preferences on distribution payments, including liquidating distributions, which could limit our ability to make distributions, including liquidating distributions, to holders of our common shares.

During November 2019, our wholly-owned subsidiary, PMC, issued $210 million of exchangeable senior notes, the 2024 Notes that are exchangeable under certain circumstances for our common shares. Upon liquidation, holders of our debt securities and other loans would receive a distribution of our available assets before holders of our common shares and holders of the 2024 Notes could receive a distribution of PMC’s available assets before holders of our common shares.



We also issued a total of 33.5 million common shares pursuant to underwritten equity offerings during 2019. Subject to applicable law, our board of trustees has the authority, without further shareholder approval, to issue additional debt, common shares and preferred shares on the terms and for the consideration it deems appropriate. We have issued, and/or intend to issue, additional common shares and securities convertible into, or exchangeable or exercisable for, common shares under our equity incentive plan. We have also filed a shelf registration statement, from which we have issued and may in the future issue additional common shares, including, without limitation, through our “at-the-market” equity program.

We also may issue from time to time additional common shares in connection with portfolio or business acquisitions and may grant demand or piggyback registration rights in connection with such issuances. Because our decision to issue securities in any future offering will depend on market conditions and other factors beyond our control, we cannot predict the effect, if any, of future issuances of our common shares, preferred shares or other equity-based securities or the prospect of such issuances on the market price of our common shares. Issuances of a substantial amount of such securities, or the perception that such issuances might occur, could depress the market price of our common shares.

Thus, holders of our common shares bear the risk that our future issuances of debt or equity securities or other borrowings will reduce the market price of our common shares and dilute their ownership in us.

Interest rate fluctuations could significantly decrease our results of operations and cash flows and the fair value of our investments.

Interest rates are highly sensitive to many factors, including governmental monetary and tax policies, domestic and international economic and political considerations and other factors beyond our control. Interest rate fluctuations present a variety of risks to our operations. Our primary interest rate exposures relate to the yield on our investments, their fair values and the financing cost of our debt, as well as any derivative financial instruments that we utilize for hedging purposes.

Changes in interest rates affect our net interest income, which is the difference between the interest income we earn on our interest earning investments and the interest expense we incur in financing these investments. Interest rate fluctuations resulting in our interest expense exceeding interest income may result in operating losses for us. An increase in prevailing interest rates could adversely affect the volume of newly originated mortgages available for purchase in our correspondent production activities.

Changes in the level of interest rates also may affect our ability to make investments, including CRT arrangements, the fair value of our investments (including our pipeline of loan commitments) and any related hedging instruments, the value of newly originated loans acquired through our correspondent production segment, and our ability to realize gains from the disposition of assets. Changes in interest rates may also affect borrower default rates and may impact our ability to refinance or modify loans and/or to sell REO. Decreasing interest rates may cause a large number of borrowers to refinance, which may result in (i) the loss of mortgage servicing business and write-downs of the associated MSRs and ES and (ii) a reduction in the fair value of our CRT arrangements. Any such scenario could materially and adversely affect us.

## We are subject to risks associated with the expected discontinuation of LIBOR.

In July 2017, the head of the United Kingdom Financial Conduct Authority announced the phase out of the use of LIBOR by the end of 2021. To identify a set of alternative interest reference rates to LIBOR, the U.S. Federal Reserve established the Alternative Reference Rates Committee (“ARRC”), a U.S. based working group composed of large U.S. financial institutions. ARRC has identified the Secured Overnight Financing Rate as its preferred replacement for LIBOR, but it is unclear how their preference may impact the risks we maintain to the cessation of LIBOR, or if other benchmarks may emerge as a replacement for LIBOR.

The expected and actual discontinuation of LIBOR could have a significant impact on the financial markets and our business activities. We rely substantially on financing arrangements and liabilities under which our cost of borrowing is based on LIBOR. We also hold assets and instruments used to hedge the value of certain assets that depend for their value on LIBOR. We anticipate significant challenges as it relates to the transition away from LIBOR for all of our LIBOR-based assets, financing arrangements, and liabilities, regardless whether their maturity dates fall before or after the anticipated discontinuation date in 2021. These challenges will include, but will not be limited to, amending agreements underlying our existing and/or new LIBOR-based assets, financing arrangements, and liabilities with appropriate fallback language prior to the discontinuation of LIBOR, and the possibility that LIBOR may deteriorate as a viable benchmark to ensure a fair cost of funds for our LIBOR-linked liabilities, interest income for our LIBOR-linked assets, and/or the fair value of our LIBOR-linked assets and hedges.

We also anticipate additional risks to our current business activities as they relate to the discontinuation of LIBOR. Further, we expect to acquire new LIBOR-based adjustable rate mortgages through our correspondent production business in 2020 and 2021. We also rely on financial models that incorporate LIBOR into their methodologies for financial planning and reporting.



Due to these risks, we expect that both the impending and actual discontinuation of LIBOR could materially affect our interest expense and earnings, our cost of capital, and the fair value of certain of our assets and the instruments we use to hedge their value. For the same reason, we also can provide no assurance that changes in the value of our hedge instruments will effectively offset changes in the value of the assets they are expected to hedge. Our inability to manage these risks effectively may materially and adversely affect our business, financial condition, liquidity and results of operations.

We are subject to market risk and declines in credit quality and changes in credit spreads, which may adversely affect investment income and cause realized and unrealized losses.

We are exposed to the credit markets and subject to the risk that we will incur losses due to adverse changes in credit spreads. Adverse changes to these spreads may occur due to changes in fiscal policy and the economic climate, the liquidity of a market or market segment, insolvency or financial distress of key market makers or participants, or changes in market perceptions of credit worthiness and/or risk tolerance.

We are subject to risks associated with potential declines in our credit quality, credit quality related to specific issuers or specific industries, and a general weakening in the economy, all of which are typically reflected through credit spreads. Credit spread is the additional yield on fixed income securities above the risk-free rate (typically referenced as the yield on U.S. Treasury securities) that market participants require to compensate them for assuming credit, liquidity and/or prepayment risks. Credit spreads vary (i.e. increase or decrease) in response to the market’s perception of risk and liquidity in a specific issuer or specific sector and are influenced by the credit ratings, and the reliability of those ratings, published by external rating agencies. A decline in the quality of our investment portfolio as a result of adverse economic conditions or otherwise could cause additional realized and unrealized losses on our investments.

A decline in credit spreads could have an adverse effect on our investment income as we invest cash in new investments that may earn less than the portfolio’s average yield. An increase in credit spreads could have an adverse effect on the value of our investment portfolio by decreasing the fair values of the credit sensitive investments in our investment portfolio. Any such scenario could materially and adversely affect us.

## Hedging against interest rate exposure may materially and adversely affect our results of operations and cash flows.

We pursue hedging strategies in a manner consistent with the REIT qualification requirements to reduce our exposure to changes in interest rates. Our hedging activity varies in scope based on the level of interest rates, the type of investments held, and changing market conditions. However, while we enter into such transactions seeking to reduce interest rate risk, unanticipated changes in interest rates may result in poorer overall investment performance than if we had not engaged in any such hedging transactions. Interest rate hedging may fail to protect or could adversely affect us because, among other things, it may not fully eliminate interest rate risk, it could expose us to counterparty and default risk that may result in greater losses or the loss of unrealized profits, and it will create additional expense, while any income it generates to offset losses may be limited by federal tax provisions applicable to REITs. Thus, hedging activity, while intended to limit losses, may materially and adversely affect our business, financial condition, liquidity, results of operations and ability to make distributions to our shareholders.

## We utilize derivative financial instruments, which could subject us to risk of loss.

We utilize derivative financial instruments for hedging purposes, which may include swaps, options and futures. However, the prices of derivative financial instruments, including futures and options, are highly volatile, as are payments made pursuant to swap agreements. As a result, the cost of utilizing derivatives may reduce our income that would otherwise be available for distribution to shareholders or for other purposes, and the derivative instruments that we utilize may fail to effectively hedge our positions. We are also subject to credit risk with regard to the counterparties involved in the derivative transactions.

The use of derivative instruments is also subject to an increasing number of laws and regulations, including the Dodd-Frank Act and its implementing regulations. These laws and regulations are complex, compliance with them may be costly and time consuming, and our failure to comply with any of these laws and regulations could subject us to lawsuits or government actions and damage our reputation, which could materially and adversely affect our business, financial condition, liquidity, results of operations and ability to make distributions to our shareholders.



## General Risks

Initiating new business activities or investment strategies, developing new products or significantly expanding existing business activities or investment strategies may expose us to new risks and will increase our cost of doing business.

Initiating new business activities or investment strategies, developing new products, or PennyMac’s recent launch of its home equity line of credit, or significantly expanding existing business activities or investment strategies, such as our entry into non-delegated correspondent production or our acquisition of new mortgage or mortgage-related products, such as non-qualified loans or home equity lines of credit, are ways to grow our businesses and respond to changing circumstances in our industry; however, they may expose us to new risks and regulatory compliance requirements. We cannot be certain that we will be able to manage these risks and compliance requirements effectively. Furthermore, our efforts may not succeed and any revenues we earn from any new or expanded business initiative or investment strategy may not be sufficient to offset the initial and ongoing costs of that initiative, which would result in a loss with respect to that initiative or strategy.

We may not be able to successfully operate our business or generate sufficient operating cash flows to make or sustain distributions to our shareholders.

There can be no assurance that we will be able to generate sufficient cash to pay our operating expenses and make distributions to our shareholders. The results of our operations and our ability to make or sustain distributions to our shareholders depends on many factors, including the availability of attractive risk-adjusted investment opportunities that satisfy our investment strategies and our success in identifying and consummating them on favorable terms, the level and expected movement of home prices, the level and volatility of interest rates, readily accessible short-term and long-term financing on favorable terms, and conditions in the financial markets, real estate market and the economy, as to which no assurance can be given.

We also face substantial competition in acquiring attractive investments, both in our investment activities and correspondent production activities. While we try to diversify our investments among various types of mortgages and mortgage-related assets, the competition for such assets may compress margins and reduce yields, making it difficult for us to make investments with attractive risk-adjusted returns. There can be no assurance that we will be able to successfully transition out of investments producing lower returns into investments that produce better returns, or that we will not seek investments with greater risk to obtain the same level of returns. Any or all of these factors could cause the fair value of our investments to decline substantially and have a material adverse effect on our business, financial condition, liquidity, results of operations and ability to make distributions to our shareholders.

Competition for mortgage assets may limit the availability of desirable investments and result in reduced risk-adjusted returns.

Our profitability depends, in part, on our ability to continue to acquire our targeted investments at favorable prices. As described in greater detail elsewhere in this Report, we compete in our investment activities with other mortgage REITs, specialty finance companies, private funds, banks, mortgage bankers, insurance companies, mutual funds, institutional investors, investment banking firms, depository institutions, governmental bodies and other entities, many of which focus on acquiring mortgage assets. Many of our competitors also have competitive advantages over us, including size, financial strength, access to capital, cost of funds, federal preemption and higher risk tolerance. Competition may result in fewer investments, higher prices, acceptance of greater risk, lower yields and a narrower spread of yields over our financing costs.

We may change our investment strategies and policies without shareholder consent, and this may materially and adversely affect the market value of our common shares and our ability to make distributions to our shareholders.

PCM is authorized by our board of trustees to follow very broad investment policies and, therefore, it has great latitude in determining the types of assets that are proper investments for us, as well as the individual investment decisions. In the future, PCM may make investments with lower rates of return than those anticipated under current market conditions and/or may make investments with greater risks to achieve those anticipated returns. Our board of trustees will periodically review our investment policies and our investment portfolio but will not review or approve each proposed investment by PCM unless it falls outside our investment policies or constitutes a related party transaction.

In addition, in conducting periodic reviews, our board of trustees will rely primarily on information provided to it by PCM. Furthermore, PCM may use complex strategies, and transactions entered into by PCM may be costly, difficult or impossible to unwind by the time they are reviewed by our board of trustees. We also may change our investment strategies and policies and targeted asset classes at any time without the consent of our shareholders, and this could result in our making investments that are different in type from, and possibly riskier than our current investments or the investments currently contemplated. Changes in our investment strategies and policies and targeted asset classes may expose us to new risks or increase our exposure to interest rate risk, counterparty risk, default risk and real estate market fluctuations, and this could materially and adversely affect the market value of our common shares and our ability to make distributions to our shareholders.



## Our correspondent production activities could subject us to increased risk of loss.

In our correspondent production activities, we acquire newly originated loans, including jumbo loans, from mortgage lenders and sell or securitize those loans to or through the Agencies or other third party investors. We also sell the resulting securities into the MBS markets. However, there can be no assurance that PLS will continue to be successful in operating this business on our behalf or that we will continue to be able to capitalize on these opportunities on favorable terms or at all. In particular, we have committed, and expect to continue to commit, capital and other resources to this operation; however, PLS may not be able to continue to source sufficient asset acquisition opportunities to justify the expenditure of such capital and other resources. In the event that PLS is unable to continue to source sufficient opportunities for this operation, there can be no assurance that we would be able to acquire such assets on favorable terms or at all, or that such assets, if acquired, would be profitable to us. In addition, we may be unable to finance the acquisition of these assets and/or may be unable to sell the resulting MBS in the secondary mortgage market on favorable terms or at all. We are also subject to the risk that the fair value of the acquired loans may decrease prior to their disposition. The occurrence of any of these risks could adversely impact our business, financial condition, liquidity, results of operations and ability to make distributions to our shareholders.

The success and growth of our correspondent production activities will depend, in part, upon PLS' ability to adapt to and implement technological changes and to successfully develop, implement and protect its proprietary technology.

Our success in the mortgage industry is highly dependent upon the ability of our servicer, PLS, to adapt to constant technological changes, successfully enhance its current information technology solutions through the use of third-party and proprietary technologies, and introduce new solutions and services that more efficiently address our needs.

Our correspondent production activities are currently dependent, in part, upon the ability of PLS to effectively interface with our mortgage lenders and other third parties and to efficiently process loan fundings and closings. The correspondent production process is becoming more dependent upon technological advancement, and our correspondent sellers expect and require certain conveniences and service levels. In this regard, PLS is in the process of transitioning from an older loan acquisition platform to a new workflow-driven, cloud-based loan acquisition platform. While we anticipate that this new system will increase scalability and produce other efficiencies, there can be no assurance that the new system will prove to be effective or that such correspondent sellers will easily adapt to a new system. Any failure to effectively or timely transition to the new system and meet our expectations and the expectations of our correspondent sellers could have a material adverse effect on our business, financial condition and results of operations.

The development, implementation and protection of these technologies and becoming more proficient with it may also require significant capital expenditures by PLS. As these technological advancements increase in the future, PLS will need to further develop and invest in these technological capabilities to remain competitive. Moreover, litigation has become required for PLS to protect its technologies and such litigation is expected to be time consuming and result in substantial costs and diversion of PLS resources. Any failure of PLS to develop, implement, execute or maintain its technological capabilities and any litigation costs associated with protection of its technologies could adversely affect PLS and its ability to effectively perform its loan production and servicing activities on our behalf which could adversely affect our business, financial condition, liquidity, results of operations and ability to make distributions to our shareholders.

We are not an approved Ginnie Mae issuer and an increase in the percentage or amount of government loans we acquire could be detrimental to our results of operations.

Government-insured or guaranteed loans that are typically securitized through the Ginnie Mae program accounted for 44% of our purchases in 2019. We are not approved as a Ginnie Mae issuer and rely heavily on PLS to acquire such loans from us. As a result, we are unable to produce or own Ginnie Mae MSRs and we earn significantly less income in connection with our acquisition of government loans as opposed to conventional loans. Further, market demand for government loans over conventional loans may increase or PLS may offer pricing to our approved correspondent sellers for government loans that is more competitive in the market than pricing for conventional loans, the result of which may be our acquisition of a greater proportion or amount of government loans. Any significant increase in the percentage or amount of government loans we acquire could adversely impact our business, financial condition, liquidity, results of operations and ability to make distributions to our shareholders.



The industry in which we operate is highly competitive, and is likely to become more competitive, and our inability to compete successfully or decreased margins resulting from increased competition could adversely affect our business, financial condition, liquidity, results of operations and ability to make distributions to our shareholders.

We operate in a highly competitive industry that could become even more competitive as a result of economic, legislative, regulatory and technological changes. Large commercial banks and savings institutions and other independent mortgage lenders and servicers are becoming increasingly competitive in the acquisition of newly originated loans. Many of these institutions have significantly greater resources and access to capital than we do, which may give them the benefit of a lower cost of funds. Additionally, our existing and potential competitors may decide to modify their business models to compete more directly with our correspondent production business. If more non-bank entities enter these markets and as more commercial banks aggressively compete, our correspondent production activities may generate lower volumes and/or margins.

## The risk management efforts of our Manager may not be effective.

We could incur substantial losses and our business operations could be disrupted if our Manager is unable to effectively identify, manage, monitor, and mitigate financial risks, such as credit risk, interest rate risk, prepayment risk, liquidity risk, and other market-related risks, as well as operational and legal risks related to our business, assets, and liabilities. We also are subject to various other laws, regulations and rules that are not industry specific, including health and safety laws, environmental laws and other federal, state and local laws, regulations and rules in the jurisdictions in which we operate. Our Manager’s risk management policies, procedures, and techniques may not be sufficient to identify all of the risks to which we are exposed, mitigate the risks we have identified, or identify additional risks to which we may become subject in the future. Expansion of our business activities may also result in our being exposed to risks to which we have not previously been exposed or may increase our exposure to certain types of risks, and our Manager may not effectively identify, manage, monitor, and mitigate these risks as our business activity changes or increases.

## We could be harmed by misconduct or fraud that is difficult to detect.

We are exposed to risks relating to misconduct by our employees, employees of PennyMac and its subsidiaries, contractors we use, or other third parties with whom we have relationships. For example, such employees could execute unauthorized transactions, use our assets improperly or without authorization, perform improper activities, use confidential information for improper purposes, or misrecord or otherwise try to hide improper activities from us. This type of misconduct could also relate to our assets managed by PCM. This type of misconduct can be difficult to detect and if not prevented or detected could result in claims or enforcement actions against us or losses. Accordingly, misconduct by the employees of PennyMac and its subsidiaries, contractors, or others could subject us to losses or regulatory sanctions and seriously harm our reputation. Our controls may not be effective in detecting this type of activity.

If we fail to maintain an effective system of internal controls, we may not be able to accurately determine our financial results or prevent fraud.

Effective internal controls are necessary for us to provide reliable financial reports and effectively prevent fraud. We may in the future discover areas of our internal controls that need improvement. Section 404 of the Sarbanes-Oxley Act requires us to evaluate and report on our internal control over financial reporting and have our independent auditors annually attest to our evaluation, as well as issue their own opinion on our internal control over financial reporting. While we have undertaken substantial work to comply with Section 404, we cannot be certain that we will be successful in maintaining adequate control over our financial reporting and financial processes. Furthermore, as we continue to grow our business, our internal controls will become more complex, and we will require significantly more resources to ensure our internal controls remain effective.

If we or our independent auditors discover a material weakness, the disclosure of that fact, even if quickly remedied, could result in an event of default under one or more of our lending arrangements and/or reduce the market value of our common shares. Additionally, the existence of any material weakness or significant deficiency could require management to devote significant time and incur significant expense to remediate any such material weakness or significant deficiency, and management may not be able to remediate any such material weakness or significant deficiency in a timely manner, or at all. Accordingly, our failure to maintain effective internal control over financial reporting could result in misstatements of our financial results or restatements of our financial statements or otherwise have a material adverse effect on our business, financial condition, liquidity, results of operations and ability to make distributions to our shareholders.



Cybersecurity risks, cyber incidents and technology failures may adversely affect our business by causing a disruption to our operations, a compromise or corruption of our confidential information, and/or damage to our business relationships, all of which could negatively impact our financial results.

A cyber incident is considered to be any adverse event that threatens the confidentiality, integrity or availability of our information resources. These incidents may be an intentional attack or an unintentional event and could involve gaining unauthorized access to our information systems for purposes of theft of certain personally identifiable information of consumers, misappropriating assets, stealing confidential information, corrupting data or causing operational disruption. The result of these incidents may include disrupted operations, misstated or unreliable financial data, liability for stolen assets or information, increased cybersecurity protection and insurance costs, litigation and damage to our investor relationships.

As our reliance on rapidly changing technology has increased, so have the risks posed to our information systems, both internal and those provided to us by third-party service providers such as cloud-based computing service providers. System disruptions and failures caused by fire, power loss, telecommunications outages, unauthorized intrusion, computer viruses and disabling devices, natural disasters and other similar events may interrupt or delay our ability to provide services to our customers.

Despite efforts by our Manager to ensure the integrity of its systems; its investment in significant physical and technological security measures, employee training, contractual precautions and business continuity plans; and its implementation of policies and procedures designed to help mitigate cybersecurity risks and cyber intrusions, there can be no assurance that any such cyber intrusions will not occur or, if they do occur, that they will be adequately addressed. We also may not be able to anticipate or implement effective preventive measures against all security breaches, especially because the methods of attack change frequently or are not recognized until launched, and because security attacks can originate from a wide variety of sources, including third parties such as persons involved with organized crime or associated with external service providers. We are also held accountable for the actions and inactions of its third-party vendors regarding cybersecurity and other consumer-related matters.

Any of the foregoing events could result in violations of applicable privacy and other laws, financial loss to us or to our customers, loss of confidence in our security measures, customer dissatisfaction, additional regulatory scrutiny, significant litigation exposure and harm to our reputation, any of which could have a material adverse effect on our business, financial condition, liquidity, results of operations and our ability to make distributions to our shareholders.

Terrorist attacks and other acts of violence or war may cause disruptions in our operations and in the financial and housing markets, and could materially and adversely affect the real estate industry generally and our business, financial condition, liquidity and results of operations.

Terrorist attacks and other acts of violence or war may cause disruptions in the U.S. financial and the housing markets, including the real estate capital markets, and negatively impact the U.S. economy in general. Such attacks could also cause disruptions in our operations. Any future terrorist attacks, the anticipation of any such attacks, the consequences of any military or other response by the United States and its allies, and other armed conflicts could cause consumer confidence and spending to decrease or result in increased volatility in the United States and worldwide financial and housing markets and economy. The economic impact of these events could also materially and adversely affect the credit quality of some of our loans and investments and the properties underlying our interests.

We may suffer losses as a result of the adverse impact of any future attacks and these losses may adversely impact our performance and may cause the market value of our common stock to decline or be more volatile. A prolonged economic slowdown, recession or declining real estate values could impair the performance of our investments and harm our financial condition and results of operations, increase our funding costs, limit our access to the capital markets or result in a decision by lenders not to extend credit to us. We cannot predict the severity of the effect that potential future armed conflicts and terrorist attacks would have on us. Losses resulting from these types of events may not be fully insurable.



## Risks Related to Our Investments

## Our retention of credit risk underlying loans we sell to the GSEs is inherently uncertain and exposes us to significant risk of loss.

In conjunction with our correspondent business, we have entered into CRT arrangements with Fannie Mae, whereby we sell pools of loans into Fannie Mae-guaranteed securitizations while retaining a portion of the credit risk and an interest-only (“IO”) ownership interest in such loans or purchasing Agency securities that absorb losses incurred by such loans. Our retention of credit risk subjects us to risks associated with delinquency and foreclosure similar to the risks associated with owning the underlying loans, and exposes us to risk of loss greater than the risks associated with selling the loans to Fannie Mae without the retention of such credit risk. Delinquency can result from many factors including unemployment, weak economic conditions or real estate values, or catastrophic events such as man-made or natural disaster, pandemic, war or terrorist attack. Further, the risks associated with delinquency and foreclosure may in some instances be greater than the risks associated with owning the underlying loans because the structure of certain of the CRT Agreements provides that we may be required to realize losses in the event of delinquency or foreclosure even where there is ultimately no loss realized with respect to the underlying loan (e.g., as a result of a borrower’s re-performance). We are also exposed to market risk 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 the CRT Agreements. Any loss we incur may be significant and may reduce distributions to our shareholders and materially and adversely affect the market value of our common shares.

Our investment strategy is highly dependent upon CRT arrangements, which exposes us to significant capital deployment risk should such investments no longer be offered by the GSEs, supported by the Federal Housing Finance Agency (“FHFA”) or produce the desired returns.

CRT arrangements represent a type of investment that is new to the market and, as such, inherently uncertain and illiquid. Although we believe that CRT arrangements are a long-term investment that can produce attractive risk-adjusted returns through our own mortgage production while aligning with the GSEs strategic goal to attract private capital investment in their credit risk, there can be no assurance that this investment type will continue to be offered by the GSEs, supported by the FHFA or that it will produce the desired returns. Further, our projected returns are highly dependent on certain internal and external models, and it is uncertain whether such models are sufficiently accurate to support our projected returns and/or avoid potentially significant losses. Should this investment no longer be offered, supported, or produce the desired returns, and we are unable to find a suitable alternative investment with similar returns, our business, liquidity, financial condition and results of operations could be materially and adversely affected.

Certain of our historic investments in CRT Agreements may not be eligible REIT assets and we have therefore held such investments in our TRS, resulting in a significant portion of our income from these investments being subject to U.S. federal and state income taxation in order not to jeopardize our REIT status.

Our new investments in CRT securities are structured with the intention of satisfying our REIT qualification requirements. Accordingly, in general we expect to hold investments in such CRT securities in the REIT based on the advice of our tax advisors. However, with respect to certain of our historic investments in CRT Agreements, the REIT eligibility of the assets subject to the CRT Agreements and the income relating thereto remains uncertain. Accordingly, in general we currently hold such investments in our TRS, although we have on occasion based on the advice of tax advisors held such positions in the REIT and may do so in the future as well, depending on the precise structure of such investments and our level of certainty that such investments are in a form consistent with their characterization as qualifying assets for a REIT. If the Internal Revenue Service (“IRS”) were to take a position adverse to our interpretation, the consequences of such action could materially and adversely affect our business, financial condition, liquidity, results of operations, and our ability to make distributions to our shareholders.

A portion of our investments is in the form of loans, and the loans in which we invest and the loans underlying the MBS in which we invest subject us to costs and losses arising from delinquency and foreclosure, as well as the risks associated with residential real estate and residential real estate-related investments, any of which could result in losses to us.

We have invested in performing and nonperforming residential loans and, through our correspondent production business, newly originated prime credit quality residential loans. Residential loans are typically secured by single-family residential property and are subject to risks and costs associated with delinquency and foreclosure and the resulting risks of loss.

Our investments in loans and MBS also subject us to the risks of residential real estate and residential real estate-related investments, including, among others: (i) declines in the value of residential real estate; (ii) risks related to general and local economic conditions; (iii) lack of available mortgage funding for borrowers to refinance or sell their homes; (iv) overbuilding; (v) increases in property taxes and operating expenses; (vi) changes in zoning laws; (vii) costs resulting from the clean-up of, and liability to third parties for damages resulting from, environmental problems, such as indoor mold; (viii) casualty or condemnation losses; (ix) uninsured damages from floods, earthquakes or other natural disasters; (x) limitations on and variations in rents; (xi) fluctuations in interest rates; (xii) fraud by borrowers, originators and/or sellers of loans; (xiii) undetected deficiencies and/or inaccuracies in underlying loan documentation and calculations; and (xiv) failure of the borrower to adequately maintain the property. To the extent



that assets underlying our investments are concentrated geographically, by property type or in certain other respects, we may be subject to certain of the foregoing risks to a greater extent.

Additionally, we may be required to foreclose on a loan and such actions may subject us to greater concentration of the risks of the residential real estate markets and risks related to the ownership and management of real property. In the event of a foreclosure, we may assume direct ownership of the underlying real estate. The liquidation proceeds upon sale of such real estate may not be sufficient to recover our investment in the loan, resulting in a loss to us. In addition, the foreclosure process may be lengthy and expensive, and any delays or costs involved in the effectuation of a foreclosure of the loan or a liquidation of the underlying property may further reduce the proceeds and thus increase the loss.

In the event of the bankruptcy of a loan borrower, the loan to such borrower will be deemed to be secured only to the extent of the value of the underlying collateral at the time of bankruptcy (as determined by the bankruptcy court), and the lien securing the loan will be subject to the avoidance powers of the bankruptcy trustee or debtor-in-possession to the extent the lien is unenforceable under state law.

## Our acquisition of mortgage servicing rights exposes us to significant risks.

MSRs arise from contractual agreements between us and the investors (or their agents) in mortgage securities and loans that we service on their behalf. We generally acquire MSRs in connection with our sale of loans to the Agencies where we assume the obligation to service such loans on their behalf. Any MSRs we acquire are initially recorded at fair value on our balance sheet. The determination of the fair value of MSRs requires our management to make numerous estimates and assumptions. Such estimates and assumptions include, without limitation, estimates of future cash flows associated with MSRs based upon assumptions involving interest rates as well as the prepayment rates, delinquencies and foreclosure rates of the underlying serviced loans. The ultimate realization of the MSRs may be materially different than the values of such MSRs as may be reflected in our consolidated balance sheet as of any particular date. The use of different estimates or assumptions in connection with the valuation of these assets could produce materially different fair values for such assets, which could have a material adverse effect on our business, financial condition, results of operations and cash flows. Accordingly, there may be material uncertainty about the fair value of any MSRs we acquire.

Prepayment speeds significantly affect MSRs. Prepayment speed is the measurement of how quickly borrowers pay down the unpaid principal balance of their loans or how quickly loans are otherwise brought current, modified, liquidated or charged off. We base the price we pay for MSRs on, among other things, our projection of the cash flows from the related pool of loans. Our expectation of prepayment speeds is a significant assumption underlying those cash flow projections. If prepayment speed expectations increase significantly, the fair value of the MSRs could decline and we may be required to record a non-cash charge, which would have a negative impact on our financial results. Furthermore, a significant increase in prepayment speeds could materially reduce the ultimate cash flows we receive from MSRs, and we could ultimately receive substantially less than what we paid for such assets. Moreover, delinquency rates have a significant impact on the valuation of any MSRs. An increase in delinquencies generally results in lower revenue because typically we only collect servicing fees from Agencies or mortgage owners for performing loans. Our expectation of delinquencies is also a significant assumption underlying our cash flow projections. If delinquencies are significantly greater than we expect, the estimated fair value of the MSRs could be diminished. When the estimated fair value of MSRs is reduced, we could suffer a loss, which could have a material adverse effect on our business, financial condition, liquidity, results of operations and ability to make distributions to our shareholders.

Changes in interest rates are a key driver of the performance of MSRs. Historically, the fair value of MSRs has increased when interest rates rise and decreased when interest rates decline due to the effect those changes in interest rates have on prepayment estimates. We may pursue, in a manner that is consistent with our qualification as a REIT, various hedging strategies to seek to reduce our exposure to adverse changes in fair value resulting from changes in interest rates. Our hedging activity will vary in scope based on the level and volatility of interest rates, the type of assets held and other changing market conditions. Interest rate hedging may fail to protect or could adversely affect us. To the extent we do not utilize derivative financial instruments to hedge against changes in fair value of MSRs or the derivatives we use in our hedging activities do not perform as expected, our business, financial condition, liquidity, results of operations and ability to make distributions to our shareholders would be more susceptible to volatility due to changes in the fair value of, or cash flows from, MSRs as interest rates change.

Furthermore, MSRs and the related servicing activities are subject to numerous federal, state and local laws and regulations and may be subject to various judicial and administrative decisions imposing various requirements and restrictions on our business. Our failure to comply, or the failure of the servicer to comply, with the laws, rules or regulations to which we or they are subject by virtue of ownership of MSRs, whether actual or alleged, could expose us to fines, penalties or potential litigation liabilities, including costs, settlements and judgments, any of which could have a material adverse effect on our business, financial condition, liquidity, results of operations and ability to make distributions to our shareholders.



## Our acquisition of excess servicing spread has exposed us to significant risks.

We have previously acquired from PLS the right to receive certain ESS arising from MSRs owned or acquired by PLS. The ESS represents the difference between PLS' contractual servicing fee with the applicable Agency and a base servicing fee that PLS retains as compensation for servicing or subservicing the related loans pursuant to the applicable servicing contract.

Because the ESS is a component of the related MSR, the risks of owning the ESS are similar to the risks of owning an MSR. We also record our ESS assets at fair value, which is based on many of the same estimates and assumptions used to value our MSR assets, thereby creating the same potential for material differences between the recorded fair value of the ESS and the actual value that is ultimately realized. Also, the performance of our ESS assets are impacted by the same drivers as our MSR assets, namely interest rates, prepayment speeds and delinquency rates. Because of the inherent uncertainty in the estimates and assumptions and the potential for significant change in the impact of the drivers, there may be material uncertainty about the fair value of any ESS we acquire, and this could ultimately have a material adverse effect on our business, financial condition, liquidity, results of operations and ability to make distributions to our shareholders.

Further, as a condition to our purchase of the ESS, we were required to subordinate our interests to those of the applicable Agency. To the extent PLS fails to maintain its Agency approvals, such failure could result in PLS' loss of the applicable MSR in its entirety, thereby extinguishing our interest in the related ESS. With respect to our ESS relating to PLS' Ginnie Mae MSRs, we sold our interest in such ESS to PLS under a repurchase agreement and PLS, in turn, pledged such ESS along with its interest in all of its Ginnie Mae MSRs to a special purpose entity, which issues variable funding notes and term notes that are secured by such Ginnie Mae assets and repaid through the cash flows received by the special purpose entity as the lender under a repurchase agreement with PLS. Accordingly, our interest in the Ginnie Mae ESS is also subordinated to the rights of an indenture trustee on behalf of the note holders to which the special purpose entity issues its variable funding notes and term notes under an indenture, pursuant to which the indenture trustee has a blanket lien on all of PLS' Ginnie Mae MSRs (including the ESS we acquired). The indenture trustee, on behalf of the note holders, may liquidate our Ginnie Mae ESS along with the related MSRs to the extent there exists an event of default under the indenture. In the event our ESS is liquidated as a result of certain actions or inactions of PLS, we may be entitled to seek indemnity under the applicable spread acquisition agreement; however, this would be an unsecured claim. In either situation, our loss of the ESS could have a material adverse effect on our business, financial condition, results of operations and our ability to make distributions to our shareholders.

We cannot independently protect our MSR or ESS assets from borrower refinancing and are dependent upon PLS to do so for our benefit.

While PLS has agreed pursuant to the terms of an MSR recapture agreement to transfer cash to us in an amount equal to 30% of the fair value of the MSRs relating to loans it refinances, we are not independently capable of protecting our MSR asset from borrower refinancing through targeted solicitations to, and origination of, refinance loans for borrowers in our servicing portfolio. Accordingly, unlike traditional mortgage originators and many servicers, we must rely upon PLS to refinance loans in our servicing portfolio that would otherwise be targeted by other lenders. Historically, PLS has had limited success soliciting loans in our servicing portfolio, and there can be no assurance that PLS will either have or allocate the time and resources required to effectively and efficiently protect our MSR assets. Its failure to do so, or the termination of our MSR recapture agreement, could result in accelerated runoff of our MSR assets, decreasing its fair value and adversely impacting our business, financial condition, liquidity, results of operations and ability to make distributions to our shareholders.

Similarly, while PLS has agreed pursuant to the terms of our spread acquisition agreements to transfer to us a portion of the ESS relating to loans it refinances, we are not independently capable of protecting our ESS asset from borrower refinancing by other lenders through targeted solicitations to, and origination of, refinance loans for borrowers in our portfolio of ESS. Accordingly, we must also rely upon PLS to refinance these loans that would otherwise be targeted by other lenders. There can be no assurance that PLS will either have or allocate the required time and resources or otherwise be capable of effectively and efficiently soliciting these loans. Its failure to do so, or the termination of our spread acquisition agreements, could result in accelerated repayment of the loans underlying our ESS assets, decreasing their value and adversely impacting our business, financial condition, liquidity, results of operations and ability to make distributions to our shareholders.

## Investments in subordinated loans and subordinated MBS could subject us to increased risk of losses.

Our investments in subordinated loans or subordinated MBS could subject us to increased risk of losses. In the event a borrower defaults on a subordinated loan and lacks sufficient assets to satisfy such loan, we may lose all or a significant part of our investment. In the event a borrower becomes subject to bankruptcy proceedings, we will not have any recourse to the assets, if any, of the borrower that are not pledged to secure our loan. If a borrower defaults on our subordinated loan or on its senior debt (i.e., a first-lien loan), or in the event of a borrower bankruptcy, our subordinated loan will be satisfied only after all senior debt is paid in full. As a result, we may not recover all or even a significant part of our investment, which could result in losses.



In general, losses on an asset securing a loan included in a securitization will be borne first by the equity holder of the property, then by a cash reserve fund or letter of credit provided by the borrower, if any, and then by the “first loss” subordinated security holder and then by the “second loss” subordinated security holder. In the event of default and the exhaustion of any equity support, reserve fund, letter of credit and any classes of securities junior to those in which we invest, we may not recover all or even a significant part of our investment, which could result in losses.

In addition, if the underlying mortgage portfolio has been serviced ineffectively by the loan servicer or overvalued by the originator, or if the fair values of the assets subsequently decline and, as a result, less collateral is available to satisfy interest and principal payments due on the related MBS, the securities in which we invest may suffer significant losses. The prices of these types of lower credit quality investments are generally more sensitive to adverse actual or perceived economic downturns or individual issuer developments than more highly rated investments. An economic downturn or a projection of an economic downturn, for example, could cause a decline in the price of lower credit quality investments because the ability of obligors to make principal and interest payments or to refinance may be impaired.

The failure of PLS or any other servicer to effectively service our portfolio of MSRs and loans would materially and adversely affect us.

Pursuant to our loan servicing agreement, PLS provides us with primary and special servicing. PLS' loan servicing activities include collecting principal, interest and escrow account payments, if any, with respect to loans, as well as managing loss mitigation, which may include, among other things, collection activities, loan workouts, modifications, foreclosure, short sales and sales of REO. The ability of PLS or any other servicer or subservicer to effectively service our portfolio of loans is critical to our success, particularly given our large investment in MSRs and our strategy of maximizing the fair value of the distressed loans that we acquire through proprietary loan modification programs, special servicing and other initiatives focused on keeping borrowers in their homes; or in the case of nonperforming loans, effecting property resolutions in a timely, orderly and economically efficient manner. The failure of PLS or any other servicer or subservicer to effectively service our portfolio of MSRs and loans would adversely impact our business, financial condition, liquidity, results of operations and our ability to make distributions to our shareholders.

In addition, our ability, through PLS, to promptly foreclose upon defaulted loans and liquidate the underlying real property plays a critical role in our valuation of the assets in which we invest and our expected return on those investments. There are a variety of factors that may inhibit our ability, through PLS, to foreclose upon a loan and liquidate the real property within the time frames we model as part of our valuation process or within the statutes of limitation under applicable state law, and this could increase our cost of doing business and/or diminish the expected return on investment.

We are subject to certain risks associated with investing in real estate and real estate related assets, including risks of loss from adverse weather conditions, man-made or natural disasters and the effects of climate change, which may cause disruptions in our operations and could materially and adversely affect the real estate industry generally and our business, financial condition, liquidity and results of operations.

Weather conditions and man-made or natural disasters such as hurricanes, tornadoes, earthquakes, floods, droughts, fires and other environmental conditions can adversely impact properties that we own or that collateralize loans we own or service or on which we bear credit risk, as well as properties where we conduct business. Future adverse weather conditions and man-made or natural disasters could also adversely impact the demand for, and value of, our assets, as well as the cost to service or manage such assets, directly impact the value of our assets through damage, destruction or loss, and thereafter materially impact the availability or cost of insurance to protect against these events. Potentially adverse consequences of global warming and climate change, including rising sea levels and increased intensity of extreme weather events, could similarly have an impact on our properties and the local economies of certain areas in which we operate. Although we believe our owned real estate and the properties collateralizing our loan assets or underlying our MSR and CRT assets are appropriately covered by insurance, we cannot predict at this time if we or our borrowers will be able to obtain such coverage at a reasonable cost in the future. There also is a risk that one or more of our property insurers may not be able to fulfill their obligations with respect to claims payments due to a deterioration in its financial condition or may even cancel policies due to the increasing costs of providing insurance coverage in certain geographic areas.

Certain types of losses, generally of a catastrophic nature, that result from events described above such as earthquakes, floods, hurricanes, tornados, terrorism or acts of war may also be uninsurable or not economically insurable. Inflation, changes in building codes and ordinances, environmental considerations and other factors, including terrorism or acts of war, also might make the insurance proceeds insufficient to repair or replace a property if it is damaged or destroyed. Under these circumstances, the insurance proceeds received might not be adequate to restore our economic position with respect to the affected real property. Any uninsured loss could result in the loss of cash flow from, and the asset value of, the affected property, which could have an adverse effect on our business, financial condition, liquidity and results of operations.



## Catastrophic events may disrupt our business.

Our corporate headquarters are located in Westlake Village, California and we have additional locations around the greater Los Angeles metropolitan area and elsewhere in the State of California. Many areas of California, including the immediate area around our corporate headquarters, have experienced extensive damage and property loss due to a series of large wildfires. California and the other jurisdictions in which we operate are also prone to other types of natural disasters. In the event of a major earthquake, hurricane, or catastrophic event such as fire, flood, power loss, telecommunications failure, cyber attack, pandemic, war, or terrorist attack, we may be unable to continue our operations and may endure significant business interruptions, reputational harm, delays in servicing our customers and working with our partners, interruptions in the availability of our technology and systems, breaches of data security, and loss of critical data, all of which could have an adverse effect on our future operating results.

Many of our investments are unrated or, where any credit ratings are assigned to our investments, they will be subject to ongoing evaluations and revisions and we can provide no assurance that those ratings will not be downgraded.

Many of our current investments are not, and many of our future investments will not be, rated by any rating agency. Therefore, PCM’s assessment of the fair value and pricing of our investments may be difficult and the accuracy of such assessment is inherently uncertain. However, certain of our investments may be rated. If rating agencies assign a lower-than-expected rating or reduce or withdraw, or indicate that they may reduce or withdraw, their ratings of our investments in the future, the fair value of the investments could significantly decline, which would materially and adversely affect the fair value of our investment portfolio and could result in losses upon disposition or the failure of borrowers to satisfy their debt service obligations to us.

We may be materially and adversely affected by risks affecting borrowers or the asset or property types in which our investments may be concentrated at any given time, as well as from unfavorable changes in the related geographic regions.

Our assets are not subject to any geographic, diversification or concentration limitations except that we will be concentrated in mortgage-related investments. Accordingly, our investment portfolio may be concentrated by geography, asset, property type and/or borrower, increasing the risk of loss to us if the particular concentration in our portfolio is subject to greater risks or is undergoing adverse developments. In addition, adverse conditions in the areas where the properties securing or otherwise underlying our investments are located (including business layoffs or downsizing, industry slowdowns, changing demographics and other factors) and local real estate conditions (such as oversupply or reduced demand) may have an adverse effect on the value of our investments. A material decline in the demand for real estate in these areas may materially and adversely affect us. Concentration or a lack of diversification can increase the correlation of non-performance and foreclosure risks among our investments.

Many of our investments are illiquid and we may not be able to adjust our portfolio in response to changes in economic and other conditions.

Our investments in distressed loans, MSRs, ESS, CRT arrangements, securities and loans held in a consolidated variable interest entity may be illiquid. As a result, it may be difficult or impossible to obtain or validate third-party pricing on the investments we purchase. Illiquid investments typically experience greater price volatility, as a ready market does not exist, and can be more difficult to value. The contractual restrictions on transfer or the illiquidity of our investments may make it difficult for us to sell such investments if the need or desire arises which could impair our ability to satisfy margin calls or certain REIT tests. In addition, if we are required to liquidate all or a portion of our portfolio quickly, we may realize significantly less than the recorded value, or may not be able to obtain any liquidation proceeds at all, thus exposing us to a material or total loss.

Fair values of many of our investments are estimates and the realization of reduced values from our recorded estimates may materially and adversely affect periodic reported results and credit availability, which may reduce earnings and, in turn, cash available for distribution to our shareholders.

The fair values of some of our investments are not readily determinable. We measure the fair value of these investments monthly, but the fair value at which our assets are recorded may differ from the values we ultimately realize. Ultimate realization of the fair value of an asset depends to a great extent on economic and other conditions that change during the time period over which the investment is held and are beyond the control of PCM, us or our board of trustees. Further, fair value is only an estimate based on good faith judgment of the price at which an investment can be sold since transacted prices of investments can only be determined by negotiation between a willing buyer and seller.



In certain cases, PCM’s estimation of the fair value of our investments includes inputs provided by third-party dealers and pricing services, and valuations of certain securities or other assets in which we invest are often difficult to obtain and are subject to judgments that may vary among market participants. Changes in the estimated fair values of those assets are directly charged or credited to earnings for the period. If we were to liquidate a particular asset, the realized value may be more than or less than the amount at which such asset was recorded. Accordingly, in either event, the fair value of our common shares could be materially and adversely affected by our determinations regarding the fair value of our investments, and such valuations may fluctuate over short periods of time.

PCM utilizes analytical models and data in connection with the valuation of our investments, and any incorrect, misleading or incomplete information used in connection therewith would subject us to potential risks.

Given the illiquidity and complexity of our investments and strategies, PCM must rely heavily on models and data, including analytical models (both proprietary models developed by PCM and those supplied by third parties) and information and data supplied by third parties. Models and data are used to value investments or potential investments and also in connection with hedging our investments. In the event models and data prove to be incorrect, misleading or incomplete, any decisions made in reliance thereon expose us to potential risks. For example, by relying on incorrect models and data, especially valuation models, PCM may be induced to buy certain investments at prices that are too high, to sell certain other investments at prices that are too low or to miss favorable opportunities altogether. Similarly, any hedging based on faulty models and data may prove to be unsuccessful.

Liability relating to environmental matters may impact the fair value of properties that we own or that underlie our investments.

Under various U.S. federal, state and local laws, an owner or operator of real property may become liable for the costs of removal of certain hazardous substances released on its property. These laws often impose liability without regard to whether the owner or operator was responsible for, or aware of, the release of such hazardous substances. The presence of hazardous substances may also adversely affect an owner’s ability to sell real estate, borrow using the real estate as collateral or make debt payments to us. In addition, if we take title to a property, the presence of hazardous substances may adversely affect our ability to sell the property, and we may become liable to a governmental entity or to third parties for various fines, damages or remediation costs. Any of these liabilities or events may materially and adversely affect the fair value of the relevant asset and/or our business, financial condition, liquidity, results of operations and ability to make distributions to our shareholders.

We depend on the accuracy and completeness of information about borrowers and counterparties and any misrepresented information could adversely affect our business, financial condition and results of operations.

In connection with our correspondent production activities, we may rely on information furnished by or on behalf of borrowers and counterparties, including financial statements and other financial information. We also may rely on representations of borrowers and counterparties as to the accuracy and completeness of that information and, with respect to audited financial statements, on reports of independent auditors. If any of this information is intentionally or negligently misrepresented and such misrepresentation is not detected prior to loan funding, the fair value of the loan may be significantly lower than expected. Our controls and processes may not have detected or may not detect all misrepresented information in our loan acquisitions or from our business clients. Any such misrepresented information could materially and adversely affect our business, financial condition, results of operations and our ability to make distributions to our shareholders.

We are subject to counterparty risk and may be unable to seek indemnity or require our counterparties to repurchase loans if they breach representations and warranties, which could cause us to suffer losses.

When we purchase mortgage assets, our counterparty typically makes customary representations and warranties to us about such assets. Our residential loan purchase agreements may entitle us to seek indemnity or demand repurchase or substitution of the loans in the event our counterparty breaches a representation or warranty given to us. However, there can be no assurance that our loan purchase agreements will contain appropriate representations and warranties, that we will be able to enforce our contractual right to demand repurchase or substitution, or that our counterparty will remain solvent or otherwise be willing and able to honor its obligations under our loan purchase agreements. Our inability to obtain indemnity or require repurchase of a significant number of loans could materially and adversely affect our business, financial condition, liquidity, results of operations and our ability to make distributions to our shareholders.

We may be required to repurchase loans or indemnify investors if we breach representations and warranties, which could materially and adversely affect our earnings.

When we sell loans, we are required to make customary representations and warranties about such loans to the loan purchaser. As part of our correspondent production activities, PLS re-underwrites a percentage of the loans that we acquire, and we rely upon PLS to ensure quality underwriting by our correspondent sellers, accurate third-party appraisals, and strict compliance with the representations and warranties that we require from our correspondent sellers and that are required from us by our investors.



Our residential loan sale agreements may require us to repurchase or substitute loans or indemnify the purchaser against future losses in the event we breach a representation or warranty given to the loan purchaser or in the event of an early payment default on a loan. The remedies available to the Agencies, other purchasers and insurers of loans may be broader than those available to us against the originator or correspondent lender, and if a purchaser or insurer enforces its remedies against us, we may not be able to enforce the remedies we have against the sellers. The repurchased loans typically can only be financed at a steep discount to their repurchase price, if at all. Repurchased loans are also typically sold at a discount to the unpaid principal balance, which in some cases can be significant. Significant repurchase activity could materially and adversely affect our business, financial condition, liquidity, results of operations and our ability to make distributions to our shareholders.

We are required to make servicing advances that can be subject to delays in recovery or may not be recoverable in certain circumstances, which could adversely affect our business, financial condition, liquidity, results of operations and ability to make distributions to our shareholders.

During any period in which a borrower is not making payments, we are required under most of our servicing agreements in respect of our MSRs to advance our own funds to pass through scheduled principal and interest payments to security holders of the MBS into which the loans are sold, pay property taxes and insurance premiums, legal expenses and other protective advances. We also advance funds under these agreements to maintain, repair and market real estate properties on behalf of investors. As home values change, we may have to reconsider certain of the assumptions underlying our decisions to make advances and, in certain situations, our contractual obligations may require us to make advances for which we may not be reimbursed. In addition, if a loan serviced by us is in default or becomes delinquent, the repayment to us of the advance may be delayed until the loan is repaid or refinanced or a liquidation occurs. A delay in our ability to collect advances may adversely affect our liquidity, and our inability to be reimbursed for advances could have a material adverse effect on our business, financial condition, liquidity, results of operations and ability to make distributions to our shareholders.

## Risks Related to Our Organization and Structure

Certain provisions of Maryland law, our staggered board of trustees and certain provisions in our declaration of trust could each inhibit a change in our control.

Certain provisions of the Maryland General Corporation Law (the “MGCL”) applicable to a Maryland real estate investment trust may have the effect of inhibiting a third party from making a proposal to acquire us or of impeding a change in our control under circumstances that otherwise could provide the holders of our common shares with the opportunity to realize a premium over the then prevailing market price of such common shares.

In addition, our board of trustees is divided into three classes of trustees. Trustees of each class will be elected for three-year terms upon the expiration of their current terms, and each year one class of trustees will be elected by our shareholders. The staggered terms of our trustees may reduce the possibility of a tender offer or an attempt at a change in control, even though a tender offer or change in control might be in the best interests of our shareholders.

Further, our declaration of trust authorizes us to issue additional authorized but unissued common shares and preferred shares. Our board of trustees may, without shareholder approval, increase the aggregate number of our authorized common shares or the number of shares of any class or series that we have authority to issue and classify or reclassify any unissued common shares or preferred shares and may set the preferences, rights and other terms of the classified or reclassified shares. As a result, our board may establish a class or series of common shares or preferred shares or take other actions that could delay or prevent a transaction or a change in our control that might involve a premium price for our common shares or otherwise be in the best interests of our shareholders.

Our rights and the rights of our shareholders to take action against our trustees and officers are limited, which could limit shareholder recourse in the event of actions not in the best interest of our shareholders.

Our declaration of trust limits the liability of our present and former trustees and officers to us and our shareholders for money damages to the maximum extent permitted under Maryland law. Under current Maryland law, our present and former trustees and officers will not have any liability to us or our shareholders for money damages other than liability resulting from either (a) actual receipt of an improper benefit or profit in money, property or services or (b) active and deliberate dishonesty by the trustee or officer that was established by a final judgment and is material to the cause of action.

Our declaration of trust authorizes us to indemnify our present and former trustees and officers for actions taken by them in those capacities to the maximum extent permitted by Maryland law. Our bylaws require us to indemnify each present and former trustee or officer, to the maximum extent permitted by Maryland law, in the defense of any proceeding to which he or she is made, or threatened to be made, a party by reason of his or her service to us. In addition, we may be obligated to pay or reimburse the expenses incurred by our present and former trustees and officers without requiring a preliminary determination of their ultimate entitlement to indemnification. As a result, we and our shareholders may have more limited rights against our present and former trustees and officers than might otherwise exist absent the current provisions in our declaration of trust and bylaws or that might exist with other companies, which could limit shareholder recourse in the event of actions not in the best interest of our shareholders.



Our declaration of trust contains provisions that make removal of our trustees difficult, which could make it difficult for our shareholders to effect changes to our management.

Our declaration of trust provides that, subject to the rights of holders of any series of preferred shares, a trustee may be removed only for “cause” (as defined in our declaration of trust), and then only by the affirmative vote of at least two-thirds of the votes entitled to be cast generally in the election of trustees. Vacancies generally may be filled only by a majority of the remaining trustees in office, even if less than a quorum, for the full term of the class of trustees in which the vacancy occurred. These requirements make it more difficult to change our management by removing and replacing trustees and may prevent a change in our control that is in the best interests of our shareholders.

Our bylaws include an exclusive forum provision that could limit our shareholders’ ability to obtain a judicial forum viewed by the shareholders as more favorable for disputes with us or our trustees or officers.

Our bylaws provide that the Circuit Court for Baltimore City, Maryland, or, if that Court does not have jurisdiction, the United States District Court for the District of Maryland, Baltimore Division, is the exclusive forum for any derivative action or proceeding brought on our behalf; any action asserting a claim of breach of fiduciary duty; any action asserting a claim against us arising pursuant to any provision of the Maryland REIT Law; or any action asserting a claim against us that is governed by the internal affairs doctrine. This exclusive forum provision may limit a shareholder’s ability to bring a claim in a judicial forum that it finds favorable for disputes with us or our trustees or officers, which may discourage such lawsuits against us and our trustees and officers. Alternatively, if a court were to find the choice of forum provision contained in our bylaws to be inapplicable or unenforceable in an action, we may incur additional costs associated with resolving such action in other jurisdictions, which could adversely affect our business and financial condition.

Failure to maintain exemptions or exclusions from registration under the Investment Company Act of 1940 could materially and adversely affect us.

Because we are organized as a holding company that conducts business primarily through our Operating Partnership and its wholly-owned subsidiaries, our status under the Investment Company Act of 1940, or the Investment Company Act, is dependent upon the status of our Operating Partnership which, as a holding company, in turn, will have its status determined by the status of its subsidiaries. If our Operating Partnership or one or more of its subsidiaries fail to maintain their exceptions or exclusions from the Investment Company Act and we do not have available to us another basis on which we may avoid registration, we may have to register under the Investment Company Act. This could subject us to substantial regulation with respect to our capital structure (including our ability to use leverage), management, operations, transactions with affiliated persons (as defined in the Investment Company Act), portfolio composition, including restrictions with respect to diversification and industry concentration, and other matters. It could also cause the breach of covenants we or our subsidiaries have made under certain of our financing arrangements, which could result in an event of default, acceleration of debt and/or termination.

There can be no assurance that the laws and regulations governing the Investment Company Act status of REITs, including guidance and interpretations from the Division of Investment Management of the SEC regarding the exceptions and exclusions therefrom, will not change in a manner that adversely affects our operations. If the SEC takes action that could result in our or our subsidiaries’ failure to maintain an exception or exclusion from the Investment Company Act, we could, among other things, be required to (a) restructure our operations to avoid being required to register as an investment company, (b) effect sales of our assets in a manner that, or at a time when, we would not otherwise choose to do so or (c) register as an investment company (which, among other things, would require us to comply with the leverage constraints applicable to investment companies), any of which could negatively affect the value of our common shares, the sustainability of our business model, our financial condition, liquidity, results of operations and ability to make distributions to our shareholders.

Further, a loss of our Investment Company Act exceptions or exclusions would allow PCM to terminate our management agreement with us, and our loan servicing agreement with PLS is subject to early termination in the event our management agreement is terminated for any reason. If either of these agreements is terminated, we will have to obtain the services on our own, and we may not be able to replace these services in a timely manner or on favorable terms, or at all. This would have a material adverse effect on our ability to continue to execute our business strategy and would likely negatively affect our financial condition, liquidity, results of operations and ability to make distributions to our shareholders.

The failure of PennyMac Corp. to avail itself of an appropriate exemption from registration as an investment company under the Investment Company Act could have a material and adverse effect on our business.

We intend to operate so that we and each of our subsidiaries are not required to register as investment companies under the Investment Company Act. We believe that our subsidiary, PennyMac Corp. (“PMC”), qualifies for one or more exemptions under the Investment Company Act because of the historical and current composition of its assets and income; however, there can be no assurances that the composition of PMC’s assets and income will remain the same over time such that one or more exemptions will continue to be applicable.



If PMC is required to register as an investment company, we would be required to comply with a variety of substantive requirements under the Investment Company Act that impose, among other things: limitations on capital structure; restrictions on specified investments; prohibitions on transactions with affiliates; compliance with reporting, record keeping, voting and proxy disclosure; and, other rules and regulations that would significantly increase our operating expenses. Further, if PMC was or is required to register as an investment company, PMC would be in breach of various representations and warranties contained in its credit and other agreements resulting in a default as to certain of our contracts and obligations. This could also subject us to civil or criminal actions or regulatory proceedings, or result in a court appointed receiver to take control of us and liquidate our business, any or all of which could have a material adverse effect on our business, financial condition, liquidity, results of operations, and ability to make distributions to our shareholders.

Rapid changes in the fair values of our investments may make it more difficult for us to maintain our REIT qualification or exclusion from the Investment Company Act.

If the fair value or income potential of our residential loans and other real estate-related assets declines as a result of increased interest rates, prepayment rates or other factors, we may need to increase certain real estate investments and income and/or liquidate our non-qualifying assets in order to maintain our REIT qualification or exclusion from the Investment Company Act. If the decline in real estate asset values and/or income occurs quickly, this may be especially difficult to accomplish, particularly given the illiquid nature of our investments. We may have to make investment decisions, including the liquidation of investments at a disadvantageous time or on unfavorable terms, that we otherwise would not make absent our REIT and Investment Company Act considerations, and such liquidations could have a material adverse effect on our business, financial condition, liquidity, results of operations, and ability to make distributions to our shareholders.

## Risks Related to Taxation

Our failure to qualify as a REIT would result in higher taxes and reduced cash available for distribution to our shareholders.

We are organized and operate in a manner so as to qualify as a REIT for U.S. federal income tax purposes. Our qualification as a REIT depends on our satisfaction of certain asset, income, organizational, distribution, shareholder ownership and other requirements on a continuing basis. If we were to lose our REIT status in any taxable year, corporate-level income taxes, including applicable state and local taxes, would apply to all of our taxable income at federal and state tax rates, and distributions to our shareholders would not be deductible by us in computing our taxable income. Any such corporate tax liability could be substantial and would reduce the amount of cash available for distribution to our shareholders, which in turn would have an adverse impact on the value of our common shares. Unless we were entitled to relief under certain Internal Revenue Code provisions, we also would be disqualified from taxation as a REIT for the four taxable years following the year during which we ceased to qualify as a REIT.

Even if we qualify as a REIT, we face tax liabilities that reduce our cash flow, and a significant portion of our income may be earned through TRSs that are subject to U.S. federal income taxation.

Even if we qualify for taxation as a REIT, we may be subject to certain U.S. federal, state and local taxes on our income and assets, including taxes on any undistributed income, tax on income from some activities conducted as a result of a foreclosure, and state or local income, property and transfer taxes, such as mortgage recording taxes. Any of these taxes would decrease cash available for distribution to our shareholders.

We also engage in business activities that are required to be conducted in a TRS. In order to meet the REIT qualification requirements, or to avert the imposition of a 100% tax that applies to certain gains derived by a REIT from dealer property or inventory, we hold a significant portion of our assets through, and derive a significant portion of our taxable income and gains in, a TRS, subject to the limitation that securities in TRSs may not represent more than 20% of our assets in order for us to remain qualified as a REIT. All taxable income and gains derived from the assets held from time to time in our TRS are subject to regular corporate income taxation.



The percentage of our assets represented by a TRS and the amount of our income that we can receive in the form of TRS dividends are subject to statutory limitations that could jeopardize our REIT status.

Currently, no more than 20% of the value of a REIT’s assets may consist of stock or securities of one or more TRSs at the end of each quarter. We may potentially have to modify our activities or the capital structure of those TRSs in order to comply with the new limitation and maintain our qualification as a REIT. While we intend to manage our affairs so as to satisfy this requirement, there can be no assurance that we will be able to do so in all market circumstances and even if we are able to do so, compliance with this rule may reduce our flexibility in operating our business. Although a TRS is subject to U.S. federal, state and local income tax on its taxable income, we may from time to time need to make distributions of such after-tax income in order to keep the value of our TRS below 20% of our total assets. However, for purposes of one of the tests we must satisfy to qualify as a REIT, at least 75% of our gross income must in each taxable year generally be from real estate assets. While we monitor our compliance with both this income test and the limitation on the percentage of our assets represented by TRS securities, the two may at times be in conflict with one another. That is, it is possible that we may wish to distribute a dividend from a TRS in order to reduce the value of our TRS below 20% of the required percentage of our assets, but be unable to do so without violating the requirement that 75% of our gross income in the taxable year be derived from real estate assets. There can be no assurance that we will be able to comply with either or both of these tests in all market conditions. Our inability to comply with both of these tests could have a material adverse effect on our business, financial condition, liquidity, results of operations, qualification as a REIT and ability to make distributions to our shareholders.

## Ordinary dividends payable by REITs do not generally qualify for the reduced tax rates applicable to certain corporate dividends.

The Internal Revenue Code provides for a 20% maximum federal income tax rate for dividends paid by regular United States corporations to eligible domestic shareholders that are individuals, trusts or estates. Dividends paid by REITs are generally not eligible for these reduced rates. H.R. 1, commonly known as the 2017 Tax Cuts and Job Act (the “Tax Act”), which was enacted on December 22, 2017, generally may allow domestic shareholders to deduct from their taxable income one-fifth of the REIT ordinary dividends payable to them for taxable years beginning after December 31, 2017 and before January 1, 2026. To qualify for this deduction, the shareholder receiving such dividend must hold the dividend-paying REIT shares for at least 46 days (taking into account certain special holding period rules) of the 91-day period beginning 45 days before the shares become ex-dividend, and cannot be under an obligation to make related payments with respect to a position in substantially similar or related property. However, even if a domestic shareholder qualifies for this deduction, the effective rate for such REIT dividends still remains higher than rates for regular corporate dividends paid to high-taxed individuals. The more favorable rates applicable to regular corporate dividends could cause investors who are individuals, trusts and estates to perceive investments in REITs to be relatively less attractive as a federal income tax matter than investments in the stocks of non-REIT corporations that pay dividends, which could materially and adversely affect the value of the stock of REITs, including our common shares.

## We have not established a minimum distribution payment level and no assurance can be given that we will be able to make distributions to our shareholders in the future at current levels or at all.

We are generally required to distribute to our shareholders at least 90% of our taxable income each year for us to qualify as a REIT under the Internal Revenue Code, which requirement we currently intend to satisfy. To the extent we satisfy the 90% distribution requirement but distribute less than 100% of our taxable income, we will be subject to U.S. federal corporate income tax on our undistributed taxable income. We have not established a minimum distribution payment level, and our ability to make distributions to our shareholders may be materially and adversely affected by the risk factors discussed in this Report and any subsequent Quarterly Reports on Form 10-Q. Although we have made, and anticipate continuing to make, quarterly distributions to our shareholders, our board of trustees has the sole discretion to determine the timing, form and amount of any future distributions to our shareholders, and such determination will depend upon, among other factors, our historical and projected results of operations, financial condition, cash flows and liquidity, maintenance of our REIT qualification and other tax considerations, capital expenditure and other expense obligations, debt covenants, contractual prohibitions or other limitations and applicable law and such other matters as our board of trustees may deem relevant from time to time. Among the factors that could impair our ability to continue to make distributions to our shareholders are:

• our inability to invest the net proceeds from our equity offerings;

• our inability to make attractive risk-adjusted returns on our current and future investments;

• non-cash earnings or unanticipated expenses that reduce our cash flow;

• defaults in our investment portfolio or decreases in its value;

• reduced cash flows caused by delays in repayment or liquidation of our investments; and

- the fact that anticipated operating expense levels may not prove accurate, as actual results may vary from estimates.



As a result, no assurance can be given that we will be able to continue to make distributions to our shareholders in the future or that the level of any future distributions will achieve a market yield or increase or even be maintained over time, any of which could materially and adversely affect the market price of our common shares.

## The REIT distribution requirements could materially and adversely affect our ability to execute our business strategies.

We intend to continue to make distributions to our shareholders to comply with the requirements of the Internal Revenue Code and to avoid paying corporate income tax on undistributed income. However, differences in timing between the recognition of taxable income and the actual receipt of cash could require us to sell assets, borrow funds on a short-term or long-term basis, or issue equity to meet the distribution requirements of the Internal Revenue Code. We may find it difficult or impossible to meet distribution requirements in certain circumstances. Due to the nature of the assets in which we invest and may invest and to our accounting elections for such assets, we may be required to recognize taxable income from those assets in advance of our receipt of cash flow on or proceeds from disposition of such assets.

In addition, pursuant to the Tax Act, we generally will be required to recognize certain amounts in income no later than the time such amounts are reflected on our financial statements filed with the SEC. The application of this rule may require the accrual of income with respect to loans, MBS, and other types of debt securities or interests in debt securities held by us, such as original issue discount or market discount, earlier than would be the case under other provisions of the Internal Revenue Code, although the precise application of this rule to our business is unclear at this time in various respects.

As a result, to the extent such income is not realized within a TRS, the requirement to distribute a substantial portion of our net taxable income could cause us to: (i) sell assets in adverse market conditions, (ii) borrow on unfavorable terms, (iii) distribute amounts that would otherwise be invested in future acquisitions, capital expenditures or repayment of debt or (iv) make a taxable distribution of our shares as part of a distribution in which shareholders may elect to receive shares or (subject to a limit measured as a percentage of the total distribution) cash, in order to comply with REIT requirements.

We may be required to report taxable income early in our holding period for certain investments in excess of the economic income we ultimately realize from them.

We acquire and/or expect to acquire in the secondary market debt instruments that we may significantly modify for less than their face amount, MBS issued with original issue discount, MBS acquired at a market discount, or debt instruments or MBS that are delinquent as to mandatory principal and interest payments. In each case, we may be required to report income regardless of whether corresponding cash payments are received or are ultimately collectible. If we eventually collect less than we had previously reported as income, there may be a bad debt deduction available to us at that time or we may record a capital loss in a disposition of such asset, but our ability to benefit from that bad debt deduction would depend on our having taxable income or capital gains, respectively, in that later taxable year. This possible “income early, losses later” phenomenon could materially and adversely affect us and our shareholders if it were persistent and in significant amounts.

The share ownership limits applicable to us that are imposed by the Internal Revenue Code for REITs and our declaration of trust may restrict our business combination opportunities.

In order for us to maintain our qualification as a REIT under the Internal Revenue Code, not more than 50% in value of our outstanding shares may be owned, directly or indirectly, by five or fewer individuals (as defined in the Internal Revenue Code to include certain entities) at any time during the last half of each taxable year following our first year. Our declaration of trust, with certain exceptions, authorizes our board of trustees to take the actions that are necessary and desirable to preserve our qualification as a REIT. Under our declaration of trust, no person may own more than 9.8% by vote or value, whichever is more restrictive, of our outstanding common shares or more than 9.8% by vote or value, whichever is more restrictive, of our outstandings shares of beneficial interest. Our board may grant an exemption to the share ownership limits in its sole discretion, subject to certain conditions and the receipt of certain representations and undertakings. These share ownership limits are based upon direct or indirect ownership by “individuals,” which term includes certain entities.

Ownership limitations are common in the organizational documents of REITs and are intended, among other purposes, to provide added assurance of compliance with the tax law requirements and to minimize administrative burdens. However, our share ownership limits might also delay or prevent a transaction or a change in our control that might involve a premium price for our common shares or otherwise be in the best interests of our shareholders.



Complying with the REIT requirements can be difficult and may cause us to forego otherwise attractive opportunities or liquidate otherwise attractive investments.

To qualify as a REIT for U.S. federal income tax purposes, we must continually satisfy tests concerning, among other things, the sources of our income, the nature and diversification of our assets, the amounts we distribute to our shareholders and the ownership of our shares. We may be required to make distributions to our shareholders at disadvantageous times or when we do not have funds readily available for distribution. Thus, compliance with the REIT requirements may hinder our ability to make certain attractive investments or require us to liquidate from our portfolio otherwise attractive investments. If we are compelled to liquidate our investments, we may be unable to comply with these requirements, ultimately jeopardizing our qualification as a REIT, or we may be subject to a 100% tax on any resultant gain if we sell assets that are treated as dealer property or inventory. These actions could have the effect of reducing our income and amounts available for distribution to our shareholders.

## Complying with the REIT requirements may limit our ability to hedge effectively.

The REIT provisions of the Internal Revenue Code may limit our ability to hedge our assets, liabilities and operations. Under current law, any income from a hedging transaction we enter into either (i) to manage risk of interest rate changes with respect to borrowings made or to be made to acquire or carry real estate assets, (ii) to manage risk of currency fluctuations with respect to items of income that qualify for purposes of the REIT 75% or 95% gross income tests or assets that generate such income, or (iii) to hedge another instrument that hedges risks described in clause (i) or (ii) for a period following the extinguishment of the liability or the disposition of the asset that was previously hedged by the instrument, and, in each case, such instrument is properly identified under applicable Treasury regulations, will not be treated as qualifying income for purposes of the REIT gross income tests. As a result of these rules, we may have to limit our use of hedging techniques that might otherwise be advantageous, which could result in greater risks associated with interest rate or other changes than we would otherwise be subject to.

The tax on prohibited transactions limits our ability to engage in transactions, including certain methods of securitizing loans that would be treated as sales for U.S. federal income tax purposes.

A REIT’s net income from prohibited transactions is subject to a 100% tax. In general, prohibited transactions are sales or other dispositions of property, other than foreclosure property, but including loans, held primarily for sale to customers in the ordinary course of business. We would be subject to this tax if we were to sell loans that we held primarily for sale to customers in a securitization transaction effected through the REIT. Therefore, in order to avoid the prohibited transactions tax, we engage in such sales of loans through the TRS. We may hold a substantial amount of assets in one or more TRSs that are subject to corporate income tax on its earnings, which may reduce the cash flow generated by us and our subsidiaries in the aggregate, and our ability to make distributions to our shareholders.

The taxable mortgage pool (“TMP”) rules may increase the taxes that we or our shareholders may incur, and may limit the manner in which we effect future securitizations.

Certain of our securitizations that involve the issuance of indebtedness rather than sales may likely be considered to result in the creation of TMPs for U.S. federal income tax purposes. A TMP is always classified as a corporation for U.S. federal income tax purposes. However, as long as a REIT owns 100% of a TMP, such classification generally does not result in the imposition of corporate income tax, because the TMP is a “qualified REIT subsidiary.”

In the case of such wholly-REIT owned TMPs, certain categories of our shareholders, such as foreign shareholders otherwise eligible for treaty benefits, shareholders with net operating losses, and tax exempt shareholders that are subject to unrelated business income tax, could be subject to increased taxes on a portion of their dividend income received from us that is attributable to the TMP or “excess inclusion income.” In addition, to the extent that our shares are owned in record name by tax exempt “disqualified organizations,” such as certain government-related entities that are not subject to tax on unrelated business income, we may incur a corporate level tax on our allocable portion of excess inclusion income from such a wholly-REIT owned TMP. In that case and to the extent feasible, we may reduce the amount of our distributions to any disqualified organization whose share ownership gave rise to the tax, or we may bear such tax as a general corporate expense. To the extent that our shares owned by disqualified organizations are held in record name by a broker/dealer or other nominee, the broker/dealer or other nominee would be liable for the corporate level tax on the portion of our excess inclusion income allocable to the shares held by the broker/dealer or other nominee on behalf of disqualified organizations. While we intend to attempt to minimize the portion of our distributions that is subject to these rules, the law is unclear concerning computation of excess inclusion income, and its amount could be significant.

In the case of any TMP that would be taxable as a domestic corporation if it were not wholly-REIT owned, we would be precluded from selling equity interests in these securitizations to outside investors, or selling any debt securities issued in connection with these securitizations that might be considered to be equity interests for tax purposes. This marketing limitation may prevent us from selling more junior or non-investment grade debt securities in such securitizations and maximizing our proceeds realized in those offerings.



New legislation or administrative or judicial action, in each instance potentially with retroactive effect, could make it more difficult or impossible for us to qualify as a REIT.

The rules dealing with federal income taxation, including the present U.S. federal income tax treatment of REITs, may be modified, possibly with retroactive effect, by legislative, judicial or administrative action at any time, which could affect the U.S. federal income tax treatment of an investment in our common shares. Changes to the tax laws, including the U.S. federal tax rules that affect REITs, are constantly under review by persons involved in the legislative process, the IRS and the U.S. Treasury, which results in statutory changes as well as frequent revisions to Treasury Regulations and interpretations. Revisions in U.S. federal tax laws and interpretations thereof could materially and adversely affect us and our shareholders.

The Tax Act includes significant changes to the Internal Revenue Code, some of which will impact REITs, as well as REIT investors. Among those changes are a significant permanent reduction in the generally applicable corporate tax rate, changes in the taxation of individuals and other non-corporate taxpayers that generally but not universally reduce their taxes on a temporary basis subject to “sunset” provisions, the elimination or modification of various currently allowed deductions (including additional limitations on the deductibility of net operating losses, business interest and substantial limitation of the deduction for personal state and local taxes imposed on individuals), and preferential taxation of income (including REIT dividends) derived by non-corporate taxpayers from “pass-through” entities. It is possible that future technical corrections legislation, regulations and interpretive guidance in areas such as net interest expense deduction and revenue recognition might result in negative impacts on us or our shareholders. There may also be a substantial delay before such legislation is enacted and/or regulations are promulgated, increasing the uncertainty as to the ultimate effect of the Tax Act on us and our shareholders. Furthermore, limitations on the deduction of net operating losses may in the future cause us to make distributions that will be taxable to our shareholders to the extent of our current or accumulated earnings and profits in order to comply with the annual REIT distribution requirements. We could also be materially and adversely impacted indirectly by provisions in the Tax Act that affect the broader mortgage industry, such as the lower debt limit for mortgage interest deductions. To the extent that the Tax Act has an overall negative impact on our industry, such legislation could have a material adverse effect on our attractiveness as a REIT and our ability to make distributions to our shareholders.

We cannot predict how future changes in the tax laws might affect us or our shareholders. New legislation, Treasury regulations, administrative interpretations or court decisions could cause us to change our investments and commitments or significantly and negatively affect our ability to qualify as a REIT or the federal income tax consequences of such qualification.

We also may enter into certain transactions where the REIT eligibility of the assets subject to such transactions is uncertain. In circumstances where the application of these rules and regulations affecting our investments is not clear, we may have to interpret them and their application to us. If the IRS were to take a position adverse to our interpretation, the consequences of such action could materially and adversely affect our business, financial condition, liquidity, results of operations, and our ability to make distributions to our shareholders.

An IRS administrative pronouncement with respect to investments by REITs in distressed debt secured by both real and personal property, if interpreted adversely to us, could cause us to pay penalty taxes or potentially to lose our REIT status.

Most of the distressed loans that we historically acquired were acquired by us at a discount from their outstanding principal amount, because our pricing was generally based on the value of the underlying real estate that secures those loans.

Treasury Regulation Section 1.856-5(c) (the “interest apportionment regulation”) provides rules for determining what portion of the interest income from loans that are secured by both real and personal property is treated as “interest on obligations secured by mortgages on real property or on interests in real property.” Under the interest apportionment regulation, if a mortgage covers both real property and other property, a REIT is required to apportion its annual interest income to the real property security based on a fraction, the numerator of which is the value of the real property securing the loan, determined when the REIT commits to acquire the loan, and the denominator of which is the highest “principal amount” of the loan during the year. The IRS issued Revenue Procedure 2011-16, which contains an example regarding the application of the interest apportionment regulation. The example interprets the “principal amount” of the loan to be the face amount of the loan, despite the Internal Revenue Code requiring taxpayers to treat any market discount, that is the difference between the purchase price of the loan and its face amount, for all purposes (other than certain withholding and information reporting purposes) as interest rather than principal.

The interest apportionment regulation applies only if the debt in question is secured both by real property and personal property. We believe that all of the loans that we acquired at a discount under the circumstances contemplated by Revenue Procedure 2011-16 are secured only by real property and no other property value is taken into account in our underwriting and pricing. Accordingly, we believe that the interest apportionment regulation does not apply to our portfolio.



Nevertheless, if the IRS were to assert successfully that our loans were secured by property other than real estate, that the interest apportionment regulation applied for purposes of our REIT testing, and that the position taken in Revenue Procedure 2011-16 should be applied to our portfolio, then depending upon the value of the real property securing our loans and their face amount, and the sources of our gross income generally, we might not be able to meet the 75% REIT gross income test, and possibly the asset tests applicable to REITs. If we did not meet this test, we could potentially either lose our REIT status or be required to pay a tax penalty to the IRS.

With respect to the 75% REIT asset test, Revenue Procedure 2011-16 provides a safe harbor under which the IRS will not challenge a REIT’s treatment of a loan as being a real estate asset in an amount equal to the lesser of (1) the fair market value of the real property securing the loan determined as of the date the REIT committed to acquire the loan or (2) the fair market value of the loan on the date of the relevant quarterly REIT asset testing date. This safe harbor, if it applied to us, would help us comply with the REIT asset tests following the acquisition of distressed debt if the value of the real property securing the loan were to subsequently decline. However, if the value of the real property securing the loan were to increase, the safe harbor rule of Revenue Procedure 2011-16, read literally, could have the peculiar effect of causing the corresponding increase in the value of the loan to not be treated as a real estate asset. We do not believe, however, that this was the intended result in situations in which the value of a loan has increased because the value of the real property securing the loan has increased, or that this safe harbor rule applies to debt that is secured solely by real property. However, for taxable years beginning after December 31, 2015, Internal Revenue Code Section 856(c)(9) was added and clarifies Revenue Procedure 2011-16. Subparagraph (B) of Section 856(c)(9) allows a REIT to treat personal property that is secured by a mortgage on both real property and personal property as a real estate asset, and the interest income as derived from a mortgage secured by real property, if the fair value of the personal property does not exceed fifteen percent 15% of the total fair value of all property secured by the mortgage. Nevertheless, if the IRS took the position that the safe harbor rule applied in these scenarios, then we might not be able to meet the various quarterly REIT asset tests if the value of the real estate securing our loans increased, and thus the value of our loans increased by a corresponding amount. If we did not meet one or more of these tests, then we could potentially either lose our REIT status or be required to pay a tax penalty to the IRS.

## Item 1B. Unresolved Staff Comments

None.

## Item 2. Properties

We do not own or lease any property. Our operations are carried out on our behalf at the principal executive offices of PennyMac, at 3043 Townsgate Road, Westlake Village, California, 91361.

## Item 3. 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 December 31, 2019, we were not involved in any material legal actions, claims or proceedings.

## Item 4. Mine Safety Disclosures

Not applicable.



## PART II

## Item 5. Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

Our common shares are listed on the New York Stock Exchange (Symbol: PMT). As of February 18, 2020, our common shares were held by 39,094 beneficial holders.

We intend to pay quarterly dividends and to distribute to our shareholders at least 90% of our taxable income in each year (subject to certain adjustments). This is one requirement to qualify for the tax benefits accorded to a REIT under the Internal Revenue Code. We have not established a minimum dividend payment level and our ability to pay dividends may be adversely affected for the reasons described in Item 1A of this Report in the section entitled Risk Factors. All distributions are made at the discretion of our board of trustees and depend on our earnings, our financial condition, maintenance of our REIT status and such other factors as our board of trustees may deem relevant from time to time.

Unregistered Sales of Equity Securities and Use of Proceeds

There were no sales of unregistered equity securities during the year ended December 31, 2019.



## Item 6. Selected Financial Data

The following financial data should be read in conjunction with Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and Item 8, “Financial Statements and Supplementary Data.” The table below presents, as of and for the dates indicated, selected historical financial information for us. The condensed consolidated statements of income data for the years ended December 31, 2019, 2018, and 2017 and the condensed consolidated balance sheets data at December 31, 2019, and 2018 have been derived from our audited financial statements included elsewhere in this Report. The condensed consolidated statements of income data for the years ended December 31, 2016 and 2015 and the condensed consolidated balance sheets data at December 31, 2017, 2016, and 2015 have been derived from our Company’s audited consolidated financial statements that are not included in this Report.

<table><tr><td rowspan="3"></td><td colspan="6">Year ended December 31,</td></tr><tr><td>2019</td><td>2018</td><td>2017</td><td>2016</td><td>2015</td><td></td></tr><tr><td colspan="6">(dollars in thousands, except per common share data)</td></tr><tr><td colspan="7">Condensed Consolidated Statements of Income:</td></tr><tr><td>Net investment income:</td><td></td><td></td><td></td><td></td><td></td><td></td></tr><tr><td>Net gain on investments</td><td>$ 263,318</td><td>$ 81,926</td><td>$ 96,384</td><td>$ 7,175</td><td>$ 53,985</td><td></td></tr><tr><td>Net gain on loans acquired for sale</td><td>170,164</td><td>59,185</td><td>74,516</td><td>106,442</td><td>51,016</td><td></td></tr><tr><td>Net loan servicing fees</td><td>(58,918)</td><td>120,587</td><td>69,240</td><td>54,789</td><td>49,319</td><td></td></tr><tr><td>Net interest income</td><td>20,439</td><td>47,601</td><td>43,805</td><td>72,354</td><td>76,637</td><td></td></tr><tr><td>Other</td><td>93,812</td><td>41,768</td><td>33,995</td><td>31,328</td><td>17,808</td><td></td></tr><tr><td></td><td>488,815</td><td>351,067</td><td>317,940</td><td>272,088</td><td>248,765</td><td></td></tr><tr><td>Expenses:</td><td></td><td></td><td></td><td></td><td></td><td></td></tr><tr><td>Expenses payable to PennyMac Financial Services, Inc.</td><td>245,899</td><td>147,860</td><td>146,007</td><td>157,737</td><td>129,224</td><td></td></tr><tr><td>Other</td><td>52,275</td><td>45,219</td><td>47,387</td><td>52,588</td><td>46,237</td><td></td></tr><tr><td></td><td>298,174</td><td>193,079</td><td>193,394</td><td>210,325</td><td>175,461</td><td></td></tr><tr><td>Income before (benefit from) provision for income taxes</td><td>190,641</td><td>157,988</td><td>124,546</td><td>61,763</td><td>73,304</td><td></td></tr><tr><td>(Benefit from) provision for income taxes</td><td>(35,716)</td><td>5,190</td><td>6,797</td><td>(14,047)</td><td>(16,796)</td><td></td></tr><tr><td>Net income</td><td>$ 226,357</td><td>$ 152,798</td><td>$ 117,749</td><td>$ 75,810</td><td>$ 90,100</td><td></td></tr><tr><td>Pretax income (loss) by segment:</td><td></td><td></td><td></td><td></td><td></td><td></td></tr><tr><td>Credit sensitive strategies</td><td>$ 182,176</td><td>$ 87,251</td><td>$ 102,214</td><td>$ 17,288</td><td>$ 66,038</td><td></td></tr><tr><td>Interest rate sensitive strategies</td><td>1,148</td><td>98,432</td><td>22,683</td><td>14,041</td><td>20,516</td><td></td></tr><tr><td>Correspondent production</td><td>64,593</td><td>16,472</td><td>42,938</td><td>73,842</td><td>36,390</td><td></td></tr><tr><td>Corporate</td><td>(57,276)</td><td>(44,167)</td><td>(43,289)</td><td>(43,408)</td><td>(49,640)</td><td></td></tr><tr><td></td><td>$ 190,641</td><td>$ 157,988</td><td>$ 124,546</td><td>$ 61,763</td><td>$ 73,304</td><td></td></tr><tr><td>Return on average common shareholders&#x27; equity</td><td>12.0%</td><td>10.2%</td><td>7.8%</td><td>5.4%</td><td>5.9%</td><td></td></tr><tr><td colspan="7">Condensed Consolidated Balance Sheets:</td></tr><tr><td>Investments:</td><td></td><td></td><td></td><td></td><td></td><td></td></tr><tr><td>Short-term</td><td>$ 90,836</td><td>$ 74,850</td><td>$ 18,398</td><td>$ 122,088</td><td>$ 41,865</td><td></td></tr><tr><td>Mortgage-backed securities at fair value</td><td>2,839,633</td><td>2,610,422</td><td>989,461</td><td>865,061</td><td>322,473</td><td></td></tr><tr><td>Loans acquired for sale at fair value</td><td>4,148,425</td><td>1,643,957</td><td>1,269,515</td><td>1,673,112</td><td>1,283,795</td><td></td></tr><tr><td>Loans at fair value</td><td>270,793</td><td>408,305</td><td>1,089,473</td><td>1,721,741</td><td>2,555,788</td><td></td></tr><tr><td>Excess servicing spread purchased from PFSI</td><td>178,586</td><td>216,110</td><td>236,534</td><td>288,669</td><td>412,425</td><td></td></tr><tr><td>Firm commitment to purchase CRT securities</td><td>109,513</td><td>37,994</td><td>—</td><td>—</td><td>—</td><td></td></tr><tr><td>Credit risk transfer arrangements assets</td><td>2,140,577</td><td>1,270,488</td><td>687,507</td><td>465,669</td><td>147,593</td><td></td></tr><tr><td>Real estate</td><td>65,583</td><td>128,791</td><td>207,089</td><td>303,393</td><td>350,642</td><td></td></tr><tr><td>Mortgage servicing rights</td><td>1,535,705</td><td>1,162,369</td><td>844,781</td><td>656,567</td><td>459,741</td><td></td></tr><tr><td></td><td>11,379,651</td><td>7,553,286</td><td>5,342,758</td><td>6,096,300</td><td>5,574,322</td><td></td></tr><tr><td>Other assets</td><td>391,700</td><td>260,075</td><td>262,175</td><td>261,202</td><td>252,602</td><td></td></tr><tr><td>Total assets</td><td>$ 11,771,351</td><td>$ 7,813,361</td><td>$ 5,604,933</td><td>$ 6,357,502</td><td>$ 5,826,924</td><td></td></tr><tr><td>Short-term debt</td><td>$ 7,005,986</td><td>$ 5,081,691</td><td>$ 3,269,462</td><td>$ 4,017,232</td><td>$ 3,323,534</td><td></td></tr><tr><td>Long-term debt</td><td>2,159,286</td><td>1,011,433</td><td>661,715</td><td>821,893</td><td>867,005</td><td></td></tr><tr><td></td><td>9,165,272</td><td>6,093,124</td><td>3,931,177</td><td>4,839,125</td><td>4,190,539</td><td></td></tr><tr><td>Other liabilities</td><td>155,164</td><td>154,105</td><td>129,171</td><td>167,263</td><td>140,272</td><td></td></tr><tr><td>Total liabilities</td><td>9,320,436</td><td>6,247,229</td><td>4,060,348</td><td>5,006,388</td><td>4,330,811</td><td></td></tr><tr><td>Shareholders&#x27; equity</td><td>2,450,915</td><td>1,566,132</td><td>1,544,585</td><td>1,351,114</td><td>1,496,113</td><td></td></tr><tr><td>Total liabilities and shareholders&#x27; equity</td><td>$ 11,771,351</td><td>$ 7,813,361</td><td>$ 5,604,933</td><td>$ 6,357,502</td><td>$ 5,826,924</td><td></td></tr><tr><td colspan="7">Per Common Share Data:</td></tr><tr><td>Earnings:</td><td></td><td></td><td></td><td></td><td></td><td></td></tr><tr><td>Basic</td><td>$ 2.54</td><td>$ 2.09</td><td>$ 1.53</td><td>$ 1.09</td><td>$ 1.19</td><td></td></tr><tr><td>Diluted</td><td>$ 2.42</td><td>$ 1.99</td><td>$ 1.48</td><td>$ 1.08</td><td>$ 1.16</td><td></td></tr><tr><td>Cash dividends:</td><td></td><td></td><td></td><td></td><td></td><td></td></tr><tr><td>Declared</td><td>$ 1.88</td><td>$ 1.88</td><td>$ 1.88</td><td>$ 1.88</td><td>$ 2.16</td><td></td></tr><tr><td>Paid</td><td>$ 1.88</td><td>$ 1.88</td><td>$ 1.88</td><td>$ 1.88</td><td>$ 2.30</td><td></td></tr><tr><td>Year-end:</td><td></td><td></td><td></td><td></td><td></td><td></td></tr><tr><td>Share price</td><td>$ 22.29</td><td>$ 18.62</td><td>$ 16.07</td><td>$ 16.37</td><td>$ 15.26</td><td></td></tr><tr><td>Book value</td><td>$ 21.37</td><td>$ 20.61</td><td>$ 20.13</td><td>$ 20.26</td><td>$ 20.28</td><td></td></tr></table>



## Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

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

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

During the year ended December 31, 2019, we purchased newly originated prime credit quality residential loans with fair values totaling $114.5 billion, as compared to $68.0 billion for the year ended December 31, 2018, in furtherance of our correspondent production business. To the extent that we purchase loans that are insured by the U.S. Department of Housing and Urban Development (“HUD”) through the Federal Housing Administration (the “FHA”), or insured or guaranteed by the Veterans Administration (the “VA”) or U.S. Department of Agriculture (“USDA”), we and PLS have agreed that PLS will fulfill and purchase such loans, as PLS is a Ginnie Mae-approved issuer and we are not. This arrangement has enabled us to compete with other correspondent aggregators that purchase both government and conventional loans. We receive a sourcing fee from PLS ranging from two to three and one-half basis points, generally based on the average number of calendar days that loans are held by us prior to purchase by PLS, on the unpaid principal balance (“UPB”) of each loan that we sell to PLS under such arrangement, and earn interest income on the loan for the period we hold it before the sale to PLS. During the year ended December 31, 2019, we received sourcing fees totaling $14.4 million, relating to $47.9 billion in UPB of loans that we sold to PLS.

## Credit Sensitive Investments

## CRT Arrangements

We believe that CRT arrangements are long-term investments that can produce attractive risk-adjusted returns through our own mortgage production while aligning with Fannie Mae’s strategic goal to attract private capital investment in its credit risk. We believe there is significant potential for investment in front-end credit risk transfer and MSRs that result from our correspondent production activities. During the year ended December 31, 2019, we purchased CRT securities (comprised of deposits securing CRT arrangements and CRT strips) totaling $933.4 million, and made commitments to purchase CRT securities with a face amount of $897.2 million. During the year ended December 31, 2019 we recognized investment income of $144.9 million relating to our holdings of CRT securities and $160.2 million related to the firm commitments to purchase the CRT securities. We held CRT-related investments (comprised of deposits securing CRT arrangements, CRT derivatives, CRT strips, and firm commitment to purchase CRT securities) totaling $2.2 billion at December 31, 2019.

## Distressed Mortgage Assets

We have invested in distressed loans through direct acquisitions of loan portfolios from institutions such as banks and mortgage companies. During the year ended December 31, 2019, we substantially liquidated our investment in distressed loans, transferred our holdings of real estate held for investment to REO and continue to reduce our holdings of REO. During the year ended December 31, 2019, we received proceeds from liquidations, payoffs, paydowns and sales from our portfolio of distressed loans and REO totaling $163.2 million. We held $14.4 million of distressed loans and $65.6 million of REO at December 31, 2019.

## Interest Rate Sensitive Investments

Our interest rate sensitive investments include:

- Mortgage servicing rights. During the year ended December 31, 2019, we received $837.7 million of MSRs as proceeds from sales of loans acquired for sale. We held $1.5 billion of MSRs at fair value at December 31, 2019.

- REIT-eligible mortgage-backed or mortgage-related securities. We purchased $1.3 billion and we sold $704.2 million of MBS during the year ended December 31, 2019. We held MBS with fair values totaling $2.8 billion at December 31, 2019.

- ESS relating to MSRs held by PFSI. We received ESS with fair value totaling $1.8 million during the year ended December 31, 2019, pursuant to a spread acquisition agreement with PLS. We held ESS with a fair value totaling $178.6 million at December 31, 2019.



## Correspondent Production

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

<table><tr><td rowspan="3"></td><td colspan="6">Year ended December 31,</td></tr><tr><td>2019</td><td>2018</td><td>2017 (in thousands)</td><td>2016</td><td>2015</td><td></td></tr><tr><td></td><td></td><td></td><td></td><td></td><td></td></tr><tr><td>Sales of loans acquired for sale:</td><td></td><td></td><td></td><td></td><td></td><td></td></tr><tr><td>To nonaffiliates</td><td>$ 61,128,081</td><td>$ 29,369,656</td><td>$ 24,314,165</td><td>$ 23,525,952</td><td>$ 14,206,816</td><td></td></tr><tr><td>To PennyMac Financial Services, Inc.</td><td>50,110,085</td><td>37,967,724</td><td>42,624,288</td><td>42,051,505</td><td>31,490,920</td><td></td></tr><tr><td></td><td>$111,238,166</td><td>$ 67,337,380</td><td>$ 66,938,453</td><td>$ 65,577,457</td><td>$ 45,697,736</td><td></td></tr><tr><td>Net gain on loans acquired for sale</td><td>$ 170,164</td><td>$ 59,185</td><td>$ 74,516</td><td>$ 106,442</td><td>$ 51,016</td><td></td></tr><tr><td>Investment activities driven by correspondent production:</td><td></td><td></td><td></td><td></td><td></td><td></td></tr><tr><td>Receipt of MSRs as proceeds from sales of loans</td><td>$ 837,706</td><td>$ 356,755</td><td>$ 290,309</td><td>$ 275,092</td><td>$ 154,474</td><td></td></tr><tr><td>Investments in CRT arrangements:</td><td></td><td></td><td></td><td></td><td></td><td></td></tr><tr><td>Deposits securing CRT arrangements</td><td>$ 933,370</td><td>$ 596,626</td><td>$ 152,641</td><td>$ 306,507</td><td>$ 147,446</td><td></td></tr><tr><td>Recognition of firm commitment to purchase CRT securities (1)</td><td>99,305</td><td>30,595</td><td>—</td><td>—</td><td>—</td><td></td></tr><tr><td>Change in face amount of firm commitment to purchase CRT securities and commitment to fund Deposits securing CRT arrangements</td><td>897,151</td><td>122,581</td><td>390,362</td><td>92,109</td><td>—</td><td></td></tr><tr><td>Total investments in CRT arrangements</td><td>$ 1,929,826</td><td>$ 749,802</td><td>$ 543,003</td><td>$ 398,616</td><td>$ 147,446</td><td></td></tr></table>

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

Common Shares of Beneficial Interest

Underwritten Equity Offerings

During 2019, we completed the following underwritten offerings of our common shares:

<table><tr><td rowspan="2">Date</td><td rowspan="2">Number of common shares</td><td rowspan="2">Average price per share</td><td rowspan="2">Gross proceeds</td><td rowspan="2">Net proceeds</td></tr><tr></tr><tr><td>February 14, 2019</td><td>7,000</td><td>$ 20.64</td><td>$ 144,480</td><td>$ 142,470</td></tr><tr><td>May 9, 2019</td><td>8,127</td><td>$ 21.15</td><td>171,877</td><td>169,605</td></tr><tr><td>August 8, 2019</td><td>9,200</td><td>$ 21.75</td><td>200,100</td><td>197,773</td></tr><tr><td>December 13, 2019</td><td>9,200</td><td>$ 22.10</td><td>203,320</td><td>200,904</td></tr><tr><td></td><td>33,527</td><td>$ 21.47</td><td>$ 719,777</td><td>$ 710,752</td></tr></table>

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

On March 14, 2019, we entered into equity distribution agreements to sell from time to time, through an ATM equity offering program under which the Agents will act as sales agent and /or principal, our common shares having an aggregate offering price of up to $200,000,000. Following is a summary of the activities under the ATM equity offering program:

<table><tr><td>Quarter ended</td><td>Number of common shares</td><td>Average price per share</td><td>Gross proceeds</td><td>Net proceeds</td></tr><tr><td colspan="5">(Amounts in thousands, except average price per share)</td></tr><tr><td>March 31, 2019</td><td>221</td><td>$ 20.76</td><td>$ 4,588</td><td>$ 4,542</td></tr><tr><td>June 30, 2019</td><td>2,068</td><td>$ 21.68</td><td>$ 44,844</td><td>$ 44,395</td></tr><tr><td>September 30, 2019</td><td>2,537</td><td>$ 22.17</td><td>$ 56,256</td><td>$ 55,694</td></tr><tr><td>December 31, 2019</td><td>637</td><td>$ 22.32</td><td>$ 14,217</td><td>$ 14,074</td></tr><tr><td></td><td>5,463</td><td>$ 21.95</td><td>$ 119,905</td><td>$ 118,705</td></tr></table>



## 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 have made 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.

## Critical Accounting Policies

Preparation of financial statements in compliance with accounting principles generally accepted in the United States (“GAAP”) requires us 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. Certain of these estimates significantly influence the portrayal of our financial condition and results, and they require us to make difficult, subjective or complex judgments. Our critical accounting policies primarily relate to our fair value estimates.

## Fair value

Our consolidated balance sheet is substantially comprised of assets that are measured at or based on their fair values. Measurement at fair value may be on a recurring or nonrecurring basis depending on the accounting principles applicable to the specific asset or liability and whether we have elected to carry them at fair value. We group financial statement items measured at or based on fair value in three levels based on the markets in which the assets are traded and the observability of the inputs used to determine fair value.

The fair value level assigned to an asset or liability is identified based on the lowest level of inputs that are significant to determining the respective asset or liability’s fair value. These levels are:

<table><tr><td rowspan="2">Level</td><td rowspan="2">Description</td><td colspan="4">December 31, 2019</td></tr><tr><td>Carrying value of assets measured (1) (in thousands)</td><td>% total assets</td><td>% shareholders&#x27; equity</td><td></td></tr><tr><td>Level 1:</td><td>Prices determined using quoted prices in active markets for identical assets or liabilities.</td><td>$ 97,504</td><td>1%</td><td>4%</td><td></td></tr><tr><td>Level 2:</td><td>Prices determined 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.</td><td>7,239,992</td><td>61%</td><td>295%</td><td></td></tr><tr><td>Level 3:</td><td>Prices determined using significant unobservable inputs. Unobservable inputs reflect our 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. (2)</td><td>4,079,958</td><td>35%</td><td>167%</td><td></td></tr><tr><td></td><td>Total assets measured at or based on fair value</td><td>$ 11,417,454</td><td>97%</td><td>466%</td><td></td></tr><tr><td></td><td>Total assets</td><td>$ 11,771,351</td><td></td><td></td><td></td></tr><tr><td></td><td>Total shareholders&#x27; equity</td><td>$ 2,450,915</td><td></td><td></td><td></td></tr></table>

(1) Includes assets measured on both a recurring and nonrecurring basis based on the accounting principles applicable to the specific asset and whether we have elected to carry the item at its fair value. For assets carried at lower of amortized cost or fair value, carrying value represents the assets' amortized cost reduced by any applicable valuation allowance; for assets carried at fair value, carrying value is represented by such assets' fair value.

(2) For purposes of this discussion, includes Deposits securing credit risk transfer arrangements which are carried at amortized cost. These deposits along with the related CRT derivatives and CRT strips are held in the form of securities which are the basis for valuation of the CRT derivatives and strips.



At December 31, 2019, $11.4 billion, or 97%, of our total assets were carried at fair value on a recurring basis and $65.6 million, or 1% (consisting of REO), were carried based on fair value on a non-recurring basis when fair value indicates evidence of impairment. Of these assets, $4.1 billion or 35% of total assets are measured using “Level 3” fair value inputs – significant inputs that are difficult to observe due to lack of observability of significant inputs used to estimate fair value. Changes in inputs to measurement of these financial statement items can have a significant effect on the amounts reported for these items including their reported balances and their effects on our net income.

As a result of the difficulty in observing certain significant valuation inputs affecting “Level 3” fair value assets and liabilities, we are 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 estimating the fair value of these fair value 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 fair value assets and liabilities, subsequent transactions may be at values significantly different from those reported.

Because the fair value of “Level 3” fair value assets and liabilities is difficult to estimate, our valuation process is conducted by specialized staff and receives significant executive management oversight. We have assigned the responsibility for estimating the fair values of our “Level 3” fair value assets and liabilities, except for interest rate lock commitments (“IRLCs”), to PFSI’s Financial Analysis and Valuation group (the “FAV group”). With respect to those valuations, PFSI’s FAV group reports to PFSI’s valuation committee, which oversees the valuations. During 2019, PFSI’s valuation committee included the Company’s executive chairman, chief executive, chief financial, chief risk and deputy chief financial officers.

The fair value of our IRLCs is developed by our Manager’s Capital Markets Risk Management staff and is reviewed by our Manager’s Capital Markets Operations group in the exercise of their internal control activities.

Following is a discussion relating to our approach to measuring the assets and liabilities that are most affected by “Level 3” fair value estimates.

## Loans

We carry loans at their fair values. We recognize changes in the fair value of loans in current period income as a component of either Net gain on loans acquired for sale or Net gain (loss) on investments. We estimate fair value of loans based on whether the loans are saleable into active markets with observable pricing.

- We categorize loans that are saleable into active markets as “Level 2” fair value assets. Such loans include substantially all of our loans acquired for sale and our loans held in a VIE. We estimate such loans’ fair values using their quoted market price or market price equivalent. We held $4.1 billion at such loans at fair value at December 31, 2019.

- We categorize loans that are not saleable into active markets as “Level 3” fair value assets. Such loans include substantially all of our investments in distressed loans and certain of the loans acquired for sale which we subsequently repurchased pursuant to representations and warranties or that we identified as non-salable to the Agencies. We held $18.6 million of such loans at fair value at December 31, 2019.

We estimate the fair value of our “Level 3” fair value loans using a discounted cash flow valuation model. Inputs to the model include current interest rates, loan amount, payment status and property type, and forecasts of future interest rates, home prices, prepayment speeds, defaults and loss severities.

## Excess Servicing Spread

We acquire the right to receive the ESS cash flows relating to certain MSRs over the life of the underlying loans. We carry our investment in ESS at fair value. We record changes in the fair value of ESS in Net gain (loss) on investments.

Because ESS is a claim to a portion of the cash flows from MSRs, its valuation process is similar to that of MSRs discussed below. We use the same discounted cash flow approach to measuring the ESS as we use to value the related MSRs except that certain inputs relating to the cost to service the loans underlying the MSRs and certain ancillary income are not included as these cash flows do not accrue to the holder of the ESS.



A shift in the market for ESS or a change in our assessment of an input to the valuation of ESS can have a significant effect on the fair value of ESS and in our income for the period. We believe that the most significant “Level 3” fair value inputs to the valuation of ESS are the pricing spread (discount rate) and prepayment speed. We held $178.6 million of ESS at December 31, 2019. Following is a summary of the effect on fair value of various changes to these inputs on our fair value estimates as of December 31, 2019:

<table><tr><td rowspan="2">Change in input</td><td colspan="3">Effect on fair value of a change in input</td></tr><tr><td>Pricing spread</td><td>Prepayment speed</td><td></td></tr><tr><td></td><td colspan="3">(in thousands)</td></tr><tr><td>(20%)</td><td>$     4,907</td><td>$     18,565</td><td></td></tr><tr><td>(10%)</td><td>$     2,422</td><td>$     8,878</td><td></td></tr><tr><td>(5%)</td><td>$     1,203</td><td>$     4,344</td><td></td></tr><tr><td>5%</td><td>$      (1,188)</td><td>$      (4,164)</td><td></td></tr><tr><td>10%</td><td>$      (2,361)</td><td>$      (8,160)</td><td></td></tr><tr><td>20%</td><td>$      (4,662)</td><td>$      (15,680)</td><td></td></tr></table>

## Derivative Assets

## Interest Rate Lock Commitments

Our net gain on loans acquired for sale includes our estimates of gains or losses we expect to realize upon the sale of loans we have committed to purchase but have not yet purchased or sold. Therefore, we recognize a substantial portion of our net gain on loans acquired for sale at fair value before we purchase the loan. In the course of our correspondent production activities, we make contractual commitments to correspondent sellers to purchase loans at specified terms. We call these commitments IRLCs. We recognize the fair value of IRLCs at the time we make the commitment to the correspondent seller and adjust the fair value of such IRLCs during the time the commitment is outstanding.

We carry IRLCs as either derivative assets or derivative liabilities on our consolidated balance sheet. The fair value of an IRLC is transferred to the fair value of loans acquired for sale at fair value when the loan is funded.

An active, observable market for IRLCs does not exist. Therefore, we measure the fair value of IRLCs using methods and inputs we believe that market participants use in pricing IRLCs. We estimate the fair value of an IRLC based on quoted Agency MBS prices, our estimates of the fair value of the MSRs we expect to receive in the sale of the loans and the probability that the loan will be purchased as a percentage of the commitment we have made (the “pull-through rate”).

Pull-through rates and MSR fair values are based on our estimates as these inputs are difficult to observe in the mortgage marketplace. Changes in our estimate of the probability that a loan will fund and changes in mortgage market interest rates are recognized as IRLCs move through the purchase process and may result in significant changes in the estimates of the fair value of the IRLCs. Such changes are reflected in the change in fair value of IRLCs which is a component of our Net gain on loans acquired for sale and may be included in Net loan servicing fees — from nonaffiliates – Amortization impairment, and change in fair value of mortgage servicing rights when we include the IRLCs in our MSR hedging activities in the period of the change. The financial effects of changes in the pull-through rates and MSR fair values generally move in different directions. Increasing interest rates have a positive effect on the fair value of the MSR component of IRLC fair value but increase the pull-through rate for the principal and interest payment portion of the loans that decrease in fair value.

A shift in the market for IRLCs or a change in our assessment of an input to the valuation of IRLCs can have an effect on the amount of gain on sale of loans acquired for sale for the period. We believe that the fair value of IRLCs is most sensitive to changes in pull-through rate inputs. We held $11.2 million of net IRLC assets at December 31, 2019. Following is a quantitative summary of the effect of changes in pull-through inputs on the fair value of IRLCs at December 31, 2019:

<table><tr><td colspan="3">Effect on fair value of a change in pull-through rate</td></tr><tr><td>Change in input (1)</td><td>Effect on fair value (in thousands)</td><td></td></tr><tr><td>(20%)</td><td>$      (2,537)</td><td></td></tr><tr><td>(10%)</td><td>$      (1,269)</td><td></td></tr><tr><td>(5%)</td><td>$      (634)</td><td></td></tr><tr><td>5%</td><td>$     336</td><td></td></tr><tr><td>10%</td><td>$     626</td><td></td></tr><tr><td>20%</td><td>$     1,142</td><td></td></tr></table>

(1) Pull-through rate adjustments for individual loans are limited to adjustments that will increase the individual loan’s pull-through rate to 100%.



## Credit Risk Transfer Arrangements

We have entered into CRT arrangements with Fannie Mae, pursuant to which we sell pools of loans into Fannie Mae-guaranteed securitizations while retaining recourse obligations as part of the retention of an interest-only ownership interest in such loans. We carry the strip or derivative asset relating to this transaction at fair value and recognize changes in the respective asset’s fair value in Net gain (loss) on investments in the consolidated statements of income.

A shift in the market for CRT arrangements or a change in our assessment of an input to the valuation of CRT arrangements can have a significant effect on the fair value of CRT arrangements and in our income for the period. We believe that the most significant “Level 3” fair value input to the valuation of CRT arrangements is the pricing spread (discount rate).

We held $2.2 billion of CRT arrangements assets at December 31, 2019. 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 as of December 31, 2019:

<table><tr><td colspan="3">Effect on fair value of a change in pricing spread input</td></tr><tr><td>Change in input (in basis points)</td><td colspan="2">Effect on fair value (in thousands)</td></tr><tr><td>(100)</td><td>$</td><td>66,054</td></tr><tr><td>(50)</td><td>$</td><td>32,539</td></tr><tr><td>(25)</td><td>$</td><td>16,150</td></tr><tr><td>25</td><td>$</td><td>(15,918)</td></tr><tr><td>50</td><td>$</td><td>(31,605)</td></tr><tr><td>100</td><td>$</td><td>(62,309)</td></tr></table>

## Firm commitment to purchase CRT securities

Similar to the CRT arrangements above, we have entered into an agreement with Fannie Mae to purchase CRT securities related to loan pools we sell into Fannie Mae securitizations.

We categorize our firm commitment to purchase CRT securities as a “Level 3” fair value asset. The fair value of the firm commitment is estimated using a discounted cash flow approach to estimate the fair value of the CRT securities to be purchased related to the loans subject to the commitment. Key inputs used in the estimation of fair value of the firm commitment are the discount rate and the voluntary and involuntary prepayment speeds of the reference loans. The firm commitment to purchase CRT securities is recognized initially as a component of Net gain on loans acquired for sale. Subsequent changes in fair value are recorded in Net gain (loss) on investments.

A shift in the market for CRT securities or a change in our assessment of an input to the valuation of the firm commitment to purchase CRT securities can have a significant effect on the fair value of the firm commitment to purchase CRT securities. We believe the most significant input to the valuation of the firm commitment to purchase CRT securities is the pricing spread (discount rate).

We held $109.5 million of firm commitment to purchase CRT securities at December 31, 2019. Following is a quantitative summary of the effect on fair value of various changes to the pricing spread input used to estimate the fair value of firm commitment to purchase CRT securities as of December 31, 2019:

<table><tr><td colspan="3">Effect on fair value of a change in pricing spread input</td></tr><tr><td>Change in input (in basis points)</td><td colspan="2">Effect on fair value (in thousands)</td></tr><tr><td>(100)</td><td>$</td><td>76,546</td></tr><tr><td>(50)</td><td>$</td><td>37,580</td></tr><tr><td>(25)</td><td>$</td><td>18,621</td></tr><tr><td>25</td><td>$</td><td>(18,290)</td></tr><tr><td>50</td><td>$</td><td>(36,256)</td></tr><tr><td>100</td><td>$</td><td>(71,248)</td></tr></table>



## Real Estate Acquired in Settlement of Loans

We measure REO based on its fair value on a nonrecurring basis and carry REO at the lower of cost or fair value. We determine the fair value of REO by using a current estimate of fair value from a broker’s price opinion, a full appraisal or the price given in a current contract of sale of the property. We record changes in fair value and gains and losses on sale of REO in the consolidated statement of income under the caption Results of real estate acquired in settlement of loans.

## Mortgage Servicing Rights

MSRs represent the value of a contract that obligates us to service the loans on behalf of the owner of the loan in exchange for servicing fees and the right to collect certain ancillary income from the borrower. We carry all of our investments in MSRs at fair value and recognize changes in fair value in current period income. Changes in fair value of MSRs are recognized as a component of Net loan servicing fees—from nonaffiliates-amortization, impairment and change in fair value of mortgage servicing rights.

A shift in the market for MSRs or a change in our assessment of an input to the valuation of MSRs can have a significant effect on the fair value of MSRs and in our income for the period. We believe the most significant “Level 3” fair value inputs to the valuation of MSRs are the pricing spread (discount rate), prepayment speed and annual per-loan cost of servicing. We held $1.5 billion of MSRs at December 31, 2019. Following is a summary of the effect on fair value of various changes to these key inputs that we use in making our fair value estimates as of December 31, 2019:

<table><tr><td rowspan="2">Change in input</td><td colspan="4">Effect on fair value of a change in input</td></tr><tr><td>Pricing spread</td><td>Prepayment speed (in thousands)</td><td>Servicing cost</td><td></td></tr><tr><td>(20%)</td><td>$ 88,582</td><td>$ 160,942</td><td>$ 39,856</td><td></td></tr><tr><td>(10%)</td><td>$ 43,061</td><td>$ 76,654</td><td>$ 19,928</td><td></td></tr><tr><td>(5%)</td><td>$ 21,235</td><td>$ 37,436</td><td>$ 9,964</td><td></td></tr><tr><td>5%</td><td>$ (20,666)</td><td>$ (35,768)</td><td>$ (9,964)</td><td></td></tr><tr><td>10%</td><td>$ (40,783)</td><td>$ (69,973)</td><td>$ (19,928)</td><td></td></tr><tr><td>20%</td><td>$ (79,453)</td><td>$ (134,068)</td><td>$ (39,856)</td><td></td></tr></table>

The preceding asset analyses hold constant all of the inputs other than the input that is being changed to show an estimate of the effect on fair value of a change in a specific input. We expect that in a market shock event, multiple inputs would be affected and the effects of these changes may compound or counteract each other. Therefore the preceding analyses are not projections of the effects of a shock event or a change in our estimate of an input and should not be relied upon as earnings projections.

## Critical Accounting Policies Not Tied to Fair Value

## Liability for Representations and Warranties

We record a provision for losses relating to our representations and warranties as part of our loan sale transactions. The method we use to estimate the liability for representations and warranties is a function of the representations and warranties made to the buyers of our loans and considers a combination of factors, including, but not limited to, estimated future default and loan defect rates, the potential severity of loss in the event of default and the probability of reimbursement by the correspondent seller who sold the loan to us. We establish a liability at the time we sell the loans to the investors and periodically update our liability estimate.

The level 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 behavior, and other external conditions that may change over the lives of the underlying loans. Our estimate of the liability for representations and warranties is developed by our credit administration staff. The liability estimate is reviewed and approved by our senior management credit committee which includes our chief executive, chief risk, chief credit, chief mortgage operations, and chief mortgage banking officers.

As economic fundamentals change, as investor and Agency evaluations of their loss mitigation strategies (including claims under representations and warranties) change and as the mortgage market and general economic conditions affect our correspondent sellers, the level of repurchase activity and ensuing losses will change. As a result of these changes, we adjust the estimate of our liability for representations and warranties. Such adjustments may be material to our financial condition and income and, when made, are included in Net gain on loans acquired for sale-from nonaffiliates.



## Consolidation—Variable Interest Entities

We enter into various types of transactions with special purpose entities (“SPEs”), which are trusts that are established for a limited purpose. Generally, SPEs are formed in connection with securitization transactions. In a securitization transaction, we transfer loans on our balance sheet to an SPE, which then issues various forms of interests in those assets to investors. In a securitization transaction, we typically receive cash and/or beneficial interests in an SPE in exchange for the assets we transfer.

SPEs are generally considered variable interest entities (“VIEs”). A VIE is an entity having either a total equity investment that is insufficient to finance its activities without additional subordinated financial support or whose equity investors lack the ability to control the entity’s activities. Variable interests are investments or other interests that will absorb portions of a VIE’s expected losses or receive portions of the VIE’s expected residual returns. Expected residual returns represent the expected positive variability in the fair value of a VIE’s net assets.

When an SPE is a VIE, holders of variable interests in that entity must evaluate whether they are the VIE’s primary beneficiary. The primary beneficiary of a VIE is the party that has both the power to direct the activities that most significantly impact the VIE and a variable interest that could potentially be significant to the VIE. The primary beneficiary of a VIE must include the assets and liabilities of the VIE on its consolidated balance sheet. Therefore, our evaluation of a securitization as a VIE and our status as the VIE’s primary beneficiary can have a significant effect on our balance sheet.

We evaluate the securitization trust into which assets are transferred to determine whether the entity is a VIE. To determine whether a variable interest we hold could potentially be significant to the VIE, we consider both qualitative and quantitative factors regarding the nature, size and form of our involvement with the VIE. We assess whether we are the primary beneficiary of a VIE on an ongoing basis.

For our financial reporting purposes, the underlying assets owned by the securitization VIEs that we presently consolidate are shown under Loans at fair value, Derivative and credit risk transfer strip assets and Deposits securing credit risk transfer agreements on our consolidated balance sheets:

- The VIEs that hold assets relating to our CRT arrangements are shown as their constituent assets and liabilities – the Deposit securing credit risk transfer agreements, Derivative and credit risk transfer strip assets which represent our Interest-only (“IO”) ownership interest and Recourse Obligation, and Interest-only security payable at fair value. We include the income we receive from the IO ownership interests and changes in fair value of the Derivative credit risk transfer strip assets, Firm commitment to purchase credit risk transfer securities and Interest-only security payable at fair value in Net gain (loss) on investments in the consolidated income statements.

- The VIE that holds loans we have securitized is also shown as its constituent assets and liabilities- Loans at fair value, and the securities issued to third parties by the consolidated VIE are shown as Asset-backed financing of a variable interest entity at fair value on our consolidated balance sheets. We include the interest earned on the loans held by the VIE in Interest income and interest attributable to the asset-backed securities issued by the VIE in Interest expense in our consolidated income statements. Changes in the fair value of loans held in the VIE and the associated asset-backed financing are included in Net gain (loss) on investments.

## Income Taxes

We have elected to be taxed as a REIT and believe we comply with the provisions of the Internal Revenue Code applicable to REITs. Accordingly, we believe that we will not be subject to federal income tax on that portion of our REIT taxable income that is distributed to shareholders as long as we meet the requirements of certain asset, income and share ownership tests. If we fail to qualify as a REIT, and do not qualify for certain statutory relief provisions, we will be subject to income taxes and may be precluded from qualifying as a REIT for the four tax years following the year of loss of our REIT qualification.

Our TRS is subject to federal and state income taxes. We provide for income taxes using the asset and liability method. We recognize deferred tax assets and liabilities for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. We measure deferred tax assets and liabilities using enacted rates expected to apply to taxable income in the years in which we expect those temporary differences to be recovered or settled.

We recognize the effect on deferred taxes of a change in tax rates in income in the period in which the change occurs. We establish a valuation allowance if, in our judgment, realization of deferred tax assets is not more likely than not.



We recognize tax benefits relating to tax positions we take only if it is more likely than not that the position will be sustained upon examination by the appropriate taxing authority. We recognize a tax position that meets this standard as the largest amount that in our judgment exceeds 50 percent likelihood of being realized upon settlement. We will classify any penalties and interest as a component of income tax expense.

## Accounting Developments

Refer to Note 3 – Significant Accounting Policies – Recently Issued Accounting Pronouncement to our consolidated financial statements for a discussion of recent accounting developments and the expected effect of these developments on us.

## 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:

<table><tr><td rowspan="3"></td><td colspan="4">Year ended December 31,</td></tr><tr><td>2019</td><td colspan="2">2018</td><td>2017</td></tr><tr><td colspan="4">(dollars in thousands)</td></tr><tr><td>Net gain on investments:</td><td></td><td></td><td></td><td></td></tr><tr><td>Mortgage-backed securities</td><td>$     77,283</td><td>$</td><td>(11,262)</td><td>$     5,498</td></tr><tr><td>Loans:</td><td></td><td></td><td></td><td></td></tr><tr><td>Held in a variable interest entity</td><td>7,883</td><td></td><td>(8,499)</td><td>4,266</td></tr><tr><td>Distressed</td><td>(7,169)</td><td></td><td>(11,514)</td><td>(5,711)</td></tr><tr><td>ESS</td><td>(7,530)</td><td></td><td>11,084</td><td>(14,530)</td></tr><tr><td>CRT arrangements</td><td>(11,445)</td><td></td><td>6,015</td><td>71,997</td></tr><tr><td>Firm commitment to purchase CRT securities</td><td>60,943</td><td></td><td>7,399</td><td>—</td></tr><tr><td>Interest-only security payable at fair value</td><td>10,302</td><td></td><td>(19,332)</td><td>(11,033)</td></tr><tr><td>Asset-backed financing of a VIE</td><td>(7,553)</td><td></td><td>9,610</td><td>(3,426)</td></tr><tr><td></td><td>122,714</td><td></td><td>(16,499)</td><td>47,061</td></tr><tr><td>Net gain on loans acquired for sale:</td><td></td><td></td><td></td><td></td></tr><tr><td>Receipt of MSRs in sale transactions</td><td>837,706</td><td></td><td>356,755</td><td>290,309</td></tr><tr><td>Fair value of commitment to purchase credit risk transfer securities</td><td>99,305</td><td></td><td>30,595</td><td>—</td></tr><tr><td>Provision for losses relating to representations and warranties provided in loan sales</td><td>(228)</td><td></td><td>1,176</td><td>6,532</td></tr><tr><td>Change in fair value during the year of loans and derivatives held at year end</td><td>(5,050)</td><td></td><td>13,833</td><td>(9,223)</td></tr><tr><td></td><td>931,733</td><td></td><td>402,359</td><td>287,618</td></tr><tr><td>Net loan servicing fees—MSR valuation adjustments</td><td>(464,353)</td><td></td><td>(58,780)</td><td>(14,135)</td></tr><tr><td>Net interest income—Capitalization of interest pursuant to loan modifications</td><td>2,318</td><td></td><td>7,439</td><td>30,795</td></tr><tr><td></td><td>$     592,412</td><td>$</td><td>334,519</td><td>$     351,339</td></tr><tr><td>Net investment income</td><td>$     488,815</td><td>$</td><td>351,067</td><td>$     317,940</td></tr><tr><td>Non-cash items as a percentage of net investment income</td><td>121%</td><td></td><td>95%</td><td>111%</td></tr></table>



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;

- 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;

- 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;

- 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;

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

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

## Results of Operations

The following is a summary of our key performance measures:

<table><tr><td rowspan="3"></td><td colspan="4">Year ended December 31,</td></tr><tr><td>2019</td><td colspan="2">2018</td><td>2017</td></tr><tr><td colspan="4">(in thousands, except per common share amounts)</td></tr><tr><td>Net investment income</td><td>$     488,815</td><td>$     351,067</td><td>$     317,940</td><td></td></tr><tr><td>Expenses</td><td>298,174</td><td>193,079</td><td>193,394</td><td></td></tr><tr><td>Pretax income</td><td>190,641</td><td>157,988</td><td>124,546</td><td></td></tr><tr><td>(Benefit from) provision for income taxes</td><td>(35,716)</td><td>5,190</td><td>6,797</td><td></td></tr><tr><td>Net income</td><td>226,357</td><td>152,798</td><td>117,749</td><td></td></tr><tr><td>Dividends on preferred shares</td><td>24,938</td><td>24,938</td><td>15,267</td><td></td></tr><tr><td>Net income attributable to common shareholders</td><td>$     201,419</td><td>$     127,860</td><td>$     102,482</td><td></td></tr><tr><td>Pretax income (loss) by segment:</td><td></td><td></td><td></td><td></td></tr><tr><td>Credit sensitive strategies</td><td>$     182,176</td><td>$     87,251</td><td>$     102,214</td><td></td></tr><tr><td>Interest rate sensitive strategies</td><td>1,148</td><td>98,432</td><td>22,683</td><td></td></tr><tr><td>Correspondent production</td><td>64,593</td><td>16,472</td><td>42,938</td><td></td></tr><tr><td>Corporate</td><td>(57,276)</td><td>(44,167)</td><td>(43,289)</td><td></td></tr><tr><td></td><td>$     190,641</td><td>$     157,988</td><td>$     124,546</td><td></td></tr><tr><td>Return on average common shareholder&#x27;s equity</td><td>12.0%</td><td>10.2%</td><td>7.8%</td><td></td></tr><tr><td>Earnings per common share:</td><td></td><td></td><td></td><td></td></tr><tr><td>Basic</td><td>$     2.54</td><td>$     2.09</td><td>$     1.53</td><td></td></tr><tr><td>Diluted</td><td>$     2.42</td><td>$     1.99</td><td>$     1.48</td><td></td></tr><tr><td>Dividends per common share</td><td>$     1.88</td><td>$     1.88</td><td>$     1.88</td><td></td></tr><tr><td>At year end:</td><td></td><td></td><td></td><td></td></tr><tr><td>Total assets</td><td>$     11,771,351</td><td>$     7,813,361</td><td>$     5,604,933</td><td></td></tr><tr><td>Book value per common share</td><td>$     21.37</td><td>$     20.61</td><td>$     20.13</td><td></td></tr><tr><td>Closing prices per common share</td><td>$     22.29</td><td>$     18.62</td><td>$     16.07</td><td></td></tr></table>

Our net income during the year ended December 31, 2019 increased by $73.6 million, reflecting the growth of our CRT-related investments and the effects of decreasing mortgage interest rates in our interest rate sensitive strategies segment during the year ended December 31, 2019, as compared to the same period in 2018. These results were supplemented by a $40.9 million decrease in provision for income taxes.



The increase in pretax results is summarized below:

- Our credit sensitive strategies segment benefitted from growth in our investments in CRT arrangements as well as from the decrease in our investment in distressed loans; we recognized a $71.3 million increase in gains on CRT arrangements as well as an $8.0 million decrease in losses on loans at fair value.

- Our interest rate sensitive strategies segment was also affected by the decrease in interest rates. We recognized a $121.5 million increase in valuation gains on our investment in MBS and hedging gains which was offset by a $179.5 million decrease in net servicing fees caused by fair value adjustments to our investment in MSRs, and a $5.4 million decrease in net interest income resulting from the expiration of a master repurchase agreement that provided us with incentives to finance loans satisfying certain consumer debt relief characteristics.

- Our correspondent production segment benefitted from increases in loan production volume and gain on sale margins due to the increase in loan demand resulting from decreasing interest rates that prevailed throughout 2019, resulting in a $48.1 million increase in our pretax income.

- Our provision for income taxes reflects the fair value impairment we recognized on our investment in MSRs in our TRS, resulting in an income tax benefit for the year ended December 31, 2019.

Our net income increased by $25.4 million during the year ended December 31, 2018, as compared to the same period in 2017, primarily due to an increase in our interest rate sensitive strategies segment, resulting from the generally increasing interest rates in 2018 compared to 2017.

Credit sensitive strategies segment pretax income decreased by $15.0 million during the year ended December 31, 2018, as compared to the same period in 2017 from $102.2 million to $87.3 million due to decreased gains on CRT Agreements and increased losses on distressed loans. During the year ended December 31, 2017, our credit sensitive strategies segment recognized net investment income totaling $133.4 million primarily due to gains from our investments in CRT Agreements which reflected both growth in our investment in CRT Agreements and a tightening of credit spreads (credit spreads represent the yield premium demanded by investors for securities similar to CRT Agreements as compared to U.S. Treasury securities).

During the year ended December 31, 2018, pretax income in our interest rate sensitive strategies segment increased by $75.7 million compared to 2017. Our interest rate sensitive strategies segment recognized net investment income totaling $133.6 million, an increase of $81.8 million from $51.8 million during the same period in 2017, primarily due to increased net servicing income, reflecting the growth in our servicing portfolio supplemented by the beneficial effect of the increasing fair value, net of hedging results, of our servicing assets.

In our correspondent production activities, our net investment income decreased by $26.4 million during the year ended December 31, 2018, as compared to the same period in 2017, from $132.0 million to $105.6 million. Our net gain on loans acquired for sale decreased due to tightening gain on sale margins, resulting from a smaller mortgage market size. However, we maintained our loan production volume in a smaller mortgage market in part due to the continued growth of our correspondent seller network.

## Net Investment Income

Our net investment income is summarized below:

<table><tr><td rowspan="3"></td><td colspan="4">Year ended December 31,</td></tr><tr><td>2019</td><td colspan="2">2018</td><td>2017</td></tr><tr><td colspan="4">(in thousands)</td></tr><tr><td>Net gain on investments</td><td>$     263,318</td><td>$     81,926</td><td>$     96,384</td><td></td></tr><tr><td>Net gain on loans acquired for sale</td><td>170,164</td><td>59,185</td><td>74,516</td><td></td></tr><tr><td>Net loan origination fees</td><td>87,997</td><td>43,321</td><td>40,184</td><td></td></tr><tr><td>Net loan servicing fees</td><td>(58,918)</td><td>120,587</td><td>69,240</td><td></td></tr><tr><td>Net interest income</td><td>20,439</td><td>47,601</td><td>43,805</td><td></td></tr><tr><td>Results of real estate acquired in settlement of loans</td><td>771</td><td>(8,786)</td><td>(14,955)</td><td></td></tr><tr><td>Other</td><td>5,044</td><td>7,233</td><td>8,766</td><td></td></tr><tr><td></td><td>$     488,815</td><td>$     351,067</td><td>$     317,940</td><td></td></tr></table>



## Net Gain on Investments

Net gain on investments is summarized below:

<table><tr><td rowspan="3"></td><td colspan="4">Year ended December 31,</td></tr><tr><td rowspan="2">2019</td><td colspan="2">2018</td><td rowspan="2">2017</td></tr><tr><td colspan="2">(in thousands)</td></tr><tr><td>From nonaffiliates:</td><td></td><td></td><td></td><td></td></tr><tr><td>Mortgage-backed securities</td><td>$     77,283</td><td>$      (11,262)</td><td>$     5,498</td><td></td></tr><tr><td>Loans at fair value:</td><td></td><td></td><td></td><td></td></tr><tr><td>Held in a VIE</td><td>7,883</td><td>(8,499)</td><td>4,266</td><td></td></tr><tr><td>Distressed</td><td>(7,169)</td><td>(15,197)</td><td>(684)</td><td></td></tr><tr><td>CRT arrangements</td><td>110,676</td><td>92,943</td><td>123,728</td><td></td></tr><tr><td>Firm commitment to purchase CRT securities</td><td>60,943</td><td>7,399</td><td>—</td><td></td></tr><tr><td>Asset-backed financings of a VIE at fair value</td><td>(7,553)</td><td>9,610</td><td>(3,426)</td><td></td></tr><tr><td>Hedging derivatives</td><td>28,785</td><td>(4,152)</td><td>(18,468)</td><td></td></tr><tr><td></td><td>270,848</td><td>70,842</td><td>110,914</td><td></td></tr><tr><td>From PFSI—ESS</td><td>(7,530)</td><td>11,084</td><td>(14,530)</td><td></td></tr><tr><td></td><td>$     263,318</td><td>$     81,926</td><td>$     96,384</td><td></td></tr></table>

The increase in net gain on investments during 2019, as compared to 2018, was caused primarily by increased gains from our investments in MBS and CRT commitments, partially offset by the ESS losses. These changes reflect the benefit of generally decreasing interest rates on MBS fair value and of decreasing credit spreads during most of 2019 on the fair value of existing firm commitments to purchase CRT securities. The decrease in net gain on investments during 2018 as compared to 2017 was caused primarily by decreased gains from our CRT arrangements during 2018. The decrease in gains from CRT arrangements reflects increases in the credit spreads included in discount rates used in valuation of CRT arrangements during 2018.

## Mortgage-Backed Securities

During 2019, we recognized net valuation gains on MBS of $77.3 million, as compared to net valuation losses of $11.3 million during 2018. The gains we recorded for the year ended December 31, 2019 reflect the influence of decreasing interest rates during 2019, as compared to increasing interest rates during 2018, and the growth of our investment in MBS. Our average investment in MBS at fair value increased by $922.5 million, or 55%, during the year ended December 31, 2019, as compared to 2018. During the year ended December 31, 2017, we recognized net valuation gains on MBS of $5.5 million.



Net losses on our investment in distressed loans at fair value are summarized below:

<table><tr><td rowspan="3"></td><td colspan="4">Year ended December 31,</td></tr><tr><td rowspan="2">2019</td><td colspan="2">2018</td><td rowspan="2">2017</td></tr><tr><td colspan="2">(in thousands)</td></tr><tr><td>Valuation changes:</td><td></td><td></td><td></td><td></td></tr><tr><td>Performing loans</td><td>$ (2,680)</td><td>$ 2,331</td><td>$ 30,721</td><td></td></tr><tr><td>Nonperforming loans</td><td>(5,459)</td><td>(13,845)</td><td>(36,432)</td><td></td></tr><tr><td></td><td>(8,139)</td><td>(11,514)</td><td>(5,711)</td><td></td></tr><tr><td>Gain on payoffs</td><td>1,137</td><td>677</td><td>3,101</td><td></td></tr><tr><td>(Loss) gain on sale</td><td>(167)</td><td>(4,360)</td><td>1,926</td><td></td></tr><tr><td></td><td>$ (7,169)</td><td>$ (15,197)</td><td>$ (684)</td><td></td></tr><tr><td>Average portfolio balance at fair value</td><td>$ 75,251</td><td>$ 473,458</td><td>$ 1,152,930</td><td></td></tr><tr><td>Proceeds from liquidation of loans</td><td></td><td></td><td></td><td></td></tr><tr><td>Sales</td><td>$ 78,064</td><td>$ 563,403</td><td>$ 415,157</td><td></td></tr><tr><td>Repayments and liquidation</td><td>10,205</td><td>37,441</td><td>101,253</td><td></td></tr><tr><td></td><td>$ 88,269</td><td>$ 600,844</td><td>$ 516,410</td><td></td></tr></table>

<table><tr><td></td><td>December 31, 2019</td><td>December 31, 2018</td></tr><tr><td></td><td>(in thousands)</td><td></td></tr><tr><td>Nonperforming loans</td><td>$ 11,247</td><td>$ 88,926</td></tr><tr><td>Performing loans</td><td>3,179</td><td>28,806</td></tr><tr><td></td><td>$ 14,426</td><td>$ 117,732</td></tr></table>

During the year ended December 31, 2019, we substantially liquidated our remaining investment in distressed loans through sales to nonaffiliates. We received proceeds from the sale of loans at fair value totaling $78.1 million compared to $563.4 million in 2018.



## CRT Arrangements

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

<table><tr><td rowspan="3"></td><td colspan="4">Year ended December 31,</td></tr><tr><td rowspan="2">2019</td><td colspan="2">2018</td><td rowspan="2">2017</td></tr><tr><td colspan="2">(in thousands)</td></tr><tr><td>UPB of loans sold</td><td>$ 47,748,300</td><td>$ 21,939,277</td><td>$ 14,529,548</td><td></td></tr><tr><td>Investments:</td><td></td><td></td><td></td><td></td></tr><tr><td>Deposits securing CRT arrangements</td><td>$ 933,370</td><td>$ 596,626</td><td>$ 152,641</td><td></td></tr><tr><td>Change in expected face amount of firm commitment to purchase CRT securities and commitments to fund Deposits securing CRT arrangements resulting from sales of loans</td><td>897,151</td><td>122,581</td><td>390,362</td><td></td></tr><tr><td></td><td>$ 1,830,521</td><td>$ 719,207</td><td>$ 543,003</td><td></td></tr><tr><td>Investment income:</td><td></td><td></td><td></td><td></td></tr><tr><td>Net gain on investments:</td><td></td><td></td><td></td><td></td></tr><tr><td>Derivative and CRT strip assets:</td><td></td><td></td><td></td><td></td></tr><tr><td>CRT strips</td><td></td><td></td><td></td><td></td></tr><tr><td>Realized</td><td>$ 32,200</td><td></td><td></td><td></td></tr><tr><td>Valuation changes</td><td>(1,874)</td><td></td><td></td><td></td></tr><tr><td></td><td>30,326</td><td></td><td></td><td></td></tr><tr><td>CRT derivatives</td><td></td><td></td><td></td><td></td></tr><tr><td>Realized</td><td>79,619</td><td>$ 86,928</td><td>$ 51,731</td><td></td></tr><tr><td>Valuation changes</td><td>(9,571)</td><td>25,347</td><td>83,030</td><td></td></tr><tr><td></td><td>70,048</td><td>112,275</td><td>134,761</td><td></td></tr><tr><td>Interest-only security payable at fair value</td><td>10,302</td><td>(19,332)</td><td>(11,033)</td><td></td></tr><tr><td></td><td>110,676</td><td>92,943</td><td>123,728</td><td></td></tr><tr><td>Firm commitments to purchase CRT securities</td><td>60,943</td><td>7,399</td><td>—</td><td></td></tr><tr><td></td><td>171,619</td><td>100,342</td><td>123,728</td><td></td></tr><tr><td>Net gain on loans acquired for sale - Fair value of firm commitment to purchase CRT securities recognized upon sale of loans</td><td>99,305</td><td>30,595</td><td>—</td><td></td></tr><tr><td>Interest income - Deposits securing CRT arrangements</td><td>34,229</td><td>15,441</td><td>4,291</td><td></td></tr><tr><td></td><td>305,153</td><td>$ 146,378</td><td>$ 128,019</td><td></td></tr><tr><td>Payments made to settle losses on credit risk transfer arrangements</td><td>$ 5,165</td><td>$ 2,133</td><td>$ 1,396</td><td></td></tr></table>



<table><tr><td></td><td>December 31, 2019
(in thousands)</td><td>December 31, 2018</td></tr><tr><td>Carrying value of CRT arrangements:</td><td></td><td></td></tr><tr><td>Derivative and credit risk transfer strip assets</td><td></td><td></td></tr><tr><td>CRT strips</td><td>$     54,930</td><td>$      —</td></tr><tr><td>CRT derivatives</td><td>115,863</td><td>123,987</td></tr><tr><td></td><td>$     170,793</td><td>$     123,987</td></tr><tr><td>Firm commitment to purchase credit risk transfer securities at fair value</td><td>$     109,513</td><td>$     37,994</td></tr><tr><td>Deposits securing credit risk transfer arrangements</td><td>$     1,969,784</td><td>$     1,146,501</td></tr><tr><td>Interest-only security payable at fair value</td><td>$     25,709</td><td>$     36,011</td></tr><tr><td>CRT arrangement assets pledged to secure borrowings:</td><td></td><td></td></tr><tr><td>Derivative and credit risk transfer strip assets</td><td>$     142,183</td><td>$     87,976</td></tr><tr><td>Deposits securing CRT arrangements</td><td>$     1,969,784</td><td>$     1,146,501</td></tr><tr><td>Face amount of firm commitment to purchase CRT securities</td><td>$     1,502,203</td><td>$     605,052</td></tr><tr><td>UPB of loans - funded credit risk transfer arrangements</td><td>$     41,944,117</td><td>$     29,934,003</td></tr><tr><td>Collection status (UPB):</td><td></td><td></td></tr><tr><td>Delinquency</td><td></td><td></td></tr><tr><td>Current</td><td>$     41,355,622</td><td>$     29,633,133</td></tr><tr><td>30—89 days delinquent</td><td>$     463,331</td><td>$     228,296</td></tr><tr><td>90—180 days delinquent</td><td>$     106,234</td><td>$     39,826</td></tr><tr><td>180 or more days delinquent</td><td>$     8,802</td><td>$     4,208</td></tr><tr><td>Foreclosure</td><td>$     10,128</td><td>$     5,180</td></tr><tr><td>Bankruptcy</td><td>$     55,452</td><td>$     23,360</td></tr><tr><td>UPB of loans - firm commitment to purchase CRT securities</td><td>$     38,738,396</td><td>$     16,392,300</td></tr><tr><td>Collection status (UPB):</td><td></td><td></td></tr><tr><td>Delinquency</td><td></td><td></td></tr><tr><td>Current</td><td>$     38,581,080</td><td>$     16,329,044</td></tr><tr><td>30—89 days delinquent</td><td>$     146,256</td><td>$     61,035</td></tr><tr><td>90—180 days delinquent</td><td>$     9,109</td><td>$     2,221</td></tr><tr><td>180 or more days delinquent</td><td>$      —</td><td>$      —</td></tr><tr><td>Foreclosure</td><td>$     1,951</td><td>$      —</td></tr><tr><td>Bankruptcy</td><td>$     2,980</td><td>$     1,258</td></tr></table>

The increase in gains recognized on CRT arrangements is due to growth in such investments which increased realized gains in the form of interest on our IO interest, on our investments, partially offset by valuation losses which reflect increases in both credit spreads and prepayment expectations for certain of our CRT investments during the year ended December 31, 2019, compared to 2018.

During 2018, the decrease in gains recognized on CRT arrangements is due to the reduced valuation gains recognized resulting from smaller decreases in credit spreads during 2018 as compared to 2017. The decreased valuation gains were partially offset by growth in the realized gain on CRT arrangements resulting from growth in our CRT portfolio.

## ESS Purchased from PFSI

We recognized fair value losses relating to our investment in ESS totaling $7.5 million for the year ended December 31, 2019, as compared to fair value gains of $11.1 million during 2018. The change in valuation results during 2019 as compared to 2018 reflects the different interest rate environments that prevailed between the periods. The decreasing interest rates that prevailed during 2019 as compared to 2018 resulted in increased prepayment expectations for the loans underlying the ESS. Such prepayment expectations result in reduced cash flow expectations, negatively affecting the assets' fair values.



We recognized fair value losses relating to our investment in ESS totaling $14.5 million during 2017. Losses recognized during 2017 reflected the effects of volatile interest rates and a flattening yield curve during the year, partially offset by a decreasing investment in ESS.

Net Gain on Loans Acquired for Sale

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

<table><tr><td rowspan="3"></td><td colspan="4">Year ended December 31,</td></tr><tr><td rowspan="2">2019</td><td colspan="2">2018</td><td rowspan="2">2017</td></tr><tr><td colspan="2">(in thousands)</td></tr><tr><td>From non-affiliates:</td><td></td><td></td><td></td><td></td></tr><tr><td>Cash loss:</td><td></td><td></td><td></td><td></td></tr><tr><td>Loans</td><td>$ (687,317)</td><td>$ (363,271)</td><td>$ (209,898)</td><td></td></tr><tr><td>Hedging activities</td><td>(88,633)</td><td>9,172</td><td>(15,288)</td><td></td></tr><tr><td></td><td>(775,950)</td><td>(354,099)</td><td>(225,186)</td><td></td></tr><tr><td>Non-cash gain:</td><td></td><td></td><td></td><td></td></tr><tr><td>Receipt of MSRs in loan sale transactions</td><td>837,706</td><td>356,755</td><td>290,309</td><td></td></tr><tr><td>Provision for losses relating to representations and warranties provided in loan sales:</td><td></td><td></td><td></td><td></td></tr><tr><td>Pursuant to loan sales</td><td>(3,778)</td><td>(2,531)</td><td>(3,147)</td><td></td></tr><tr><td>Reduction in liability due to change in estimate</td><td>3,550</td><td>3,707</td><td>9,679</td><td></td></tr><tr><td></td><td>(228)</td><td>1,176</td><td>6,532</td><td></td></tr><tr><td>Recognition of fair value of commitment to purchase credit risk transfer securities relating to loans sold</td><td>99,305</td><td>30,595</td><td>—</td><td></td></tr><tr><td>Change in fair value during the year of financial instruments held at year end:</td><td></td><td></td><td></td><td></td></tr><tr><td>IRLCs</td><td>(834)</td><td>7,356</td><td>855</td><td></td></tr><tr><td>Loans</td><td>(1,765)</td><td>(9,685)</td><td>5,879</td><td></td></tr><tr><td>Hedging derivatives</td><td>(2,451)</td><td>16,162</td><td>(15,957)</td><td></td></tr><tr><td></td><td>(5,050)</td><td>13,833</td><td>(9,223)</td><td></td></tr><tr><td></td><td>931,733</td><td>402,359</td><td>287,618</td><td></td></tr><tr><td>Total from non-affiliates</td><td>155,783</td><td>48,260</td><td>62,432</td><td></td></tr><tr><td>From PFSI—cash gain</td><td>14,381</td><td>10,925</td><td>12,084</td><td></td></tr><tr><td></td><td>$ 170,164</td><td>$ 59,185</td><td>$ 74,516</td><td></td></tr><tr><td>Interest rate lock commitments issued on loans acquired for sale to nonaffiliates</td><td>$ 63,323,599</td><td>$ 29,341,579</td><td>$ 24,855,512</td><td></td></tr><tr><td>Acquisition of loans for sale:</td><td></td><td></td><td></td><td></td></tr><tr><td>To nonaffiliates</td><td>$ 57,396,037</td><td>$ 26,438,464</td><td>$ 22,971,119</td><td></td></tr><tr><td>To PFSI</td><td>49,116,781</td><td>36,366,180</td><td>40,050,776</td><td></td></tr><tr><td></td><td>$ 106,512,818</td><td>$ 62,804,644</td><td>$ 63,021,895</td><td></td></tr></table>

The changes in net gain on loans acquired for sale during the year ended December 31, 2019, as compared to 2018, reflects both the effects of increasing demand in the mortgage market on our loan sales volume and gain on sale margins and the fair value of our commitment to invest in the credit risk assets arising from our loan production. We included $99.3 million in gain on sale of loans related to our continued involvement in the credit risk relating to the loans we sold during the year ended December 31, 2019, as compared to $30.6 million during 2018. Our commitment to invest in this credit risk contributed approximately 58% of our gain on loans acquired for sale during 2019 and 52% during 2018.

## Non-cash elements of gain on sale of loans

The MSRs and liability for representations and warranties we recognize represent our estimate of the fair value of future benefits and costs we will realize for years in the future. These estimates represented approximately 492% of our gain on sale of loans at fair value and 171% of our net investment income for the year ended December 31, 2019 as compared to 605% and 102%, respectively, for the year ended December 31, 2018 and 398% and 93% for the year ended December 31, 2017, respectively. As discussed in the Critical Accounting Policies section above, these estimates change over time and such changes may be material to our future results of operations and financial condition.



How we measure and update our measurements of MSRs is detailed in Note 7 – Fair value – Valuation Techniques and Inputs to the consolidated financial statements included in this Report.

We recognize a liability for losses we expect to incur relating to representations and warranties created in our loan sales transactions. Our agreements with the purchasers include representations and warranties related to the loans we sell. The representations and warranties require adherence to purchaser and insurer origination and underwriting guidelines, including but not limited to the validity of the lien securing the loan, property eligibility, borrower credit, income and asset requirements, and compliance with applicable federal, state and local law. We recorded a provision for losses relating to representations and warranties of $3.8 million, $2.5 million and $3.1 million as part of our loan sales in each of the years ended December 31, 2019, 2018 and 2017, respectively.

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 and loans subject to representations and warranties:

<table><tr><td rowspan="3"></td><td colspan="4">Year ended December 31,</td></tr><tr><td>2019</td><td colspan="2">2018</td><td>2017</td></tr><tr><td colspan="4">(in thousands)</td></tr><tr><td>Indemnification activity (UPB):</td><td></td><td></td><td></td><td></td></tr><tr><td>Loans indemnified at beginning of year</td><td>$     7,075</td><td>$     5,926</td><td>$     4,856</td><td></td></tr><tr><td>New indemnifications</td><td>583</td><td>1,937</td><td>2,069</td><td></td></tr><tr><td>Less: Indemnified loans repaid or refinanced</td><td>1,961</td><td>788</td><td>999</td><td></td></tr><tr><td>Loans indemnified at end of year</td><td>$     5,697</td><td>$     7,075</td><td>$     5,926</td><td></td></tr><tr><td>UPB of loans with deposits received from correspondent sellers collateralizing prospective indemnification losses at end of year</td><td>$     603</td><td>$     781</td><td>$     1,145</td><td></td></tr><tr><td>Repurchase activity (UPB):</td><td></td><td></td><td></td><td></td></tr><tr><td>Loans repurchased</td><td>$     22,648</td><td>$     12,208</td><td>$     11,596</td><td></td></tr><tr><td>Less:</td><td></td><td></td><td></td><td></td></tr><tr><td>Loans repurchased by correspondent sellers</td><td>13,745</td><td>8,455</td><td>7,669</td><td></td></tr><tr><td>Loans repaid by borrowers</td><td>4,830</td><td>2,713</td><td>4,133</td><td></td></tr><tr><td>Net indemnified loans repurchased or (resolved)</td><td>$     4,073</td><td>$     1,040</td><td>$      (206)</td><td></td></tr><tr><td>Net losses charged (recovery credited) to liability for representations and warranties</td><td>$     128</td><td>$      (12)</td><td>$     140</td><td></td></tr><tr><td>At end of year:</td><td></td><td></td><td></td><td></td></tr><tr><td>Loans subject to representations and warranties</td><td>$     122,163,186</td><td>$     90,427,100</td><td>$     71,416,333</td><td></td></tr><tr><td>Liability for representations and warranties</td><td>$     7,614</td><td>$     7,514</td><td>$     8,678</td><td></td></tr></table>

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 reductions in liabilities for representations and warranties for previously sold loans totaling $3.6 million, $3.7 million and $9.7 million during each of the years ended December 31, 2019, 2018 and 2017, respectively, due to the effects of certain loans reaching specified performance histories identified by the Agencies as sufficient to limit repurchase claims relating to such loans.

## Loan Origination Fees

Loan origination fees represent fees we charge correspondent sellers relating to our purchase of loans from those sellers. The increase in fees during 2019, as compared to 2018 and 2017, reflects an increase in our purchases of loans with delivery fees.

## Net Loan Servicing Fees

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

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

Net loan servicing fees are summarized below:

<table><tr><td rowspan="3"></td><td colspan="4">Year ended December 31,</td></tr><tr><td>2019</td><td colspan="2">2018</td><td>2017</td></tr><tr><td colspan="4">(in thousands)</td></tr><tr><td>From nonaffiliates:</td><td></td><td></td><td></td><td></td></tr><tr><td>Contractually specified (1)</td><td>$     295,390</td><td>$     204,663</td><td>$     164,776</td><td></td></tr><tr><td>Other</td><td>24,099</td><td>8,062</td><td>6,523</td><td></td></tr><tr><td>Effect of MSRs fair value changes:</td><td></td><td></td><td></td><td></td></tr><tr><td>Realization of cashflows and amortization</td><td>(202,322)</td><td>(119,552)</td><td>(91,386)</td><td></td></tr><tr><td>Market changes and impairment</td><td>(262,031)</td><td>60,772</td><td>(10,249)</td><td></td></tr><tr><td></td><td>(464,353)</td><td>(58,780)</td><td>(101,635)</td><td></td></tr><tr><td>Gain on sale</td><td>—</td><td>—</td><td>660</td><td></td></tr><tr><td>Gains (losses) on hedging derivatives</td><td>80,622</td><td>(35,550)</td><td>(2,512)</td><td></td></tr><tr><td></td><td>(383,731)</td><td>(94,330)</td><td>(103,487)</td><td></td></tr><tr><td>Net servicing fees from non-affiliates</td><td>(64,242)</td><td>118,395</td><td>67,812</td><td></td></tr><tr><td>From PFSI—MSR recapture income</td><td>5,324</td><td>2,192</td><td>1,428</td><td></td></tr><tr><td>Net loan servicing fees</td><td>$    (58,918)</td><td>$   120,587</td><td>$    69,240</td><td></td></tr><tr><td>Average servicing portfolio UPB</td><td>$   110,075,179</td><td>$   80,500,212</td><td>$    63,836,843</td><td></td></tr></table>

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

Net loan servicing fees decreased by $179.5 million during the year ended December 31, 2019 as compared to 2018. The decrease in net loan servicing fees during 2019, as compared to 2018, was primarily attributable to the negative effect of the decrease in fair value of our MSRs, net of hedging derivative gains, resulting from decreasing interest rates during 2019 compared to 2018. This negative effect was partially offset by growth in our loan servicing portfolio resulting from our correspondent production activities which included retention of a higher servicing fee rate relating to loans sold during 2019 as compared to 2018.

The fair value changes attributable to market inputs such as projected prepayment speeds decreased by $322.8 million, primarily due to the effect of lower interest rates that prevailed during the year ended December 31, 2019, as compared to the effect of increasing interest rates on prepayment experience and expectations that prevailed during the same period in 2018. This loss was partially offset by an increase in hedging gains of $116.2 million, as compared to the same period in 2018.



Loan servicing fees (including ancillary and other fees) increased by $106.8 million during the year ended December 31, 2019, reflecting the growth of our servicing portfolio and retention of a higher servicing fee rate relating to loans sold during 2019, as compared to 2018. This increase was offset by increases in realization of cash flows of $82.8 million during the year ended December 31, 2019. Realization of cash flows increased disproportionately to the increase in servicing fees due to acceleration of the rate of realization caused by the increased prepayment experience and expectations that accompany lower interest rates.

Net loan servicing fees increased during the year ended December 31, 2018, as compared to 2017, by $51.3 million. The increase in net loan servicing fees during the year ended December 31, 2018, as compared to the year ended December 31, 2017, was primarily attributable to a 26% increase in the average size of our servicing portfolio measured in UPB during 2018, as compared to 2017, supplemented by the beneficial effect of an increase in fair value of our MSRs as a result of increasing interest rates during 2018 compared to 2017.

## Net Interest Income

Net interest income is summarized below:

<table><tr><td rowspan="3"></td><td colspan="5">For the year ended December 31, 2019</td></tr><tr><td colspan="4">Interest income/expense</td><td rowspan="2">Interest yield/cost %</td></tr><tr><td>Coupon</td><td>Discount/ fees (1)</td><td>Total (dollars in thousands)</td><td>Average balance</td></tr><tr><td>Assets:</td><td></td><td></td><td></td><td></td><td></td></tr><tr><td>Cash and short-term investments</td><td>$ 4,559</td><td>$ —</td><td>$ 4,559</td><td>$ 164,577</td><td>2.73%</td></tr><tr><td>Mortgage-backed securities</td><td>91,303</td><td>(12,853)</td><td>78,450</td><td>2,591,828</td><td>2.99%</td></tr><tr><td>Loans acquired for sale at fair value</td><td>121,387</td><td>—</td><td>121,387</td><td>2,754,955</td><td>4.35%</td></tr><tr><td>Loans at fair value:</td><td></td><td></td><td></td><td></td><td></td></tr><tr><td>Held by variable interest entity</td><td>10,632</td><td>1,102</td><td>11,734</td><td>281,449</td><td>4.11%</td></tr><tr><td>Distressed</td><td>1,671</td><td>2,177</td><td>3,848</td><td>75,251</td><td>5.04%</td></tr><tr><td></td><td>12,303</td><td>3,279</td><td>15,582</td><td>356,700</td><td>4.31%</td></tr><tr><td>ESS from PFSI</td><td>10,291</td><td>—</td><td>10,291</td><td>197,273</td><td>5.15%</td></tr><tr><td>Deposits securing CRT arrangements</td><td>34,229</td><td>—</td><td>34,229</td><td>1,639,885</td><td>2.06%</td></tr><tr><td></td><td>274,072</td><td>(9,574)</td><td>264,498</td><td>7,705,218</td><td>3.39%</td></tr><tr><td>Placement fees relating to custodial funds</td><td>52,587</td><td>—</td><td>52,587</td><td></td><td></td></tr><tr><td>Other</td><td>800</td><td>—</td><td>800</td><td></td><td></td></tr><tr><td></td><td>327,459</td><td>(9,574)</td><td>317,885</td><td>$ 7,705,218</td><td>4.07%</td></tr><tr><td>Liabilities:</td><td></td><td></td><td></td><td></td><td></td></tr><tr><td>Assets sold under agreements to repurchase (2)</td><td>$ 182,261</td><td>$ (4,050)</td><td>$ 178,211</td><td>$ 5,600,469</td><td>3.14%</td></tr><tr><td>Mortgage loan participation purchase and sale agreements</td><td>1,412</td><td>158</td><td>1,570</td><td>40,036</td><td>3.87%</td></tr><tr><td>Notes payable</td><td>51,735</td><td>2,233</td><td>53,968</td><td>1,101,501</td><td>4.83%</td></tr><tr><td>Exchangeable Notes</td><td>15,344</td><td>1,693</td><td>17,037</td><td>279,207</td><td>6.02%</td></tr><tr><td>Asset-backed financings of a VIE at fair value</td><td>9,263</td><td>2,061</td><td>11,324</td><td>267,539</td><td>4.17%</td></tr><tr><td>Assets sold to PFSI under agreement to repurchase</td><td>6,302</td><td>—</td><td>6,302</td><td>118,264</td><td>5.33%</td></tr><tr><td></td><td>266,317</td><td>2,095</td><td>268,412</td><td>7,407,016</td><td>3.57%</td></tr><tr><td>Interest shortfall on repayments of loans serviced for Agency securitizations</td><td>25,776</td><td>—</td><td>25,776</td><td></td><td></td></tr><tr><td>Interest on loan impound deposits</td><td>3,258</td><td>—</td><td>3,258</td><td></td><td></td></tr><tr><td></td><td>$ 295,351</td><td>$ 2,095</td><td>$ 297,446</td><td>$ 7,407,016</td><td>3.96%</td></tr><tr><td>Net interest income</td><td>$ 32,108</td><td>$ (11,669)</td><td>$ 20,439</td><td></td><td></td></tr><tr><td>Net interest margin</td><td></td><td></td><td></td><td></td><td>0.26%</td></tr><tr><td>Net interest spread</td><td></td><td></td><td></td><td></td><td>0.11%</td></tr></table>

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

(2) In 2017, we entered into a master repurchase agreement that provided us with incentives to finance loans approved for satisfying certain consumer relief characteristics as provided in the agreement. During the year ended December 31, 2019, we included $10.8 million of such incentives as a reduction to Interest expense. The master repurchase agreement expired on August 21, 2019.



<table><tr><td rowspan="3"></td><td colspan="5">For the year ended December 31, 2018</td></tr><tr><td colspan="4">Interest income/expense</td><td rowspan="2">Average balance</td></tr><tr><td>Discount/ fees (1)</td><td>Total</td><td></td><td>Interest yield/cost %</td></tr><tr><td></td><td colspan="5">(dollars in thousands)</td></tr><tr><td>Assets:</td><td></td><td></td><td></td><td></td><td></td></tr><tr><td>Short-term investments</td><td>$ 852</td><td>$ —</td><td>$ 852</td><td>$ 37,939</td><td>2.25%</td></tr><tr><td>Mortgage-backed securities</td><td>60,280</td><td>(4,793)</td><td>55,487</td><td>1,669,373</td><td>3.33%</td></tr><tr><td>Loans acquired for sale at fair value</td><td>75,610</td><td>—</td><td>75,610</td><td>1,577,395</td><td>4.81%</td></tr><tr><td>Loans at fair value:</td><td></td><td></td><td></td><td></td><td></td></tr><tr><td>Held by variable interest entity</td><td>11,713</td><td>100</td><td>11,813</td><td>301,398</td><td>3.93%</td></tr><tr><td>Distressed</td><td>14,027</td><td>7,639</td><td>21,666</td><td>473,458</td><td>4.59%</td></tr><tr><td></td><td>25,740</td><td>7,739</td><td>33,479</td><td>774,856</td><td>4.33%</td></tr><tr><td>ESS from PFSI</td><td>15,138</td><td>—</td><td>15,138</td><td>231,448</td><td>6.56%</td></tr><tr><td>Deposits securing CRT arrangements</td><td>15,441</td><td>—</td><td>15,441</td><td>751,593</td><td>2.06%</td></tr><tr><td></td><td>193,061</td><td>2,946</td><td>196,007</td><td>5,042,604</td><td>3.90%</td></tr><tr><td>Placement fees relating to custodial funds</td><td>26,065</td><td>—</td><td>26,065</td><td></td><td></td></tr><tr><td>Other</td><td>700</td><td>—</td><td>700</td><td></td><td></td></tr><tr><td></td><td>219,826</td><td>2,946</td><td>222,772</td><td>$ 5,042,604</td><td>4.43%</td></tr><tr><td>Liabilities:</td><td></td><td></td><td></td><td></td><td></td></tr><tr><td>Assets sold under agreements to repurchase (2)</td><td>126,675</td><td>(11,292)</td><td>115,383</td><td>$ 3,901,772</td><td>2.97%</td></tr><tr><td>Mortgage loan participation purchase and sale agreements</td><td>2,205</td><td>217</td><td>2,422</td><td>64,512</td><td>3.76%</td></tr><tr><td>Notes payable</td><td>14,027</td><td>596</td><td>14,623</td><td>300,035</td><td>4.89%</td></tr><tr><td>Exchangeable Notes</td><td>13,437</td><td>1,164</td><td>14,601</td><td>250,000</td><td>5.86%</td></tr><tr><td>Asset-backed financings of a VIE at fair value</td><td>10,244</td><td>577</td><td>10,821</td><td>288,244</td><td>3.76%</td></tr><tr><td>Assets sold to PFSI under agreement to repurchase</td><td>7,462</td><td>—</td><td>7,462</td><td>138,155</td><td>5.42%</td></tr><tr><td></td><td>174,050</td><td>(8,738)</td><td>165,312</td><td>4,942,718</td><td>3.35%</td></tr><tr><td>Interest shortfall on repayments of loans serviced for Agency securitizations</td><td>7,324</td><td>—</td><td>7,324</td><td></td><td></td></tr><tr><td>Interest on loan impound deposits</td><td>2,535</td><td>—</td><td>2,535</td><td></td><td></td></tr><tr><td></td><td>183,909</td><td>(8,738)</td><td>175,171</td><td>$ 4,942,718</td><td>3.55%</td></tr><tr><td>Net interest income</td><td>$ 35,917</td><td>$ 11,684</td><td>$ 47,601</td><td></td><td></td></tr><tr><td>Net interest margin</td><td></td><td></td><td></td><td></td><td>0.94%</td></tr><tr><td>Net interest spread</td><td></td><td></td><td></td><td></td><td>0.88%</td></tr></table>

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

(2) In 2017, we entered into a master repurchase agreement that provided us with incentives to finance loans approved for satisfying certain consumer relief characteristics as provided in the agreement. During the year ended December 31, 2018, we included $19.7 million of such incentives as a reduction to Interest expense. The master repurchase agreement expired on August 21, 2019.



<table><tr><td rowspan="3"></td><td colspan="5">For the year ended December 31, 2017</td></tr><tr><td colspan="3">Interest income/expense</td><td rowspan="2">Average balance</td><td rowspan="2">Interest yield/cost %</td></tr><tr><td>Discount/ fees (1)</td><td>Total</td></tr><tr><td></td><td colspan="5">(dollars in thousands)</td></tr><tr><td>Assets:</td><td></td><td></td><td></td><td></td><td></td></tr><tr><td>Short-term investments</td><td>$     576</td><td>$      —</td><td>$     576</td><td>$     34,804</td><td>1.66%</td></tr><tr><td>Mortgage-backed securities</td><td>34,805</td><td>(5,367)</td><td>29,438</td><td>1,026,850</td><td>2.87%</td></tr><tr><td>Loans acquired for sale at fair value</td><td>53,164</td><td>—</td><td>53,164</td><td>1,366,017</td><td>3.90%</td></tr><tr><td>Loans at fair value:</td><td></td><td></td><td></td><td></td><td></td></tr><tr><td>Held by variable interest entity</td><td>12,981</td><td>1,444</td><td>14,425</td><td>344,942</td><td>4.19%</td></tr><tr><td>Distressed</td><td>33,106</td><td>30,507</td><td>63,613</td><td>1,152,930</td><td>5.53%</td></tr><tr><td></td><td>46,087</td><td>31,951</td><td>78,038</td><td>1,497,872</td><td>5.22%</td></tr><tr><td>ESS from PFSI</td><td>16,951</td><td>—</td><td>16,951</td><td>264,858</td><td>6.42%</td></tr><tr><td>Deposits securing CRT arrangements</td><td>4,291</td><td>—</td><td>4,291</td><td>501,778</td><td>0.86%</td></tr><tr><td></td><td>155,874</td><td>26,584</td><td>182,458</td><td>4,692,179</td><td>3.89%</td></tr><tr><td>Placement fees relating to custodial funds</td><td>12,517</td><td>—</td><td>12,517</td><td></td><td></td></tr><tr><td>Other</td><td>201</td><td>—</td><td>201</td><td></td><td></td></tr><tr><td></td><td>168,592</td><td>26,584</td><td>195,176</td><td>$ 4,692,179</td><td>4.17%</td></tr><tr><td>Liabilities:</td><td></td><td></td><td></td><td></td><td></td></tr><tr><td>Assets sold under agreements to repurchase (2)</td><td>86,067</td><td>7,513</td><td>93,580</td><td>$ 3,487,150</td><td>2.69%</td></tr><tr><td>Mortgage loan participation purchase and sale agreements</td><td>1,468</td><td>125</td><td>1,593</td><td>61,807</td><td>2.58%</td></tr><tr><td>Notes payable</td><td>8,429</td><td>4,205</td><td>12,634</td><td>145,638</td><td>8.70%</td></tr><tr><td>Exchangeable Notes</td><td>13,438</td><td>1,097</td><td>14,535</td><td>250,000</td><td>5.83%</td></tr><tr><td>Asset-backed financings of a VIE at fair value</td><td>11,403</td><td>1,781</td><td>13,184</td><td>331,409</td><td>3.99%</td></tr><tr><td>Assets sold to PFSI under agreement to repurchase</td><td>8,084</td><td>(46)</td><td>8,038</td><td>149,319</td><td>5.40%</td></tr><tr><td></td><td>128,889</td><td>14,675</td><td>143,564</td><td>4,425,323</td><td>3.25%</td></tr><tr><td>Interest shortfall on repayments of loans serviced for Agency securitizations</td><td>5,928</td><td>—</td><td>5,928</td><td></td><td></td></tr><tr><td>Interest on loan impound deposits</td><td>1,879</td><td>—</td><td>1,879</td><td></td><td></td></tr><tr><td></td><td>$ 136,696</td><td>$ 14,675</td><td>$ 151,371</td><td>$ 4,425,323</td><td>3.43%</td></tr><tr><td>Net interest income</td><td>$ 31,896</td><td>$ 11,909</td><td>$ 43,805</td><td></td><td></td></tr><tr><td>Net interest margin</td><td></td><td></td><td></td><td></td><td>0.93%</td></tr><tr><td>Net interest spread</td><td></td><td></td><td></td><td></td><td>0.74%</td></tr></table>

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

(2) In 2017, we entered into a master repurchase agreement that provided us with incentives to finance loans approved for satisfying certain consumer relief characteristics as provided in the agreement. During the year ended December 31, 2017, we included $3.1 million of such incentives as a reduction to Interest expense. The master repurchase agreement expired on August 21, 2019.



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

<table><tr><td rowspan="4"></td><td colspan="3">Year ended December 31, 2019</td><td colspan="3">Year ended December 31, 2018</td></tr><tr><td colspan="3">vs.</td><td colspan="3">vs.</td></tr><tr><td colspan="3">Year ended December 31, 2018</td><td colspan="3">Year ended December 31, 2017</td></tr><tr><td colspan="3">Increase (decrease) due to changes in</td><td colspan="3">Increase (decrease) due to changes in</td></tr><tr><td></td><td>Rate</td><td>Volume</td><td>Total change</td><td>Rate</td><td>Volume</td><td>Total change</td></tr><tr><td>Assets:</td><td></td><td></td><td></td><td>(in thousands)</td><td></td><td></td></tr><tr><td>Short-term investments</td><td>$ 242</td><td>$ 3,465</td><td>$ 3,707</td><td>$ 220</td><td>$ 56</td><td>$ 276</td></tr><tr><td>Mortgage-backed securities</td><td>(5,339)</td><td>28,302</td><td>22,963</td><td>5,289</td><td>20,760</td><td>26,049</td></tr><tr><td>Loans acquired for sale at fair value</td><td>(6,553)</td><td>52,330</td><td>45,777</td><td>13,456</td><td>8,990</td><td>22,446</td></tr><tr><td>Loans at fair value:</td><td></td><td></td><td></td><td></td><td></td><td></td></tr><tr><td>Held by variable interest entity</td><td>728</td><td>(807)</td><td>(79)</td><td>(867)</td><td>(1,745)</td><td>(2,612)</td></tr><tr><td>Distressed</td><td>2,282</td><td>(20,100)</td><td>(17,818)</td><td>(9,417)</td><td>(32,530)</td><td>(41,947)</td></tr><tr><td></td><td>3,010</td><td>(20,907)</td><td>(17,897)</td><td>(10,284)</td><td>(34,275)</td><td>(44,559)</td></tr><tr><td>ESS from PFSI</td><td>(2,803)</td><td>(2,044)</td><td>(4,847)</td><td>365</td><td>(2,178)</td><td>(1,813)</td></tr><tr><td>Deposits securing CRT arrangements</td><td>251</td><td>18,537</td><td>18,788</td><td>8,229</td><td>2,921</td><td>11,150</td></tr><tr><td></td><td>(11,192)</td><td>79,683</td><td>68,491</td><td>17,275</td><td>(3,726)</td><td>13,549</td></tr><tr><td>Placement fees relating to custodial funds</td><td>—</td><td>26,522</td><td>26,522</td><td>—</td><td>13,548</td><td>13,548</td></tr><tr><td>Other</td><td>—</td><td>100</td><td>100</td><td>—</td><td>499</td><td>499</td></tr><tr><td></td><td>(11,192)</td><td>106,305</td><td>95,113</td><td>17,275</td><td>10,321</td><td>27,596</td></tr><tr><td>Liabilities:</td><td></td><td></td><td></td><td></td><td></td><td></td></tr><tr><td>Assets sold under agreements to repurchase</td><td>9,342</td><td>53,486</td><td>62,828</td><td>10,066</td><td>11,737</td><td>21,803</td></tr><tr><td>Mortgage loan participation purchase and sale agreement</td><td>104</td><td>(956)</td><td>(852)</td><td>756</td><td>73</td><td>829</td></tr><tr><td>Notes payable</td><td>78</td><td>39,267</td><td>39,345</td><td>(7,252)</td><td>9,241</td><td>1,989</td></tr><tr><td>Exchangeable Notes</td><td>675</td><td>1,761</td><td>2,436</td><td>66</td><td>—</td><td>66</td></tr><tr><td>Asset-backed financing of a VIE at fair value</td><td>1,316</td><td>(813)</td><td>503</td><td>(713)</td><td>(1,650)</td><td>(2,363)</td></tr><tr><td>Assets sold to PFSI under agreement to repurchase</td><td>(99)</td><td>(1,061)</td><td>(1,160)</td><td>27</td><td>(603)</td><td>(576)</td></tr><tr><td></td><td>11,416</td><td>91,684</td><td>103,100</td><td>2,950</td><td>18,798</td><td>21,748</td></tr><tr><td>Interest shortfall on repayments of loans serviced for Agency securitizations</td><td>—</td><td>18,452</td><td>18,452</td><td>—</td><td>1,396</td><td>1,396</td></tr><tr><td>Interest loan impound deposits</td><td>—</td><td>723</td><td>723</td><td>—</td><td>656</td><td>656</td></tr><tr><td></td><td>11,416</td><td>110,859</td><td>122,275</td><td>2,950</td><td>20,850</td><td>23,800</td></tr><tr><td>Net interest income</td><td>$ (22,608)</td><td>$ (4,554)</td><td>$ (27,162)</td><td>$ 14,325</td><td>$ (10,529)</td><td>$ 3,796</td></tr></table>



The decrease in net interest income during the year ended December 31, 2019, as compared to the year ended December 31, 2018, reflects increased financing of non-interest earning assets such as MSRs, CRT derivatives and CRT strips, along with a shift in our interest-earning investments toward MBS and away from distressed assets and the expiration of a master repurchase agreement that provided us with incentives to finance loans approved for satisfying certain consumer relief characteristics:

- During 2019, we issued approximately $1.3 billion of term notes secured by our investments in CRT arrangements. While we earn interest on the Deposits securing credit risk transfer arrangements, most of the net investment income we earn relating to these arrangements is included in Net gain on investments.

- During 2019, as noted above, our production of loans for sale increased significantly due to decreases in market mortgage interest rates as borrowers refinanced their existing loans. Generally, when a borrower repays its 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. The increase in refinancing activity in our MSR portfolio caused an $18.5 million increase in the interest shortfall on payments of Agency securitizations as compared to the amount we incurred in 2018.

- Included in net interest income as a reduction of interest expense relating to Assets sold under agreements to repurchase for the year ended December 31, 2019 are $10.8 million, compared to $19.7 million during the year ended December 31, 2018, of incentives we recognized relating to a master repurchase agreement. This master repurchase agreement expired on August 21, 2019.

These reductions in net interest income were partially offset by:

- An increase in placement fees relating to custodial funds, which reflects the growth in our MSR portfolio from 2018 to 2019 partially offset by reductions in the placement fee rates we are able to obtain from the banks where we place the custodial funds.

- An increase in net interest income from increases in our investment in MBS and loans acquired for sale. Our average investment in MBS increased by approximately $922.5 million, or 55%, during 2019, as compared to 2018, and our average investment in loans held for sale increased by approximately $1.2 billion, or 75%, during 2019, as compared to 2018.

## Results of Real Estate Acquired in Settlement of Loans

Results of REO includes the gains or losses we record upon sale of the properties as well as valuation adjustments we record during the period we hold those properties. During the year ended December 31, 2019, we recorded net gains of $771,000, as compared to losses of $8.8 million and $15.0 million for the same periods in 2018 and 2017, respectively, in Results of real estate acquired in settlement of loans. This improvement in results reflects the ongoing liquidation of our investments in distressed mortgage assets. During the quarter ended June 30, 2019, we committed to liquidate our real estate held for investment. As the result of this commitment, we transferred $30.4 million of real estate held for investment to REO. Notwithstanding this transfer, REO balances have decreased to $65.6 million at December 31, 2019 from $85.7 million at December 31, 2018.

Results of REO are summarized below:

<table><tr><td rowspan="3"></td><td colspan="4">Year ended December 31,</td></tr><tr><td rowspan="2">2019</td><td colspan="2">2018</td><td rowspan="2">2017</td></tr><tr><td colspan="2">(dollars in thousands)</td></tr><tr><td>Proceeds from sales of REO</td><td>$     74,973</td><td>$     99,194</td><td>$     166,921</td><td></td></tr><tr><td>Results of real estate acquired in settlement of loans:</td><td></td><td></td><td></td><td></td></tr><tr><td>Valuation adjustments, net</td><td>$      (6,527)</td><td>$      (17,323)</td><td>$      (27,505)</td><td></td></tr><tr><td>Gain on sale, net</td><td>7,298</td><td>8,537</td><td>12,550</td><td></td></tr><tr><td></td><td>$     771</td><td>$      (8,786)</td><td>$      (14,955)</td><td></td></tr><tr><td>Number of properties sold</td><td>338</td><td>570</td><td>1,158</td><td></td></tr><tr><td>Average carrying value of REO</td><td>$     80,142</td><td>$     118,461</td><td>$     211,841</td><td></td></tr><tr><td>At year end:</td><td></td><td></td><td></td><td></td></tr><tr><td>Carrying value</td><td>$     65,583</td><td>$     85,681</td><td>$     162,865</td><td></td></tr><tr><td>Number of properties</td><td>189</td><td>295</td><td>589</td><td></td></tr></table>



## Expenses

Our expenses are summarized below:

<table><tr><td rowspan="3"></td><td colspan="4">Year ended December 31,</td></tr><tr><td>2019</td><td colspan="2">2018</td><td>2017</td></tr><tr><td colspan="4">(in thousands)</td></tr><tr><td>Earned by PennyMac Financial Services, Inc.:</td><td></td><td></td><td></td><td></td></tr><tr><td>Loan fulfillment fees</td><td>$     160,610</td><td>$     81,350</td><td>$     80,359</td><td></td></tr><tr><td>Loan servicing fees</td><td>48,797</td><td>42,045</td><td>43,064</td><td></td></tr><tr><td>Management fees</td><td>36,492</td><td>24,465</td><td>22,584</td><td></td></tr><tr><td>Loan origination</td><td>15,105</td><td>6,562</td><td>7,521</td><td></td></tr><tr><td>Compensation</td><td>6,897</td><td>6,781</td><td>6,322</td><td></td></tr><tr><td>Professional services</td><td>5,556</td><td>6,380</td><td>6,905</td><td></td></tr><tr><td>Safekeeping</td><td>5,097</td><td>1,805</td><td>2,918</td><td></td></tr><tr><td>Loan collection and liquidation</td><td>4,600</td><td>7,852</td><td>6,063</td><td></td></tr><tr><td>Other</td><td>15,020</td><td>15,839</td><td>17,658</td><td></td></tr><tr><td></td><td>$     298,174</td><td>$     193,079</td><td>$     193,394</td><td></td></tr></table>

Expenses increased $105.1 million, or 54%, during the year ended December 31, 2019, as compared to 2018, primarily due to increased loan fulfillment fees attributable to increases in our production volume partially offset by a reduction in the average fulfillment fee rate we incurred during 2019, as compared to the same period in 2018, as well as an increase in the management fee we incurred, reflecting both the growth in our shareholders' equity and profitability which are the basis for our fees. Expenses decreased $315,000 during the year ended December 31, 2018, as compared to 2017, primarily due to the decreased size of our distressed asset portfolio offset by increased management fees due to an increase in shareholders' equity and increased incentive-based fees.

## Loan Fulfillment Fees

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

<table><tr><td rowspan="3"></td><td colspan="4">Year ended December 31,</td></tr><tr><td rowspan="2">2019</td><td colspan="2">2018</td><td>2017</td></tr><tr><td colspan="3">(dollars in thousands)</td></tr><tr><td>Fulfillment fee expense</td><td>$     160,610</td><td>$     81,350</td><td>$     80,359</td><td></td></tr><tr><td>UPB of loans fulfilled by PLS</td><td>$     56,033,704</td><td>$     26,194,303</td><td>$     22,971,119</td><td></td></tr><tr><td>Average fulfillment fee rate (in basis points)</td><td>29</td><td>31</td><td>35</td><td></td></tr></table>

The increase in loan fulfillment fees during 2019, as compared to 2018 and 2017, is primarily due to an increase in the volume of loans fulfilled for us by PFSI, partially offset by a decrease in the average fulfillment fee rate due to an increase in discretionary reductions made by PFSI to facilitate successful loan acquisitions by us.



## Loan Servicing Fees

Loan servicing fees payable to PLS are summarized below:

<table><tr><td rowspan="3"></td><td colspan="4">Year ended December 31,</td></tr><tr><td rowspan="2">2019</td><td colspan="2">2018</td><td rowspan="2">2017</td></tr><tr><td colspan="2">(in thousands)</td></tr><tr><td>Loan servicing fees:</td><td></td><td></td><td></td><td></td></tr><tr><td>Loans acquired for sale at fair value</td><td>$     1,772</td><td>$     1,037</td><td>$     954</td><td></td></tr><tr><td>Loans at fair value</td><td>2,207</td><td>7,555</td><td>15,610</td><td></td></tr><tr><td>MSRs</td><td>44,818</td><td>33,453</td><td>26,500</td><td></td></tr><tr><td></td><td>$     48,797</td><td>$     42,045</td><td>$     43,064</td><td></td></tr><tr><td>Average investment in:</td><td></td><td></td><td></td><td></td></tr><tr><td>Loans acquired for sale at fair value</td><td>$     2,754,955</td><td>$     1,577,395</td><td>$     1,366,017</td><td></td></tr><tr><td>Loans at fair value:</td><td></td><td></td><td></td><td></td></tr><tr><td>Distressed</td><td>$     75,251</td><td>$     473,458</td><td>$     1,152,930</td><td></td></tr><tr><td>Held in a VIE</td><td>$     281,449</td><td>$     301,398</td><td>$     344,942</td><td></td></tr><tr><td>Average MSR portfolio UPB</td><td>$     110,075,179</td><td>$     80,500,212</td><td>$     63,836,843</td><td></td></tr><tr><td>MSR recapture income recognized included in Net loan servicing fees —from PennyMac Financial Services, Inc.</td><td>$     5,324</td><td>$     2,192</td><td>$     1,428</td><td></td></tr></table>

Loan servicing fees increased by $6.8 million during the year ended December 31, 2019, as compared to 2018 and $5.7 million compared to 2017. 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, partially offset by reductions in the distressed loan portfolio resulting from the ongoing window-down of this investment throughout the years presented.

Loan servicing fees decreased by $1.0 million during the year ended December 31, 2018, as compared to 2017. The decrease in loan servicing fees was primarily due to reductions in the distressed loan portfolio resulting from the ongoing wind-down of this investment throughout 2018. This decrease was partially offset by the increase in servicing fees resulting from the ongoing growth of our MSR portfolio. Servicing fee rates relating to distressed loans are significantly higher than those relating to MSRs due to the higher cost of servicing such loans. Therefore, reductions in the balance of distressed loans had a more significant effect on loan servicing fees during 2018 than the additions of new MSRs.

## Management Fees

Management fees payable to PCM are summarized below:

<table><tr><td rowspan="3"></td><td colspan="4">Year ended December 31,</td></tr><tr><td rowspan="2">2019</td><td colspan="2">2018</td><td rowspan="2">2017</td></tr><tr><td colspan="2">(in thousands)</td></tr><tr><td>Base</td><td>$     29,303</td><td>$     23,033</td><td>$     22,280</td><td></td></tr><tr><td>Performance incentive</td><td>7,189</td><td>1,432</td><td>304</td><td></td></tr><tr><td></td><td>$     36,492</td><td>$     24,465</td><td>$     22,584</td><td></td></tr><tr><td>Average shareholders&#x27; equity amounts used to calculate base management fee expense</td><td>$     1,958,970</td><td>$     1,535,590</td><td>$     1,484,446</td><td></td></tr><tr><td>Return on average common shareholder&#x27;s equity</td><td>12%</td><td>10.2%</td><td>7.8%</td><td></td></tr></table>

Management fees increased by $12.0 million during the year ended December 31, 2019, as compared to 2018 and $13.9 million compared to 2017, due to increases in both the base management and performance incentive fees. Performance incentive fees are based on our profitability in relation to our common shareholders' equity. The increase in the base management fee is due to increases in our average shareholders' equity as the result of common share issuances during the year ended December 31, 2019. The increases in performance incentive fees also reflects the increase in average shareholders' equity and the increases in our return on common shareholders' equity from 10.2% during 2018 to 12.0% during 2019.



Management fees increased by $1.9 million during 2018, as compared to 2017, primarily due to the increase in the 2018 performance incentives as well as the increase in our shareholders' equity, which is the basis for the calculation of our base management fee.

## Loan origination

Loan origination expenses increased $8.5 million or 130% during 2019 as compared to 2018 reflecting the increases in our loan originations produced through our correspondent production activities. Loan origination expenses decreased slightly in 2018 compared 2017, due to tax related adjustments.

## Compensation

Compensation expense increased $116,000 during 2019, as compared to 2018, primarily due to an increase in share-based compensation expense, reflecting changes in performance expectations relating to the performance-based restricted share unit awards.

## Safekeeping

Safekeeping expense increased by $3.3 million during 2019 as compared to 2018 as a result of our increase in correspondent acquisition-volume. Our correspondent acquisition volume increased by $29.8 billion in UPB, or 114%, in 2019, from $26.2 billion during 2018 and $23.0 billion during 2017.

## Loan collection and liquidation

Loan collection and liquidation expenses decreased $3.3 million during 2019 as compared to 2018 due to decreased investment in our portfolio of nonperforming loans, reflecting the ongoing wind-down of this investment. Loan collection and liquidation expenses increased $1.8 million during 2018 as compared to 2017, due to our continuing collection and liquidation efforts relating to our portfolio of nonperforming mortgage loans.

## Other Expenses

Other expenses are summarized below:

<table><tr><td rowspan="3"></td><td colspan="4">Year ended December 31,</td></tr><tr><td rowspan="2">2019</td><td colspan="2">2018</td><td rowspan="2">2017</td></tr><tr><td colspan="2">(in thousands)</td></tr><tr><td>Common overhead allocation from PFSI</td><td>$ 5,340</td><td>$ 4,640</td><td>$ 5,306</td><td></td></tr><tr><td>Bank service charges</td><td>2,552</td><td>1,522</td><td>2,150</td><td></td></tr><tr><td>Technology</td><td>1,616</td><td>1,408</td><td>1,479</td><td></td></tr><tr><td>Insurance</td><td>1,239</td><td>1,193</td><td>1,150</td><td></td></tr><tr><td>Other</td><td>4,273</td><td>7,076</td><td>7,573</td><td></td></tr><tr><td></td><td>$ 15,020</td><td>$ 15,839</td><td>$ 17,658</td><td></td></tr></table>

## Income Taxes

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

Our effective tax rates were (18.8)% for the year ended December 31, 2019 and 3.3% for the year ended December 31, 2018. Our TRS recognized a tax benefit of $36.4 million on a loss of $187.8 million while our consolidated pretax income was $190.6 million for the year ended December 31, 2019. For 2018, the TRS recognized tax expense of $4.5 million on income of $31.1 million while our consolidated pretax income was $158.0 million. The relative values between the tax benefit or expense at the TRS and our consolidated pretax income drive the fluctuation in the effective tax rate. The primary difference between our effective tax rate and the statutory tax rate is due to nontaxable REIT income resulting from the dividends paid deduction.



We evaluated the net deferred tax asset of our TRS and established a deferred tax valuation allowance in the amount of $13.6 million. In our evaluation, we consider, among other things, 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. We establish valuation allowances based on the consideration of all available evidence using a more-likely-than-not standard.

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.

Below is a reconciliation of GAAP year to date net income to taxable income (loss) and the allocation of taxable income (loss) between the TRS and the REIT:

<table><tr><td rowspan="2">Year ended December 31, 2019</td><td rowspan="2">GAAP net income</td><td rowspan="2">GAAP/tax differences</td><td colspan="3">Taxable income (loss)</td></tr><tr><td>Total taxable income (loss) (in thousands)</td><td>Taxable subsidiaries</td><td>REIT</td></tr><tr><td>Net investment income (expense)</td><td></td><td></td><td></td><td></td><td></td></tr><tr><td>Net loan servicing fees/ESS transactions</td><td>$ (58,918)</td><td>$ 817,041</td><td>$ 758,123</td><td>$ 758,123</td><td>$ —</td></tr><tr><td>Net gain (loss) on mortgage loans acquired for sale</td><td>170,164</td><td>(936,911)</td><td>(766,747)</td><td>(766,747)</td><td>—</td></tr><tr><td>Loan origination fees</td><td>87,997</td><td>—</td><td>87,997</td><td>87,997</td><td>—</td></tr><tr><td>Net gain (loss) on investments</td><td>263,318</td><td>(208,354)</td><td>54,964</td><td>77,585</td><td>(22,621)</td></tr><tr><td>Net interest income (expense)</td><td>20,439</td><td>45,127</td><td>65,566</td><td>(105,524)</td><td>171,090</td></tr><tr><td>Results of real estate acquired in settlement of loans</td><td>771</td><td>(4,152)</td><td>(3,381)</td><td>(3,381)</td><td>—</td></tr><tr><td>Other</td><td>5,044</td><td>—</td><td>5,044</td><td>3,839</td><td>1,205</td></tr><tr><td>Net investment income</td><td>488,815</td><td>(287,249)</td><td>201,566</td><td>51,892</td><td>149,674</td></tr><tr><td>Expenses</td><td>298,174</td><td>6,046</td><td>304,220</td><td>271,530</td><td>32,690</td></tr><tr><td>REIT dividend deduction</td><td>—</td><td>117,092</td><td>117,092</td><td>—</td><td>117,092</td></tr><tr><td>Total expenses and dividend deduction</td><td>298,174</td><td>123,138</td><td>421,312</td><td>271,530</td><td>149,782</td></tr><tr><td>Income (loss) before (benefit from) provision for income taxes</td><td>190,641</td><td>(410,387)</td><td>(219,746)</td><td>(219,638)</td><td>(108)</td></tr><tr><td>(Benefit from) provision for income taxes</td><td>(35,716)</td><td>35,608</td><td>(108)</td><td>—</td><td>(108)</td></tr><tr><td>Net income (loss)</td><td>$ 226,357</td><td>$ (445,995)</td><td>$ (219,638)</td><td>$ (219,638)</td><td>$ —</td></tr></table>



## Balance Sheet Analysis

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

<table><tr><td rowspan="2"></td><td colspan="2">December 31, 2019</td><td colspan="2">December 31, 2018</td></tr><tr><td colspan="4">(in thousands)</td></tr><tr><td>Assets</td><td></td><td></td><td></td><td></td></tr><tr><td>Cash</td><td>$     104,056</td><td>$     59,845</td><td></td><td></td></tr><tr><td>Investments:</td><td></td><td></td><td></td><td></td></tr><tr><td>Short-term</td><td>90,836</td><td>74,850</td><td></td><td></td></tr><tr><td>Mortgage-backed securities at fair value</td><td>2,839,633</td><td>2,610,422</td><td></td><td></td></tr><tr><td>Loans acquired for sale at fair value</td><td>4,148,425</td><td>1,643,957</td><td></td><td></td></tr><tr><td>Loans at fair value</td><td>270,793</td><td>408,305</td><td></td><td></td></tr><tr><td>ESS</td><td>178,586</td><td>216,110</td><td></td><td></td></tr><tr><td>Derivative and credit risk transfer strip assets</td><td>202,318</td><td>167,165</td><td></td><td></td></tr><tr><td>Firm commitment to purchase CRT securities</td><td>109,513</td><td>37,994</td><td></td><td></td></tr><tr><td>Real estate</td><td>65,583</td><td>128,791</td><td></td><td></td></tr><tr><td>MSRs</td><td>1,535,705</td><td>1,162,369</td><td></td><td></td></tr><tr><td>Deposits securing credit risk transfer arrangements</td><td>1,969,784</td><td>1,146,501</td><td></td><td></td></tr><tr><td></td><td>11,411,176</td><td>7,596,464</td><td></td><td></td></tr><tr><td>Other</td><td>256,119</td><td>157,052</td><td></td><td></td></tr><tr><td>Total assets</td><td>$     11,771,351</td><td>$     7,813,361</td><td></td><td></td></tr><tr><td>Liabilities</td><td></td><td></td><td></td><td></td></tr><tr><td>Borrowings:</td><td></td><td></td><td></td><td></td></tr><tr><td>Short-term debt</td><td>$     7,005,986</td><td>$     5,081,691</td><td></td><td></td></tr><tr><td>Long-term debt</td><td>2,159,286</td><td>1,011,433</td><td></td><td></td></tr><tr><td></td><td>9,165,272</td><td>6,093,124</td><td></td><td></td></tr><tr><td>Other</td><td>155,164</td><td>154,105</td><td></td><td></td></tr><tr><td>Total liabilities</td><td>9,320,436</td><td>6,247,229</td><td></td><td></td></tr><tr><td>Shareholders&#x27; equity</td><td>2,450,915</td><td>1,566,132</td><td></td><td></td></tr><tr><td>Total liabilities and shareholders&#x27; equity</td><td>$     11,771,351</td><td>$     7,813,361</td><td></td><td></td></tr></table>

Total assets increased by approximately $4.0 billion, or 51%, from December 31, 2018 to December 31, 2019, primarily due to a $2.5 billion increase in loans acquired for sale at fair value, a $823.3 million increase in deposits securing CRT arrangements, a $373.3 million increase in MSRs and a $229.2 million increase in MBS.

## Asset Acquisitions

Our asset acquisitions are summarized below.

## Correspondent Production

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

<table><tr><td rowspan="3"></td><td colspan="4">Year ended December 31,</td></tr><tr><td rowspan="2">2019</td><td>2018</td><td>2017</td><td></td></tr><tr><td colspan="2">(in thousands)</td><td></td></tr><tr><td>Correspondent loan purchases:</td><td></td><td></td><td></td><td></td></tr><tr><td>Agency-eligible</td><td>$ 63,989,938</td><td>$ 30,221,732</td><td>$ 23,742,999</td><td></td></tr><tr><td>Government-insured or guaranteed-for sale to PLS</td><td>50,499,641</td><td>37,718,502</td><td>42,087,007</td><td></td></tr><tr><td>Jumbo</td><td>12,839</td><td>67,501</td><td>—</td><td></td></tr><tr><td>Home equity lines of credit</td><td>5,182</td><td>—</td><td>—</td><td></td></tr><tr><td>Commercial loans</td><td>—</td><td>7,263</td><td>69,167</td><td></td></tr><tr><td></td><td>$ 114,507,600</td><td>$ 68,014,998</td><td>$ 65,899,173</td><td></td></tr></table>



During 2019, we purchased for sale $114.5 billion in fair value of correspondent production loans as compared to $68.0 billion during 2018 and $65.9 billion during 2017. Our ability to increase the level of correspondent production from 2018 to 2019 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.

The increase in correspondent acquisitions from 2017 to 2018 is primarily due to the production we generated from continued growth in our correspondent production seller network combined with our ability to offer competitive execution in our purchases of loans, partially offset by the decreased size of the mortgage market during 2018 as compared to 2017.

## Other Investment Activities

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

<table><tr><td rowspan="3"></td><td colspan="4">Year ended December 31,</td></tr><tr><td rowspan="2">2019</td><td>2018</td><td>2017</td><td></td></tr><tr><td colspan="2">(in thousands)</td><td></td></tr><tr><td>Credit sensitive assets:</td><td></td><td></td><td></td><td></td></tr><tr><td>Credit risk transfer strips</td><td>$     56,804</td><td>$      —</td><td>$      —</td><td></td></tr><tr><td>Deposits and commitments to fund deposits relating to CRT arrangements</td><td>933,370</td><td>596,626</td><td>152,641</td><td></td></tr><tr><td>Change in expected face amount of firm commitment to purchase CRT securities</td><td></td><td></td><td></td><td></td></tr><tr><td>Fair value</td><td>160,248</td><td>37,994</td><td>—</td><td></td></tr><tr><td>UPB of securities</td><td>897,151</td><td>122,581</td><td>390,362</td><td></td></tr><tr><td></td><td>1,057,399</td><td>160,575</td><td>390,362</td><td></td></tr><tr><td>Interest rate sensitive assets:</td><td></td><td></td><td></td><td></td></tr><tr><td>MSRs received in loan sales and purchased</td><td>837,706</td><td>356,755</td><td>290,388</td><td></td></tr><tr><td>MBS</td><td>1,250,289</td><td>1,810,877</td><td>251,872</td><td></td></tr><tr><td>ESS received pursuant to a recapture agreement</td><td>1,757</td><td>2,688</td><td>5,244</td><td></td></tr><tr><td></td><td>2,089,752</td><td>2,170,320</td><td>547,504</td><td></td></tr><tr><td></td><td>2,047,573</td><td>757,201</td><td>543,003</td><td></td></tr><tr><td></td><td>$     4,137,325</td><td>$     2,927,521</td><td>$     1,090,507</td><td></td></tr></table>

Our acquisitions during the three years ended December 31, 2019 were financed through the use of a combination of proceeds from borrowings, liquidations of existing investments and proceeds from equity issuances. We continue to identify additional means of increasing our investment portfolio through cash flow from our business activities, existing investments, borrowings, and transactions that minimize current cash outlays. However, we expect that, over time, our ability to continue our investment portfolio growth will depend on our ability to raise additional equity capital.

## Investment Portfolio Composition

Mortgage-Backed Securities

Following is a summary of our MBS holdings:

<table><tr><td rowspan="3"></td><td colspan="5">December 31, 2019</td><td colspan="5">December 31, 2018</td></tr><tr><td rowspan="2">Fair value</td><td rowspan="2">Principal</td><td colspan="3">Average</td><td rowspan="2">Market yield</td><td rowspan="2">Fair value</td><td rowspan="2">Principal</td><td colspan="2">Average</td></tr><tr><td>Life (in years)</td><td>Coupon</td><td>(dollars in thousands)</td><td>(in years)</td><td>Coupon</td></tr><tr><td>Agency:</td><td></td><td></td><td></td><td></td><td></td><td></td><td></td><td></td><td></td><td></td></tr><tr><td>Fannie Mae</td><td>$2,009,093</td><td>$1,946,203</td><td>5.0</td><td>3.4%</td><td>2.6%</td><td>$2,075,337</td><td>$2,050,769</td><td>7.5</td><td>3.8%</td><td>3.5%</td></tr><tr><td>Freddie Mac</td><td>830,540</td><td>809,595</td><td>5.3</td><td>3.2%</td><td>2.6%</td><td>535,085</td><td>530,734</td><td>8.3</td><td>3.7%</td><td>3.5%</td></tr><tr><td></td><td>$2,839,633</td><td>$2,755,798</td><td></td><td></td><td></td><td>$2,610,422</td><td>$2,581,503</td><td></td><td></td><td></td></tr></table>



## 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:

<table><tr><td rowspan="2"></td><td colspan="2">December 31, 2019</td><td colspan="2">December 31, 2018</td></tr><tr><td colspan="4">(in thousands)</td></tr><tr><td>Carrying value of CRT arrangements:</td><td></td><td></td><td></td><td></td></tr><tr><td>Credit risk transfer strips</td><td>$     54,930</td><td>$      —</td><td></td><td></td></tr><tr><td>Derivative assets</td><td>115,863</td><td>123,987</td><td></td><td></td></tr><tr><td>Deposits securing CRT arrangements</td><td>1,969,784</td><td>1,146,501</td><td></td><td></td></tr><tr><td>Interest-only security payable at fair value</td><td>(25,709)</td><td>(36,011)</td><td></td><td></td></tr><tr><td></td><td>$     2,114,868</td><td>$     1,234,477</td><td></td><td></td></tr><tr><td>UPB of loans subject to credit guarantee obligations</td><td>$     41,944,117</td><td>$     29,934,003</td><td></td><td></td></tr></table>

Following is a summary of the composition of the loans underlying our investment in CRT arrangements as of December 31, 2019:

<table><tr><td rowspan="2"></td><td colspan="8">Year of origination</td></tr><tr><td>2019</td><td>2018</td><td>2017</td><td>2016</td><td>2015</td><td>Total</td><td></td><td></td></tr><tr><td></td><td colspan="8">(in millions)</td></tr><tr><td>UPB:</td><td></td><td></td><td></td><td></td><td></td><td></td><td></td><td></td></tr><tr><td>Outstanding</td><td>$     3,676</td><td>$     16,517</td><td>$     11,412</td><td>$     7,849</td><td>$     2,490</td><td>$     41,944</td><td></td><td></td></tr><tr><td>Originally delivered</td><td>$     7,702</td><td>$     20,510</td><td>$     15,307</td><td>$     11,515</td><td>$     4,928</td><td>$     59,962</td><td></td><td></td></tr><tr><td>Cumulative defaults</td><td>$      —</td><td>$     7.6</td><td>$     27.1</td><td>$     30.1</td><td>$     23.3</td><td>$     88.1</td><td></td><td></td></tr><tr><td>Cumulative losses</td><td>$      —</td><td>$     0.7</td><td>$     2.8</td><td>$     3.0</td><td>$     2.3</td><td>$     8.8</td><td></td><td></td></tr></table>

<table><tr><td rowspan="2">Original debt-to income ratio</td><td colspan="2">2019</td><td colspan="2">2018</td><td colspan="2">2017</td><td colspan="2">2016</td><td colspan="2">2015</td><td colspan="2">Total</td></tr><tr><td colspan="12">(in millions)</td></tr><tr><td>&lt;25%</td><td>$     342</td><td>$     1,631</td><td>$     1,413</td><td>$     1,103</td><td>$     320</td><td>$     4,809</td><td></td><td></td><td></td><td></td><td></td><td></td></tr><tr><td>25 - 30%</td><td>364</td><td>1,635</td><td>1,409</td><td>1,092</td><td>332</td><td>4,832</td><td></td><td></td><td></td><td></td><td></td><td></td></tr><tr><td>30 - 35%</td><td>507</td><td>2,282</td><td>1,872</td><td>1,401</td><td>445</td><td>6,507</td><td></td><td></td><td></td><td></td><td></td><td></td></tr><tr><td>35 - 40%</td><td>682</td><td>2,860</td><td>2,215</td><td>1,566</td><td>541</td><td>7,864</td><td></td><td></td><td></td><td></td><td></td><td></td></tr><tr><td>40 - 45%</td><td>895</td><td>3,731</td><td>2,808</td><td>2,046</td><td>713</td><td>10,193</td><td></td><td></td><td></td><td></td><td></td><td></td></tr><tr><td>&gt;45%</td><td>886</td><td>4,378</td><td>1,695</td><td>641</td><td>139</td><td>7,739</td><td></td><td></td><td></td><td></td><td></td><td></td></tr><tr><td></td><td>$     3,676</td><td>$     16,517</td><td>$     11,412</td><td>$     7,849</td><td>$     2,490</td><td>$     41,944</td><td></td><td></td><td></td><td></td><td></td><td></td></tr><tr><td>Weighted average</td><td colspan="2">38.0%</td><td colspan="2">38.0%</td><td colspan="2">36.1%</td><td colspan="2">35.0%</td><td colspan="2">35.2%</td><td colspan="2">36.8%</td></tr></table>

<table><tr><td rowspan="2">Origination FICO credit score</td><td colspan="8">Year of origination</td></tr><tr><td>2019</td><td>2018</td><td>2017</td><td>2016</td><td>2015</td><td>Total</td><td></td><td></td></tr><tr><td></td><td colspan="8">(in millions)</td></tr><tr><td>600 - 649</td><td>$     32</td><td>$     250</td><td>$     90</td><td>$     60</td><td>$     34</td><td>$     466</td><td></td><td></td></tr><tr><td>650 - 699</td><td>507</td><td>2,562</td><td>1,515</td><td>896</td><td>419</td><td>5,899</td><td></td><td></td></tr><tr><td>700 - 749</td><td>1,323</td><td>5,518</td><td>3,782</td><td>2,506</td><td>808</td><td>13,937</td><td></td><td></td></tr><tr><td>750 or greater</td><td>1,810</td><td>8,161</td><td>6,008</td><td>4,386</td><td>1,228</td><td>21,593</td><td></td><td></td></tr><tr><td>Not available</td><td>4</td><td>26</td><td>17</td><td>1</td><td>1</td><td>49</td><td></td><td></td></tr><tr><td></td><td>$     3,676</td><td>$     16,517</td><td>$     11,412</td><td>$     7,849</td><td>$     2,490</td><td>$     41,944</td><td></td><td></td></tr><tr><td>Weighted average</td><td colspan="2">745</td><td colspan="2">743</td><td colspan="2">751</td><td colspan="2">744</td><td>746</td></tr></table>



<table><tr><td rowspan="2">Origination loan-to value ratio</td><td colspan="8">Year of origination</td></tr><tr><td>2019</td><td colspan="2">2018</td><td>2017</td><td colspan="2">2016</td><td>2015</td><td>Total</td></tr><tr><td></td><td></td><td></td><td></td><td colspan="5">(in millions)</td></tr><tr><td>&lt;80%</td><td>$ 991</td><td>$ 5,038</td><td>$ 3,453</td><td>$ 3,092</td><td>$ 919</td><td>$ 13,493</td><td></td><td></td></tr><tr><td>80-85%</td><td>834</td><td>4,072</td><td>3,173</td><td>2,024</td><td>638</td><td>10,741</td><td></td><td></td></tr><tr><td>85-90%</td><td>221</td><td>869</td><td>614</td><td>463</td><td>134</td><td>2,301</td><td></td><td></td></tr><tr><td>90-95%</td><td>500</td><td>1,984</td><td>1,466</td><td>899</td><td>309</td><td>5,158</td><td></td><td></td></tr><tr><td>95-100%</td><td>1,130</td><td>4,554</td><td>2,706</td><td>1,371</td><td>490</td><td>10,251</td><td></td><td></td></tr><tr><td></td><td>$ 3,676</td><td>$ 16,517</td><td>$ 11,412</td><td>$ 7,849</td><td>$ 2,490</td><td>$ 41,944</td><td></td><td></td></tr><tr><td>Weighted average</td><td>84.7%</td><td>83.6%</td><td>83.1%</td><td>81.2%</td><td>81.9%</td><td>83.0%</td><td></td><td></td></tr></table>

<table><tr><td rowspan="2">Current loan-to value ratio (1)</td><td colspan="2">2019</td><td colspan="2">2018</td><td colspan="2">2017</td><td colspan="2">2016</td><td colspan="2">2015</td><td colspan="2">Total</td></tr><tr><td></td><td></td><td></td><td></td><td colspan="8">(in millions)</td></tr><tr><td>&lt;80%</td><td>$ 1,912</td><td>$ 9,872</td><td>$ 9,084</td><td>$ 7,428</td><td>$ 2,407</td><td>$ 30,703</td><td></td><td></td><td></td><td></td><td></td><td></td></tr><tr><td>80-85%</td><td>438</td><td>2,193</td><td>1,521</td><td>327</td><td>62</td><td>4,541</td><td></td><td></td><td></td><td></td><td></td><td></td></tr><tr><td>85-90%</td><td>760</td><td>2,870</td><td>656</td><td>77</td><td>15</td><td>4,378</td><td></td><td></td><td></td><td></td><td></td><td></td></tr><tr><td>90-95%</td><td>500</td><td>1,366</td><td>127</td><td>14</td><td>5</td><td>2,012</td><td></td><td></td><td></td><td></td><td></td><td></td></tr><tr><td>95-100%</td><td>63</td><td>193</td><td>21</td><td>2</td><td>1</td><td>280</td><td></td><td></td><td></td><td></td><td></td><td></td></tr><tr><td>&gt;100%</td><td>3</td><td>23</td><td>3</td><td>1</td><td>-</td><td>30</td><td></td><td></td><td></td><td></td><td></td><td></td></tr><tr><td></td><td>$ 3,676</td><td>$ 16,517</td><td>$ 11,412</td><td>$ 7,849</td><td>$ 2,490</td><td>$ 41,944</td><td></td><td></td><td></td><td></td><td></td><td></td></tr><tr><td>Weighted average</td><td>79.3%</td><td>77.0%</td><td>71.1%</td><td>64.8%</td><td>61.8%</td><td>72.4%</td><td></td><td></td><td></td><td></td><td></td><td></td></tr></table>

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

<table><tr><td rowspan="2">Geographic distribution</td><td colspan="8">Year of origination</td></tr><tr><td>2019</td><td colspan="2">2018</td><td>2017</td><td colspan="2">2016</td><td>2015</td><td>Total</td></tr><tr><td></td><td></td><td></td><td></td><td colspan="5">(in millions)</td></tr><tr><td>CA</td><td>$ 511</td><td>$ 2,121</td><td>$ 1,427</td><td>$ 1,823</td><td>$ 483</td><td>$ 6,365</td><td></td><td></td></tr><tr><td>FL</td><td>454</td><td>1,703</td><td>998</td><td>659</td><td>186</td><td>4,000</td><td></td><td></td></tr><tr><td>TX</td><td>237</td><td>1,084</td><td>827</td><td>882</td><td>372</td><td>3,402</td><td></td><td></td></tr><tr><td>VA</td><td>128</td><td>698</td><td>612</td><td>619</td><td>260</td><td>2,317</td><td></td><td></td></tr><tr><td>MD</td><td>125</td><td>699</td><td>644</td><td>493</td><td>148</td><td>2,109</td><td></td><td></td></tr><tr><td>Other</td><td>2,221</td><td>10,212</td><td>6,904</td><td>3,373</td><td>1,041</td><td>23,751</td><td></td><td></td></tr><tr><td></td><td>$ 3,676</td><td>$ 16,517</td><td>$ 11,412</td><td>$ 7,849</td><td>$ 2,490</td><td>$ 41,944</td><td></td><td></td></tr></table>

<table><tr><td rowspan="2">Regional geographic distribution (1)</td><td colspan="8">Year of origination</td></tr><tr><td>2019</td><td>2018</td><td>2017</td><td>2016</td><td>2015</td><td>Total</td><td></td><td></td></tr><tr><td></td><td></td><td></td><td>(in millions)</td><td></td><td></td><td></td><td></td><td></td></tr><tr><td>Northeast</td><td>$ 317</td><td>$ 1,467</td><td>$ 1,309</td><td>$ 876</td><td>$ 333</td><td>$ 4,302</td><td></td><td></td></tr><tr><td>Southeast</td><td>1,366</td><td>5,768</td><td>3,788</td><td>2,318</td><td>765</td><td>14,005</td><td></td><td></td></tr><tr><td>Midwest</td><td>258</td><td>1,319</td><td>1,073</td><td>668</td><td>191</td><td>3,509</td><td></td><td></td></tr><tr><td>Southwest</td><td>756</td><td>3,335</td><td>2,231</td><td>1,425</td><td>519</td><td>8,266</td><td></td><td></td></tr><tr><td>West</td><td>979</td><td>4,628</td><td>3,011</td><td>2,562</td><td>682</td><td>11,862</td><td></td><td></td></tr><tr><td></td><td>$ 3,676</td><td>$ 16,517</td><td>$ 11,412</td><td>$ 7,849</td><td>$ 2,490</td><td>$ 41,944</td><td></td><td></td></tr></table>

(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.



<table><tr><td rowspan="2">Collection status</td><td colspan="8">Year of origination</td></tr><tr><td>2019</td><td>2018</td><td>2017</td><td>2016</td><td>2015</td><td>Total</td><td></td><td></td></tr><tr><td></td><td colspan="8">(in millions)</td></tr><tr><td>Delinquency</td><td></td><td></td><td></td><td></td><td></td><td></td><td></td><td></td></tr><tr><td>Current - 89 Days</td><td>$ 3,670</td><td>$ 16,459</td><td>$ 11,376</td><td>$ 7,831</td><td>$ 2,483</td><td>$ 41,819</td><td></td><td></td></tr><tr><td>90 - 179 Days</td><td>5</td><td>43</td><td>35</td><td>17</td><td>6</td><td>106</td><td></td><td></td></tr><tr><td>180+ Days</td><td>—</td><td>9</td><td>—</td><td>—</td><td>—</td><td>9</td><td></td><td></td></tr><tr><td>Foreclosure</td><td>1</td><td>6</td><td>1</td><td>1</td><td>1</td><td>10</td><td></td><td></td></tr><tr><td></td><td>$ 3,676</td><td>$ 16,517</td><td>$ 11,412</td><td>$ 7,849</td><td>$ 2,490</td><td>$ 41,944</td><td></td><td></td></tr><tr><td>Bankruptcy</td><td>$ 3</td><td>$ 20</td><td>$ 13</td><td>$ 14</td><td>$ 8</td><td>$ 55</td><td></td><td></td></tr></table>

Firm commitment to purchase CRT securities

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

<table><tr><td></td><td>December 31, 2019</td><td>December 31, 2018</td></tr><tr><td>Face amount of firm commitment to purchase CRT securities</td><td>$ 1,502,203</td><td>$ 605,052</td></tr><tr><td>Fair value of firm commitment</td><td>$ 109,513</td><td>$ 37,994</td></tr></table>

Following is a summary of the composition of the loans underlying our firm commitment to purchase CRT securities as of December 31, 2019:

<table><tr><td>Original debt-to income ratio</td><td colspan="2">December 31, 2019 (in millions)</td></tr><tr><td>&lt;25%</td><td>$</td><td>5,580</td></tr><tr><td>25 - 30%</td><td></td><td>5,261</td></tr><tr><td>30 - 35%</td><td></td><td>6,479</td></tr><tr><td>35 - 40%</td><td></td><td>7,144</td></tr><tr><td>40 - 45%</td><td></td><td>8,081</td></tr><tr><td>&gt;45%</td><td></td><td>6,193</td></tr><tr><td></td><td>$</td><td>38,738</td></tr><tr><td>Weighted average</td><td></td><td>35.6%</td></tr><tr><td>Origination FICO credit score</td><td colspan="2">December 31, 2019 (in millions)</td></tr><tr><td>600 - 649</td><td>$</td><td>363</td></tr><tr><td>650 - 699</td><td></td><td>3,041</td></tr><tr><td>700 - 749</td><td></td><td>10,777</td></tr><tr><td>750 or greater</td><td></td><td>24,458</td></tr><tr><td>Not available</td><td></td><td>99</td></tr><tr><td></td><td>$</td><td>38,738</td></tr><tr><td>Weighted average</td><td></td><td>755</td></tr><tr><td>Origination loan-to value ratio</td><td colspan="2">December 31, 2019 (in millions)</td></tr><tr><td>&lt;80%</td><td>$</td><td>13,952</td></tr><tr><td>80-84%</td><td></td><td>7,467</td></tr><tr><td>85-89%</td><td></td><td>2,466</td></tr><tr><td>90-94%</td><td></td><td>4,175</td></tr><tr><td>95-100%</td><td></td><td>10,678</td></tr><tr><td></td><td>$</td><td>38,738</td></tr><tr><td>Weighted average</td><td></td><td>83.1%</td></tr></table>



<table><tr><td>Current loan-to value ratio (1)</td><td>December 31, 2019 (in millions)</td></tr><tr><td>&lt;80%</td><td>$ 19,595</td></tr><tr><td>80-84%</td><td>3,523</td></tr><tr><td>85-89%</td><td>5,045</td></tr><tr><td>90-94%</td><td>8,085</td></tr><tr><td>95-100%</td><td>2,401</td></tr><tr><td>&gt;100%</td><td>89</td></tr><tr><td></td><td>$ 38,738</td></tr><tr><td>Weighted average</td><td>81.1%</td></tr></table>

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

<table><tr><td>Geographic distribution</td><td>December 31, 2019 (in millions)</td></tr><tr><td>CA</td><td>$ 5,211</td></tr><tr><td>FL</td><td>2,742</td></tr><tr><td>TX</td><td>2,606</td></tr><tr><td>AZ</td><td>1,905</td></tr><tr><td>WA</td><td>1,872</td></tr><tr><td>Other</td><td>24,402</td></tr><tr><td></td><td>$ 38,738</td></tr><tr><td>Regional geographic distribution (1)</td><td>December 31, 2019 (in millions)</td></tr><tr><td>Northeast</td><td>$ 3,572</td></tr><tr><td>Southeast</td><td>11,738</td></tr><tr><td>Midwest</td><td>3,598</td></tr><tr><td>Southwest</td><td>9,414</td></tr><tr><td>West</td><td>10,416</td></tr><tr><td></td><td>$ 38,738</td></tr></table>

(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.

<table><tr><td>Collection status</td><td>December 31, 2019 (in millions)</td></tr><tr><td>Delinquency</td><td></td></tr><tr><td>Current - 89 Days</td><td>$ 38,727</td></tr><tr><td>90 - 179 Days</td><td>9</td></tr><tr><td>180+ Days</td><td>—</td></tr><tr><td>Foreclosure</td><td>2</td></tr><tr><td>Bankruptcy</td><td>$ 38,738</td></tr></table>



## Real Estate Acquired in Settlement of Loans

Following is a summary of our REO by property type:

<table><tr><td rowspan="2">Property type</td><td colspan="2">December 31, 2019</td><td colspan="2">December 31, 2018</td></tr><tr><td>Carrying value</td><td>% total</td><td>Carrying value</td><td>% total</td></tr><tr><td></td><td colspan="4">(dollars in thousands)</td></tr><tr><td>1 - 4 dwelling units</td><td>$ 51,539</td><td>79%</td><td>$ 71,318</td><td>83%</td></tr><tr><td>Condominium/Townhome/Co-op</td><td>5,669</td><td>9%</td><td>9,060</td><td>11%</td></tr><tr><td>Planned unit development</td><td>8,375</td><td>12%</td><td>5,303</td><td>6%</td></tr><tr><td></td><td>$ 65,583</td><td>100%</td><td>$ 85,681</td><td>100%</td></tr></table>

<table><tr><td rowspan="2">Geographic distribution</td><td colspan="2">December 31, 2019</td><td colspan="2">December 31, 2018</td></tr><tr><td>Carrying value</td><td>% total</td><td>Carrying value</td><td>% total</td></tr><tr><td></td><td colspan="4">(dollars in thousands)</td></tr><tr><td>Florida</td><td>$ 14,430</td><td>22%</td><td>$ 7,770</td><td>9%</td></tr><tr><td>New York</td><td>14,030</td><td>21%</td><td>20,068</td><td>23%</td></tr><tr><td>New Jersey</td><td>10,253</td><td>16%</td><td>17,060</td><td>20%</td></tr><tr><td>Illinois</td><td>5,931</td><td>9%</td><td>4,631</td><td>5%</td></tr><tr><td>Massachusetts</td><td>2,652</td><td>4%</td><td>5,789</td><td>7%</td></tr><tr><td>Maryland</td><td>4,900</td><td>7%</td><td>3,583</td><td>4%</td></tr><tr><td>Other</td><td>13,387</td><td>21%</td><td>26,780</td><td>32%</td></tr><tr><td></td><td>$ 65,583</td><td>100%</td><td>$ 85,681</td><td>100%</td></tr></table>

## Cash Flows

Our cash flows for the years ended December 31, 2019, 2018, and 2017 are summarized below:

<table><tr><td rowspan="3"></td><td colspan="4">Year ended December 31,</td></tr><tr><td>2019</td><td colspan="2">2018</td><td>2017</td></tr><tr><td colspan="4">(in thousands)</td></tr><tr><td>Operating activities</td><td>(2,985,074)</td><td>$</td><td>(573,752)</td><td>$ 223,125</td></tr><tr><td>Investing activities</td><td>(704,677)</td><td></td><td>(1,424,292)</td><td>$ 681,681</td></tr><tr><td>Financing activities</td><td>3,733,962</td><td></td><td>1,980,242</td><td>$ (861,635)</td></tr><tr><td>Net cash flows</td><td>$ 44,211</td><td></td><td>(17,802)</td><td>$ 43,171</td></tr></table>

Our cash flows resulted in a net increase in cash of $44.2 million during 2019, as discussed below.

## Operating activities

Cash used in operating activities totaled $3.0 billion during 2019, as compared to $573.8 million during 2018 and cash provided by operating activities of $223.1 million during 2017, respectively. Cash flows from operating activities primarily reflect cash flows from loans acquired for sale as shown below:

<table><tr><td rowspan="3"></td><td colspan="4">Year ended December 31,</td></tr><tr><td>2019</td><td colspan="2">2018</td><td>2017</td></tr><tr><td colspan="4">(in thousands)</td></tr><tr><td>Operating cash flows from:</td><td></td><td></td><td></td><td></td></tr><tr><td>Loans acquired for sale</td><td>$ (3,291,371)</td><td>$ (689,826)</td><td>$ 192,849</td><td></td></tr><tr><td>Other</td><td>306,297</td><td>116,074</td><td>30,276</td><td></td></tr><tr><td></td><td>$ (2,985,074)</td><td>$ (573,752)</td><td>$ 223,125</td><td></td></tr></table>

Cash flows from loans acquired for sale primarily reflect changes in the level of production inventory from the beginning to end of the years presented. Our inventory of loans acquired for sale increased during both 2019 and 2018, resulting in the cash outflow relating to loans acquired for sale.



## Investing activities

Net cash used in our investing activities was $704.7 million during 2019, as compared to cash used in investing activities of $1.4 billion during 2018. We did not increase our investment in MBS as significantly during 2019. However, reduced growth in investment in MBS was partially offset by increased investments in CRT arrangements.

Net cash provided by our investing activities was $681.7 million during 2017. Cash flows from investing activities reflects proceeds from sales and repayments on our investments in distressed loans, which exceeded our new investments in CRT Agreements and MBS. We realized cash inflows from repayments of MBS, sales and repayments of loans, repayment of ESS, sales of REO and distributions from CRT Agreements totaling $1.0 billion. We used cash to purchase MBS of $251.9 million and made deposits of cash collateral securing CRT Agreements transactions totaling $152.6 million during the year ended December 31, 2017.

## Financing activities

Net cash provided by financing activities was $3.7 billion during 2019, as compared to $2.0 billion during 2018 and cash used in financing activities totaling $861.6 million for 2017 respectively. Cash provided by financing activities during 2019 and 2018, reflects the increased borrowings and the equity issuances made to finance growth in investments in MBS, CRT arrangements and growth in our production of loans held for sale. The cash used by financing activities during 2017 reflects repayment of repurchase agreements pursuant to decreases in our inventories of loans at fair value and loans acquired for sale.

As discussed below in Liquidity and Capital Resources, our Manager continues to evaluate and pursue additional sources of financing to provide us with future investing capacity. We do not raise equity or enter into borrowings for the purpose of financing the payment of dividends. We believe that our 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.

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 a portion of 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 3.75 and 3.89 at December 31, 2019 and December 31, 2018, 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:

<table><tr><td rowspan="3">Assets sold under agreements to repurchase</td><td colspan="4">Year ended December 31,</td></tr><tr><td rowspan="2">2019</td><td colspan="2">2018</td><td rowspan="2">2017</td></tr><tr><td colspan="2">(in thousands)</td></tr><tr><td>Average balance outstanding</td><td>$ 5,600,469</td><td>$ 3,901,772</td><td>$ 3,332,084</td><td></td></tr><tr><td>Maximum daily balance outstanding</td><td>$ 8,577,065</td><td>$ 6,665,118</td><td>$ 4,242,600</td><td></td></tr><tr><td>Ending balance</td><td>$ 6,648,890</td><td>$ 4,777,027</td><td>$ 3,180,886</td><td></td></tr></table>



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 $8.9 billion at December 31, 2019.

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

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

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

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

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

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

- profitability at the Company for at least one (1) of the previous two consecutive fiscal quarters, and at the Company and our Operating Partnership over the prior three (3) calendar quarters;

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

- a minimum tangible net worth for the Company of $860 million; a minimum tangible net worth for our Operating Partnership of $860 million; a minimum tangible net worth for PMH of $250 million; and a minimum tangible net worth for PMC of $150 million;

- a maximum ratio of total liabilities to tangible net worth of less than 10:1 for PMC and PMH and 5:1 for the Company and our Operating Partnership; 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, measured quarterly and as of the end of each fiscal quarter;

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

• a minimum tangible net worth of $500 million; and

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

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%.



- Liquidity equal to or exceeding 3.5 basis points multiplied by the aggregate UPB of all mortgages secured by 1-4 unit residential properties serviced for Freddie Mac, Fannie Mae and Ginnie Mae (“Agency Mortgage Servicing”) plus 200 basis points multiplied by the sum of nonperforming (90 or more days delinquent) Agency Mortgage Servicing that exceed 6% of Agency Mortgage Servicing.

- 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.

- 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.

We and/or PLS, as applicable, are obligated to maintain these financial covenants pursuant to our MSR financing agreements.

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

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

## Off-Balance Sheet Arrangements and Aggregate Contractual Obligations

## Off-Balance Sheet Arrangements

As of December 31, 2019, we have not entered into any off-balance sheet arrangements.

## Contractual Obligations

As of December 31, 2019, we had contractual obligations aggregating $14.3 billion comprised of borrowings, interest expense on long term debt from our Exchangeable Notes and asset-backed financing of a VIE, and commitments to purchase loans from correspondent sellers. Payment obligations under these agreements, including expected interest payments on long-term debt, are summarized below:

<table><tr><td rowspan="3">Contractual obligations</td><td colspan="5">Payments due by period</td></tr><tr><td rowspan="2">Total</td><td>Less than 1 year</td><td>1 - 3 years</td><td>3 - 5 years</td><td>More than 5 years</td></tr><tr><td colspan="4">(in thousands)</td></tr><tr><td>Commitments to purchase loans from correspondent sellers</td><td>$ 3,199,680</td><td>$ 3,199,680</td><td>$ —</td><td>$ —</td><td>$ —</td></tr><tr><td>Face amount of firm commitment to purchase CRT securities</td><td>1,502,203</td><td>1,502,203</td><td>—</td><td>—</td><td>—</td></tr><tr><td>Short-term debt</td><td>7,006,691</td><td>7,006,691</td><td>—</td><td>—</td><td>—</td></tr><tr><td>Long-term debt</td><td>2,177,140</td><td>—</td><td>210,000</td><td>1,702,262</td><td>264,878</td></tr><tr><td>Interest expense on long term debt (1)</td><td>444,445</td><td>104,132</td><td>204,608</td><td>87,208</td><td>48,497</td></tr><tr><td>Total</td><td>$ 14,330,159</td><td>$ 11,812,706</td><td>$ 414,608</td><td>$ 1,789,470</td><td>$ 313,375</td></tr></table>

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

All debt financing arrangements that matured between December 31, 2019 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 December 31, 2019:

<table><tr><td>Counterparty</td><td>Amount at risk (in thousands)</td></tr><tr><td>Citibank, N.A.</td><td>$ 283,315</td></tr><tr><td>Credit Suisse First Boston Mortgage Capital LLC</td><td>$ 227,577</td></tr><tr><td>JPMorgan Chase &amp; Co.</td><td>$ 195,279</td></tr><tr><td>Bank of America, N.A.</td><td>$ 55,682</td></tr><tr><td>Morgan Stanley Bank, N.A.</td><td>$ 41,672</td></tr><tr><td>Daiwa Capital Markets America Inc.</td><td>$ 28,234</td></tr><tr><td>Royal Bank of Canada</td><td>$ 15,902</td></tr><tr><td>Mizuho Securities</td><td>$ 12,214</td></tr><tr><td>BNP Paribas Corporate &amp; Institutional Banking</td><td>$ 6,370</td></tr><tr><td>Amherst Pierpont Securities LLC</td><td>$ 2,404</td></tr><tr><td></td><td>$ 585,334</td></tr></table>

Management Agreement. We are externally managed and advised by our Manager pursuant to a management agreement, which was amended and restated effective September 12, 2016. Our management agreement requires our Manager to oversee our business affairs in conformity with the investment policies that are approved and monitored by our board of trustees. Our Manager is responsible for our day-to-day management and will perform such services and activities related to our assets and operations as may be appropriate.

Pursuant to our management agreement, our Manager collects a base management fee and may collect a performance incentive fee, both payable quarterly and in arrears. The management agreement, as amended, expires on September 12, 2020 subject to automatic renewal for additional 18-month periods, unless terminated earlier in accordance with the terms of the servicing agreement.

The base management fee is calculated at a defined annualized percentage of “shareholders’ equity.” Our “shareholders’ equity” is defined as the sum of the net proceeds from any issuances of our equity securities since our inception (weighted for the time outstanding during the measurement period); plus our retained earnings at the end of the quarter; less any amount that we pay for repurchases of our common shares (weighted for the time held during the measurement period); and excluding one-time events pursuant to changes in GAAP and certain other non-cash charges after discussions between our Manager and our independent trustees and approval by a majority of our independent trustees.

Pursuant to the terms of our amended and restated management agreement, the base management fee 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.

The performance incentive fee is calculated 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 annualized return on our “equity.” For the purpose of determining the amount of the performance incentive fee, “net income” is defined as net income attributable to common shares or loss computed in accordance with GAAP and adjusted to exclude one-time events pursuant to changes in GAAP and certain other non-cash charges determined after discussions between PCM and our independent trustees and approval by a majority of our independent trustees. For this purpose, “equity” is the weighted average of the issue price per common share of all of our public offerings of common shares, multiplied by the weighted average number of common shares outstanding (including restricted share units issued under our equity incentive plans) in the four-quarter period.

The performance incentive fee is calculated quarterly and is equal to: (a) 10% of the amount by which net income attributable to common shares of beneficial interest 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.



The “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 Fannie Mae MBS yield (the target yield) for such quarter. 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 our 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, and a performance incentive fee is earned.

Under the management agreement, PCM is entitled to reimbursement of its organizational and operating expenses, including third-party expenses, incurred on our 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 our direct benefit. With respect to the allocation of PCM’s and its affiliates’ personnel, from and after September 12, 2016, PCM shall be reimbursed $120,000 per fiscal quarter, such amount to be reviewed annually and to not preclude reimbursement for any other services performed by PCM or its affiliates.

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

PCM may also be entitled to a termination fee under certain circumstances. Specifically, the termination fee is payable for (1) our termination of our management agreement without cause, (2) PCM’s termination of our management agreement upon a default by us in the performance of any material term of the agreement that has continued uncured for a period of 30 days after receipt of written notice thereof or (3) PCM’s termination of the agreement after the termination by us without cause (excluding a non-renewal) of our MBS agreement, our MSR recapture agreement or our servicing agreement (each as described and/or defined below). The termination fee is equal to three times the sum of (a) the average annual base management fee and (b) the average annual (or, if the period is less than 24 months, annualized) performance incentive fee earned by our Manager during the 24-month period immediately preceding the date of termination.

We may terminate the management agreement without the payment of any termination fee under certain circumstances, including, among other circumstances, uncured material breaches by our Manager of the management agreement, upon a change in control of our Manager (defined to include a 50% change in the shareholding of our Manager in a single transaction or related series of transactions).

Our management agreement also provides that, prior to the undertaking by PCM or its affiliates of any new investment opportunity or any other business opportunity requiring a source of capital with respect to which PCM or its affiliates will earn a management, advisory, consulting or similar fee, PCM shall present to us such new opportunity and the material terms on which PCM proposes to provide services to us before pursuing such opportunity with third parties.

Servicing Agreement. We have entered into a loan servicing agreement with PLS, pursuant to which PLS provides servicing for our portfolio of residential loans and subservicing for our portfolio of MSRs. Such servicing and subservicing provided by PLS include collecting principal, interest and escrow account payments, if any, with respect to loans, as well as managing loss mitigation, which may include, among other things, collection activities, loan workouts, modifications, foreclosures and short sales. PLS also engages in certain loan origination activities that include refinancing loans and financings that facilitate sales of real estate owned properties, or REOs. The servicing agreement expires on September 12, 2020, subject to automatic renewal for additional 18-month periods, unless terminated earlier in accordance with the terms of the agreement.

The base servicing fee rates for distressed whole 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 loans range from $30 per month for current loans up to $85 per month for loans where the borrower has declared bankruptcy. The base servicing fee rate for REO is $75 per month. To the extent that we rent our REO under our REO rental program, we pay PLS an REO rental fee of $30 per month per REO, an REO property lease renewal fee of $100 per lease renewal, and a property management fee in an amount equal to PLS' cost if property management services and/or any related software costs are outsourced to a third-party property management firm or 9% of gross rental income if PLS provides property management services directly. PLS is also entitled to retain any tenant paid application fees and late rent fees and seek reimbursement for certain third-party vendor fees.



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

The base servicing fee rates for non-distressed loans subserviced by PLS on our behalf are also calculated through a monthly per-loan dollar amount, with the actual dollar amount for each loan based on whether the loan is a fixed-rate or adjustable-rate loan. The base servicing fee rates for loans subserviced on our behalf are $7.50 per month for fixed-rate loans and $8.50 per month for adjustable-rate loans. To the extent that these loans become delinquent, PLS is entitled to an additional servicing fee per loan falling within a range of $10 to $55 per month and based on the delinquency, bankruptcy and foreclosure status of the loan or $75 per month if the underlying mortgaged property becomes REO. PLS is also entitled to customary ancillary income and certain market-based fees and charges, including boarding and deboarding fees, liquidation and disposition fees, and assumption, modification and origination fees.

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

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

We currently participate in HAMP (or other similar loan modification programs). HAMP establishes standard loan modification guidelines for “at risk” homeowners and provides incentive payments to certain participants, including loan servicers, for achieving modifications and successfully remaining in the program. The loan servicing agreement entitles PLS to retain any incentive payments made to it and to which it is entitled under HAMP; provided, however, that with respect to any such incentive payments paid to PLS in connection with a loan modification for which we previously paid PLS a modification fee, PLS is required to reimburse us an amount equal to the incentive payments.

PLS continues to be entitled to reimbursement for all customary, bona fide reasonable and necessary out-of-pocket expenses incurred by PLS in connection with the performance of its servicing obligations.

Mortgage Banking Services Agreement. Pursuant to a mortgage banking services agreement (the “MBS agreement”), PLS provides us with certain mortgage banking services, including fulfillment and disposition-related services, with respect to loans acquired by us from correspondent sellers.

Pursuant to the MBS agreement, PLS has agreed to provide such services exclusively for our benefit, and PLS and its affiliates are prohibited from providing such services for any other third party. However, such exclusivity and prohibition shall not apply, and certain other duties instead will be imposed upon PLS, if we are unable to purchase or finance loans as contemplated under our MBS agreement for any reason. The MBS agreement expires, unless terminated earlier in accordance with the terms of the agreement, on September 12, 2020, subject to automatic renewal for additional 18-month periods, unless terminated earlier in accordance with the terms of the agreement.

In consideration for the mortgage banking services provided by PLS with respect to our acquisition of loans, PLS is entitled to a monthly fulfillment fee that shall equal (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 Ginnie Mae loans. We do not hold the Ginnie Mae approval required to issue Ginnie Mae MBS and act as a servicer. Accordingly, under the MBS agreement, PLS currently purchases loans underwritten in accordance with the Ginnie Mae Mortgage-Backed Securities Guide “as is” and without recourse of any kind from us at our cost less an administrative fee plus accrued interest and a sourcing fee ranging from two to three and one-half basis points, generally based on the average number of calendar days that loans are held by us prior to purchase by PLS.

In consideration for the mortgage banking services provided by PLS with respect to our acquisition of loans under PLS’ 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 loan that we acquire thereunder.



Notwithstanding any provision of the MBS agreement to the contrary, if it becomes reasonably necessary or advisable for PLS to engage in additional services in connection with post-breach or post-default resolution activities for the purposes of a correspondent agreement, then we have generally agreed with PLS to negotiate in good faith for additional compensation and reimbursement of expenses to be paid to PLS for the performance of such additional services.

MSR Recapture Agreement. Pursuant to the terms of the MSR recapture agreement entered into by PMC with PLS, if PLS refinances through its consumer direct lending business loans for which we previously held the MSRs, PLS is generally required to transfer and convey to PMC, cash in an amount equal to 30% of the fair market value of the MSRs related to all such loans so originated. The MSR recapture agreement expires, unless terminated earlier in accordance with the terms of the agreement, on September 12, 2020, subject to automatic renewal for additional 18-month periods, unless terminated earlier in accordance with the terms of the agreement.

Spread Acquisition and MSR Servicing Agreement. On December 19, 2016, we amended and restated a master spread acquisition and MSR servicing agreement with PLS (the “12/19/16 Spread Acquisition Agreement”). Pursuant to the 12/19/16 Spread Acquisition Agreement, we may acquire from PLS, from time to time, the right to receive 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 us in connection with the parties’ participation in the GNMA MSR Facility (as defined below).

To the extent PLS refinances any of the loans relating to the ESS we have acquired, the 12/19/16 Spread Acquisition Agreement also contains recapture provisions requiring that PLS transfer to us, at no cost, the ESS relating to a certain percentage of the unpaid principal balance of the newly originated loans. However, under the 12/19/16 Spread Acquisition Agreement, in any month where the transferred ESS relating to newly originated Ginnie Mae loans is not equivalent 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 equivalent to at least 90% of the product of the excess servicing fee rate and the unpaid principal balance of the modified loans, the 12/19/16 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, wire cash to us in an amount equal to such fair market value in lieu of transferring such ESS.

## Master Repurchase Agreement with PLS

On December 19, 2016, we, 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 12/19/16 Spread Acquisition Agreement. PLS then re-pledges such participation certificates to PNMAC GMRS ISSUER TRUST (the “Issuer Trust”) under a master repurchase agreement by and among PLS, the Issuer Trust and Private National Mortgage Acceptance Company, LLC, as guarantor (the “PC Repurchase Agreement”). The Issuer Trust was formed for the purpose of allowing PLS to finance MSRs and ESS relating to such MSRs (the “GNMA MSR Facility”).

In connection with the GNMA MSR Facility, PLS pledges and/or sells to the Issuer Trust participation certificates representing beneficial interests in MSRs and ESS pursuant to the terms of the PC Repurchase Agreement. In return, the Issuer Trust (a) has issued to PLS, pursuant to the terms of an indenture, the Series 2016-MSRVF1 Variable Funding Note, dated December 19, 2016, known as the “PNMAC GMRS ISSUER TRUST MSR Collateralized Notes, Series 2016-MSRVF1” (the “VFN”), and (b) has issued and 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 $1,000,000,000.

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

As a condition to our entry into the 12/19/16 Spread Acquisition Agreement and our participation in the GNMA MSR Facility, we were also required to enter into a subordination, acknowledgement and pledge agreement (the “Subordination Agreement”). Under the terms of the Subordination Agreement, we pledged to the Issuer Trust our rights under the 12/19/16 Spread Acquisition Agreement and our interest in any ESS purchased thereunder.



The Subordination Agreement contains representations, warranties and covenants by us that are substantially similar to those contained in our other financing arrangements. To the extent there exists an event of default under the PC Repurchase Agreement or a “trigger event” (as defined in the Subordination Agreement), the Issuer Trust would be entitled to liquidate any and all of the collateral securing the PC Repurchase Agreement, including the ESS subject to the PMH Repurchase Agreement.

Loan Purchase Agreement. We have entered into a loan purchase agreement with our Servicer. Currently, we use the loan purchase agreement for the purpose of acquiring prime jumbo and Agency-eligible residential loans originated by our Servicer through its consumer direct lending channel. The loan purchase agreement contains customary terms and provisions, including representations and warranties, covenants, repurchase remedies and indemnities. The purchase prices we pay our Servicer for such loans are market-based.

Reimbursement Agreement. In connection with the initial public offering of our common shares on August 4, 2009 (the “IPO”), we entered into an agreement with PCM pursuant to which we agreed to reimburse PCM for the $2.9 million payment that it made to the underwriters for the IPO (the “Conditional Reimbursement”) if we satisfied certain performance measures over a specified period of time. Effective February 1, 2013, we amended the terms of the reimbursement agreement to provide for the reimbursement of PCM of the Conditional Reimbursement if we are required to pay PCM performance incentive fees under our management agreement at a rate of $10 in reimbursement for every $100 of performance incentive fees earned. The reimbursement of the Conditional Reimbursement is subject to a maximum reimbursement in any particular 12-month period of $1.0 million and the maximum amount that may be reimbursed under the agreement is $2.9 million. The reimbursement agreement also provides for the payment to the IPO underwriters of the payment that we agreed to make to them at the time of the IPO if we satisfied certain performance measures over a specified period of time. As PCM earns performance incentive fees under our management agreement, the IPO underwriters will be paid at a rate of $20 of payments for every $100 of performance incentive fees earned by PCM. The payment to the underwriters is subject to a maximum reimbursement in any particular 12-month period of $2.0 million and the maximum amount that may be paid under the agreement is $5.9 million.

In the event the termination fee is payable to our Manager under our management agreement and our Manager and the underwriters have not received the full amount of the reimbursements and payments under the reimbursement agreement, such amount will be paid in full. On February 1, 2019, the term of the reimbursement agreement was extended, and it now expires on February 1, 2023.

## Item 7A. Quantitative and Qualitative Disclosures About Market Risk

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

## Real Estate Risk

Residential property values are subject to volatility and may be affected adversely by a number of factors, including, but not limited to, national, regional and local economic conditions (which may be adversely affected by industry slowdowns and other factors); local real estate conditions (such as an oversupply of housing); construction quality, age and design; demographic factors; and retroactive changes to building or similar codes. Decreases in property values reduce the value of the collateral and the potential proceeds available to a borrower to repay loans, which could cause us to suffer losses.

## Credit Risk

We are subject to credit risk in connection with our investments. A significant portion of our assets is comprised of residential loans. The credit risk related to these investments pertains to the ability and willingness of the borrowers to pay, which is assessed before credit is granted. We believe that residual loan credit quality is primarily determined by the borrowers' credit profiles and loan characteristics. We have entered into CRT arrangements which involve the absorption on our part of losses relating to certain loans we sell that subsequently default. The fair value of the assets we carry related to these arrangements are sensitive to credit market conditions generally, perceptions of the performance of the loans in our CRT arrangements' reference pools specifically and to the actual performance of such loans.



## Interest Rate Risk

Interest rate risk is highly sensitive to many factors, including governmental monetary and tax policies, domestic and international economic and political considerations and other factors beyond our control. Changes in interest rates affect the fair value of, interest income and net servicing income we earn from our mortgage-related investments. This effect is most pronounced with fixed-rate investments, MSRs and ESS. In general, rising interest rates negatively affect the fair value of our investments in MBS and loans, while decreasing market interest rates negatively affect the fair value of our MSRs and ESS.

Our operating results will depend, in part, on differences between the income from our investments and our financing costs. Presently much of our debt financing is based on a floating rate of interest calculated on a fixed spread over the relevant index, as determined by the particular financing arrangement.

In the event of a significant rising interest rate environment and/or economic downturn, defaults could increase and result in credit losses to us, which could materially and adversely affect our business, financial condition, liquidity, results of operations and prospects. Furthermore, such defaults could have an adverse effect on the spread between our interest earning assets and interest bearing liabilities.

We engage in interest rate risk management activities in an effort to reduce the variability of earnings caused by changes in interest rates. To manage this price risk resulting from interest rate risk, we use derivative financial instruments acquired with the intention of moderating the risk that changes in market interest rates will result in unfavorable changes in the value of our interest rate lock commitments, inventory of loans acquired for sale, MBS, ESS, loans and MSRs. We do not use derivative financial instruments for purposes other than in support of our risk management activities.

## Prepayment Risk

To the extent that the actual prepayment rate on our mortgage-based investments differs from what we projected when we purchased the loans and when we measured fair value as of the end of each reporting period, our unrealized gain or loss will be affected. As we receive prepayments of principal on our MBS investments, any premiums paid for such investments will be amortized against interest income using the interest method through the expected maturity dates of the investments. In general, an increase in prepayment rates will accelerate the amortization of purchase premiums, thereby reducing the interest income earned on such MBS investments and will accelerate the amortization of MSRs and ESS thereby reducing net servicing income. Conversely, as we receive prepayments of principal on our investments, any discounts realized on the purchase of such investments will be accrued into interest income using the interest method through the expected maturity dates of the investments. In general, an increase in prepayment rates will accelerate the accrual of purchase discounts, thereby increasing the interest income earned on such MBS investments.

## Inflation Risk

Virtually all of our assets and liabilities are interest rate sensitive in nature. As a result, interest rates and other factors will influence our performance more so than inflation. Changes in interest rates do not necessarily correlate with inflation rates or changes in inflation rates. Furthermore, our consolidated financial statements are prepared in accordance with GAAP and any distributions we may make to our shareholders will be determined by our board of trustees based primarily on our taxable income and, in each case, our activities and balance sheet are measured with reference to historical cost and/or fair value without considering inflation.

## Fair Value Risk

Our loans, MBS, MSRs, ESS and CRT arrangements are reported at their fair values. The fair value of these assets fluctuates primarily based on the exposure of the underlying investment. Performing prime loans (along with any related recognized IRLCs), MBS, MSRs and ESS are more sensitive to changes in market interest rates, while CRT arrangements are more sensitive to changes in the market credit spreads, underlying real estate values relating to the loans underlying our investments, and other factors such as the effectiveness and servicing practices of the servicers associated with the properties securing such investment.

Generally, in an interest rate market where interest rates are rising or are expected to rise, the fair value of our loans and MBS would be expected to decrease, whereas in an interest rate market where interest rates are generally decreasing or are expected to decrease, loan and MBS values would be expected to increase. The fair value of MSRs and ESS, on the other hand, tends to respond generally in an opposite manner to that of loans acquired for sale and MBS.

Generally, in a real estate market where values are rising or are expected to rise, the fair value of our investment in distressed loans and CRT arrangements would be expected to appreciate, whereas in a real estate market where values are generally dropping or are expected to drop, the fair values of distressed loans and CRT arrangements would be expected to decrease.



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 December 31, 2019, given several hypothetical (instantaneous) changes in interest rates and parallel shifts in the yield curve:

<table><tr><td>Interest rate shift in basis points</td><td>-200</td><td>-75</td><td>-50</td><td>50</td><td>75</td><td>200</td></tr><tr><td></td><td></td><td></td><td colspan="4">(dollar in thousands)</td></tr><tr><td>Fair value</td><td>$2,853,054</td><td>$2,866,149</td><td>$2,862,994</td><td>$2,791,254</td><td>$2,759,791</td><td>$2,568,129</td></tr><tr><td>Change in fair value:</td><td></td><td></td><td></td><td></td><td></td><td></td></tr><tr><td>$</td><td>$13,421</td><td>$26,516</td><td>$23,361</td><td>$ (48,379)</td><td>$ (79,842)</td><td>$ (271,504)</td></tr><tr><td>%</td><td>0.5%</td><td>0.9%</td><td>0.8%</td><td>(1.7)%</td><td>(2.8)%</td><td>(9.6)%</td></tr></table>

## Mortgage Servicing Rights

The following tables summarize the estimated change in fair value of MSRs as of December 31, 2019, given several shifts in pricing spread, prepayment speeds and annual per-loan cost of servicing:

<table><tr><td>Pricing spread shift in %</td><td>-20%</td><td>-10%</td><td>-5%</td><td>+5%</td><td>+10%</td><td>+20%</td></tr><tr><td></td><td></td><td></td><td colspan="4">(dollars in thousands)</td></tr><tr><td>Fair value</td><td>$1,624,286</td><td>$1,578,766</td><td>$1,556,940</td><td>$1,515,039</td><td>$1,494,922</td><td>$1,456,252</td></tr><tr><td>Change in fair value:</td><td></td><td></td><td></td><td></td><td></td><td></td></tr><tr><td>$</td><td>$ 88,582</td><td>$ 43,061</td><td>$ 21,235</td><td>$ (20,666)</td><td>$ (40,783)</td><td>$ (79,453)</td></tr><tr><td>%</td><td>5.8%</td><td>2.8%</td><td>1.4%</td><td>(1.3)%</td><td>(2.7)%</td><td>(5.2)%</td></tr><tr><td>Prepayment speed shift in %</td><td>-20%</td><td>-10%</td><td>-5%</td><td>+5%</td><td>+10%</td><td>+20%</td></tr><tr><td></td><td></td><td></td><td colspan="4">(dollars in thousands)</td></tr><tr><td>Fair value</td><td>$1,696,646</td><td>$1,612,359</td><td>$1,573,141</td><td>$1,499,936</td><td>$1,465,731</td><td>$1,401,636</td></tr><tr><td>Change in fair value:</td><td></td><td></td><td></td><td></td><td></td><td></td></tr><tr><td>$</td><td>$ 160,942</td><td>$ 76,654</td><td>$ 37,436</td><td>$ (35,768)</td><td>$ (69,973)</td><td>$ (134,068)</td></tr><tr><td>%</td><td>10.5%</td><td>5.0%</td><td>2.4%</td><td>(2.3)%</td><td>(4.6)%</td><td>(8.7)%</td></tr><tr><td>Per-loan servicing cost shift in %</td><td>-20%</td><td>-10%</td><td>-5%</td><td>+5%</td><td>+10%</td><td>+20%</td></tr><tr><td></td><td></td><td></td><td colspan="4">(dollars in thousands)</td></tr><tr><td>Fair value</td><td>$1,575,561</td><td>$1,555,633</td><td>$1,545,669</td><td>$1,525,740</td><td>$1,515,776</td><td>$1,495,848</td></tr><tr><td>Change in fair value:</td><td></td><td></td><td></td><td></td><td></td><td></td></tr><tr><td>$</td><td>$ 39,856</td><td>$ 19,928</td><td>$ 9,964</td><td>$ (9,964)</td><td>$ (19,928)</td><td>$ (39,856)</td></tr><tr><td>%</td><td>2.6%</td><td>1.3%</td><td>0.6%</td><td>(0.6)%</td><td>(1.3)%</td><td>(2.6)%</td></tr></table>

## Excess servicing spread

The following tables summarize the estimated change in fair value of our ESS as of December 31, 2019, given several shifts in pricing spread and prepayment speed:

<table><tr><td>Pricing spread shift in %</td><td>-20%</td><td>-10%</td><td>-5%</td><td>+5%</td><td>+10%</td><td>+20%</td></tr><tr><td></td><td></td><td></td><td colspan="4">(dollars in thousands)</td></tr><tr><td>Fair value</td><td>$ 183,492</td><td>$ 181,007</td><td>$ 179,789</td><td>$ 177,398</td><td>$ 176,225</td><td>$ 173,923</td></tr><tr><td>Change in fair value:</td><td></td><td></td><td></td><td></td><td></td><td></td></tr><tr><td>$</td><td>$ 4,907</td><td>$ 2,422</td><td>$ 1,203</td><td>$ (1,188)</td><td>$ (2,361)</td><td>$ (4,662)</td></tr><tr><td>%</td><td>2.7%</td><td>1.4%</td><td>0.7%</td><td>(0.7)%</td><td>(1.3)%</td><td>(2.6)%</td></tr></table>



<table><tr><td>Prepayment speed shift in %</td><td>-20%</td><td>-10%</td><td>-5%</td><td>+5%</td><td>+10%</td><td>+20%</td></tr><tr><td></td><td></td><td></td><td colspan="4">(dollars in thousands)</td></tr><tr><td>Fair value</td><td>$ 197,151</td><td>$ 187,463</td><td>$ 182,929</td><td>$ 174,421</td><td>$ 170,426</td><td>$ 162,906</td></tr><tr><td>Change in fair value:</td><td></td><td></td><td></td><td></td><td></td><td></td></tr><tr><td>$</td><td>$ 18,565</td><td>$ 8,878</td><td>$ 4,344</td><td>$ (4,164)</td><td>$ (8,160)</td><td>$ (15,680)</td></tr><tr><td>%</td><td>10.4%</td><td>5.0%</td><td>2.4%</td><td>(2.3)%</td><td>(4.6)%</td><td>(8.8)%</td></tr></table>

## 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:

<table><tr><td>Pricing spread shift in basis points</td><td>-100</td><td>-50</td><td>-25</td><td>25</td><td>50</td><td>100</td></tr><tr><td></td><td></td><td></td><td colspan="4">(dollars in thousands)</td></tr><tr><td>Fair value</td><td>$2,178,021</td><td>$2,144,506</td><td>$2,128,117</td><td>$2,096,049</td><td>$2,080,362</td><td>$2,049,659</td></tr><tr><td>Change in fair value:</td><td></td><td></td><td></td><td></td><td></td><td></td></tr><tr><td>$</td><td>$ 66,054</td><td>$ 32,539</td><td>$ 16,150</td><td>$ (15,918)</td><td>$ (31,605)</td><td>$ (62,309)</td></tr><tr><td>%</td><td>3.1%</td><td>1.5%</td><td>0.8%</td><td>(0.8)%</td><td>(1.5)%</td><td>(3.0)%</td></tr></table>

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:

<table><tr><td>Property value shift in %</td><td>-15%</td><td>-10%</td><td>-5%</td><td>5%</td><td>10%</td><td>15%</td></tr><tr><td></td><td></td><td></td><td colspan="4">(dollars in thousands)</td></tr><tr><td>Fair value</td><td>$2,091,082</td><td>$2,101,775</td><td>$2,108,654</td><td>$2,114,132</td><td>$2,114,462</td><td>$2,114,308</td></tr><tr><td>Change in fair value:</td><td></td><td></td><td></td><td></td><td></td><td></td></tr><tr><td>$</td><td>$ (20,880)</td><td>$ (10,187)</td><td>$ (3,308)</td><td>$ 2,170</td><td>$ 2,500</td><td>$ 2,346</td></tr><tr><td>%</td><td>(1.0)%</td><td>(0.5)%</td><td>(0.2)%</td><td>0.1%</td><td>0.1%</td><td>0.1%</td></tr></table>

## Firm commitment to purchase CRT securities

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

<table><tr><td>Pricing spread shift in basis points</td><td>-100</td><td>-50</td><td>-25</td><td>25</td><td>50</td><td>100</td></tr><tr><td></td><td></td><td></td><td colspan="4">(dollars in thousands)</td></tr><tr><td>Fair value</td><td>$ 186,059</td><td>$ 147,093</td><td>$ 128,134</td><td>$ 91,223</td><td>$ 73,257</td><td>$ 38,265</td></tr><tr><td>Change in fair value:</td><td></td><td></td><td></td><td></td><td></td><td></td></tr><tr><td>$</td><td>$ 76,546</td><td>$ 37,580</td><td>$ 18,621</td><td>$ (18,290)</td><td>$ (36,256)</td><td>$ (71,248)</td></tr><tr><td>%</td><td>69.9%</td><td>34.3%</td><td>17.0%</td><td>(16.7)%</td><td>(33.1)%</td><td>(65.1)%</td></tr></table>

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

<table><tr><td>Property value shift in %</td><td>-15%</td><td>-10%</td><td>-5%</td><td>5%</td><td>10%</td><td>15%</td></tr><tr><td></td><td></td><td></td><td colspan="4">(dollars in thousands)</td></tr><tr><td>Fair value</td><td>$ 87,440</td><td>$ 98,946</td><td>$ 105,649</td><td>$ 110,807</td><td>$ 111,461</td><td>$ 111,483</td></tr><tr><td>Change in fair value:</td><td></td><td></td><td></td><td></td><td></td><td></td></tr><tr><td>$</td><td>$ (22,074)</td><td>$ (10,567)</td><td>$ (3,864)</td><td>$ 1,294</td><td>$ 1,948</td><td>$ 1,970</td></tr><tr><td>%</td><td>(20.2)%</td><td>(9.6)%</td><td>(3.5)%</td><td>1.2%</td><td>1.8%</td><td>1.8%</td></tr></table>



## 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 December 31, 2019, 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:

<table><tr><td>Interest rate shift in basis points</td><td>-200</td><td>-75</td><td>-50</td><td>50</td><td>75</td><td>200</td></tr><tr><td>Fair value</td><td>$ 256,361</td><td>$ 256,426</td><td>$ 256,427</td><td>$ 256,188</td><td>$ 256,058</td><td>$ 255,216</td></tr><tr><td>Change in fair value:</td><td></td><td></td><td></td><td></td><td></td><td></td></tr><tr><td>$</td><td>$</td><td>(6)</td><td>$ 59</td><td>$ 60</td><td>(179)</td><td>$ (309)</td></tr><tr><td>%</td><td></td><td>—</td><td>—</td><td>—</td><td>(0.1)%</td><td>(0.1)%</td></tr></table>

## Item 8. Financial Statements and Supplementary Data

The information called for by this Item 8 is hereby incorporated by reference from our Financial Statements and Auditors' Report beginning at page F-1 of this Report.

## Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure

None

## Item 9A. 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.



## Internal Control over Financial Reporting

## Management’s Annual Report on Internal Control over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Exchange Act Rule 13a-15(f). Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Management assessed the effectiveness of its internal control over financial reporting based on the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control—Integrated Framework (2013). Based on those criteria, management concluded that our internal control over financial reporting was effective as of December 31, 2019.

Management has evaluated, with the participation of our Chief Executive Officer and Chief Financial Officer, whether any changes in our internal control over financial reporting that occurred during our last fiscal quarter have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. Below we describe changes in our internal control over financial reporting since June 30, 2019 that management believes have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

In the ordinary course of business, we review our system of internal control over financial reporting and make changes that we believe will improve the efficiency and effectiveness of controls, ensure sufficient precision of controls, and appropriately mitigate the risk of material misstatement in the financial statements. Changes may include implementing new systems, updating existing systems, automating manual processes and enhancing the documentation of controls.

During the quarter ended September 30, 2019, our loan servicer, PLS, implemented an internally-developed loan servicing system. In connection with this implementation and related business process changes, we updated the design of certain of our internal controls over financial reporting that were previously considered effective to reflect the design of its new loan servicing system and associated data sources, and implemented new controls to replace controls previously addressed by certain service organization SOC 1 Reports (System and Organization Controls Reports). PLS' loan servicing system provides significant information that we use in our financial reporting process. We will continue to monitor and test these new controls for adequate design and operating effectiveness. PLS adopted this internally-developed loan servicing system and we updated the design of our internal controls during the quarter ended September 30, 2019. Therefore, the use of this system was included in the preparation of our financial statements for the year ended December 31, 2019.

The effectiveness of our internal control over financial reporting as of December 31, 2019 has been audited by Deloitte & Touche LLP, an independent registered public accounting firm, as stated in their report which appears herein.



# REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Shareholders and the Board of Trustees of PennyMac Mortgage Investment Trust
3043 Townsgate Road
Westlake Village, CA 91361

## Opinion on Internal Control over Financial Reporting

We have audited the internal control over financial reporting of PennyMac Mortgage Investment Trust and subsidiaries (the "Company") as of December 31, 2019, based on criteria established in Internal Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2019, based on criteria established in Internal Control—Integrated Framework (2013) issued by COSO.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated financial statements as of and for the year ended December 31, 2019, of the Company and our report dated February 21, 2020, expressed an unqualified opinion on those financial statements. and included an explanatory paragraph regarding the Company’s election in 2018 to prospectively change its method of accounting for the classes of mortgage servicing rights it had accounted for using the amortization method.

## Basis for Opinion

The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Annual Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

## Definition and Limitations of Internal Control over Financial Reporting

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.



## Changes in Internal Control over Financial Reporting

Management has evaluated, with the participation of our Chief Executive Officer and Chief Financial Officer, whether any changes in our internal control over financial reporting that occurred during our last fiscal quarter have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. Below we describe changes in our internal control over financial reporting since June 30, 2019 that management believes have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

In the ordinary course of business, we review our system of internal control over financial reporting and make changes that we believe will improve the efficiency and effectiveness of controls, ensure sufficient precision of controls, and appropriately mitigate the risk of material misstatement in the financial statements. Changes may include implementing new systems, updating existing systems, automating manual processes and enhancing the documentation of controls.

During the quarter ended September 30, 2019, our loan servicer, PennyMac Loan Services, LLC (“PLS”) implemented an internally-developed loan servicing system. In connection with this implementation and related business process changes, we updated the design of certain of our internal controls over financial reporting that were previously considered effective to reflect the design of its new loan servicing system and associated data sources, and implemented new controls to replace controls previously addressed by certain service organization SOC 1 Reports (System and Organization Controls Reports). PLS’ loan servicing system provides significant information that we use in our financial reporting process. We will continue to monitor and test these new controls for adequate design and operating effectiveness. PLS adopted this internally-developed loan servicing system and we updated the design of our internal controls during the quarter ended September 30, 2019. Therefore, the use of this system was included in the preparation of our financial statements for the year ended December 31, 2019.

## Item 9B. Other Information

None.



## PART III

## Item 10. Directors, Executive Officers and Corporate Governance

The information required by this Item 10 is hereby incorporated by reference from our definitive proxy statement, or will be contained in an amendment to this Report, in either case to be filed by April 29, 2020, which is within 120 days after the end of fiscal year 2019.

## Item 11. Executive Compensation

The information required by this Item 11 is hereby incorporated by reference from our definitive proxy statement, or will be contained in an amendment to this Report, in either case to be filed by April 29, 2020, which is within 120 days after the end of fiscal year 2019.

## Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

## Equity Compensation Plan Information

The PennyMac Mortgage Investment Trust 2019 Equity Incentive Plan (the “2019 Plan”) was adopted and approved by the Company’s shareholders in June 2019. The PennyMac Mortgage Investment Trust 2009 Equity Incentive Plan (the “2009 Plan”) expired on July 24, 2019; however, there are outstanding equity awards under the 2009 Plan that remain subject to the terms of such plan. The 2019 Plan provides for the issuance of equity based awards, including share options, restricted shares, restricted share units, unrestricted common share awards, LTIP units (a special class of partnership interests in our Operating Partnership) and other awards based on our shares that may be awarded by us to our officers and trustees, and the members, officers, trustees, directors and employees of PFSI and its subsidiaries or other entities that provide services to us and the employees of such other entities. The 2019 Plan is administered by our compensation committee, pursuant to authority delegated by our 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 2019 Plan allows for grants of equity-based awards up to an aggregate of 8% of our issued and outstanding common shares on a diluted basis at the time of the award. However, the total number of shares available for issuance under the 2019 Plan cannot exceed 40 million.

The following table provides information as of December 31, 2019 concerning our common shares authorized for issuance under our equity incentive plan.

<table><tr><td></td><td>(a)</td><td>(b)</td><td>(c)</td></tr><tr><td>Plan category</td><td>Number of securities to be issued upon exercise of outstanding options, warrants and rights</td><td>Weighted average exercise price of outstanding options, warrants and rights</td><td>Number of securities remaining available for future issuance under equity compensation plans excluding securities reflected in column(a))</td></tr><tr><td>Equity compensation plans approved by security holders (1)</td><td>463,500</td><td>$ —</td><td>8,137,723</td></tr><tr><td>Equity compensation plans not approved by security holders (2)</td><td>—</td><td>—</td><td>—</td></tr><tr><td>Total</td><td>463,500</td><td>—</td><td>8,137,723</td></tr></table>

(1) Represents equity awards outstanding under the 2009 Plan and the 2019 Plan.

(2) We do not have any equity plans that have not been approved by our shareholders.

The information otherwise required by this Item 12 is hereby incorporated by reference from our definitive proxy statement, or will be contained in an amendment to this Report, in either case to be filed by April 29, 2020, which is within 120 days after the end of fiscal year 2019.

## Item 13. Certain Relationships and Related Transactions, and Director Independence

The information required by this Item 13 is hereby incorporated by reference from our definitive proxy statement, or will be contained in an amendment to this Report, in either case to be filed by April 29, 2020, which is within 120 days after the end of fiscal year 2019.



## Item 14. Principal Accounting Fees and Services

The information required by this Item 14 is hereby incorporated by reference from our definitive proxy statement, or will be contained in an amendment to this Report, in either case to be filed by April 29, 2020, which is within 120 days after the end of fiscal year 2019.



## PART IV

Item 15. Exhibits and Financial Statement Schedules

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 | Specimen Common Share Certificate of PennyMac Mortgage Investment Trust. | 10-Q | November 6, 2009
4.2 | Specimen Certificate for 8.125% Series A Fixed-to-Floating Rate Cumulative Redeemable Preferred Shares of Beneficial Interest. | 8-A | March 7, 2017
4.3 | Specimen Certificate for 8.00% Series B Fixed-to-Floating Rate Cumulative Redeemable Preferred Shares of Beneficial Interest. | 8-A | June 30, 2017
4.4 | Indenture for Senior Debt Securities, dated as of April 30, 2013, among PennyMac Corp., PennyMac Mortgage Investment Trust and The Bank of New York Mellon Trust Company, N.A. | 8-K | April 30, 2013
4.5 | First Supplemental Indenture, dated as of April 30, 2013, among PennyMac Corp., PennyMac Mortgage Investment Trust and The Bank of New York Mellon Trust Company, N.A. | 8-K | April 30, 2013
4.6 | Second Supplemental Indenture, dated as of November 7, 2019, among PennyMac Corp., PennyMac Mortgage Investment Trust and The Bank of New York Mellon Trust Company, N.A. | 8-K | November 8, 2019
4.7 | Form of 5.375% Exchangeable Senior Notes due 2020 (included in Exhibit 4.5). |  |
4.8 | Form of 5.50% Exchangeable Senior Notes due 2024 (included in Exhibit 4.6). |  |
4.9 | Description of Securities Registered Pursuant to Section 12 of the Securities Exchange Act of 1934. | * |
10.1 | Amended and Restated Limited Partnership Agreement of PennyMac Operating Partnership, L.P. | 10-Q | November 6, 2009
10.2 | First Amendment to the Amended and Restated Limited Partnership Agreement of PennyMac Operating Partnership, L.P., dated as of March 9, 2017. | 8-K | March 9, 2017
10.3 | Second Amendment to the Amended and Restated Limited Partnership Agreement of PennyMac Operating Partnership, L.P., dated as of July 5, 2017. | 8-K | July 6, 2017



<table><tr><td>10.4</td><td>Registration Rights Agreement, dated as of August 4, 2009, among PennyMac Mortgage Investment Trust, Stanford L. Kurland, David A. Spector, BlackRock Holdco II, Inc., Highfields Capital Investments LLC and Private National Mortgage Acceptance Company, LLC.</td><td>10-Q</td><td>November 6, 2009</td></tr><tr><td>10.5</td><td>Second Amended and Restated Underwriting Fee Reimbursement Agreement, dated as of February 1, 2019, by and among PennyMac Mortgage Investment Trust, PennyMac Operating Partnership, L.P. and PNMAC Capital Management, LLC.</td><td>10-K</td><td>February 26, 2019</td></tr><tr><td>10.6</td><td>Second Amended and Restated Management Agreement, dated as of September 12, 2016, by and among PennyMac Mortgage Investment Trust, PennyMac Operating Partnership, L.P. and PNMAC Capital Management, LLC.</td><td>8-K</td><td>September 12, 2016</td></tr><tr><td>10.7</td><td>Amendment No. 1 to Second Amended and Restated Management Agreement, dated as of September 27, 2017, among PennyMac Mortgage Investment Trust, PennyMac Operating Partnership, L.P. and PNMAC Capital Management, LLC.</td><td>10-Q</td><td>November 8, 2017</td></tr><tr><td>10.8</td><td>Third Amended and Restated Flow Servicing Agreement, dated as of September 12, 2016, between PennyMac Operating Partnership, L.P. and PennyMac Loan Services, LLC.</td><td>8-K</td><td>September 12, 2016</td></tr><tr><td>10.9</td><td>Amendment No. 1 to Third Amended and Restated Flow Servicing Agreement, dated as of March 1, 2018, between PennyMac Operating Partnership, L.P. and PennyMac Loan Services, LLC.</td><td>10-Q</td><td>May 7, 2018</td></tr><tr><td>10.10</td><td>Amended and Restated Mortgage Banking Services Agreement, dated as of September 12, 2016, by and between PennyMac Loan Services, LLC and PennyMac Corp.</td><td>8-K</td><td>September 12, 2016</td></tr><tr><td>10.11</td><td>Amendment No. 1 to Amended and Restated Mortgage Banking Services Agreement, dated as of May 25, 2017, by and between PennyMac Loan Services, LLC and PennyMac Corp.</td><td>10-Q</td><td>August 8, 2017</td></tr><tr><td>10.12</td><td>Amendment No. 2 to Amended and Restated Mortgage Banking Services Agreement, dated as of October 31, 2017, among PennyMac Loan Services, LLC and PennyMac Corp.</td><td>10-Q</td><td>November 8, 2017</td></tr><tr><td>10.13</td><td>Amendment No. 3 to Amended and Restated Mortgage Banking Services Agreement, dated as of December 1, 2017, by and between PennyMac Loan Services, LLC and PennyMac Corp.</td><td>10-K</td><td>March 1, 2018</td></tr><tr><td>10.14</td><td>Amended and Restated MSR Recapture Agreement, dated as of September 12, 2016, by and between PennyMac Loan Services, LLC and PennyMac Corp.</td><td>8-K</td><td>September 12, 2016</td></tr><tr><td>10.15</td><td>Amendment No. 1 to Amended and Restated MSR Recapture Agreement, dated as of December 1, 2017, by and between PennyMac Loan Services, LLC and PennyMac Corp.</td><td>10-K</td><td>March 1, 2018</td></tr><tr><td>10.16</td><td>Mortgage Loan Purchase Agreement, dated as of September 25, 2012, by and between PennyMac Loan Services, LLC and PennyMac Corp.</td><td>10-K</td><td>February 26, 2016</td></tr><tr><td>10.17</td><td>Flow Sale Agreement, dated as of June 16, 2015, by and between PennyMac Corp. and PennyMac Loan Services, LLC.</td><td>10-Q</td><td>August 10, 2015</td></tr><tr><td>10.18</td><td>HELOC Flow Purchase and Servicing Agreement, dated as of February 25, 2019, by and between PennyMac Loan Services, LLC and PennyMac Corp.</td><td>10-Q</td><td>May 5, 2019</td></tr><tr><td>10.19†</td><td>PennyMac Mortgage Investment Trust 2009 Equity Incentive Plan.</td><td>10-Q</td><td>November 6, 2009</td></tr><tr><td>10.20†</td><td>First Amendment to the PennyMac Mortgage Investment Trust Equity Incentive Plan.</td><td>10-Q</td><td>November 8, 2017</td></tr></table>



<table><tr><td>10.21†</td><td>Second Amendment to the PennyMac Mortgage Investment Trust Equity Incentive Plan.</td><td>10-K</td><td>March 1, 2018</td></tr><tr><td>10.22†</td><td>PennyMac Mortgage Investment Trust 2019 Equity Incentive Plan.</td><td>DEF 14A</td><td>April 22, 2019</td></tr><tr><td>10.23†</td><td>Form of Restricted Share Unit Award Agreement under the PennyMac Mortgage Investment Trust 2009 Equity Incentive Plan.</td><td>S-11/A</td><td>July 24, 2009</td></tr><tr><td>10.24†</td><td>Form of Restricted Share Unit Award Agreement under the PennyMac Mortgage Investment Trust 2009 Equity Incentive Plan.</td><td>10-Q</td><td>May 6, 2016</td></tr><tr><td>10.25†</td><td>Form of Performance Share Unit Award Agreement under the PennyMac Mortgage Investment Trust 2009 Equity Incentive Plan (2017).</td><td>10-Q</td><td>November 8, 2017</td></tr><tr><td>10.26†</td><td>Form of Performance Share Unit Award Agreement under the PennyMac Mortgage Investment Trust 2009 Equity Incentive Plan (2018).</td><td>10-Q</td><td>August 7, 2018</td></tr><tr><td>10.27†</td><td>Form of Restricted Share Unit Award Agreement under the PennyMac Mortgage Investment Trust 2009 Equity Incentive Plan (2019).</td><td>10-Q</td><td>February 26, 2019</td></tr><tr><td>10.28†</td><td>Form of Performance Share Unit Award Agreement under the PennyMac Mortgage Investment Trust 2009 Equity Incentive Plan (2019).</td><td>10-Q</td><td>February 26, 2019</td></tr><tr><td>10.29†</td><td>Form of Restricted Share Unit Award Agreement for Non-Employee Trustee under the PennyMac Mortgage Investment Trust 2009 Equity Incentive Plan (2019).</td><td>10-Q</td><td>May 3, 2019</td></tr><tr><td>10.30</td><td>Third Amended and Restated Master Repurchase Agreement, dated as of March 14, 2019, by and among Credit Suisse First Boston Mortgage Capital LLC, Credit Suisse AG, Cayman Islands Branch, Alpine Securitization LTD, PennyMac Corp., PennyMac Holdings, LLC, PennyMac Operating Partnership, L.P., PMC REO Financing Trust, PMC REO Trust 2015-1, and PennyMac Mortgage Investment Trust.</td><td>10-Q</td><td>May 5, 2019</td></tr><tr><td>10.31</td><td>Amendment No. 1 to Third Amended and Restated Master Repurchase Agreement, dated as of April 26, 2019, by and among Credit Suisse First Boston Mortgage Capital LLC, Credit Suisse AG, Alpine Securitization LTD, PennyMac Holdings, LLC, PennyMac Corp., PennyMac Operating Partnership, L.P., PMC REO Financing Trust, PMC REO Trust 2015-1 and PennyMac Mortgage Investment Trust.</td><td>10-Q</td><td>May 5, 2019</td></tr><tr><td>10.32</td><td>Third Amended and Restated Guaranty, dated as of March 14, 2019, by PennyMac Mortgage Investment Trust and PennyMac Operating Partnership, L.P. in favor of Credit Suisse First Boston Mortgage Capital LLC.</td><td>10-Q</td><td>May 5, 2019</td></tr><tr><td>10.33</td><td>Second Amended and Restated Master Repurchase Agreement, dated as of April 28, 2017, by and among Credit Suisse First Boston Mortgage Capital LLC, Credit Suisse AG, Alpine Securitization LTD, PennyMac Holdings, LLC, PennyMac Corp., PennyMac Operating Partnership, L.P., PMC REO Financing Trust and PennyMac Mortgage Investment Trust.</td><td>8-K</td><td>May 3, 2017</td></tr><tr><td>10.34</td><td>Amendment No. 1 to Second Amended and Restated Master Repurchase Agreement, dated as of April 27, 2018, by and among Credit Suisse First Boston Mortgage Capital LLC, Credit Suisse AG, Cayman Islands Branch, Alpine Securitization LTD, PennyMac Operating Partnership, L.P. and PennyMac Mortgage Investment Trust.</td><td>10-Q</td><td>August 7, 2018</td></tr><tr><td>10.35</td><td>Amendment No. 2 to Second Amended and Restated Master Repurchase Agreement, dated as of April 26, 2019, by and among Credit Suisse First Boston Mortgage Capital LLC, Credit Suisse AG, Alpine Securitization LTD, PennyMac Operating Partnership, L.P. and PennyMac Mortgage Investment Trust.</td><td>10-Q</td><td>May 5, 2019</td></tr></table>



<table><tr><td>10.36</td><td>Amended and Restated Guaranty, dated as of April 28, 2017, by PennyMac Mortgage Investment Trust in favor of Credit Suisse First Boston Mortgage Capital LLC.</td><td>8-K</td><td>May 3, 2017</td></tr><tr><td>10.37</td><td>Second Amended and Restated Master Spread Acquisition and MSR Servicing Agreement, dated as of December 19, 2016, between PennyMac Loan Services, LLC and PennyMac Holdings, LLC.</td><td>8-K</td><td>December 21, 2016</td></tr><tr><td>10.38</td><td>Master Repurchase Agreement, dated as of December 19, 2016, by and among PennyMac Holdings, LLC, as Seller, PennyMac Loan Services, LLC, as Buyer, and PennyMac Mortgage Investment Trust, as Guarantor.</td><td>8-K</td><td>December 21, 2016</td></tr><tr><td>10.39</td><td>Guaranty, dated as of December 19, 2016, by PennyMac Mortgage Investment Trust, in favor of PennyMac Loan Services, LLC.</td><td>8-K</td><td>December 21, 2016</td></tr><tr><td>10.40</td><td>Subordination, Acknowledgement and Pledge Agreement, dated as of December 19, 2016, between PNMAC GMSR ISSUER TRUST, as Buyer, and PennyMac Holdings, LLC, as Pledgor.</td><td>8-K</td><td>December 21, 2016</td></tr><tr><td>10.41</td><td>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.</td><td>8-K</td><td>December 27, 2017</td></tr><tr><td>10.42</td><td>Amendment No. 1, dated as of April 25, 2018, 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.</td><td>8-K</td><td>April 30, 2018</td></tr><tr><td>10.43</td><td>Series 2017-VF1 Indenture Supplement, 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.</td><td>10-K</td><td>March 1, 2018</td></tr><tr><td>10.44</td><td>Amendment No. 1 to the Series 2017-VF1 Indenture Supplement, dated as of June 29, 2018, by and among PMT ISSUER TRUST-FMSR, Citibank, N.A., PennyMac Corp. and Credit Suisse First Boston Mortgage Capital LLC.</td><td>8-K</td><td>July 6, 2018</td></tr><tr><td>10.45</td><td>Series 2018-FT1 Indenture Supplement, dated as of April 25, 2018 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.</td><td>8-K</td><td>April 30, 2018</td></tr><tr><td>10.46</td><td>Master Repurchase Agreement, dated as of December 20, 2017, by and among PennyMac Corp., PMT ISSUER TRUST-FMSR and PennyMac Mortgage Investment Trust.</td><td>8-K</td><td>December 27, 2017</td></tr><tr><td>10.47</td><td>Guaranty, dated as of December 20, 2017, by PennyMac Mortgage Investment Trust in favor of PMT ISSUER TRUST - FMSR.</td><td>8-K</td><td>December 27, 2017</td></tr><tr><td>10.48</td><td>Master Repurchase Agreement, dated as of December 20, 2017, by and among PennyMac Holdings, LLC, PennyMac Corp. and PennyMac Mortgage Investment Trust.</td><td>8-K</td><td>December 27, 2017</td></tr><tr><td>10.49</td><td>Guaranty, dated as of December 20, 2017, by PennyMac Mortgage Investment Trust in favor of PennyMac Corp.</td><td>8-K</td><td>December 27, 2017</td></tr><tr><td>10.50</td><td>Subordination, Acknowledgement and Pledge Agreement, dated as of December 20, 2017, between PMT ISSUER TRUST - FMSR and PennyMac Holdings, LLC.</td><td>8-K</td><td>December 27, 2017</td></tr><tr><td>10.51</td><td>Amended and Restated Master Repurchase Agreement, dated as of June 29, 2018, by and among Credit Suisse First Boston Mortgage Capital LLC and PennyMac Corp.</td><td>8-K</td><td>July 6, 2018</td></tr></table>



10.52 Amended and Restated Guaranty, dated as of June 29, 2018 by PennyMac Mortgage Investment Trust in favor of Credit Suisse AG, Cayman Island Branch and Citibank, N.A. 8-K July 6, 2018

10.53 Loan and Security Agreement, dated as of February 1, 2018, by and among Credit Suisse AG, Cayman Islands Branch, PennyMac Corp., PennyMac Holdings, LLC
PennyMac Mortgage Investment Trust.
8-K February 7, 2018

10.54 Amendment Number One to Loan and Security Agreement, dated as of January 29, 2020, by and among Credit Suisse AG, Cayman Islands Branch, PennyMac Corp., PennyMac Holdings, LLC and PennyMac Mortgage Investment Trust.

21.1 Subsidiaries of PennyMac Mortgage Investment Trust. *

23.1 Consent of Deloitte & Touche LLP. *

31.1 Certification of David A. Spector pursuant to Rule 13a-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2 Certification of Andrew S. Chang pursuant to Rule 13a-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1** Certification of David A. Spector pursuant to Rule 13a-14(b) and 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2** Certification of Andrew S. Chang pursuant to Rule 13a-14(b) and 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

101 Interactive data files pursuant to Rule 405 of Regulation S-T, formatted in Inline XBRL: (i) the Consolidated Balance Sheets as of December 31, 2019 and December 31, 2018 (ii) the Consolidated Statements of Income for the years ended December 31, 2019 and December 31, 2018, (iii) the Consolidated Statements of Changes in Stockholders' Equity for the years ended December 31, 2019 and December 31, 2018, (iv) the Consolidated Statements of Cash Flows for the years ended December 31, 2019 and December 31, 2018 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.SCHInline XBRL Taxonomy Extension Schema Document
101.CALInline XBRL Taxonomy Extension Calculation Linkbase Document
101.DEFInline XBRL Taxonomy Extension Definition Linkbase Document
101.LABInline XBRL Taxonomy Extension Label Linkbase Document
101.PREInline 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.

## Item 16. Form 10-K Summary

None.



# PENNYMAC MORTGAGE INVESTMENT TRUST AND SUBSIDIARIES

## INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

## December 31, 2019

Report of Independent Registered Public Accounting Firm
Financial Statements:
Consolidated Balance Sheets ..... F-1
Consolidated Statements of Income ..... F-3
Consolidated Statements of Changes in Shareholders' Equity ..... F-4
Consolidated Statements of Cash Flows ..... F-5
Notes to Consolidated Financial Statements ..... F-7



# REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Shareholders and the Board of Trustees of PennyMac Mortgage Investment Trust
3043 Townsgate Road
Westlake Village, CA 91361

## Opinion on the Financial Statements

We have audited the accompanying consolidated balance sheets of PennyMac Mortgage Investment Trust and subsidiaries (the "Company") as of December 31, 2019 and 2018, the related consolidated statements of income, changes in shareholders' equity, and cash flows for each of the three years in the period ended December 31, 2019, and the related notes (collectively referred to as the "financial statements"). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2019 and 2018, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2019, in conformity with accounting principles generally accepted in the United States of America.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of December 31, 2019, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 21, 2020, expressed an unqualified opinion on the Company’s internal control over financial reporting.

## Change in Accounting Principle

As discussed in Note 3 to the financial statements, during 2018 the Company elected to prospectively change its method of accounting for the classes of mortgage servicing rights (“MSRs”) it had accounted for using the amortization method.

## Basis for Opinion

These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.

## Critical Audit Matters

The critical audit matters communicated below are matters arising from the current-period audit of the financial statements that were communicated or required to be communicated to the audit committee and that (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.

## Mortgage Servicing Rights - Refer to Notes 3, 7 and 13 to the financial statements

## Critical Audit Matter Description

The Company accounts for MSRs at fair value and categorizes its MSRs as “Level 3” fair value assets. The Company uses a discounted cash flow approach to estimate the fair value of MSRs. The key inputs used in the estimation of the fair value of MSRs include the applicable pricing spread (a component of the discount rate), the prepayment and default rates of the underlying loans (“prepayment speed”) and the annual per-loan cost of servicing, all of which are unobservable. Significant changes to any of those inputs in isolation could result in a significant change in the MSRs’ fair value measurement.



We identified the pricing spread and prepayment speed assumptions used in the valuation of MSRs as a critical audit matter because of the significant judgments made by management in determining these assumptions. Auditing these assumptions required a high degree of auditor judgment and an increased extent of effort, including the need to involve our fair value specialists, to evaluate the reasonableness of management’s estimates and assumptions related to selection of the pricing spread and prepayment speed.

## How the Critical Audit Matter Was Addressed in the Audit

Our audit procedures related to the pricing spread and prepayment speed assumptions used by the Company to estimate the fair value of MSRs included the following, among others:

- We tested the design and operating effectiveness of internal controls over determining the fair value of MSRs, including those over the determination of the pricing spread and prepayment speed assumptions

- With the assistance of our fair value specialists, we evaluated the reasonableness of management’s prepayment speed assumptions by comparing them to independent market information

- We evaluated the reasonableness of management’s prepayment speed assumptions of the underlying mortgage loans, by comparing historical prepayment speed assumptions to actual results

- We tested management’s process for determining the pricing spread assumptions by comparing them to the implied spreads within market transactions and other third-party information used by management

Credit Risk Transfer Agreements and Credit Risk Transfer Strip Assets — Refer to Notes 2, 3, 6 and 7 to the financial statements

## Critical Audit Matter Description

The Company invests in credit risk transfer (“CRT”) arrangements whereby it sells pools of recently-originated loans into Fannie Mae-guaranteed securitizations while retaining a portion of the credit risk underlying such loans. The Company retains an interest-only (“IO”) ownership interest in such loans and an obligation to absorb credit losses arising from such loans (“Recourse Obligations”). The Company placed deposits securing CRT arrangements into subsidiary trust entities to secure its Recourse Obligations. The deposits securing CRT arrangements represent the Company’s maximum contractual exposure to claims under its Recourse Obligations and is the sole source of settlement of losses. Together, the Recourse Obligations and the IO ownership interest comprise the CRT agreements and CRT strip assets.

The Company accounts for CRT agreements and CRT strip assets at fair value and categorizes them as “Level 3” fair value assets. The Company determines the fair value of the CRT agreements and CRT strip assets based on indications of fair value provided to the Company by nonaffiliated brokers for the certificates representing the beneficial interest in the CRT agreements and CRT strip assets and the related deposits. The Company applies adjustments to the indications of fair value of the CRT strip assets due to contractual restrictions limiting the Company’s ability to sell them. The fair value of the CRT agreements and CRT strip assets are estimated by deducting the balance of the deposits securing the CRT arrangements from the estimated fair value of the certificates.

We identified the valuation of the CRT agreements and CRT strip assets as a critical audit matter. Auditing the related fair values, particularly developing the discount rate and involuntary prepayment speeds used in the valuation required a high degree of auditor judgment and an increased extent of effort, including the need to involve our fair value specialists.

## How the Critical Audit Matter Was Addressed in the Audit

Our audit procedures related to the fair value of the CRT agreements and CRT strip assets included the following, among others:

- We tested the design and operating effectiveness of internal controls over the evaluation and approval of the fair value provided by nonaffiliated brokers

- With the assistance of our fair value specialists, we developed independent estimates of the discount rate and involuntary prepayment speeds

- With the assistance of our fair value specialists, we developed independent fair value estimates of the CRT Agreements and CRT Strips and compared our estimates to the Company’s fair value



## Firm Commitment to Purchase Credit Risk Transfer Securities at Fair Value — Refer to Notes 2, 3, 6 and 7 to the financial statements

## Critical Audit Matter Description

The Company sells pools of recently-originated loans into Fannie Mae-guaranteed securitizations and enters into a firm commitment to purchase CRT securities (“Firm Commitment”) that absorbs losses from defaults of such reference loans.

The Company elected to account for the Firm Commitment at fair value and categorizes the Firm Commitment as a “Level 3” fair value asset. The fair value of the Firm Commitment is estimated using a discounted cash flow approach to estimate the fair value of the CRT securities to be purchased less the contractual purchase price. The key unobservable inputs are the discount rate, voluntary and involuntary prepayment rates of the reference mortgage loans and the remaining loss expectations.

We identified the valuation of the Firm Commitment as a critical audit matter. Auditing the fair value, particularly developing the discount rate used in the valuation of the Firm Commitment requires significant judgment and required a high degree of auditor judgment and an increased extent of effort, including the need to involve our fair value specialists.

## How the Critical Audit Matter Was Addressed in the Audit

Our audit procedures related to the fair value of the firm commitment included the following, among others:

- We tested the design and operating effectiveness of internal controls over determining the fair value of the firm commitment, including those related to the review and approval of the discount rate

• With the assistance of our fair value specialists, we developed independent estimates of the discount rate

- With the assistance of our fair value specialists, we developed an independent estimate of the fair value of the firm commitment and compared our estimate of fair value to the Company’s fair value

/s/ Deloitte & Touch LLP

Los Angeles, California

February 21, 2020

We have served as the Company’s auditor since 2009.



## PENNYMAC MORTGAGE INVESTMENT TRUST AND SUBSIDIARIES

## CONSOLIDATED BALANCE SHEETS

<table><tr><td></td><td>December 31, 2019</td><td>December 31, 2018</td></tr><tr><td></td><td colspan="2">(in thousands, except share information)</td></tr><tr><td>ASSETS</td><td></td><td></td></tr><tr><td>Cash</td><td>$ 104,056</td><td>$ 59,845</td></tr><tr><td>Short-term investments at fair value</td><td>90,836</td><td>74,850</td></tr><tr><td>Mortgage-backed securities at fair value pledged to creditors</td><td>2,839,633</td><td>2,610,422</td></tr><tr><td>Loans acquired for sale at fair value ($4,070,134 and $1,621,879 pledged to creditors, respectively)</td><td>4,148,425</td><td>1,643,957</td></tr><tr><td>Loans at fair value ($268,757 and $399,266 pledged to creditors, respectively)</td><td>270,793</td><td>408,305</td></tr><tr><td>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</td><td>178,586</td><td>216,110</td></tr><tr><td>Derivative and credit risk transfer strip assets ($142,183 and $87,976 pledged to creditors, respectively)</td><td>202,318</td><td>167,165</td></tr><tr><td>Firm commitment to purchase credit risk transfer securities at fair value</td><td>109,513</td><td>37,994</td></tr><tr><td>Real estate acquired in settlement of loans ($40,938 and $40,198 pledged to creditors, respectively)</td><td>65,583</td><td>85,681</td></tr><tr><td>Real estate held for investment ($23,262 pledged to creditors at December 31, 2018)</td><td>—</td><td>43,110</td></tr><tr><td>Deposits securing credit risk transfer arrangements pledged to creditors</td><td>1,969,784</td><td>1,146,501</td></tr><tr><td>Mortgage servicing rights at fair value ($1,510,651 and $1,139,582 pledged to creditors, respectively)</td><td>1,535,705</td><td>1,162,369</td></tr><tr><td>Servicing advances</td><td>48,971</td><td>67,666</td></tr><tr><td>Due from PennyMac Financial Services, Inc.</td><td>2,760</td><td>4,077</td></tr><tr><td>Other</td><td>204,388</td><td>85,309</td></tr><tr><td>Total assets</td><td>$ 11,771,351</td><td>$ 7,813,361</td></tr><tr><td>LIABILITIES</td><td></td><td></td></tr><tr><td>Assets sold under agreements to repurchase</td><td>$ 6,648,890</td><td>$ 4,777,027</td></tr><tr><td>Mortgage loan participation purchase and sale agreements</td><td>—</td><td>178,639</td></tr><tr><td>Notes payable secured by credit risk transfer and mortgage servicing assets</td><td>1,696,295</td><td>445,573</td></tr><tr><td>Exchangeable senior notes</td><td>443,506</td><td>248,350</td></tr><tr><td>Asset-backed financing of a variable interest entity at fair value</td><td>243,360</td><td>276,499</td></tr><tr><td>Interest-only security payable at fair value</td><td>25,709</td><td>36,011</td></tr><tr><td>Assets sold to PennyMac Financial Services, Inc. under agreements to repurchase</td><td>107,512</td><td>131,025</td></tr><tr><td>Derivative liabilities</td><td>6,423</td><td>5,914</td></tr><tr><td>Accounts payable and accrued liabilities</td><td>91,149</td><td>70,687</td></tr><tr><td>Due to PennyMac Financial Services, Inc.</td><td>48,159</td><td>33,464</td></tr><tr><td>Income taxes payable</td><td>1,819</td><td>36,526</td></tr><tr><td>Liability for losses under representations and warranties</td><td>7,614</td><td>7,514</td></tr><tr><td>Total liabilities</td><td>9,320,436</td><td>6,247,229</td></tr></table>

<table><tr><td colspan="3">SHAREHOLDERS&#x27; EQUITY</td></tr><tr><td>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</td><td>299,707</td><td>299,707</td></tr><tr><td>Common shares of beneficial interest—authorized, 500,000,000 common shares of $0.01 par value; issued and outstanding, 100,182,227 and 60,951,444 common shares, respectively</td><td>1,002</td><td>610</td></tr><tr><td>Additional paid-in capital</td><td>2,127,889</td><td>1,285,533</td></tr><tr><td>Retained earnings (accumulated deficit)</td><td>22,317</td><td>(19,718)</td></tr><tr><td>Total shareholders&#x27; equity</td><td>2,450,915</td><td>1,566,132</td></tr><tr><td>Total liabilities and shareholders&#x27; equity</td><td>$ 11,771,351</td><td>$ 7,813,361</td></tr></table>

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



## PENNYMAC MORTGAGE INVESTMENT TRUST AND SUBSIDIARIES

## CONSOLIDATED BALANCE SHEETS

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):

<table><tr><td rowspan="3"></td><td>December 31, 2019</td><td>December 31, 2018</td></tr><tr><td colspan="2">(in thousands)</td></tr><tr><td colspan="2">(in thousands)</td></tr><tr><td>ASSETS</td><td></td><td></td></tr><tr><td>Loans at fair value</td><td>$ 256,367</td><td>$ 290,573</td></tr><tr><td>Derivative and credit risk transfer strip assets</td><td>170,793</td><td>123,987</td></tr><tr><td>Deposits securing credit risk transfer arrangements</td><td>1,969,784</td><td>1,146,501</td></tr><tr><td>Other—interest receivable</td><td>712</td><td>839</td></tr><tr><td></td><td>$ 2,397,656</td><td>$ 1,561,900</td></tr><tr><td>LIABILITIES</td><td></td><td></td></tr><tr><td>Asset-backed financing at fair value</td><td>$ 243,360</td><td>$ 276,499</td></tr><tr><td>Interest-only security payable at fair value</td><td>25,709</td><td>36,011</td></tr><tr><td>Accounts payable and accrued liabilities—interest payable</td><td>712</td><td>839</td></tr><tr><td></td><td>$ 269,781</td><td>$ 313,349</td></tr></table>

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



## PENNYMAC MORTGAGE INVESTMENT TRUST AND SUBSIDIARIES

## CONSOLIDATED STATEMENTS OF INCOME

<table><tr><td rowspan="3"></td><td colspan="4">Year ended December 31,</td></tr><tr><td>2019</td><td>2018</td><td>2017</td><td></td></tr><tr><td colspan="4">(in thousands, except earnings per share)</td></tr><tr><td>Net investment income</td><td></td><td></td><td></td><td></td></tr><tr><td>Net gain on investments:</td><td></td><td></td><td></td><td></td></tr><tr><td>From nonaffiliates</td><td>$     270,848</td><td>$     70,842</td><td>$     110,914</td><td></td></tr><tr><td>From PennyMac Financial Services, Inc.</td><td>(7,530)</td><td>11,084</td><td>(14,530)</td><td></td></tr><tr><td></td><td>263,318</td><td>81,926</td><td>96,384</td><td></td></tr><tr><td>Net gain on loans acquired for sale:</td><td></td><td></td><td></td><td></td></tr><tr><td>From nonaffiliates</td><td>155,783</td><td>48,260</td><td>62,432</td><td></td></tr><tr><td>From PennyMac Financial Services, Inc.</td><td>14,381</td><td>10,925</td><td>12,084</td><td></td></tr><tr><td></td><td>170,164</td><td>59,185</td><td>74,516</td><td></td></tr><tr><td>Loan origination fees</td><td>87,997</td><td>43,321</td><td>40,184</td><td></td></tr><tr><td>Net loan servicing fees:</td><td></td><td></td><td></td><td></td></tr><tr><td>From nonaffiliates</td><td></td><td></td><td></td><td></td></tr><tr><td>Contractually specified</td><td>295,390</td><td>204,663</td><td>164,776</td><td></td></tr><tr><td>Other</td><td>24,099</td><td>8,062</td><td>6,523</td><td></td></tr><tr><td></td><td>319,489</td><td>212,725</td><td>171,299</td><td></td></tr><tr><td>Amortization, impairment, and change in fair value of mortgage servicing rights</td><td>(383,731)</td><td>(94,330)</td><td>(103,487)</td><td></td></tr><tr><td></td><td>(64,242)</td><td>118,395</td><td>67,812</td><td></td></tr><tr><td>From PennyMac Financial Services, Inc.</td><td>5,324</td><td>2,192</td><td>1,428</td><td></td></tr><tr><td></td><td>(58,918)</td><td>120,587</td><td>69,240</td><td></td></tr><tr><td>Interest income:</td><td></td><td></td><td></td><td></td></tr><tr><td>From nonaffiliates</td><td>307,594</td><td>207,634</td><td>178,225</td><td></td></tr><tr><td>From PennyMac Financial Services, Inc.</td><td>10,291</td><td>15,138</td><td>16,951</td><td></td></tr><tr><td></td><td>317,885</td><td>222,772</td><td>195,176</td><td></td></tr><tr><td>Interest expense:</td><td></td><td></td><td></td><td></td></tr><tr><td>To nonaffiliates</td><td>291,144</td><td>167,709</td><td>143,333</td><td></td></tr><tr><td>To PennyMac Financial Services, Inc.</td><td>6,302</td><td>7,462</td><td>8,038</td><td></td></tr><tr><td></td><td>297,446</td><td>175,171</td><td>151,371</td><td></td></tr><tr><td>Net interest income</td><td>20,439</td><td>47,601</td><td>43,805</td><td></td></tr><tr><td>Results of real estate acquired in settlement of loans</td><td>771</td><td>(8,786)</td><td>(14,955)</td><td></td></tr><tr><td>Other</td><td>5,044</td><td>7,233</td><td>8,766</td><td></td></tr><tr><td>Net investment income</td><td>488,815</td><td>351,067</td><td>317,940</td><td></td></tr><tr><td>Expenses</td><td></td><td></td><td></td><td></td></tr><tr><td>Earned by PennyMac Financial Services, Inc.:</td><td></td><td></td><td></td><td></td></tr><tr><td>Loan fulfillment fees</td><td>160,610</td><td>81,350</td><td>80,359</td><td></td></tr><tr><td>Loan servicing fees</td><td>48,797</td><td>42,045</td><td>43,064</td><td></td></tr><tr><td>Management fees</td><td>36,492</td><td>24,465</td><td>22,584</td><td></td></tr><tr><td>Loan origination</td><td>15,105</td><td>6,562</td><td>7,521</td><td></td></tr><tr><td>Compensation</td><td>6,897</td><td>6,781</td><td>6,322</td><td></td></tr><tr><td>Professional services</td><td>5,556</td><td>6,380</td><td>6,905</td><td></td></tr><tr><td>Safekeeping</td><td>5,097</td><td>1,805</td><td>2,918</td><td></td></tr><tr><td>Loan collection and liquidation</td><td>4,600</td><td>7,852</td><td>6,063</td><td></td></tr><tr><td>Other</td><td>15,020</td><td>15,839</td><td>17,658</td><td></td></tr><tr><td>Total expenses</td><td>298,174</td><td>193,079</td><td>193,394</td><td></td></tr><tr><td>Income before (benefit from) provision for income taxes</td><td>190,641</td><td>157,988</td><td>124,546</td><td></td></tr><tr><td>(Benefit from) provision for income taxes</td><td>(35,716)</td><td>5,190</td><td>6,797</td><td></td></tr><tr><td>Net income</td><td>226,357</td><td>152,798</td><td>117,749</td><td></td></tr><tr><td>Dividends on preferred shares</td><td>24,938</td><td>24,938</td><td>15,267</td><td></td></tr><tr><td>Net income attributable to common shareholders</td><td>$     201,419</td><td>$     127,860</td><td>$     102,482</td><td></td></tr><tr><td>Earnings per common share</td><td></td><td></td><td></td><td></td></tr><tr><td>Basic</td><td>$     2.54</td><td>$     2.09</td><td>$     1.53</td><td></td></tr><tr><td>Diluted</td><td>$     2.42</td><td>$     1.99</td><td>$     1.48</td><td></td></tr><tr><td>Weighted average common shares outstanding</td><td></td><td></td><td></td><td></td></tr><tr><td>Basic</td><td>78,990</td><td>60,898</td><td>66,144</td><td></td></tr><tr><td>Diluted</td><td>87,711</td><td>69,365</td><td>74,611</td><td></td></tr></table>

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

<table><tr><td rowspan="3"></td><td colspan="2">Preferred shares</td><td colspan="2">Common shares</td><td rowspan="3">(Accumulated deficit) Retained earnings</td><td rowspan="3">Total</td></tr><tr><td>Number of shares</td><td>Amount</td><td>Number of shares</td><td>Par value</td></tr><tr><td colspan="5">(in thousands, except per share amounts)</td></tr><tr><td>Balance at December 31, 2016</td><td>—</td><td>—</td><td>66,697</td><td>667</td><td>$ 1,377,171</td><td>$ (26,724)</td></tr><tr><td>Net income</td><td>—</td><td>—</td><td>—</td><td>—</td><td>—</td><td>117,749</td></tr><tr><td>Share-based compensation</td><td>—</td><td>—</td><td>284</td><td>2</td><td>4,902</td><td>—</td></tr><tr><td>Dividends:</td><td></td><td></td><td></td><td></td><td></td><td></td></tr><tr><td>Common shares ($1.88 per share)</td><td>—</td><td>—</td><td>—</td><td>—</td><td>—</td><td>(123,625)</td></tr><tr><td>Preferred shares</td><td>—</td><td>—</td><td>—</td><td>—</td><td>—</td><td>(14,066)</td></tr><tr><td>Issuance of preferred shares</td><td>12,400</td><td>310,000</td><td>—</td><td>—</td><td>—</td><td>—</td></tr><tr><td>Issuance cost relating to preferred shares</td><td>—</td><td>(10,293)</td><td>—</td><td>—</td><td>—</td><td>—</td></tr><tr><td>Repurchase of common shares</td><td>—</td><td>—</td><td>(5,647)</td><td>(56)</td><td>(91,142)</td><td>—</td></tr><tr><td>Balance at December 31, 2017</td><td>12,400</td><td>299,707</td><td>61,334</td><td>613</td><td>1,290,931</td><td>(46,666)</td></tr><tr><td>Cumulative effect of a change in accounting principle—Adoption of fair value accounting for mortgage servicing rights</td><td>—</td><td>—</td><td>—</td><td>—</td><td>—</td><td>14,361</td></tr><tr><td>Balance at January 1, 2018</td><td>12,400</td><td>299,707</td><td>61,334</td><td>613</td><td>1,290,931</td><td>(32,305)</td></tr><tr><td>Net income</td><td>—</td><td>—</td><td>—</td><td>—</td><td>—</td><td>152,798</td></tr><tr><td>Share-based compensation</td><td>—</td><td>—</td><td>288</td><td>3</td><td>5,315</td><td>—</td></tr><tr><td>Dividends:</td><td></td><td></td><td></td><td></td><td></td><td></td></tr><tr><td>Common shares ($1.88 per share)</td><td>—</td><td>—</td><td>—</td><td>—</td><td>—</td><td>(115,267)</td></tr><tr><td>Preferred shares</td><td>—</td><td>—</td><td>—</td><td>—</td><td>—</td><td>(24,944)</td></tr><tr><td>Repurchase of common shares</td><td>—</td><td>—</td><td>(671)</td><td>(6)</td><td>(10,713)</td><td>—</td></tr><tr><td>Balance at December 31, 2018</td><td>12,400</td><td>299,707</td><td>60,951</td><td>610</td><td>1,285,533</td><td>(19,718)</td></tr><tr><td>Net income</td><td>—</td><td>—</td><td>—</td><td>—</td><td>—</td><td>226,357</td></tr><tr><td>Share-based compensation</td><td>—</td><td>—</td><td>241</td><td>2</td><td>2,928</td><td>—</td></tr><tr><td>Issuance of exchangeable notes with cash conversion option</td><td>—</td><td>—</td><td>—</td><td>—</td><td>10,361</td><td>—</td></tr><tr><td>Issuance of common shares</td><td>—</td><td>—</td><td>38,990</td><td>390</td><td>839,292</td><td>—</td></tr><tr><td>Issuance costs relating to common shares</td><td>—</td><td>—</td><td>—</td><td>—</td><td>(10,225)</td><td>—</td></tr><tr><td>Dividends:</td><td></td><td></td><td></td><td></td><td></td><td></td></tr><tr><td>Common shares ($1.88 per share)</td><td>—</td><td>—</td><td>—</td><td>—</td><td>—</td><td>(159,378)</td></tr><tr><td>Preferred shares</td><td>—</td><td>—</td><td>—</td><td>—</td><td>—</td><td>(24,944)</td></tr><tr><td>Balance at December 31, 2019</td><td>12,400</td><td>299,707</td><td>100,182</td><td>1,002</td><td>2,127,889</td><td>$ 22,317</td></tr></table>

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



## PENNYMAC MORTGAGE INVESTMENT TRUST AND SUBSIDIARIES

## CONSOLIDATED STATEMENTS OF CASH FLOWS

<table><tr><td rowspan="3"></td><td colspan="4">Year ended December 31,</td></tr><tr><td rowspan="2">2019</td><td>2018</td><td>2017</td><td></td></tr><tr><td colspan="3">(in thousands)</td></tr><tr><td>Cash flows from operating activities</td><td></td><td></td><td></td><td></td></tr><tr><td>Net income</td><td>$     226,357</td><td>$     152,798</td><td>$     117,749</td><td></td></tr><tr><td>Adjustments to reconcile net income to net cash provided by operating activities:</td><td></td><td></td><td></td><td></td></tr><tr><td>Net gain on investments</td><td>(263,318)</td><td>(81,926)</td><td>(96,384)</td><td></td></tr><tr><td>Net gain on loans acquired for sale at fair value</td><td>(170,164)</td><td>(59,185)</td><td>(74,516)</td><td></td></tr><tr><td>Amortization, impairment, and change in fair value of mortgage servicing rights</td><td>383,731</td><td>94,330</td><td>103,487</td><td></td></tr><tr><td>Accrual of interest on excess servicing spread purchased from PennyMac Financial Services, Inc.</td><td>(10,291)</td><td>(15,138)</td><td>(16,951)</td><td></td></tr><tr><td>Capitalization of interest and fees on loans at fair value</td><td>(2,318)</td><td>(7,439)</td><td>(30,795)</td><td></td></tr><tr><td>Amortization of debt issuance costs and (premiums), net</td><td>34</td><td>(9,323)</td><td>13,769</td><td></td></tr><tr><td>Accrual of unearned discounts and amortization of purchase premiums on mortgage-backed securities, loans at fair value, and asset-backed financing of a VIE</td><td>13,574</td><td>5,270</td><td>5,703</td><td></td></tr><tr><td>Results of real estate acquired in settlement of loans</td><td>(771)</td><td>8,786</td><td>14,955</td><td></td></tr><tr><td>Share-based compensation expense</td><td>5,530</td><td>5,318</td><td>4,904</td><td></td></tr><tr><td>Reversal of contingent underwriting fees</td><td>(1,134)</td><td>—</td><td>—</td><td></td></tr><tr><td>Purchase of loans acquired for sale at fair value from nonaffiliates</td><td>(108,251,144)</td><td>(64,671,970)</td><td>(65,830,095)</td><td></td></tr><tr><td>Purchase of loans acquired for sale at fair value from PennyMac Financial Services, Inc.</td><td>(6,255,915)</td><td>(3,343,028)</td><td>(904,097)</td><td></td></tr><tr><td>Repurchase of loans subject to representation and warranties</td><td>(22,478)</td><td>(12,208)</td><td>(11,412)</td><td></td></tr><tr><td>Sale to nonaffiliates and repayment of loans acquired for sale at fair value</td><td>61,128,081</td><td>29,369,656</td><td>24,314,165</td><td></td></tr><tr><td>Sale of loans acquired for sale to PennyMac Financial Services, Inc.</td><td>50,110,085</td><td>37,967,724</td><td>42,624,288</td><td></td></tr><tr><td>Settlement of repurchase agreement derivatives</td><td>19,317</td><td>8,964</td><td>—</td><td></td></tr><tr><td>Decrease (increase) in servicing advances</td><td>18,772</td><td>20,525</td><td>(2,353)</td><td></td></tr><tr><td>Decrease (increase) in due from PennyMac Financial Services, Inc.</td><td>1,286</td><td>(26)</td><td>2,514</td><td></td></tr><tr><td>Decrease (increase) in other assets</td><td>102,215</td><td>(23,482)</td><td>8,822</td><td></td></tr><tr><td>Increase (decrease) in accounts payable and accrued liabilities</td><td>3,613</td><td>6,400</td><td>(40,435)</td><td></td></tr><tr><td>Increase in due to PennyMac Financial Services, Inc.</td><td>14,571</td><td>6,345</td><td>10,656</td><td></td></tr><tr><td>(Decrease) increase in income taxes payable</td><td>(34,707)</td><td>3,857</td><td>9,151</td><td></td></tr><tr><td>Net cash (used in) provided by operating activities</td><td>(2,985,074)</td><td>(573,752)</td><td>223,125</td><td></td></tr><tr><td>Cash flows from investing activities</td><td></td><td></td><td></td><td></td></tr><tr><td>Net (increase) decrease in short-term investments</td><td>(15,986)</td><td>(56,452)</td><td>103,690</td><td></td></tr><tr><td>Purchase of mortgage-backed securities at fair value</td><td>(1,250,289)</td><td>(1,810,877)</td><td>(251,872)</td><td></td></tr><tr><td>Sales and repayment of mortgage-backed securities at fair value</td><td>1,085,508</td><td>173,862</td><td>127,591</td><td></td></tr><tr><td>Repurchase of loans at fair value</td><td>(1,077)</td><td>—</td><td>—</td><td></td></tr><tr><td>Sale and repayment of loans at fair value</td><td>131,652</td><td>622,705</td><td>582,207</td><td></td></tr><tr><td>Repayment of excess servicing spread by PennyMac Financial Services, Inc.</td><td>40,316</td><td>46,750</td><td>54,980</td><td></td></tr><tr><td>Settlement of firm commitment to purchase credit risk transfer securities</td><td>31,925</td><td>—</td><td>—</td><td></td></tr><tr><td>Net settlement of derivative financial instruments</td><td>(929)</td><td>(4,863)</td><td>(716)</td><td></td></tr><tr><td>Sale of real estate acquired in settlement of loans</td><td>74,973</td><td>99,194</td><td>166,921</td><td></td></tr><tr><td>Purchase of mortgage servicing rights</td><td>—</td><td>—</td><td>(79)</td><td></td></tr><tr><td>Sale of mortgage servicing rights</td><td>17</td><td>100</td><td>1,199</td><td></td></tr><tr><td>Deposit of cash securing credit risk transfer arrangements</td><td>(933,370)</td><td>(596,626)</td><td>(152,641)</td><td></td></tr><tr><td>Distribution from credit risk transfer agreements</td><td>221,905</td><td>125,920</td><td>65,564</td><td></td></tr><tr><td>Increase in margin deposits</td><td>(89,322)</td><td>(24,005)</td><td>(15,163)</td><td></td></tr><tr><td>Net cash (used in) provided by investing activities</td><td>(704,677)</td><td>(1,424,292)</td><td>681,681</td><td></td></tr></table>

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



## PENNYMAC MORTGAGE INVESTMENT TRUST AND SUBSIDIARIES

## CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)

<table><tr><td rowspan="3"></td><td colspan="3">Year ended December 31,</td></tr><tr><td>2019</td><td>2018</td><td>2017</td></tr><tr><td colspan="3">(in thousands)</td></tr><tr><td>Cash flows from financing activities</td><td></td><td></td><td></td></tr><tr><td>Sale of assets under agreements to repurchase</td><td>137,742,171</td><td>85,574,226</td><td>77,985,354</td></tr><tr><td>Repurchase of assets sold under agreements to repurchase</td><td>(135,870,355)</td><td>(83,978,547)</td><td>(78,587,535)</td></tr><tr><td>Issuance of mortgage loan participation purchase and sale agreements</td><td>4,825,348</td><td>7,559,680</td><td>6,960,713</td></tr><tr><td>Repayment of mortgage loan participation purchase and sale agreements</td><td>(5,004,074)</td><td>(7,425,503)</td><td>(6,942,079)</td></tr><tr><td>Issuance of notes payable secured by credit risk transfer and mortgage servicing assets</td><td>1,308,730</td><td>450,000</td><td>396,240</td></tr><tr><td>Repayment of notes payable secured by credit risk transfer and mortgage servicing assets</td><td>(56,468)</td><td>—</td><td>(671,346)</td></tr><tr><td>Issuance of exchangeable notes with cash conversion option</td><td>210,000</td><td>—</td><td>—</td></tr><tr><td>Repayment of asset-backed financing of a variable interest entity at fair value</td><td>(42,753)</td><td>(21,886)</td><td>(51,687)</td></tr><tr><td>Sale of assets to PennyMac Financial Services, Inc. under agreements to repurchase</td><td>26,503</td><td>2,293</td><td>—</td></tr><tr><td>Repurchase of assets sold to PennyMac Financial Services, Inc. under agreement to repurchase</td><td>(50,016)</td><td>(15,396)</td><td>(5,872)</td></tr><tr><td>Payment of debt issuance costs</td><td>(15,642)</td><td>(13,230)</td><td>(13,670)</td></tr><tr><td>Payment of contingent underwriting fees</td><td>(394)</td><td>(136)</td><td>(61)</td></tr><tr><td>Payment of dividends to preferred shareholders</td><td>(24,944)</td><td>(24,944)</td><td>(14,066)</td></tr><tr><td>Payment of dividends to common shareholders</td><td>(141,001)</td><td>(115,596)</td><td>(126,135)</td></tr><tr><td>Issuance of preferred shares</td><td>—</td><td>—</td><td>310,000</td></tr><tr><td>Payment of issuance costs related to preferred shares</td><td>—</td><td>—</td><td>(10,293)</td></tr><tr><td>Issuance of common shares</td><td>839,682</td><td>—</td><td>—</td></tr><tr><td>Payment of issuance costs related to common shares</td><td>(10,225)</td><td>—</td><td>—</td></tr><tr><td>Payment of vested share-based compensation withholdings</td><td>(2,600)</td><td>—</td><td>—</td></tr><tr><td>Repurchase of common shares</td><td>—</td><td>(10,719)</td><td>(91,198)</td></tr><tr><td>Net cash provided by (used in) financing activities</td><td>3,733,962</td><td>1,980,242</td><td>(861,635)</td></tr><tr><td>Net increase (decrease) in cash</td><td>44,211</td><td>(17,802)</td><td>43,171</td></tr><tr><td>Cash at beginning of year</td><td>59,845</td><td>77,647</td><td>34,476</td></tr><tr><td>Cash at end of year</td><td>$ 104,056</td><td>$ 59,845</td><td>$ 77,647</td></tr></table>

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



# PENNYMAC MORTGAGE INVESTMENT TRUST AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

## 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 and CRT strips (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 PNAMAC Capital Management, LLC (“PCM” or the “Manager”) and PennyMac Loan Services, LLC (“PLS”), both indirect controlled subsidiaries of PFSI.

Almost all of the loans the Company has acquired in its correspondent production activities have been eligible for sale to government-sponsored entities (“GSEs”) such as the Federal National Mortgage Association (“Fannie Mae”) and the Federal Home Loan Mortgage Corporation (“Freddie Mac”) or through government agencies such as the Government National Mortgage Association (“Ginnie Mae”). Fannie Mae, Freddie Mac and Ginnie Mae are each referred to as an “Agency” and, collectively, as the “Agencies.”

• The 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—Concentration of Risks

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

## Credit Risk

Note 5 – Loan Sales details the Company’s investments in CRT arrangements whereby the Company sells pools of recently-originated loans into Fannie Mae-guaranteed securitizations while either:

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

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

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



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

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

## Fair Value Risk

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

- MSRs are generally subject to loss in fair value when mortgage interest rates decrease. Decreasing mortgage interest rates normally encourage increased mortgage refinancing activity. Increased refinancing activity reduces the expected life of the underlying loans, thereby reducing the cash flows expected to accrue to the MSRs. Reductions in the fair value of MSRs affect income primarily through recognition of the change in fair value.

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

- The Company has a significant investment in CRT arrangements and carries such arrangements at fair value. The fair value of CRT arrangements is sensitive to market perceptions of future credit performance of the underlying loans as well as the actual credit performance of such loans.

## Note 3—Significant Accounting Policies

PMT’s significant accounting policies are summarized below.

## 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”).

## Use of Estimates

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.

## Consolidation

The consolidated financial statements include the accounts of PMT and all wholly-owned subsidiaries. PMT has no significant equity method or cost-basis investments. Intercompany accounts and transactions are eliminated upon consolidation. The Company also consolidates the assets and liabilities included in certain Variable Interest Entities (“VIEs”) discussed below.

## Variable Interest Entities

The Company enters into various types of on- and off-balance sheet transactions with special purpose entities (“SPEs”), which are trusts that are established for a limited purpose. Generally, SPEs are formed in connection with securitization transactions. In a securitization transaction, the Company transfers assets on its balance sheet to an SPE, which then issues various forms of beneficial interests in those assets to investors. In a securitization transaction, the Company typically receives a combination of cash and beneficial interests in the SPE in exchange for the assets transferred by the Company.



SPEs are generally VIEs. A VIE is an entity having either a total equity investment at risk that is insufficient to finance its activities without additional subordinated financial support or whose equity investors at risk lack the ability to control the entity’s activities. Variable interests are investments or other interests that will absorb portions of a VIE’s expected losses or receive portions of the VIE’s expected residual returns. Expected residual returns represent the expected positive variability in the fair value of a VIE’s net assets.

PMT consolidates the assets and liabilities of VIEs of which the Company is the primary beneficiary. The primary beneficiary is the party that has both the power to direct the activities that most significantly impact the VIE and holds a variable interest that could potentially be significant to the VIE. To determine whether a variable interest the Company holds could potentially be significant to the VIE, the Company considers both qualitative and quantitative factors regarding the nature, size and form of its involvement with the VIE. The Company assesses whether it is the primary beneficiary of a VIE on an ongoing basis.

The Company evaluates the securitization trust into which assets are transferred to determine whether the entity is a VIE and whether the Company is the primary beneficiary and therefore is required to consolidate the securitization trust.

## Jumbo Loan Securitization Transaction

On September 30, 2013, the Company completed a securitization transaction in which PMT Loan Trust 2013-J1, a VIE, issued $537.0 million in unpaid principal balance (“UPB”) of certificates backed by fixed-rate prime jumbo loans at a 3.9% weighted cost.

The securities issued by the VIE are backed by the expected cash flows from its underlying fixed-rate prime jumbo loans. Cash inflows from these fixed-rate prime jumbo loans are distributed to investors and service providers in accordance with the contractual priority of payments and, as such, most of these inflows must be directed first to service and repay the senior certificates. After the senior certificates are repaid, substantially all cash inflows will be directed to the subordinated certificates until fully repaid and, thereafter, to the residual interest in the trust that the Company owns.

The Company retains beneficial interests in the securitization transaction, including subordinated certificates and residual interests issued by the VIE. The Company retains credit risk in the securitization because the Company’s beneficial interests include the most subordinated interests in the securitized assets, which are the first beneficial interests to absorb credit losses on those assets. The Manager expects that any credit losses in the pools of securitized assets will likely be limited to the Company’s subordinated and residual interests. The Company has no obligation to repurchase or replace securitized assets that subsequently become delinquent or are otherwise in default other than pursuant to breaches of representations and warranties.

The VIE is consolidated by PMT as the Company determined that it is the primary beneficiary of the VIE. The Company concluded that it is the primary beneficiary of the VIE as it has the power, through its affiliate, PLS, in its role as servicer of the loans, to direct the activities of the trust that most significantly impact the trust’s economic performance and the retained subordinated and residual interest trust certificates expose PMT to losses and returns that could potentially be significant to the VIE.

For financial reporting purposes, the loans owned by the consolidated VIE are included in Loans at fair value and the securities issued to third parties by the consolidated VIE are included in Asset-backed financing of a variable interest entity at fair value on the Company’s consolidated balance sheets. Both the Loans at fair value and the Asset-backed financing of a variable interest entity at fair value included in the consolidated VIE are also included in a separate statement following the Company’s consolidated balance sheets.

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

## Credit Risk Transfer

The Company invests in CRT arrangements with Fannie Mae, pursuant to which PennyMac Corp. (“PMC”), through subsidiary trust entities, sells pools of loans into Fannie Mae-guaranteed loan securitizations while retaining Recourse Obligations in addition to IO ownership interests in such loans. The loans subject to the CRT arrangements were transferred by PMC to subsidiary trust entities which sold the loans into Fannie Mae loan securitizations. Transfers of loans subject to CRT arrangements receive sale accounting treatment.



The Company has concluded that its subsidiary trust entities holding its CRT arrangements are VIEs and the Company is the primary beneficiary of the VIEs as it is the holder of the primary beneficial interests which absorb the variability of the trusts' results of operations. Consolidation of the VIEs results in the inclusion on the Company's consolidated balance sheet of the fair value of the Recourse Obligations, and retained IO ownership interests in the form of derivative and interest-only strip assets, the deposits pledged to fulfill the Recourse Obligations and an interest only security payable at fair value. The deposits represent the Company's maximum contractual exposure to claims under its Recourse Obligations and is the sole source of settlement of losses under the CRT arrangements. Gains and losses on the derivative and interest-only strip assets related to CRT arrangements are included in Net gain on investments in the consolidated statements of income.

## 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.

## Short-Term Investments

Short-term investments are carried at fair value with changes in fair value recognized in current period income. Short-term investments represent deposit accounts. The Company categorizes its short-term investments as “Level 1” fair value assets.

## Mortgage-Backed Securities

Purchases and sales of MBS are recorded as of the trade date. The Company’s investments in MBS are carried at fair value with changes in fair value recognized in current period income. Changes in fair value arising from amortization of purchase premiums and accrual of unearned discounts are recognized using the interest method and are included in Interest income. Changes in fair value arising from other factors are included in Net gain on investments. The Company categorizes its investments in MBS as “Level 2” fair value assets.

## Interest Income Recognition

Interest income on MBS is recognized over the life of the security using the interest method. The Company estimates, at the time of purchase, the future expected cash flows and determines the effective interest rate based on the estimated cash flows and the security’s purchase price. The Company updates its cash flow estimates monthly.



## Loans

Loans are carried at their fair values. Changes in the fair value of loans are recognized in current period income. Changes in fair value, other than changes in fair value attributable to accrual of unearned discounts and amortization of purchase premiums, are included in Net gain on investments for loans classified as Loans at fair value and Net gain on loans acquired for sale for loans classified as Loans acquired for sale at fair value. Changes in fair value attributable to accrual of unearned discounts and amortization of purchase premiums are included in Interest income on the consolidated statements of income. The Company categorizes its Loans acquired for sale at fair value that are readily saleable into active markets with observable inputs that are significant to their fair values and its Loans at fair value held in VIE as “Level 2” fair value assets. The Company categorizes all other loans as “Level 3” fair value assets.

## Sale Recognition

The Company purchases from and sells loans into the secondary mortgage market without recourse for credit losses. However, the Company maintains continuing involvement with the loans in the form of servicing arrangements and the liability under the representations and warranties it makes to purchasers and insurers of the loans.

The Company recognizes transfers of loans as sales based on whether the transfer is made to a VIE:

- For loans that are not transferred to a VIE, the Company recognizes the transfer as a sale when it surrenders control over the loans. Control over transferred loans is deemed to be surrendered when (i) the loans have been isolated from the Company, (ii) the transferee has the right (free of conditions that constrain it from taking advantage of that right) to pledge or exchange the transferred loans, and (iii) the Company does not maintain effective control over the transferred loans through either (a) an agreement that entitles and obligates the Company to repurchase or redeem them before their maturity or (b) the ability to unilaterally cause the holder to return specific loans.

- For loans that are transferred to a VIE, the Company recognizes the transfer as a sale when it determines that the Company is not the primary beneficiary of the VIE.

## Interest Income Recognition

The Company has the ability but not the intent to hold loans acquired for sale and loans at fair value other than loans held in a VIE for the foreseeable future. Therefore, interest income on loans acquired for sale and loans at fair value other than loans held in a VIE is recognized over the life of the loans using their contractual interest rates.

The Company has both the ability and intent to hold loans held in a VIE for the foreseeable future. Therefore, interest income on loans held in a variable interest entity is recognized over the estimated remaining life of the loans using the interest method. Unearned discounts and purchase premiums are accrued and amortized to interest income using the effective interest rate inherent in the estimated cash flows from the loans.

Income recognition is suspended and the accrued unpaid interest receivable is reversed against interest income when loans become 90 days delinquent, or when, in the Company’s opinion, a full recovery of income and principal becomes doubtful. Income recognition is resumed when the loan becomes contractually current.

## Excess Servicing Spread

The Company has acquired the right to receive the ESS related to certain of the MSRs owned by PFSI. ESS is carried at its fair value. The Company categorizes ESS as a “Level 3” fair value asset.

## Interest Income Recognition

Interest income for ESS is accrued using the interest method, based upon the expected yield from the ESS through the expected life of the underlying mortgages. Changes to the expected interest yield result in a change in fair value which is recorded in Interest income.



## Derivative and Credit Risk Transfer Strip Assets

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:

- Interest rate lock commitments (“IRLCs”) that are created when the Company commits to purchase loans acquired for sale;

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

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

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

- The Company is exposed to 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 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 income. The Company does not designate and qualify any of its derivative financial instruments for hedge accounting.

## Firm Commitment to Purchase Credit Risk Transfer Securities

The Company carries its firm commitment to purchase CRT securities at fair value. The firm commitment to purchase CRT securities is recognized initially as a component of Net gain on loans acquired for sale. Subsequent changes in fair value are recorded in Net gain on investments. The Company categorizes its firm commitment to purchase CRT securities as a “Level 3” fair value asset.

## Real Estate Acquired in Settlement of Loans

REO is measured at the lower of the acquisition cost of the property (as measured by purchase price in the case of purchased REO; or the fair value of the loan immediately before REO acquisition in the case of acquisition in settlement of a loan) or its fair value reduced by estimated costs to sell. Changes in fair value to levels that are less than or equal to acquisition cost and gains or losses on sale of REO are recognized in the consolidated statements of income under the caption Results of real estate acquired in settlement of loans. The Company categorizes REO as a “Level 3” fair value asset.

## Mortgage Servicing Rights

MSRs arise from contractual agreements between the Company and investors (or their agents) in mortgage securities and loans. Under these agreements, the Company is obligated to provide loan servicing functions in exchange for fees and other remuneration. The servicing functions typically performed include, among other responsibilities, collecting and remitting loan payments; responding to borrower inquiries; accounting for principal and interest, holding custodial (impound) funds for payment of property taxes and insurance premiums; counseling delinquent borrowers; and supervising the acquisition and disposition of REO. The Company has engaged PFSI to provide these services on its behalf.

The Company recognizes MSRs initially at their fair values, either as proceeds from sales of loans where the Company assumes the obligation to service the loan in the sale transaction, or from the purchase of MSRs. The Company categorizes its MSR as a “Level 3” fair value asset.



Through December 31, 2017, the Company accounted for MSRs at either the asset’s fair value with changes in fair value recorded in current period earnings or using the amortization method with the MSRs carried at the lower of amortized cost or fair value based on the class of MSR. The Company identified two classes of MSRs: originated MSRs backed by loans with initial interest rates of less than or equal to 4.5%; and originated MSRs backed by loans with initial interest rates of more than 4.5%. Originated MSRs backed by loans with initial interest rates of less than or equal to 4.5% were accounted for using the amortization method. Originated MSRs backed by loans with initial interest rates of more than 4.5% were accounted for at fair value with changes in fair value recorded in current period income.

## MSRs Accounted for at Fair Value

Effective January 1, 2018, the Company accounts for all current classes of MSRs at fair value. Changes in fair value of MSRs accounted for at fair value are recognized in current period income as a component of Net loan servicing fees—from nonaffiliates—amortization, impairment, and changes fair value of mortgage servicing rights.

## MSRs Accounted for Using the MSR Amortization Method

The Company amortized MSRs that were accounted for using the MSR amortization method. MSR amortization was determined by applying the ratio of the net MSR cash flows projected for the current period to the projected total remaining net MSR cash flows. The estimated total net MSR cash flows were estimated at the beginning of each month using prepayment inputs applicable at that time.

The Company assessed MSRs accounted for using the amortization method for impairment monthly. Impairment occurred when the current fair value of the MSR decreased below the asset’s amortized cost. If MSRs were impaired, the impairment was recognized in current-period income and the carrying value (carrying value is amortized cost reduced by a valuation allowance) of the MSRs was adjusted through a valuation allowance. If the fair value of impaired MSRs subsequently increased, the Company recognized the increase in fair value in current-period earnings and adjusted the carrying value of the MSRs through a reduction in the valuation allowance to adjust the carrying value only to the extent of the valuation allowance.

The Company stratified its MSRs by risk characteristic when evaluating for impairment. For purposes of performing its MSR impairment evaluation, the Company stratified its servicing portfolio on the basis of certain risk characteristics including loan type (fixed-rate or adjustable-rate) and note interest rate. Fixed-rate loans were stratified into note interest rate pools of 50 basis points for note interest rates between 3.0% and 4.5% and a single pool for note interest rates below 3%. Adjustable rate loans with initial interest rates of 4.5% or less were evaluated in a single pool. If the fair value of MSRs in any of the note interest rate pools was below the amortized cost of the MSRs for that pool, impairment was recognized to the extent of the difference between the fair value and the existing carrying value for that pool.

The Company periodically reviewed the various impairment strata to determine whether the fair value of the impaired MSRs in a given stratum was likely to recover in the foreseeable future. When the Company deemed recovery of the fair value to be unlikely in the foreseeable future, a write-down of the cost of the MSRs for that stratum to its estimated recoverable value was charged to the valuation allowance.

Amortization and impairment of MSRs were included in current period income as a component of Net loan servicing fees - from nonaffiliates - Amortization, impairment and change in fair value of mortgage servicing rights.

## Servicing Advances

Servicing advances represent advances made on behalf of borrowers and the loans’ investors to fund delinquent balances for property tax and insurance premiums and out of pocket costs (e.g., preservation and restoration of mortgaged property, legal fees, appraisals and insurance premiums). Servicing advances are made in accordance with the Company’s servicing agreements and, when made, are deemed recoverable. The Company periodically reviews servicing advances for collectability. Servicing advances are written off when they are deemed uncollectible.

## Borrowings

Borrowings, other than Asset-backed financing of a VIE at fair value and Interest-only security payable at fair value, are carried at amortized cost. Costs of creating the facilities underlying the agreements and premiums received relating to advances under the facilities are included in the carrying value of the borrowing facilities and are amortized to Interest expense over the term of revolving borrowing facilities on the straight-line basis and for Exchangeable senior notes and Notes payable secured by credit risk transfer and mortgage servicing assets are amortized over the respective borrowings' contractual lives using the interest method.



## Asset-backed financing of a VIE at Fair Value

The certificates issued to nonaffiliates by the Company relating to the asset-backed financing are recorded as borrowings. Certificates issued to nonaffiliates have the right to receive principal and interest payments of the loans held by the consolidated VIE. Asset-backed financings of the VIE are carried at fair value. Changes in fair value are recognized in current period income as a component of Net gain on investments. The Company categorizes asset-backed financing of the VIE at fair value as a “Level 2” fair value liability.

## Liability for Losses Under Representations and Warranties

The Company provides for its estimate of the losses that it expects to incur in the future as a result of its breach of the representations and warranties that it provides to the purchasers and insurers of the loans it has sold. The Company’s agreements with the Agencies and other investors include representations and warranties related to the loans the Company sells to the Agencies and other investors. The representations and warranties require adherence to Agency and other investor origination and underwriting guidelines, including but not limited to the validity of the lien securing the loan, property eligibility, property value, loan amount, borrower credit, income and asset requirements, and compliance with applicable federal, state and local law.

In the event of a breach of its representations and warranties, the Company may be required to either repurchase the loans with the identified defects or indemnify the investor or insurer. In such cases, the Company bears any subsequent credit loss on the loans. The Company’s credit loss may be reduced by any recourse it has to correspondent sellers that, in turn, had sold such loans to the Company and breached similar or other representations and warranties. In such event, the Company has the right to seek a recovery of related repurchase losses from that correspondent seller.

The Company records a provision for losses relating to representations and warranties as part of its loan sale transactions. The method used to estimate the liability for representations and warranties is a function of the representations and warranties given and considers a combination of factors, including, but not limited to, estimated future defaults and loan defect rates, the estimated severity of loss in the event of default and the probability of reimbursement by the correspondent loan seller. The Company establishes a liability at the time loans are sold and periodically updates its liability estimate. The level of the liability for representations and warranties is reviewed and approved by the Company’s management credit committee.

The level 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 demand strategies, and other external conditions that may change over the lives of the underlying loans. The Company’s representations and warranties are generally not subject to stated limits of exposure. However, the Company believes that the current unpaid principal balance of loans sold by PMT to date represents the maximum exposure to repurchases related to representations and warranties.

## Loan Servicing Fees

Loan servicing fees and other remuneration are received by the Company for servicing residential loans. Loan servicing activities are described under Mortgage servicing rights above.

Loan servicing fee amounts are based upon fee schedules established by the applicable investor and upon the unpaid principal balance of the loans.

The Company’s obligation under its loan servicing agreements is fulfilled as the Company services the loans. Loan servicing fees are recorded net of Agency guarantee fees paid by the Company. Loan servicing fees are recorded when the loan payments are collected from the borrowers.

## Share-Based Compensation

The Company amortizes the fair value of previously granted share-based awards to Compensation expense over the vesting period using the graded vesting method. Expense relating to share-based awards is included in Compensation expense on the consolidated statements of income.

The initial cost of share-based awards is established at the Company’s closing share price adjusted for the portion of the awards expected to vest on the date of the award. The Company adjusts the cost of its share-based awards for changes in estimates of the portion of the awards it expects to be forfeited by grantees and for changes in expected performance attainment in each subsequent reporting period until the units have vested or have been forfeited, the service being provided is subsequently completed, or, under certain circumstances, is likely to be completed, whichever occurs first.



## Income Taxes

The Company has elected to be taxed as a REIT and the Company believes PMT complies with the provisions of the Internal Revenue Code applicable to REITs. Accordingly, the Company believes PMT will not be subject to federal income tax on that portion of its REIT taxable income that is distributed to shareholders as long as certain asset, income and share ownership tests are met. If PMT fails to qualify as a REIT, and does not qualify for certain statutory relief provisions, it will be subject to income taxes and may be precluded from qualifying as a REIT for the four tax years following the year of loss of the Company’s REIT qualification.

The Company’s taxable REIT subsidiary (“TRS”) is subject to federal and state income taxes. Income taxes are provided for using the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted rates expected to apply to taxable income in the years in which the Company expects those temporary differences to be recovered or settled. The effect on deferred taxes of a change in tax rates is recognized in income in the period in which the change occurs.

A valuation allowance is established if, in the Company’s judgment, realization of deferred tax assets is not more likely than not. The Company recognizes a tax benefit relating to tax positions it takes only if it is more likely than not that the position will be sustained upon examination by the appropriate taxing authority. A tax position that meets this standard is recognized as the largest amount that exceeds 50 percent likelihood of being realized upon settlement. The Company will classify any penalties and interest as a component of income tax expense.

## Recently Issued Accounting Pronouncement

In June 2016, the FASB issued Accounting Standard Update No. 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (“ASU 2016-13”). ASU 2016-13 replaces the existing measurement of the allowance for credit losses that is based on an incurred loss accounting model with an expected loss model, which requires the Company to use a forward-looking expected credit loss model for accounts receivable, loans and other financial instruments that are measured on the amortized cost basis. Most of the Company’s financial assets are measured at their fair values and are therefore not subject to the requirements of ASU 2016-13.

ASU 2016-13 is effective January 1, 2020 for the Company. Adoption of ASU 2016-13 will be applied using a modified retrospective approach through a cumulative-effect adjustment to retained earnings as of the effective date. Because of the Company’s current accounting, adoption of ASU 2016-13 on January 1, 2020 is not expected to have a significant effect on the Company’s allowance for credit losses on its assets subject to ASU 2016-13 due to the assets’ relatively short-term lives.

## 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.

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

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

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



The mortgage banking services agreement expires on September 12, 2020, subject to automatic renewal for additional 18-month periods, unless terminated earlier in accordance with the terms of the agreement.

The Company purchases 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:

<table><tr><td rowspan="3"></td><td colspan="5">Year ended December 31,</td></tr><tr><td colspan="2">2019</td><td colspan="2">2018</td><td>2017</td></tr><tr><td colspan="5">(in thousands)</td></tr><tr><td>Loan fulfillment fees earned by PLS</td><td>$     160,610</td><td>$     81,350</td><td>$     80,359</td><td></td><td></td></tr><tr><td>UPB of loans fulfilled by PLS</td><td>$     56,033,704</td><td>$     26,194,303</td><td>$     22,971,119</td><td></td><td></td></tr><tr><td>Sourcing fees received from PLS included in Net gain on loans acquired for sale</td><td>$     14,381</td><td>$     10,925</td><td>$     12,084</td><td></td><td></td></tr><tr><td>UPB of loans sold to PLS</td><td>$     47,937,306</td><td>$     36,415,933</td><td>$     40,561,241</td><td></td><td></td></tr><tr><td>Purchases of loans acquired for sale from PLS</td><td>$     6,255,915</td><td>$     3,343,028</td><td>$     904,097</td><td></td><td></td></tr><tr><td>Tax service fees paid to PLS</td><td>$     14,697</td><td>$     7,433</td><td>$     7,078</td><td></td><td></td></tr><tr><td></td><td colspan="2">December 31, 2019</td><td colspan="2">December 31, 2018</td><td></td></tr><tr><td></td><td colspan="4">(in thousands)</td><td></td></tr><tr><td>Loans included in Loans acquired for sale at fair value pending sale to PLS</td><td>$     490,383</td><td>$     86,308</td><td></td><td></td><td></td></tr></table>

## Loan Servicing

The Company, through its Operating Partnership, has an amended and restated loan servicing agreement with PLS dated as of September 12, 2016, pursuant to which PLS provides subservicing for the Company's portfolio of residential loans and its portfolio of MSRs. The servicing agreement provides for servicing fees earned by PLS that are based on a percentage of the loan's unpaid principal balance or fixed per loan monthly amounts based on the delinquency, bankruptcy and/or foreclosure status of the serviced loan or REO. PLS is also entitled to market-based fees and charges including boarding and deboarding fees, liquidation and disposition, assumption, modification and origination fees and a percentage of late charges relating to loans it services for the Company.

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

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

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

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



During the period in which the U.S. Department of Treasury’s Home Affordable Modification Plan (“HAMP”) was in effect, PLS, on behalf of the Company, was entitled to retain any incentive payments made to it and to which it was entitled under HAMP, provided, however, that with respect to any such incentive payments paid to PLS under HAMP in connection with a loan modification for which the Company previously paid PLS a modification fee, PLS reimbursed the Company an amount equal to the incentive payments.

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

The base servicing fees for non-distressed loans subserviced by PLS on the Company’s behalf are also calculated through a monthly per-loan dollar amount, with the actual dollar amount for each loan based on whether the loan is a fixed-rate or adjustable-rate loan. The base servicing fees for loans subserviced on the Company’s behalf are $7.50 per month for fixed-rate loans and $8.50 per month for adjustable-rate loans.

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

The term of the loan servicing agreement expires on September 12, 2020, subject to automatic renewal for additional 18-month periods, unless terminated earlier in accordance with the terms of the servicing agreement.

Pursuant to the terms of an amended and restated MSR recapture agreement, if PLS refinances loans for which the Company previously held the MSRs, PLS is generally required to transfer and convey to one of the Company’s wholly-owned subsidiaries cash in an amount equal to 30% of the fair market value of the MSRs related to all the loans so originated. The MSR recapture agreement expires, unless terminated earlier in accordance with the agreement, on September 12, 2020, subject to automatic renewal for additional 18-month periods.

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

<table><tr><td rowspan="3"></td><td colspan="5">Year ended December 31,</td></tr><tr><td rowspan="2">2019</td><td colspan="2">2018</td><td rowspan="2">2017</td><td rowspan="2"></td></tr><tr><td colspan="2">(in thousands)</td></tr><tr><td>Loan servicing fees:</td><td></td><td></td><td></td><td></td><td></td></tr><tr><td>Loans acquired for sale at fair value</td><td>$ 1,772</td><td>$ 1,037</td><td>$ 954</td><td></td><td></td></tr><tr><td>Loans at fair value</td><td>2,207</td><td>7,555</td><td>15,610</td><td></td><td></td></tr><tr><td>MSRs</td><td>44,818</td><td>33,453</td><td>26,500</td><td></td><td></td></tr><tr><td></td><td>$ 48,797</td><td>$ 42,045</td><td>$ 43,064</td><td></td><td></td></tr><tr><td>Average investment in:</td><td></td><td></td><td></td><td></td><td></td></tr><tr><td>Loans acquired for sale at fair value</td><td>$ 2,754,955</td><td>$ 1,577,395</td><td>$ 1,366,017</td><td></td><td></td></tr><tr><td>Loans at fair value:</td><td></td><td></td><td></td><td></td><td></td></tr><tr><td>Distressed</td><td>$ 75,251</td><td>$ 473,458</td><td>$ 1,152,930</td><td></td><td></td></tr><tr><td>Held in a VIE</td><td>$ 281,449</td><td>$ 301,398</td><td>$ 344,942</td><td></td><td></td></tr><tr><td>Average MSR portfolio UPB</td><td>$ 110,075,179</td><td>$ 80,500,212</td><td>$ 63,836,843</td><td></td><td></td></tr><tr><td>MSR recapture income recognized included in Net loan servicing fees — from PennyMac Financial Services, Inc.</td><td>$ 5,324</td><td>$ 2,192</td><td>$ 1,428</td><td></td><td></td></tr></table>



## Management Fees

The Company has a management agreement with PCM, which was amended and restated effective as of September 12, 2016. Under the management agreement, 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 of beneficial interest computed in accordance with GAAP and certain other non-cash charges determined after discussions between PCM and the Company’s independent trustees and after approval by a majority of the Company’s independent trustees.

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

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

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

The management agreement expires on September 12, 2020, subject to automatic renewal for additional 18-month periods, unless terminated earlier in accordance with the terms of the agreement. In the event of termination of the management agreement between the Company and PCM, PCM may be entitled to a termination fee in certain circumstances. The termination fee is equal to three times the sum of (a) the average annual base management fee, and (b) the average annual performance incentive fee earned by PCM, in each case during the 24-month period immediately preceding the date of termination.

Following is a summary of management fee expenses:

<table><tr><td rowspan="3"></td><td colspan="5">Year ended December 31,</td></tr><tr><td colspan="2">2019</td><td colspan="2">2018</td><td>2017</td></tr><tr><td colspan="5">(in thousands)</td></tr><tr><td>Base management</td><td>$     29,303</td><td>$     23,033</td><td>$     22,280</td><td></td><td></td></tr><tr><td>Performance incentive</td><td>7,189</td><td>1,432</td><td>304</td><td></td><td></td></tr><tr><td></td><td>$     36,492</td><td>$     24,465</td><td>$     22,584</td><td></td><td></td></tr><tr><td>Average shareholders&#x27; equity amounts used to calculate management fee expense</td><td>$     1,958,970</td><td>$     1,535,590</td><td>$     1,484,446</td><td></td><td></td></tr></table>

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.



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. With respect to the allocation of PCM’s and its affiliates’ compensation expenses, from and after September 12, 2016, PCM shall be reimbursed $120,000 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:

<table><tr><td rowspan="3"></td><td colspan="4">Year ended December 31,</td></tr><tr><td>2019</td><td colspan="2">2018</td><td>2017</td></tr><tr><td colspan="4">(in thousands)</td></tr><tr><td>Reimbursement of:</td><td></td><td></td><td></td><td></td></tr><tr><td>Common overhead incurred by PCM and its affiliates</td><td>$ 5,340</td><td>$ 4,640</td><td>$ 5,306</td><td></td></tr><tr><td>Compensation</td><td>480</td><td>480</td><td>—</td><td></td></tr><tr><td>Expenses incurred on the Company’s behalf, net</td><td>4,362</td><td>1,113</td><td>2,257</td><td></td></tr><tr><td></td><td>$ 10,182</td><td>$ 6,233</td><td>$ 7,563</td><td></td></tr><tr><td>Payments and settlements during the year (1)</td><td>$ 177,116</td><td>$ 71,943</td><td>$ 64,945</td><td></td></tr></table>

(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

On December 19, 2016, the Company, through a wholly-owned subsidiary, PennyMac Holdings, LLC (“PMH”), amended and restated a master spread acquisition and MSR servicing agreement with PLS (the “Spread Acquisition Agreement”), pursuant to which the Company may purchase from PLS, from time to time, the right to receive 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 the parties’ 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.



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

<table><tr><td rowspan="3"></td><td colspan="4">Year ended December 31,</td></tr><tr><td>2019</td><td colspan="2">2018</td><td>2017</td></tr><tr><td colspan="4">(in thousands)</td></tr><tr><td>ESS:</td><td></td><td></td><td></td><td></td></tr><tr><td>Received pursuant to a recapture agreement</td><td>$     1,757</td><td>$     2,688</td><td>$     5,244</td><td></td></tr><tr><td>Repayments and sales</td><td>$     40,316</td><td>$     46,750</td><td>$     54,980</td><td></td></tr><tr><td>Interest income</td><td>$     10,291</td><td>$     15,138</td><td>$     16,951</td><td></td></tr><tr><td>Net (loss) gain included in Net gain (loss) on investments:</td><td></td><td></td><td></td><td></td></tr><tr><td>Valuation changes</td><td>$      (9,256)</td><td>$     8,500</td><td>$      (19,350)</td><td></td></tr><tr><td>Recapture income</td><td>1,726</td><td>2,584</td><td>4,820</td><td></td></tr><tr><td></td><td>$      (7,530)</td><td>$     11,084</td><td>$      (14,530)</td><td></td></tr><tr><td></td><td colspan="2">December 31,</td><td></td><td></td></tr><tr><td></td><td>2019</td><td>2018</td><td></td><td></td></tr><tr><td></td><td colspan="2">(in thousands)</td><td></td><td></td></tr><tr><td>Excess servicing spread purchased from</td><td></td><td></td><td></td><td></td></tr><tr><td>PennyMac Financial Services, Inc. at fair value</td><td>$     178,586</td><td>$     216,110</td><td></td><td></td></tr></table>

## Financing Activities

PFSI held 75,000 of the Company’s common shares at both December 31, 2019 and December 31, 2018.

## Repurchase Agreement with PLS

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

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

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

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

In connection with its IPO, the Company conditionally agreed to reimburse PCM up to $2.9 million for underwriting fees paid to the IPO underwriters by PCM on the Company’s behalf (the “Conditional Reimbursement”). On February 1, 2019, the term of the reimbursement agreement was extended and now expires on February 1, 2023.



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

<table><tr><td rowspan="3"></td><td colspan="5">Year ended December 31,</td></tr><tr><td rowspan="2">2019</td><td colspan="2">2018</td><td rowspan="2">2017</td><td></td></tr><tr><td colspan="3">(in thousands)</td><td></td></tr><tr><td>Net repayments of assets sold under agreements to repurchase</td><td>$     23,513</td><td>$     13,103</td><td>$     5,872</td><td></td><td></td></tr><tr><td>Interest expense</td><td>$     6,302</td><td>$     7,462</td><td>$     8,038</td><td></td><td></td></tr><tr><td>Payment of conditional reimbursement to PCM</td><td>$     580</td><td>$     69</td><td>$     30</td><td></td><td></td></tr></table>

<table><tr><td></td><td>December 31, 2019</td><td>December 31, 2018</td></tr><tr><td></td><td colspan="2">(in thousands)</td></tr><tr><td>Assets sold to PFSI under agreement to repurchase</td><td>$     107,512</td><td>$     131,025</td></tr><tr><td>Conditional Reimbursement payable to PCM included in Due to PennyMac Financial Services, Inc.</td><td>$     221</td><td>$     801</td></tr></table>

Amounts Receivable from and Payable to PFSI

Amounts receivable from and payable to PFSI are summarized below:

<table><tr><td></td><td>December 31, 2019 (in thousands)</td><td>December 31, 2018 (in thousands)</td></tr><tr><td>Due from PFSI:</td><td></td><td></td></tr><tr><td>MSR recapture</td><td>$     149</td><td>$     179</td></tr><tr><td>Other</td><td>2,611</td><td>3,898</td></tr><tr><td></td><td>$     2,760</td><td>$     4,077</td></tr><tr><td>Due to PFSI:</td><td></td><td></td></tr><tr><td>Fulfillment fees</td><td>$     18,285</td><td>$     10,006</td></tr><tr><td>Correspondent production fees</td><td>10,606</td><td>2,071</td></tr><tr><td>Management fees</td><td>10,579</td><td>6,559</td></tr><tr><td>Loan servicing fees</td><td>4,659</td><td>4,841</td></tr><tr><td>Allocated expenses and expenses paid by PFSI on PMT&#x27;s behalf</td><td>3,724</td><td>9,066</td></tr><tr><td>Conditional Reimbursement</td><td>221</td><td>801</td></tr><tr><td>Interest on Assets sold to PFSI under agreement to repurchase</td><td>85</td><td>120</td></tr><tr><td></td><td>$     48,159</td><td>$     33,464</td></tr></table>

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 on the respective balance sheet items as summarized below:

<table><tr><td>Balance sheet line including advance amount</td><td>December 31, 2019 (in thousands)</td><td>December 31, 2018 (in thousands)</td></tr><tr><td>Loan servicing advances</td><td>$     48,971</td><td>$     67,666</td></tr><tr><td>Real estate acquired in settlement of loans</td><td>21,549</td><td>32,888</td></tr><tr><td></td><td>$     70,520</td><td>$     100,554</td></tr></table>



## 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:

<table><tr><td rowspan="3"></td><td colspan="4">Year ended December 31,</td></tr><tr><td rowspan="2">2019</td><td>2018</td><td rowspan="2">2017</td><td></td></tr><tr><td colspan="2">(in thousands)</td><td></td></tr><tr><td>Cash flows:</td><td></td><td></td><td></td><td></td></tr><tr><td>Proceeds from sales</td><td>$ 61,128,081</td><td>$ 29,369,656</td><td>$ 24,314,165</td><td></td></tr><tr><td>Loan servicing fees received net of guarantee fees</td><td>$ 295,390</td><td>$ 204,663</td><td>$ 164,776</td><td></td></tr></table>

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:

<table><tr><td rowspan="2"></td><td colspan="2">December 31, 2019</td><td colspan="2">December 31, 2018</td></tr><tr><td colspan="4">(in thousands)</td></tr><tr><td>UPB of loans outstanding</td><td>$ 130,663,117</td><td>$ 91,982,335</td><td></td><td></td></tr><tr><td>Collection Status (UPB)</td><td></td><td></td><td></td><td></td></tr><tr><td>Delinquency:</td><td></td><td></td><td></td><td></td></tr><tr><td>30-89 days delinquent</td><td>$ 1,014,094</td><td>$ 614,668</td><td></td><td></td></tr><tr><td>90 or more days delinquent:</td><td></td><td></td><td></td><td></td></tr><tr><td>Not in foreclosure</td><td>$ 258,036</td><td>$ 142,871</td><td></td><td></td></tr><tr><td>In foreclosure</td><td>$ 53,697</td><td>$ 40,445</td><td></td><td></td></tr><tr><td>Bankruptcy</td><td>$ 130,936</td><td>$ 75,947</td><td></td><td></td></tr><tr><td>Custodial funds managed by the Company (1)</td><td>$ 2,529,984</td><td>$ 970,328</td><td></td><td></td></tr></table>

(1) 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 income.

## Note 6—Variable Interest Entities

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

## Credit Risk Transfer Arrangements

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

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

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

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



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

Following is a summary of the CRT arrangements:

<table><tr><td rowspan="3"></td><td colspan="4">Year ended December 31,</td></tr><tr><td rowspan="2">2019</td><td colspan="2">2018</td><td rowspan="2">2017</td></tr><tr><td colspan="2">(in thousands)</td></tr><tr><td>UPB of loans sold</td><td>$ 47,748,300</td><td>$ 21,939,277</td><td>$ 14,529,548</td><td></td></tr><tr><td>Investments:</td><td></td><td></td><td></td><td></td></tr><tr><td>Deposits securing CRT arrangements</td><td>$ 933,370</td><td>$ 596,626</td><td>$ 152,641</td><td></td></tr><tr><td>Change in expected face amount of firm commitment to purchase CRT securities and commitments to fund Deposits securing CRT arrangements resulting from sales of loans</td><td>897,151</td><td>122,581</td><td>390,362</td><td></td></tr><tr><td></td><td>$ 1,830,521</td><td>$ 719,207</td><td>$ 543,003</td><td></td></tr><tr><td>Investment income:</td><td></td><td></td><td></td><td></td></tr><tr><td>Net gain on investments:</td><td></td><td></td><td></td><td></td></tr><tr><td>Derivative and CRT strip assets:</td><td></td><td></td><td></td><td></td></tr><tr><td>CRT strips</td><td></td><td></td><td></td><td></td></tr><tr><td>Realized</td><td>$ 32,200</td><td></td><td></td><td></td></tr><tr><td>Valuation changes</td><td>(1,874)</td><td></td><td></td><td></td></tr><tr><td></td><td>30,326</td><td></td><td></td><td></td></tr><tr><td>CRT derivatives</td><td></td><td></td><td></td><td></td></tr><tr><td>Realized</td><td>79,619</td><td>$ 86,928</td><td>$ 51,731</td><td></td></tr><tr><td>Valuation changes</td><td>(9,571)</td><td>25,347</td><td>83,030</td><td></td></tr><tr><td></td><td>70,048</td><td>112,275</td><td>134,761</td><td></td></tr><tr><td>Interest-only security payable at fair value</td><td>10,302</td><td>(19,332)</td><td>(11,033)</td><td></td></tr><tr><td></td><td>110,676</td><td>92,943</td><td>123,728</td><td></td></tr><tr><td>Firm commitments to purchase CRT securities</td><td>60,943</td><td>7,399</td><td>—</td><td></td></tr><tr><td></td><td>171,619</td><td>100,342</td><td>123,728</td><td></td></tr><tr><td>Net gain on loans acquired for sale - Fair value of firm commitment to purchase CRT securities recognized upon sale of loans</td><td>99,305</td><td>30,595</td><td>—</td><td></td></tr><tr><td>Interest income - Deposits securing CRT arrangements</td><td>34,229</td><td>15,441</td><td>4,291</td><td></td></tr><tr><td></td><td>$ 305,153</td><td>$ 146,378</td><td>$ 128,019</td><td></td></tr><tr><td>Payments made to settle losses on credit risk transfer arrangements</td><td>$ 5,165</td><td>$ 2,133</td><td>$ 1,396</td><td></td></tr></table>



<table><tr><td></td><td>December 31, 2019
(in thousands)</td><td>December 31, 2018</td></tr><tr><td>Carrying value of CRT arrangements:</td><td></td><td></td></tr><tr><td>Derivative and credit risk transfer strip assets</td><td></td><td></td></tr><tr><td>CRT strips</td><td>$     54,930</td><td>$      —</td></tr><tr><td>CRT derivatives</td><td>115,863</td><td>123,987</td></tr><tr><td></td><td>$     170,793</td><td>$     123,987</td></tr><tr><td>Firm commitment to purchase credit risk transfer securities at fair value</td><td>$     109,513</td><td>$     37,994</td></tr><tr><td>Deposits securing credit risk transfer arrangements</td><td>$     1,969,784</td><td>$     1,146,501</td></tr><tr><td>Interest-only security payable at fair value</td><td>$     25,709</td><td>$     36,011</td></tr><tr><td>CRT arrangement assets pledged to secure borrowings:</td><td></td><td></td></tr><tr><td>Derivative and credit risk transfer strip assets</td><td>$     142,183</td><td>$     87,976</td></tr><tr><td>Deposits securing CRT arrangements</td><td>$     1,969,784</td><td>$     1,146,501</td></tr><tr><td>Face amount of firm commitment to purchase CRT securities</td><td>$     1,502,203</td><td>$     605,052</td></tr><tr><td>UPB of loans - funded credit risk transfer arrangements</td><td>$     41,944,117</td><td>$     29,934,003</td></tr><tr><td>Collection status (UPB):</td><td></td><td></td></tr><tr><td>Delinquency</td><td></td><td></td></tr><tr><td>Current</td><td>$     41,355,622</td><td>$     29,633,133</td></tr><tr><td>30—89 days delinquent</td><td>$     463,331</td><td>$     228,296</td></tr><tr><td>90—180 days delinquent</td><td>$     106,234</td><td>$     39,826</td></tr><tr><td>180 or more days delinquent</td><td>$     8,802</td><td>$     4,208</td></tr><tr><td>Foreclosure</td><td>$     10,128</td><td>$     5,180</td></tr><tr><td>Bankruptcy</td><td>$     55,452</td><td>$     23,360</td></tr><tr><td>UPB of loans - firm commitment to purchase CRT securities</td><td>$     38,738,396</td><td>$     16,392,300</td></tr><tr><td>Collection status (UPB):</td><td></td><td></td></tr><tr><td>Delinquency</td><td></td><td></td></tr><tr><td>Current</td><td>$     38,581,080</td><td>$     16,329,044</td></tr><tr><td>30—89 days delinquent</td><td>$     146,256</td><td>$     61,035</td></tr><tr><td>90—180 days delinquent</td><td>$     9,109</td><td>$     2,221</td></tr><tr><td>180 or more days delinquent</td><td>$      —</td><td>$      —</td></tr><tr><td>Foreclosure</td><td>$     1,951</td><td>$      —</td></tr><tr><td>Bankruptcy</td><td>$     2,980</td><td>$     1,258</td></tr></table>

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 income statements.

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

<table><tr><td rowspan="3"></td><td colspan="4">Year ended December 31,</td></tr><tr><td rowspan="2">2019</td><td colspan="2">2018</td><td rowspan="2">2017</td></tr><tr><td colspan="2">(in thousands)</td></tr><tr><td>Interest income</td><td>$     11,734</td><td>$     11,813</td><td>$     14,425</td><td></td></tr><tr><td>Interest expense</td><td>$     11,324</td><td>$     10,821</td><td>$     13,184</td><td></td></tr></table>



<table><tr><td rowspan="2"></td><td colspan="2">December 31, 2019</td><td colspan="2">December 31, 2018</td></tr><tr><td colspan="4">(in thousands)</td></tr><tr><td>Loans at fair value</td><td>$     256,367</td><td>$     290,573</td><td></td><td></td></tr><tr><td>Asset-backed financing at fair value</td><td>$     243,360</td><td>$     276,499</td><td></td><td></td></tr><tr><td>Certificates retained at fair value</td><td>$     13,007</td><td>$     14,074</td><td></td><td></td></tr></table>

## Note 7—Fair Value

## Fair Value Accounting Elections

## 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:

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



<table><tr><td rowspan="3"></td><td colspan="5">December 31, 2018</td></tr><tr><td>Level 1</td><td>Level 2</td><td>Level 3</td><td>Total</td><td></td></tr><tr><td colspan="5">(in thousands)</td></tr><tr><td>Assets:</td><td></td><td></td><td></td><td></td><td></td></tr><tr><td>Short-term investments</td><td>$ 74,850</td><td>$ —</td><td>$ —</td><td>$ 74,850</td><td></td></tr><tr><td>Mortgage-backed securities at fair value</td><td>—</td><td>2,610,422</td><td>—</td><td>2,610,422</td><td></td></tr><tr><td>Loans acquired for sale at fair value</td><td>—</td><td>1,626,483</td><td>17,474</td><td>1,643,957</td><td></td></tr><tr><td>Loans at fair value</td><td>—</td><td>290,573</td><td>117,732</td><td>408,305</td><td></td></tr><tr><td>Excess servicing spread purchased from PFSI</td><td>—</td><td>—</td><td>216,110</td><td>216,110</td><td></td></tr><tr><td>Derivative assets:</td><td></td><td></td><td></td><td></td><td></td></tr><tr><td>CRT derivatives</td><td>—</td><td>—</td><td>123,987</td><td>123,987</td><td></td></tr><tr><td>Interest rate lock commitments</td><td>—</td><td>—</td><td>12,162</td><td>12,162</td><td></td></tr><tr><td>Repurchase agreement derivatives</td><td>—</td><td>—</td><td>14,511</td><td>14,511</td><td></td></tr><tr><td>Forward purchase contracts</td><td>—</td><td>14,845</td><td>—</td><td>14,845</td><td></td></tr><tr><td>Forward sale contracts</td><td>—</td><td>13</td><td>—</td><td>13</td><td></td></tr><tr><td>MBS put options</td><td>—</td><td>218</td><td>—</td><td>218</td><td></td></tr><tr><td>MBS call options</td><td>—</td><td>945</td><td>—</td><td>945</td><td></td></tr><tr><td>Call options on interest rate futures</td><td>5,137</td><td>—</td><td>—</td><td>5,137</td><td></td></tr><tr><td>Put options on interest rate futures</td><td>178</td><td>—</td><td>—</td><td>178</td><td></td></tr><tr><td>Total derivative assets before netting</td><td>5,315</td><td>16,021</td><td>150,660</td><td>171,996</td><td></td></tr><tr><td>Netting</td><td>—</td><td>—</td><td>—</td><td>(4,831)</td><td></td></tr><tr><td>Total derivative assets after netting</td><td>5,315</td><td>16,021</td><td>150,660</td><td>167,165</td><td></td></tr><tr><td>Firm commitment to purchase credit risk transfer securities at fair value</td><td>—</td><td>—</td><td>37,994</td><td>37,994</td><td></td></tr><tr><td>Mortgage servicing rights at fair value</td><td>—</td><td>—</td><td>1,162,369</td><td>1,162,369</td><td></td></tr><tr><td></td><td>$ 80,165</td><td>$ 4,543,499</td><td>$ 1,702,339</td><td>$ 6,321,172</td><td></td></tr><tr><td>Liabilities:</td><td></td><td></td><td></td><td></td><td></td></tr><tr><td>Asset-backed financing of a VIE at fair value</td><td>$ —</td><td>$ 276,499</td><td>$ —</td><td>$ 276,499</td><td></td></tr><tr><td>Interest-only security payable at fair value</td><td>—</td><td>—</td><td>36,011</td><td>36,011</td><td></td></tr><tr><td>Derivative liabilities:</td><td></td><td></td><td></td><td></td><td></td></tr><tr><td>Interest rate lock commitments</td><td>—</td><td>—</td><td>174</td><td>174</td><td></td></tr><tr><td>Forward purchase contracts</td><td>—</td><td>43</td><td>—</td><td>43</td><td></td></tr><tr><td>Forward sales contracts</td><td>—</td><td>29,273</td><td>—</td><td>29,273</td><td></td></tr><tr><td>Total derivative liabilities before netting</td><td>—</td><td>29,316</td><td>174</td><td>29,490</td><td></td></tr><tr><td>Netting</td><td>—</td><td>—</td><td>—</td><td>(23,576)</td><td></td></tr><tr><td>Total derivative liabilities after netting</td><td>—</td><td>29,316</td><td>174</td><td>5,914</td><td></td></tr><tr><td></td><td>$ —</td><td>$ 305,815</td><td>$ 36,185</td><td>$ 318,424</td><td></td></tr></table>



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 years presented:

Year ended December 31, 2019

<table><tr><td>Assets</td><td>Loans acquired for sale</td><td>Loans at fair value</td><td>Excess servicing spread</td><td>CRT strips</td><td>CRT derivatives</td><td>Interest rate lock commitments (1) (in thousands)</td><td>Repurchase agreement derivatives</td><td>Firm commitment to purchase CRT securities</td><td>Mortgage servicing rights</td><td>Total</td></tr><tr><td>Balance, December 31, 2018</td><td>$ 17,474</td><td>$117,732</td><td>$216,110</td><td>$ —</td><td>$ 123,987</td><td>$ 11,988</td><td>$ 14,511</td><td>$ 37,994</td><td>$1,162,369</td><td>$1,702,165</td></tr><tr><td>Purchases and issuances</td><td>26,823</td><td>1,077</td><td>—</td><td>—</td><td>—</td><td>65,051</td><td>10,057</td><td>—</td><td>—</td><td>103,008</td></tr><tr><td>Repayments and sales</td><td>(27,609)</td><td>(88,460)</td><td>(40,316)</td><td>(32,200)</td><td>(78,172)</td><td>—</td><td>(19,317)</td><td>(31,925)</td><td>(17)</td><td>(318,016)</td></tr><tr><td>Capitalization of interest and fees</td><td>—</td><td>2,318</td><td>10,291</td><td>—</td><td>—</td><td>—</td><td>—</td><td>—</td><td>—</td><td>12,609</td></tr><tr><td>Capitalization of advances</td><td>—</td><td>1,340</td><td>—</td><td>—</td><td>—</td><td>—</td><td>—</td><td>—</td><td>—</td><td>1,340</td></tr><tr><td>ESS received pursuant to a recapture agreement with PFSI</td><td>—</td><td>—</td><td>1,757</td><td>—</td><td>—</td><td>—</td><td>—</td><td>—</td><td>—</td><td>1,757</td></tr><tr><td>Amounts received as proceeds from sales of loans</td><td>—</td><td>—</td><td>—</td><td>—</td><td>—</td><td>—</td><td>—</td><td>99,305</td><td>837,706</td><td>937,011</td></tr><tr><td>Changes in fair value included in income arising from:</td><td></td><td></td><td></td><td></td><td></td><td></td><td></td><td></td><td></td><td></td></tr><tr><td>Changes in instrument-specific credit risk</td><td>—</td><td>3,737</td><td>—</td><td>—</td><td>—</td><td>—</td><td>—</td><td>—</td><td>—</td><td>3,737</td></tr><tr><td>Other factors</td><td>1,070</td><td>(10,906)</td><td>(9,256)</td><td>30,326</td><td>70,048</td><td>80,133</td><td>24</td><td>60,943</td><td>(464,353)</td><td>(241,971)</td></tr><tr><td></td><td>1,070</td><td>(7,169)</td><td>(9,256)</td><td>30,326</td><td>70,048</td><td>80,133</td><td>24</td><td>60,943</td><td>(464,353)</td><td>(238,234)</td></tr><tr><td>Transfers:</td><td></td><td></td><td></td><td></td><td></td><td></td><td></td><td></td><td></td><td></td></tr><tr><td>Loans to REO</td><td>—</td><td>(12,412)</td><td>—</td><td>—</td><td>—</td><td>—</td><td>—</td><td>—</td><td>—</td><td>(12,412)</td></tr><tr><td>Loans acquired for sale at fair value from &quot;Level 2&quot; to &quot;Level 3&quot; (2)</td><td>809</td><td>—</td><td>—</td><td>—</td><td>—</td><td>—</td><td>—</td><td>—</td><td></td><td>809</td></tr><tr><td>Firm commitment to purchase CRT securities to CRT strips</td><td>—</td><td>—</td><td>—</td><td>56,804</td><td>—</td><td>—</td><td>—</td><td>(56,804)</td><td>—</td><td>—</td></tr><tr><td>Interest rate lock commitments to loans acquired for sale (3)</td><td>—</td><td>—</td><td>—</td><td>—</td><td>—</td><td>(146,018)</td><td>—</td><td>—</td><td>—</td><td>(146,018)</td></tr><tr><td>Balance, December 31, 2019</td><td>$ 18,567</td><td>$ 14,426</td><td>$ 178,586</td><td>$ 54,930</td><td>$ 115,863</td><td>$ 11,154</td><td>$ 5,275</td><td>$ 109,513</td><td>$ 1,535,705</td><td>$2,044,019</td></tr><tr><td>Changes in fair value recognized during the year relating to assets still held at December 31, 2019</td><td>$ 121</td><td>$ (8,255)</td><td>$ (9,256)</td><td>$ (1,874)</td><td>$ (9,571)</td><td>$ 11,154</td><td>$ 107</td><td>$ 29,808</td><td>$ (464,353)</td><td>$ (452,119)</td></tr></table>

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

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

(3) 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.

<table><tr><td>Liabilities</td><td>Year ended December 31, 2019 (in thousands)</td></tr><tr><td>Interest-only security payable:</td><td></td></tr><tr><td>Balance, December 31, 2018</td><td>$ 36,011</td></tr><tr><td>Changes in fair value included in income arising from:</td><td></td></tr><tr><td>Changes in instrument-specific credit risk</td><td>—</td></tr><tr><td>Other factors</td><td>(10,302)</td></tr><tr><td>Balance, December 31, 2019</td><td>$ 25,709</td></tr><tr><td>Changes in fair value recognized during the year relating to liability outstanding at December 31, 2019</td><td>$ (10,302)</td></tr></table>



Year ended December 31, 2018

<table><tr><td>Assets</td><td>Loans acquired for sale</td><td>Loans at fair value</td><td>Excess servicing spread</td><td>Interest rate lock commitments (1)</td><td>CRT derivatives</td><td>Repurchase agreement derivatives</td><td>Firm commitment to purchase CRT securities</td><td>Mortgage servicing rights</td><td>Total</td></tr><tr><td>Balance, December 31, 2017</td><td>$ 8,135</td><td>$ 768,433</td><td>$ 236,534</td><td>$ 4,632</td><td>$ 98,640</td><td>$ 3,748</td><td>$ —</td><td>$ 91,459</td><td>$ 1,211,581</td></tr><tr><td>Cumulative effect of a change in accounting principle — Adoption of fair value accounting for mortgage servicing rights</td><td>—</td><td>—</td><td>—</td><td>—</td><td>—</td><td>—</td><td>—</td><td>773,035</td><td>773,035</td></tr><tr><td>Balance, January 1, 2018</td><td>8,135</td><td>768,433</td><td>236,534</td><td>4,632</td><td>98,640</td><td>3,748</td><td>—</td><td>864,494</td><td>1,984,616</td></tr><tr><td>Purchases and issuances</td><td>12,208</td><td>—</td><td>—</td><td>4,655</td><td>—</td><td>19,918</td><td>—</td><td>—</td><td>36,781</td></tr><tr><td>Repayments and sales</td><td>(12,934)</td><td>(600,638)</td><td>(46,750)</td><td>—</td><td>(86,928)</td><td>(8,964)</td><td>—</td><td>(100)</td><td>(756,314)</td></tr><tr><td>Capitalization of interest</td><td>—</td><td>7,439</td><td>15,138</td><td>—</td><td>—</td><td>—</td><td>—</td><td>—</td><td>22,577</td></tr><tr><td>Capitalization of advances</td><td>—</td><td>5,481</td><td>—</td><td>—</td><td>—</td><td>—</td><td>—</td><td>—</td><td>5,481</td></tr><tr><td>ESS received pursuant to a recapture agreement with PFSI</td><td>—</td><td>—</td><td>2,688</td><td>—</td><td>—</td><td>—</td><td>—</td><td>—</td><td>2,688</td></tr><tr><td>Amounts received as proceeds from sales of loan</td><td>—</td><td>—</td><td>—</td><td>—</td><td>—</td><td>—</td><td>30,595</td><td>356,755</td><td>387,350</td></tr><tr><td>Changes in fair value included in income arising from:</td><td></td><td></td><td></td><td></td><td></td><td></td><td></td><td></td><td></td></tr><tr><td>Changes in instrument-specific credit risk</td><td>—</td><td>2,907</td><td>—</td><td>—</td><td>—</td><td>—</td><td>—</td><td>—</td><td>2,907</td></tr><tr><td>Other factors</td><td>(16)</td><td>(18,104)</td><td>8,500</td><td>(14,016)</td><td>112,275</td><td>(191)</td><td>7,399</td><td>(58,780)</td><td>37,067</td></tr><tr><td></td><td>(16)</td><td>(15,197)</td><td>8,500</td><td>(14,016)</td><td>112,275</td><td>(191)</td><td>7,399</td><td>(58,780)</td><td>39,974</td></tr><tr><td>Transfers:</td><td></td><td></td><td></td><td></td><td></td><td></td><td></td><td></td><td></td></tr><tr><td>Loans to REO</td><td>—</td><td>(47,786)</td><td>—</td><td>—</td><td>—</td><td>—</td><td>—</td><td>—</td><td>(47,786)</td></tr><tr><td>Loans acquired for sale at fair value from &quot;Level 2&quot; to &quot;Level 3&quot; (2)</td><td>10,081</td><td>—</td><td>—</td><td>—</td><td>—</td><td>—</td><td>—</td><td>—</td><td>10,081</td></tr><tr><td>Interest rate lock commitments to loans acquired for sale (3)</td><td>—</td><td>—</td><td>—</td><td>16,717</td><td>—</td><td>—</td><td>—</td><td>—</td><td>16,717</td></tr><tr><td>Balance, December 31, 2018</td><td>$ 17,474</td><td>$ 117,732</td><td>$ 216,110</td><td>$ 11,988</td><td>$ 123,987</td><td>$ 14,511</td><td>$ 37,994</td><td>$ 1,162,369</td><td>$ 1,702,165</td></tr><tr><td>Changes in fair value recognized during the year relating to assets still held at December 31, 2018</td><td>$ (158)</td><td>$ (18,428)</td><td>$ 8,500</td><td>$ 11,988</td><td>$ 25,347</td><td>$ 77</td><td>$ 37,994</td><td>$ (58,780)</td><td>$ 6,540</td></tr></table>

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

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

(3) 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.

<table><tr><td>Liabilities</td><td>Year ended December 31, 2018 (in thousands)</td></tr><tr><td>Interest-only security payable:</td><td></td></tr><tr><td>Balance, December 31, 2017</td><td>$ 7,070</td></tr><tr><td>Changes in fair value included in income arising from:</td><td></td></tr><tr><td>Changes in instrument-specific credit risk</td><td>—</td></tr><tr><td>Other factors</td><td>28,941</td></tr><tr><td></td><td>28,941</td></tr><tr><td>Balance, December 31, 2018</td><td>$ 36,011</td></tr><tr><td>Changes in fair value recognized during the year relating to liability outstanding at December 31, 2018</td><td>$ 28,941</td></tr></table>



<table><tr><td rowspan="2">Assets</td><td colspan="9">Year ended December 31, 2017</td></tr><tr><td>Loans acquired for sale</td><td>Loans at fair value</td><td>Excess servicing spread</td><td>Interest rate lock commitments (1)</td><td>CRT derivatives</td><td>Repurchase agreement derivatives</td><td>Mortgage servicing rights</td><td>Total</td><td></td></tr><tr><td></td><td></td><td></td><td></td><td colspan="6">(in thousands)</td><td></td></tr><tr><td>Balance, January 31, 2016</td><td>$ 5,682</td><td>$1,354,572</td><td>$288,669</td><td>$ 3,777</td><td>$ 15,610</td><td>$ —</td><td>$ 64,136</td><td>$1,732,446</td><td></td><td></td></tr><tr><td>Purchases and issuances</td><td>11,415</td><td>—</td><td>—</td><td>36,005</td><td>—</td><td>3,864</td><td>79</td><td>51,363</td><td></td><td></td></tr><tr><td>Repayments and sales</td><td>(12,513)</td><td>(530,367)</td><td>(54,980)</td><td>—</td><td>(51,731)</td><td>—</td><td>—</td><td>(649,591)</td><td></td><td></td></tr><tr><td>Capitalization of interest</td><td>—</td><td>30,795</td><td>16,951</td><td>—</td><td>—</td><td>—</td><td>—</td><td>47,746</td><td></td><td></td></tr><tr><td>Capitalization of advances</td><td>—</td><td>18,923</td><td>—</td><td>—</td><td>—</td><td>—</td><td>—</td><td>18,923</td><td></td><td></td></tr><tr><td>ESS received pursuant to a recapture agreement with PFSI</td><td>—</td><td>—</td><td>5,244</td><td>—</td><td>—</td><td>—</td><td>—</td><td>5,244</td><td></td><td></td></tr><tr><td>Amounts received as proceeds from sales of loans</td><td>—</td><td>—</td><td>—</td><td>—</td><td>—</td><td>—</td><td>41,379</td><td>41,379</td><td></td><td></td></tr><tr><td>Changes in fair value included in income arising from:</td><td></td><td></td><td></td><td></td><td></td><td></td><td></td><td></td><td></td><td></td></tr><tr><td>Changes in instrument-specific credit risk</td><td>—</td><td>24,685</td><td>—</td><td>—</td><td>—</td><td>—</td><td>—</td><td>24,685</td><td></td><td></td></tr><tr><td>Other factors</td><td>1,045</td><td>(25,369)</td><td>(19,350)</td><td>45,304</td><td>134,761</td><td>(116)</td><td>(14,135)</td><td>122,140</td><td></td><td></td></tr><tr><td></td><td>1,045</td><td>(684)</td><td>(19,350)</td><td>45,304</td><td>134,761</td><td>(116)</td><td>(14,135)</td><td>146,825</td><td></td><td></td></tr><tr><td>Transfers:</td><td></td><td></td><td></td><td></td><td></td><td></td><td></td><td></td><td></td><td></td></tr><tr><td>Loans to REO</td><td>—</td><td>(104,806)</td><td>—</td><td>—</td><td>—</td><td>—</td><td>—</td><td>(104,806)</td><td></td><td></td></tr><tr><td>Loans acquired for sale at fair value from &quot;Level 2&quot; to &quot;Level 3&quot; (2)</td><td>2,506</td><td>—</td><td>—</td><td>—</td><td>—</td><td>—</td><td>—</td><td>2,506</td><td></td><td></td></tr><tr><td>Interest rate lock commitments to loans acquired for sale (3)</td><td>—</td><td>—</td><td>—</td><td>(80,454)</td><td>—</td><td>—</td><td>—</td><td>(80,454)</td><td></td><td></td></tr><tr><td>Balance, December 31, 2017</td><td>$ 8,135</td><td>$ 768,433</td><td>$236,534</td><td>$ 4,632</td><td>$ 98,640</td><td>$ 3,748</td><td>$ 91,459</td><td>$1,211,581</td><td></td><td></td></tr><tr><td>Changes in fair value recognized during the year relating to assets still held at December 31, 2017</td><td>$ 98</td><td>$ (10,594)</td><td>$ (19,350)</td><td>$ 4,632</td><td>$ 83,030</td><td>$ (116)</td><td>$ (14,135)</td><td>$ 43,565</td><td></td><td></td></tr></table>

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

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

(3) 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.

<table><tr><td>Liabilities</td><td>Year ended December 31, 2017 (in thousands)</td></tr><tr><td>Interest-only security payable:</td><td></td></tr><tr><td>Balance, December 31, 2016</td><td>$ 4,114</td></tr><tr><td>Changes in fair value included in income arising from:</td><td></td></tr><tr><td>Changes in instrument-specific credit risk</td><td>—</td></tr><tr><td>Other factors</td><td>2,956</td></tr><tr><td></td><td>2,956</td></tr><tr><td>Balance, December 31, 2017</td><td>$ 7,070</td></tr><tr><td>Changes in fair value recognized during the year relating to liability outstanding at December 31, 2017</td><td>$ 2,956</td></tr></table>



## 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:

<table><tr><td rowspan="2"></td><td colspan="3">December 31, 2019</td><td colspan="3">December 31, 2018</td></tr><tr><td>Principal amount due upon maturity</td><td>Difference (in thousands)</td><td>Fair value</td><td>Principal amount due upon maturity</td><td>Difference</td><td></td></tr><tr><td>Loans acquired for sale at fair value:</td><td></td><td></td><td></td><td></td><td></td><td></td></tr><tr><td>Current through 89 days delinquent:</td><td>$4,147,374</td><td>$4,010,444</td><td>$136,930</td><td>$1,643,465</td><td>$1,580,504</td><td>$62,961</td></tr><tr><td>90 or more days delinquent:</td><td></td><td></td><td></td><td></td><td></td><td></td></tr><tr><td>Not in foreclosure</td><td>572</td><td>615</td><td>(43)</td><td>492</td><td>492</td><td>—</td></tr><tr><td>In foreclosure</td><td>479</td><td>566</td><td>(87)</td><td>—</td><td>—</td><td>—</td></tr><tr><td></td><td>1,051</td><td>1,181</td><td>(130)</td><td>492</td><td>492</td><td>—</td></tr><tr><td></td><td>$4,148,425</td><td>$4,011,625</td><td>$136,800</td><td>$1,643,957</td><td>$1,580,996</td><td>$62,961</td></tr><tr><td>Loans at fair value:</td><td></td><td></td><td></td><td></td><td></td><td></td></tr><tr><td>Loans held in a consolidated VIE:</td><td></td><td></td><td></td><td></td><td></td><td></td></tr><tr><td>Current through 89 days delinquent</td><td>$255,706</td><td>$251,425</td><td>$4,281</td><td>$290,573</td><td>$294,617</td><td>$(4,044)</td></tr><tr><td>90 or more days delinquent:</td><td></td><td></td><td></td><td></td><td></td><td></td></tr><tr><td>Not in foreclosure</td><td>661</td><td>809</td><td>(148)</td><td>—</td><td>—</td><td>—</td></tr><tr><td>In foreclosure</td><td>—</td><td>—</td><td>—</td><td>—</td><td>—</td><td>—</td></tr><tr><td></td><td>661</td><td>809</td><td>(148)</td><td>—</td><td>—</td><td>—</td></tr><tr><td></td><td>256,367</td><td>252,234</td><td>4,133</td><td>290,573</td><td>294,617</td><td>(4,044)</td></tr><tr><td>Distressed loans:</td><td></td><td></td><td></td><td></td><td></td><td></td></tr><tr><td>Current through 89 days delinquent</td><td>3,179</td><td>6,202</td><td>(3,023)</td><td>28,806</td><td>43,043</td><td>(14,237)</td></tr><tr><td>90 or more days delinquent:</td><td></td><td></td><td></td><td></td><td></td><td></td></tr><tr><td>Not in foreclosure</td><td>4,897</td><td>13,154</td><td>(8,257)</td><td>37,288</td><td>71,732</td><td>(34,444)</td></tr><tr><td>In foreclosure</td><td>6,350</td><td>15,698</td><td>(9,348)</td><td>51,638</td><td>86,259</td><td>(34,621)</td></tr><tr><td></td><td>11,247</td><td>28,852</td><td>(17,605)</td><td>88,926</td><td>157,991</td><td>(69,065)</td></tr><tr><td></td><td>14,426</td><td>35,054</td><td>(20,628)</td><td>117,732</td><td>201,034</td><td>(83,302)</td></tr><tr><td></td><td>$270,793</td><td>$287,288</td><td>$ (16,495)</td><td>$408,305</td><td>$495,651</td><td>$(87,346)</td></tr></table>

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

<table><tr><td rowspan="2"></td><td colspan="6">Year ended December 31, 2019</td></tr><tr><td>Net gain on investments</td><td>Net gain on loans acquired for sale</td><td>Net loan servicing fees (in thousands)</td><td>Net interest income</td><td>Total</td><td></td></tr><tr><td>Assets:</td><td></td><td></td><td></td><td></td><td></td><td></td></tr><tr><td>Mortgage-backed securities at fair value</td><td>$ 77,283</td><td>$ —</td><td>$ —</td><td>$ —</td><td>$ (12,853)</td><td>$ 64,430</td></tr><tr><td>Credit risk transfer strips</td><td>30,326</td><td>—</td><td>—</td><td>—</td><td>—</td><td>30,326</td></tr><tr><td>Loans acquired for sale at fair value</td><td>—</td><td>163,244</td><td>—</td><td>—</td><td>—</td><td>163,244</td></tr><tr><td>Loans at fair value</td><td>714</td><td>—</td><td>—</td><td>3,420</td><td>4,134</td><td></td></tr><tr><td>ESS at fair value</td><td>(9,256)</td><td>—</td><td>—</td><td>10,291</td><td>1,035</td><td></td></tr><tr><td>Firm commitment to purchase credit risk transfer securities at fair value</td><td>60,943</td><td>99,305</td><td>—</td><td>—</td><td>—</td><td>160,248</td></tr><tr><td>MSRs at fair value</td><td>—</td><td>—</td><td>(464,353)</td><td>—</td><td>(464,353)</td><td></td></tr><tr><td></td><td>$ 160,010</td><td>$ 262,549</td><td>$ (464,353)</td><td>$ 858</td><td>$ (40,936)</td><td></td></tr><tr><td>Liabilities:</td><td></td><td></td><td></td><td></td><td></td><td></td></tr><tr><td>Interest-only security payable at fair value</td><td>$ 10,302</td><td>$ —</td><td>$ —</td><td>$ —</td><td>$ 10,302</td><td></td></tr><tr><td>Asset-backed financing of a VIE at fair value</td><td>(7,553)</td><td>—</td><td>—</td><td>(2,061)</td><td>(9,614)</td><td></td></tr><tr><td></td><td>$ 2,749</td><td>$ —</td><td>$ —</td><td>$ (2,061)</td><td>$ 688</td><td></td></tr></table>



<table><tr><td rowspan="2"></td><td colspan="6">Year ended December 31, 2018</td></tr><tr><td>Net gain on investments</td><td>Net gain on loans acquired for sale</td><td>Net loan servicing fees (in thousands)</td><td>Net interest income</td><td>Total</td><td></td></tr><tr><td>Assets:</td><td></td><td></td><td></td><td></td><td></td><td></td></tr><tr><td>Mortgage-backed securities at fair value</td><td>$ (11,262)</td><td>$ —</td><td>$ —</td><td>$ (4,793)</td><td>$ (16,055)</td><td></td></tr><tr><td>Loans acquired for sale at fair value</td><td>—</td><td>(5,298)</td><td>—</td><td>—</td><td>(5,298)</td><td></td></tr><tr><td>Loans at fair value</td><td>(23,696)</td><td>—</td><td>—</td><td>7,539</td><td>(16,157)</td><td></td></tr><tr><td>ESS at fair value</td><td>8,500</td><td>—</td><td>—</td><td>15,138</td><td>23,638</td><td></td></tr><tr><td>Firm commitment to purchase credit risk transfer securities at fair value</td><td>7,399</td><td>30,595</td><td>—</td><td>—</td><td>37,994</td><td></td></tr><tr><td>MSRs at fair value</td><td>—</td><td>—</td><td>(58,780)</td><td>—</td><td>(58,780)</td><td></td></tr><tr><td></td><td>$ (19,059)</td><td>$ 25,297</td><td>$ (58,780)</td><td>$ 17,884</td><td>$ (34,658)</td><td></td></tr><tr><td>Liabilities:</td><td></td><td></td><td></td><td></td><td></td><td></td></tr><tr><td>Interest-only security payable at fair value</td><td>$ (28,941)</td><td>$ —</td><td>$ —</td><td>$ —</td><td>$ (28,941)</td><td></td></tr><tr><td>Asset-backed financing of a VIE at fair value</td><td>9,610</td><td>—</td><td>—</td><td>(577)</td><td>9,033</td><td></td></tr><tr><td></td><td>$ (19,331)</td><td>$ —</td><td>$ —</td><td>$ (577)</td><td>$ (19,908)</td><td></td></tr><tr><td></td><td></td><td colspan="5">Year ended December 31, 2017</td></tr><tr><td></td><td>Net gain on investments</td><td>Net gain on loans acquired for sale</td><td>Net loan servicing fees (in thousands)</td><td>Net interest income</td><td>Total</td><td></td></tr><tr><td>Assets:</td><td></td><td></td><td></td><td></td><td></td><td></td></tr><tr><td>Mortgage-backed securities at fair value</td><td>$ 5,498</td><td>$ —</td><td>$ —</td><td>$ 5,367</td><td>$ 10,865</td><td></td></tr><tr><td>Loans acquired for sale at fair value</td><td>—</td><td>97,940</td><td>—</td><td>—</td><td>97,940</td><td></td></tr><tr><td>Loans at fair value</td><td>3,582</td><td>—</td><td>—</td><td>32,239</td><td>35,821</td><td></td></tr><tr><td>ESS at fair value</td><td>(19,350)</td><td>—</td><td>—</td><td>16,951</td><td>(2,399)</td><td></td></tr><tr><td>MSRs at fair value</td><td>—</td><td>—</td><td>(14,135)</td><td>—</td><td>(14,135)</td><td></td></tr><tr><td></td><td>$ (10,270)</td><td>$ 97,940</td><td>$ (14,135)</td><td>$ 54,557</td><td>$ 128,092</td><td></td></tr><tr><td>Liabilities:</td><td></td><td></td><td></td><td></td><td></td><td></td></tr><tr><td>Interest-only security payable</td><td>$ 2,956</td><td>$ —</td><td>$ —</td><td>$ —</td><td>$ 2,956</td><td></td></tr><tr><td>Asset-backed financing of a VIE at fair value</td><td>(3,426)</td><td>—</td><td>—</td><td>(1,781)</td><td>(5,207)</td><td></td></tr><tr><td></td><td>$ (470)</td><td>$ —</td><td>$ —</td><td>$ (1,781)</td><td>$ (2,251)</td><td></td></tr></table>

## 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 year based on fair value on a nonrecurring basis:

<table><tr><td>Real estate acquired in settlement of loans</td><td>Level 1</td><td>Level 2</td><td>Level 3</td><td>Total</td></tr><tr><td></td><td colspan="4">(in thousands)</td></tr><tr><td>December 31, 2019</td><td>$ —</td><td>$ —</td><td>$ 24,115</td><td>$ 24,115</td></tr><tr><td>December 31, 2018</td><td>$ —</td><td>$ —</td><td>$ 24,515</td><td>$ 24,515</td></tr></table>

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

<table><tr><td rowspan="3"></td><td colspan="4">Year ended December 31,</td></tr><tr><td>2019</td><td>2018</td><td>2017</td><td></td></tr><tr><td colspan="4">(in thousands)</td></tr><tr><td>Real estate asset acquired in settlement of loans</td><td>$ (2,155)</td><td>$ (4,434)</td><td>$ (11,882)</td><td></td></tr><tr><td>MSRs at lower of amortized cost or fair value</td><td>—</td><td>—</td><td>(5,876)</td><td></td></tr><tr><td></td><td>$ (2,155)</td><td>$ (4,434)</td><td>$ (17,758)</td><td></td></tr></table>



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 income.

## 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, Exchangeable senior notes, Notes payable secured by credit risk transfer and mortgage servicing assets 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.

The fair value of the Term Notes at December 31, 2019 was based on non-affiliate broker indications of fair value. The fair value of Term Notes at December 31, 2018 was estimated using a discounted cash flow approach using indications of market pricing spreads provided by non-affiliate brokers to develop an appropriate discount rate. Following are the fair values of the Notes payable secured by credit risk transfer and mortgage servicing rights and Exchangeable senior notes:

<table><tr><td rowspan="3">Instrument</td><td colspan="3">December 31, 2019</td><td colspan="3">December 31, 2018</td></tr><tr><td colspan="2">Carrying value</td><td>Fair value</td><td colspan="2">Carrying value</td><td>Fair value</td></tr><tr><td colspan="6">(in thousands)</td></tr><tr><td>Notes payable secured by credit risk transfer and mortgage servicing assets</td><td>$</td><td>1,696,295</td><td>$</td><td>1,705,544</td><td>$</td><td>445,573</td></tr><tr><td>Exchangeable senior notes</td><td>$</td><td>443,506</td><td>$</td><td>462,117</td><td>$</td><td>248,350</td></tr></table>

## 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 liabilities are carried at fair value with changes in fair value recognized in current period income. 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. FPSI’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 FPSI’s Capital Markets Risk Management staff and is reviewed by the FPSI’s Capital Markets Operations group.

The FAV group monitors the models used for valuation of the Company’s “Level 3” fair value assets and liabilities, including the models’ performance versus actual results, and reports those results to FPSI’s senior management valuation committee. During the periods presented, FPSI’s senior management valuation committee included the Company’s executive chairman, chief executive, chief financial, chief risk and deputy chief financial officers.

With respect to the non-IRLC “Level 3” valuations, the FAV group reports to FPSI’s senior management valuation committee, which oversees the valuations. The FAV group is responsible for reporting to FPSI’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 gain on investments in the consolidated statements of income.

## Loans

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

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

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

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

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

- before September 30, 2019, the distressed loans’ fair values were estimated using a discounted cash flow approach. Inputs to the discounted cash flow model included current interest rates, loan amount, payment status, property type, discount rates and forecasts of future interest rates, home prices, prepayment speeds, default speeds, loss severities or contracted selling price when applicable.

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

Before September 30, 2019, the significant unobservable inputs used in the fair value measurement of the Company’s loans at fair value were discount rate, home price projections, voluntary prepayment speeds and default speeds. Significant changes in any of those inputs in isolation could result in a significant change to the loans’ fair value measurement. Increases in home price projections are generally accompanied by an increase in voluntary prepayment speeds. Changes in the fair value of loans at fair value are included in Net gain on investments in the consolidated statements of income.



Following is a quantitative summary of key inputs used in the valuation of the Company’s “Level 3” loans at fair value:

<table><tr><td>Key inputs (1)</td><td>December 31, 2018</td></tr><tr><td>Fair value (in thousands)</td><td>$ 117,732</td></tr><tr><td>Discount rate</td><td></td></tr><tr><td>Range</td><td>2.8% - 19.6%</td></tr><tr><td>Weighted average</td><td>12.0%</td></tr><tr><td>Twelve-month projected housing price index change</td><td></td></tr><tr><td>Range</td><td>3.1% - 3.7%</td></tr><tr><td>Weighted average</td><td>3.4%</td></tr><tr><td>Voluntary prepayment speed (2)</td><td></td></tr><tr><td>Range</td><td>0.9% - 8.3%</td></tr><tr><td>Weighted average</td><td>3.2%</td></tr><tr><td>Total prepayment speed (3)</td><td></td></tr><tr><td>Range</td><td>8.3% - 22.0%</td></tr><tr><td>Weighted average</td><td>18.3%</td></tr></table>

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

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

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

Changes in fair value attributable to changes in instrument-specific credit risk were measured by the effect on fair value of the change in the respective loan’s delinquency status and performance history at year end from the later of the beginning of the year or acquisition date.

## Excess Servicing Spread Purchased from PFSI

The Company categorizes ESS as a “Level 3” fair value asset. The Company uses a discounted cash flow approach to estimate the fair value of ESS. The key inputs used in the estimation of the fair value of ESS include pricing spread (discount rate) and prepayment speed. Significant changes to those inputs in isolation may result in a significant change in the ESS fair value measurement. Changes in these key inputs are not necessarily directly related. Changes in the fair value of ESS are included in Net gain on investments in the consolidated statements of income.

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

<table><tr><td></td><td>December 31, 2019</td><td>December 31, 2018</td></tr><tr><td>Fair value (in thousands)</td><td>$ 178,586</td><td>$ 216,110</td></tr><tr><td>UPB of underlying loans (in thousands)</td><td>$ 19,904,571</td><td>$ 23,196,033</td></tr><tr><td>Average servicing fee rate (in basis points)</td><td>34</td><td>34</td></tr><tr><td>Average ESS rate (in basis points)</td><td>19</td><td>19</td></tr><tr><td>Key inputs (1)</td><td></td><td></td></tr><tr><td>Pricing spread (2)</td><td></td><td></td></tr><tr><td>Range</td><td>3.0% - 3.3%</td><td>2.8% - 3.2%</td></tr><tr><td>Weighted average</td><td>3.1%</td><td>3.1%</td></tr><tr><td>Annual total prepayment speed (3)</td><td></td><td></td></tr><tr><td>Range</td><td>8.7% - 16.2%</td><td>8.2% - 29.5%</td></tr><tr><td>Weighted average</td><td>11.0%</td><td>9.7%</td></tr><tr><td>Life (in years)</td><td></td><td></td></tr><tr><td>Range</td><td>2.7 - 7.2</td><td>1.6 - 7.6</td></tr><tr><td>Weighted average</td><td>6.1</td><td>6.8</td></tr></table>

(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 CPR. Equivalent life information is included for informational purposes.



Derivative and Credit Risk Transfer Strip Assets

Derivative Assets

CRT Derivatives

The Company categorizes CRT derivatives as “Level 3” fair value assets. 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 interest 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 indications of fair value of the certificates provided by the nonaffiliated brokers. The Company assesses the fair values it receives from nonaffiliated brokers using the discounted cash flow approach.

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

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

<table><tr><td></td><td>December 31, 2019 (dollars in thousands)</td><td>December 31, 2018</td></tr><tr><td>Fair value</td><td></td><td></td></tr><tr><td>CRT derivatives</td><td>$ 115,863</td><td>$ 123,987</td></tr><tr><td>Deposits securing CRT arrangements</td><td>$ 1,524,590</td><td>$ 1,146,501</td></tr><tr><td>UPB of loans in reference pools</td><td>$ 24,824,616</td><td>$ 29,934,003</td></tr><tr><td>Key inputs (1)</td><td></td><td></td></tr><tr><td>Discount rate</td><td></td><td></td></tr><tr><td>Range</td><td>4.7% - 5.3%</td><td>6.6% - 7.5%</td></tr><tr><td>Weighted average</td><td>5.2%</td><td>7.3%</td></tr><tr><td>Voluntary prepayment speed (2)</td><td></td><td></td></tr><tr><td>Range</td><td>16.4% - 18.5%</td><td>9.0% - 10.6%</td></tr><tr><td>Weighted average</td><td>17.9%</td><td>9.9%</td></tr><tr><td>Involuntary prepayment speed (3)</td><td></td><td></td></tr><tr><td>Range</td><td>0.2% - 0.3%</td><td>0.2% - 0.2%</td></tr><tr><td>Weighted average</td><td>0.3%</td><td>0.2%</td></tr><tr><td>Remaining loss expectation (4)</td><td></td><td></td></tr><tr><td>Range</td><td>0.1% - 0.1%</td><td>0.1% - 0.2%</td></tr><tr><td>Weighted average</td><td>0.1%</td><td>0.2%</td></tr></table>

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

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

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

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

## Interest Rate Lock Commitments

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

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



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

<table><tr><td></td><td>December 31, 2019</td><td>December 31, 2018</td></tr><tr><td>Fair value (in thousands) (1)</td><td>$ 11,154</td><td>$ 11,988</td></tr><tr><td>Key inputs (2)</td><td></td><td></td></tr><tr><td>Pull-through rate</td><td></td><td></td></tr><tr><td>Range</td><td>64.6% - 100%</td><td>45.4% - 100%</td></tr><tr><td>Weighted average</td><td>93.3%</td><td>91.8%</td></tr><tr><td>MSR fair value expressed as</td><td></td><td></td></tr><tr><td>Servicing fee multiple</td><td></td><td></td></tr><tr><td>Range</td><td>2.1 - 5.8</td><td>2.4 - 5.6</td></tr><tr><td>Weighted average</td><td>4.7</td><td>4.3</td></tr><tr><td>Percentage of UPB</td><td></td><td></td></tr><tr><td>Range</td><td>0.7% - 2.2%</td><td>0.6% - 3.6%</td></tr><tr><td>Weighted average</td><td>1.4%</td><td>2.2%</td></tr></table>

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

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

## Repurchase Agreement Derivatives

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

The significant unobservable inputs into the valuation of repurchase agreement derivative assets are the discount rate and the expected approval rate of the loans financed under the master repurchase agreement. The resulting ratios included in the Company’s fair value estimate were 99% and 97% at December 31, 2019 and 2018, respectively. Changes in fair value of repurchase agreement derivatives are included in Interest expense in the consolidated statements of income.

## Hedging Derivatives

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

## Credit Risk Transfer Strips

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

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



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

<table><tr><td></td><td colspan="2">December 31, 2019(dollars in thousands)</td></tr><tr><td>Carrying value</td><td></td><td></td></tr><tr><td>CRT strips</td><td>$     54,930</td><td></td></tr><tr><td>Deposits securing CRT arrangements</td><td>$     445,194</td><td></td></tr><tr><td>UPB of loans in the reference pools</td><td>$     17,119,501</td><td></td></tr><tr><td>Key inputs (1)</td><td></td><td></td></tr><tr><td>Discount rate</td><td>6.3%</td><td></td></tr><tr><td>Voluntary prepayment speed (2)</td><td>23.4%</td><td></td></tr><tr><td>Involuntary prepayment speed (3)</td><td>0.2%</td><td></td></tr><tr><td>Remaining loss expectation (4)</td><td>0.1%</td><td></td></tr></table>

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

## Firm commitment to purchase CRT securities

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

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

<table><tr><td rowspan="2"></td><td colspan="2">December 31, 2019</td><td colspan="2">December 31, 2018</td></tr><tr><td colspan="4">(dollars in thousands)</td></tr><tr><td>Fair value</td><td>$     109,513</td><td>$     37,994</td><td></td><td></td></tr><tr><td>UPB of loans in the reference pools</td><td>$     38,738,396</td><td>$     16,392,300</td><td></td><td></td></tr><tr><td>Key inputs (1)</td><td></td><td></td><td></td><td></td></tr><tr><td>Discount rate</td><td>6.5%</td><td>7.9%</td><td></td><td></td></tr><tr><td>Voluntary prepayment speed (2)</td><td>14.3%</td><td>12.4%</td><td></td><td></td></tr><tr><td>Involuntary prepayment speed (3)</td><td>0.1%</td><td>0.1%</td><td></td><td></td></tr><tr><td>Remaining loss expectation (4)</td><td>0.1%</td><td>0.1%</td><td></td><td></td></tr></table>

(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 related 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 the Manager’s staff appraisers when the Company obtains multiple indications of fair value and there is a significant difference between the fair values received. The Manager’s staff appraisers will attempt to resolve the difference between the indications of fair value. In circumstances where the appraisers are not able to generate adequate data to support a fair value conclusion, the staff appraisers will order an additional appraisal to determine 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 income.



## Mortgage Servicing Rights

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

The key inputs used in the estimation of the fair value of MSRs include the applicable pricing spread, the prepayment and default rates of the underlying loans (“prepayment speed”) and the annual per-loan cost to service loans, all of which are unobservable. Significant changes to any of those inputs in isolation could result in a significant change in the MSR fair value measurement. Changes in these key inputs are not necessarily directly related. Changes in the fair value of MSRs are included in Net loan servicing fees – Amortization, impairment and change in fair value of mortgage servicing rights in the consolidated statements of income.

MSRs are generally subject to loss in fair value when mortgage interest rates decrease. Decreasing mortgage interest rates normally encourage increased mortgage refinancing activity. Increased refinancing activity reduces the expected life of the underlying loans, thereby reducing the cash flows expected to accrue to the MSRs. 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:

<table><tr><td rowspan="3"></td><td colspan="5">Year ended December 31,</td></tr><tr><td>2019</td><td colspan="2">2018</td><td colspan="2">2017</td></tr><tr><td>Fair value</td><td>Fair value</td><td>Fair value</td><td colspan="2">Amortized cost</td></tr><tr><td></td><td colspan="5">(MSR recognized and UPB of underlying loan amounts in thousands)</td></tr><tr><td>MSR recognized</td><td>$ 837,706</td><td>$ 356,755</td><td>$ 41,379</td><td>$ 248,930</td><td></td></tr><tr><td>UPB of underlying loans</td><td>$ 59,951,884</td><td>$ 28,923,523</td><td>$ 3,724,642</td><td>$ 19,982,686</td><td></td></tr><tr><td>Weighted average annual servicing fee rate (in basis points)</td><td>31</td><td>26</td><td>25</td><td>25</td><td></td></tr><tr><td>Key inputs (1)</td><td></td><td></td><td></td><td></td><td></td></tr><tr><td>Pricing spread (2)</td><td></td><td></td><td></td><td></td><td></td></tr><tr><td>Range</td><td>5.6% - 9.9%</td><td>5.8% - 12.9%</td><td>7.6% - 7.6%</td><td>7.6% - 12.6%</td><td></td></tr><tr><td>Weighted average</td><td>6.1%</td><td>6.9%</td><td>7.6%</td><td>7.6%</td><td></td></tr><tr><td>Prepayment speed (3)</td><td></td><td></td><td></td><td></td><td></td></tr><tr><td>Range</td><td>8.5% - 26.1%</td><td>3.2% - 35.3%</td><td>7.9% - 29.5%</td><td>3.2% - 31.1%</td><td></td></tr><tr><td>Weighted average</td><td>11.7%</td><td>9.9%</td><td>10.7%</td><td>8.0%</td><td></td></tr><tr><td>Life (in years)</td><td></td><td></td><td></td><td></td><td></td></tr><tr><td>Range</td><td>3.1 - 7.7</td><td>2.3 - 11.9</td><td>2.8 - 8.5</td><td>2.6 - 11.9</td><td></td></tr><tr><td>Weighted average</td><td>6.8</td><td>7.6</td><td>7.3</td><td>8.3</td><td></td></tr><tr><td>Annual per-loan cost of servicing</td><td></td><td></td><td></td><td></td><td></td></tr><tr><td>Range</td><td>$78 - $78</td><td>$77 - $79</td><td>$79 - $79</td><td>$79 - $79</td><td></td></tr><tr><td>Weighted average</td><td>$78</td><td>$79</td><td>$79</td><td>$79</td><td></td></tr></table>

(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. Equivalent life information is included 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:

<table><tr><td></td><td>December 31, 2019</td><td>December 31, 2018</td></tr><tr><td></td><td colspan="2">(Carrying value, UPB of underlying loans and effect on fair value amounts in thousands)</td></tr><tr><td>Fair value</td><td>$     1,535,705</td><td>$     1,162,369</td></tr><tr><td>UPB of underlying loans</td><td>$     131,024,381</td><td>$     92,410,226</td></tr><tr><td>Weighted average annual servicing fee rate (in basis points)</td><td>28</td><td>25</td></tr><tr><td>Weighted average note interest rate</td><td>4.2%</td><td>4.2%</td></tr><tr><td>Key inputs (1):</td><td></td><td></td></tr><tr><td>Pricing spread (2)</td><td></td><td></td></tr><tr><td>Range</td><td>6.8% - 9.9%</td><td>5.7% - 10.7%</td></tr><tr><td>Weighted average</td><td>6.8%</td><td>5.8%</td></tr><tr><td>Effect on fair value of:</td><td></td><td></td></tr><tr><td>5% adverse change</td><td>$ (20,666)</td><td>$ (13,872)</td></tr><tr><td>10% adverse change</td><td>$ (40,783)</td><td>$ (27,428)</td></tr><tr><td>20% adverse change</td><td>$ (79,453)</td><td>$ (53,626)</td></tr><tr><td>Prepayment speed (3)</td><td></td><td></td></tr><tr><td>Range</td><td>10.2% - 22.0%</td><td>8.1% - 27.1%</td></tr><tr><td>Weighted average</td><td>12.1%</td><td>9.8%</td></tr><tr><td>Life (in years)</td><td></td><td></td></tr><tr><td>Range</td><td>2.4 - 6.5</td><td>2.7 - 7.3</td></tr><tr><td>Weighted average</td><td>6.3</td><td>7.1</td></tr><tr><td>Effect on fair value of:</td><td></td><td></td></tr><tr><td>5% adverse change</td><td>$ (35,768)</td><td>$ (21,661)</td></tr><tr><td>10% adverse change</td><td>$ (69,973)</td><td>$ (42,458)</td></tr><tr><td>20% adverse change</td><td>$ (134,068)</td><td>$ (81,660)</td></tr><tr><td>Annual per-loan cost of servicing</td><td></td><td></td></tr><tr><td>Range</td><td>$ 77 - $ 78</td><td>$ 77 - $ 78</td></tr><tr><td>Weighted average</td><td>$ 78</td><td>$ 78</td></tr><tr><td>Effect on fair value of:</td><td></td><td></td></tr><tr><td>5% adverse change</td><td>$ (9,964)</td><td>$ (8,298)</td></tr><tr><td>10% adverse change</td><td>$ (19,928)</td><td>$ (16,597)</td></tr><tr><td>20% adverse change</td><td>$ (39,856)</td><td>$ (33,194)</td></tr></table>

(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. Equivalent life information is included for informational purposes.

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



## Note 8—Mortgage Backed Securities

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

<table><tr><td rowspan="3"></td><td colspan="4">Year ended December 31,</td></tr><tr><td>2019</td><td colspan="2">2018</td><td>2017</td></tr><tr><td colspan="4">(in thousands)</td></tr><tr><td>Balance at beginning of year</td><td>$ 2,610,422</td><td>$ 989,461</td><td>$ 865,061</td><td></td></tr><tr><td>Purchases</td><td>1,250,289</td><td>1,810,877</td><td>251,872</td><td></td></tr><tr><td>Sales</td><td>(704,178)</td><td>—</td><td>(1,206)</td><td></td></tr><tr><td>Repayments</td><td>(381,330)</td><td>(173,862)</td><td>(126,385)</td><td></td></tr><tr><td>Changes in fair value included in income arising from:</td><td></td><td></td><td></td><td></td></tr><tr><td>Amortization of purchase premiums</td><td>(12,853)</td><td>(4,792)</td><td>(5,367)</td><td></td></tr><tr><td>Valuation adjustments</td><td>77,283</td><td>(11,262)</td><td>5,486</td><td></td></tr><tr><td></td><td>64,430</td><td>(16,054)</td><td>119</td><td></td></tr><tr><td>Balance at end of year</td><td>$ 2,839,633</td><td>$ 2,610,422</td><td>$ 989,461</td><td></td></tr></table>

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

<table><tr><td rowspan="2"></td><td colspan="4">December 31, 2019</td><td colspan="4">December 31, 2018</td></tr><tr><td>Principal balance</td><td>Unamortized purchase premiums</td><td>Accumulated valuation changes</td><td>Fair value</td><td>Principal balance</td><td>Unamortized purchase premiums</td><td>Accumulated valuation changes</td><td>Fairy value</td></tr><tr><td>Fannie Mae</td><td>$1,946,203</td><td>$ 29,657</td><td>$ 33,233</td><td>$2,009,093</td><td>$2,050,769</td><td>$ 39,488</td><td>$ (14,920)</td><td>$2,075,337</td></tr><tr><td>Freddie Mac</td><td>809,595</td><td>11,083</td><td>9,862</td><td>830,540</td><td>530,734</td><td>6,702</td><td>(2,351)</td><td>535,085</td></tr><tr><td></td><td>$2,755,798</td><td>$ 40,740</td><td>$ 43,095</td><td>$2,839,633</td><td>$2,581,503</td><td>$ 46,190</td><td>$ (17,271)</td><td>$2,610,422</td></tr></table>

(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 both December 31, 2019 and December 31, 2018.

## Note 9—Loans Acquired for Sale at Fair Value

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

<table><tr><td>Loan type</td><td colspan="2">December 31, 2019</td><td colspan="2">December 31, 2018</td></tr><tr><td></td><td colspan="4">(in thousands)</td></tr><tr><td>Agency-eligible</td><td>$</td><td>3,626,038</td><td>$</td><td>1,495,954</td></tr><tr><td>Held for sale to PLS — Government insured or guaranteed</td><td></td><td>490,383</td><td></td><td>86,308</td></tr><tr><td>Jumbo</td><td></td><td>13,437</td><td></td><td>44,221</td></tr><tr><td>Commercial real estate</td><td></td><td>1,015</td><td></td><td>8,559</td></tr><tr><td>Home equity lines of credit</td><td></td><td>4,632</td><td></td><td>—</td></tr><tr><td>Repurchased pursuant to representations and warranties</td><td></td><td>12,920</td><td></td><td>8,915</td></tr><tr><td></td><td>$</td><td>4,148,425</td><td>$</td><td>1,643,957</td></tr><tr><td>Loans pledged to secure:</td><td></td><td></td><td></td><td></td></tr><tr><td>Assets sold under agreements to repurchase</td><td>$</td><td>4,070,134</td><td>$</td><td>1,436,437</td></tr><tr><td>Mortgage loan participation purchase and sale agreements</td><td></td><td>—</td><td></td><td>185,442</td></tr><tr><td></td><td>$</td><td>4,070,134</td><td>$</td><td>1,621,879</td></tr></table>

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



## Note 10—Loans at Fair Value

Loans at fair value are comprised of loans that are not acquired for sale and, to the extent they are not held in a VIE securing an asset-backed financing, 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:

<table><tr><td rowspan="2">Loan type</td><td colspan="2">December 31, 2019</td><td colspan="2">December 31, 2018</td></tr><tr><td>Fair value</td><td>Unpaid principal balance</td><td>Fair value</td><td>Unpaid principal balance</td></tr><tr><td>Fixed interest rate jumbo loans held in a VIE</td><td>$ 256,367</td><td>$ 251,425</td><td>$ 290,573</td><td>$ 294,617</td></tr><tr><td>Distressed loans:</td><td></td><td></td><td></td><td></td></tr><tr><td>Nonperforming</td><td>11,247</td><td>28,852</td><td>88,926</td><td>157,991</td></tr><tr><td>Performing</td><td>3,179</td><td>6,202</td><td>28,806</td><td>43,043</td></tr><tr><td></td><td>14,426</td><td>35,054</td><td>117,732</td><td>201,034</td></tr><tr><td></td><td>$ 270,793</td><td>$ 286,479</td><td>$ 408,305</td><td>$ 495,651</td></tr><tr><td>Loans at fair value pledged to secure:</td><td></td><td></td><td></td><td></td></tr><tr><td>Assets sold under agreements to repurchase</td><td>$ 12,390</td><td></td><td>$ 108,693</td><td></td></tr><tr><td>Asset-backed financing of a VIE at fair value</td><td>256,367</td><td></td><td>290,573</td><td></td></tr><tr><td></td><td>$ 268,757</td><td></td><td>$ 399,266</td><td></td></tr></table>

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

Derivative and credit risk transfer assets are summarized below:

<table><tr><td rowspan="2"></td><td colspan="2">December 31, 2019</td><td colspan="2">December 31, 2018</td></tr><tr><td colspan="4">(in thousands)</td></tr><tr><td>Derivative assets</td><td>$ 147,388</td><td>$ 167,165</td><td></td><td></td></tr><tr><td>Credit risk transfer strips</td><td colspan="2">54,930</td><td>—</td><td></td></tr><tr><td></td><td>$ 202,318</td><td>$ 167,165</td><td></td><td></td></tr></table>

Credit Risk Transfer Strips

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

<table><tr><td rowspan="2"></td><td colspan="2">December 31, 2019</td></tr><tr><td colspan="2">(in thousands)</td></tr><tr><td>Credit risk transfer strips contractually restricted from sale (1)</td><td>$</td><td>17,629</td></tr><tr><td>Through June 13, 2020</td><td></td><td>37,301</td></tr><tr><td>To maturity</td><td></td><td>$ 54,930</td></tr><tr><td>CRT strips pledged to secure Assets sold under agreements to repurchase and Notes payable</td><td>$</td><td>54,930</td></tr></table>

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



## 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:

<table><tr><td rowspan="3">Instrument</td><td colspan="4">December 31, 2019</td><td colspan="4">December 31, 2018</td></tr><tr><td colspan="4">Fair value</td><td colspan="4">Fair value</td></tr><tr><td>Notional amount</td><td>Derivative assets</td><td>Derivative liabilities</td><td>Notional amount</td><td>Derivative assets</td><td>Derivative liabilities</td><td></td><td></td></tr><tr><td>Not subject to master netting arrangements:</td><td></td><td></td><td></td><td>(in thousands)</td><td></td><td></td><td></td><td></td></tr><tr><td>CRT derivatives</td><td>24,824,616</td><td>$ 115,863</td><td>$ —</td><td>29,934,003</td><td>$ 123,987</td><td>$ —</td><td></td><td></td></tr><tr><td>Interest rate lock commitments</td><td>3,199,680</td><td>11,726</td><td>572</td><td>1,688,516</td><td>12,162</td><td>174</td><td></td><td></td></tr><tr><td>Repurchase agreement derivatives</td><td></td><td>5,275</td><td>—</td><td></td><td>14,511</td><td>—</td><td></td><td></td></tr><tr><td>Subject to master netting agreements—used for economic hedging purposes:</td><td></td><td></td><td></td><td></td><td></td><td></td><td></td><td></td></tr><tr><td>Forward purchase contracts</td><td>5,883,198</td><td>7,525</td><td>3,600</td><td>3,072,223</td><td>14,845</td><td>43</td><td></td><td></td></tr><tr><td>Forward sale contracts</td><td>9,297,179</td><td>637</td><td>15,644</td><td>4,595,241</td><td>13</td><td>29,273</td><td></td><td></td></tr><tr><td>MBS put options</td><td>4,000,000</td><td>1,625</td><td>—</td><td>2,550,000</td><td>218</td><td>—</td><td></td><td></td></tr><tr><td>MBS call options</td><td>—</td><td>—</td><td>—</td><td>500,000</td><td>945</td><td>—</td><td></td><td></td></tr><tr><td>Call options on interest rate futures</td><td>2,662,500</td><td>3,809</td><td>—</td><td>512,500</td><td>5,137</td><td>—</td><td></td><td></td></tr><tr><td>Put options on interest rate futures</td><td>950,000</td><td>2,859</td><td>—</td><td>1,102,500</td><td>178</td><td>—</td><td></td><td></td></tr><tr><td>Swap futures</td><td>2,075,000</td><td>4,347</td><td>—</td><td>—</td><td>—</td><td>—</td><td></td><td></td></tr><tr><td>Swaptions</td><td>2,700,000</td><td>—</td><td>—</td><td>—</td><td>—</td><td>—</td><td></td><td></td></tr><tr><td>Bond futures</td><td>114,500</td><td>—</td><td>—</td><td>815,000</td><td>—</td><td>—</td><td></td><td></td></tr><tr><td>Total derivative instruments before netting</td><td></td><td>153,666</td><td>19,816</td><td></td><td>171,996</td><td>29,490</td><td></td><td></td></tr><tr><td>Netting</td><td></td><td>(6,278)</td><td>(13,393)</td><td></td><td>(4,831)</td><td>(23,576)</td><td></td><td></td></tr><tr><td></td><td></td><td>$ 147,388</td><td>$ 6,423</td><td></td><td>$ 167,165</td><td>$ 5,914</td><td></td><td></td></tr><tr><td>Margin deposits placed with derivatives counterparties, net</td><td></td><td>$ 7,114</td><td></td><td></td><td>$ 18,744</td><td></td><td></td><td></td></tr><tr><td>Derivative assets pledged to secure:</td><td></td><td></td><td></td><td></td><td></td><td></td><td></td><td></td></tr><tr><td>Notes payable</td><td></td><td>$ 115,110</td><td></td><td></td><td>$ —</td><td></td><td></td><td></td></tr><tr><td>Assets sold under agreements to repurchase</td><td></td><td>$ 27,073</td><td></td><td></td><td>$ 87,976</td><td></td><td></td><td></td></tr></table>

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

<table><tr><td rowspan="2">Instrument</td><td colspan="4">Notional amounts, year ended December 31, 2019</td></tr><tr><td>Beginning of year</td><td>Additions</td><td>Dispositions/expirations</td><td>End of year</td></tr><tr><td></td><td></td><td>(in thousands)</td><td></td><td></td></tr><tr><td>Forward purchase contracts</td><td>3,072,223</td><td>246,730,665</td><td>(243,919,690)</td><td>5,883,198</td></tr><tr><td>Forward sales contracts</td><td>4,595,241</td><td>322,636,252</td><td>(317,934,314)</td><td>9,297,179</td></tr><tr><td>MBS put options</td><td>2,550,000</td><td>56,150,000</td><td>(54,700,000)</td><td>4,000,000</td></tr><tr><td>MBS call options</td><td>500,000</td><td>13,200,000</td><td>(13,700,000)</td><td>—</td></tr><tr><td>Call options on interest rate futures</td><td>512,500</td><td>30,752,000</td><td>(28,602,000)</td><td>2,662,500</td></tr><tr><td>Put options on interest rate futures</td><td>1,102,500</td><td>31,662,400</td><td>(31,814,900)</td><td>950,000</td></tr><tr><td>Swap futures</td><td>—</td><td>5,371,970</td><td>(3,296,970)</td><td>2,075,000</td></tr><tr><td>Swaptions</td><td>—</td><td>3,700,000</td><td>(1,000,000)</td><td>2,700,000</td></tr><tr><td>Bond futures</td><td>815,000</td><td>23,330,100</td><td>(24,030,600)</td><td>114,500</td></tr></table>



<table><tr><td rowspan="2">Instrument</td><td colspan="4">Notional amounts, year ended December 31, 2018</td></tr><tr><td>Beginning of year</td><td>Additions</td><td>Dispositions/expirations</td><td>End of year</td></tr><tr><td></td><td colspan="4">(in thousands)</td></tr><tr><td>Forward purchase contracts</td><td>1,996,235</td><td>97,737,906</td><td>(96,661,918)</td><td>3,072,223</td></tr><tr><td>Forward sales contracts</td><td>2,565,271</td><td>129,544,573</td><td>(127,514,603)</td><td>4,595,241</td></tr><tr><td>MBS put options</td><td>2,375,000</td><td>9,575,000</td><td>(9,400,000)</td><td>2,550,000</td></tr><tr><td>MBS call options</td><td>—</td><td>2,000,000</td><td>(1,500,000)</td><td>500,000</td></tr><tr><td>Call options on interest rate futures</td><td>—</td><td>3,487,500</td><td>(2,975,000)</td><td>512,500</td></tr><tr><td>Put options on interest rate futures</td><td>550,000</td><td>13,302,500</td><td>(12,750,000)</td><td>1,102,500</td></tr><tr><td>Swap futures</td><td>275,000</td><td>—</td><td>(275,000)</td><td>—</td></tr><tr><td>Bond futures</td><td>—</td><td>5,274,400</td><td>(4,459,400)</td><td>815,000</td></tr><tr><td>Eurodollar future sale contracts</td><td>937,000</td><td>149,597</td><td>(1,086,597)</td><td>—</td></tr></table>

<table><tr><td rowspan="2">Instrument</td><td colspan="4">Notional amounts, year ended December 31, 2017</td></tr><tr><td>Beginning of year</td><td>Additions</td><td>Dispositions/expirations</td><td>End of year</td></tr><tr><td></td><td colspan="4">(in thousands)</td></tr><tr><td>Forward purchase contracts</td><td>4,840,707</td><td>71,768,061</td><td>(74,612,533)</td><td>1,996,235</td></tr><tr><td>Forward sales contracts</td><td>6,148,242</td><td>95,889,432</td><td>(99,472,403)</td><td>2,565,271</td></tr><tr><td>MBS put options</td><td>925,000</td><td>9,225,000</td><td>(7,775,000)</td><td>2,375,000</td></tr><tr><td>MBS call options</td><td>750,000</td><td>550,000</td><td>(1,300,000)</td><td>—</td></tr><tr><td>Call options on interest rate futures</td><td>200,000</td><td>825,000</td><td>(1,025,000)</td><td>—</td></tr><tr><td>Put options on interest rate futures</td><td>550,000</td><td>7,150,000</td><td>(7,150,000)</td><td>550,000</td></tr><tr><td>Swap futures</td><td>150,000</td><td>1,650,000</td><td>(1,525,000)</td><td>275,000</td></tr><tr><td>Eurodollar future sale contracts</td><td>1,351,000</td><td>404,000</td><td>(818,000)</td><td>937,000</td></tr><tr><td>Treasury future buy contracts</td><td>—</td><td>110,700</td><td>(110,700)</td><td>—</td></tr><tr><td>Treasury future sale contracts</td><td>—</td><td>110,700</td><td>(110,700)</td><td>—</td></table>

## 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 December 31, 2019 and December 31, 2018, 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.

<table><tr><td rowspan="2"></td><td colspan="3">December 31, 2019</td><td colspan="3">December 31, 2018</td></tr><tr><td>Gross amounts of recognized assets</td><td>Gross amounts offset in the consolidated balance sheet</td><td>Net amounts of assets presented in the consolidated balance sheet</td><td>Gross amounts of recognized assets</td><td>Gross amounts offset in the consolidated balance sheet</td><td>Net amount of assets presented in the consolidated balance sheet</td></tr><tr><td>Derivative assets</td><td></td><td></td><td></td><td></td><td></td><td></td></tr><tr><td>Not subject to master netting arrangements:</td><td></td><td></td><td></td><td></td><td></td><td></td></tr><tr><td>CRT derivatives</td><td>$ 115,863</td><td>$ —</td><td>$ 115,863</td><td>$ 123,987</td><td>$ —</td><td>$ 123,987</td></tr><tr><td>Interest rate lock commitments</td><td>11,726</td><td>—</td><td>11,726</td><td>12,162</td><td>—</td><td>12,162</td></tr><tr><td>Repurchase agreement derivatives</td><td>5,275</td><td>—</td><td>5,275</td><td>14,511</td><td>—</td><td>14,511</td></tr><tr><td></td><td>132,864</td><td>—</td><td>132,864</td><td>150,660</td><td>—</td><td>150,660</td></tr><tr><td>Subject to master netting arrangements:</td><td></td><td></td><td></td><td></td><td></td><td></td></tr><tr><td>Forward purchase contracts</td><td>7,525</td><td>—</td><td>7,525</td><td>14,845</td><td>—</td><td>14,845</td></tr><tr><td>Forward sale contracts</td><td>637</td><td>—</td><td>637</td><td>13</td><td>—</td><td>13</td></tr><tr><td>MBS put options</td><td>1,625</td><td>—</td><td>1,625</td><td>218</td><td>—</td><td>218</td></tr><tr><td>MBS call options</td><td>—</td><td>—</td><td>—</td><td>945</td><td>—</td><td>945</td></tr><tr><td>Call options on interest rate futures</td><td>3,809</td><td>—</td><td>3,809</td><td>5,137</td><td>—</td><td>5,137</td></tr><tr><td>Put options on interest rate futures</td><td>2,859</td><td>—</td><td>2,859</td><td>178</td><td>—</td><td>178</td></tr><tr><td>Swap futures</td><td>4,347</td><td>—</td><td>4,347</td><td>—</td><td>—</td><td>—</td></tr><tr><td>Netting</td><td>—</td><td>(6,278)</td><td>(6,278)</td><td>—</td><td>(4,831)</td><td>(4,831)</td></tr><tr><td></td><td>20,802</td><td>(6,278)</td><td>14,524</td><td>21,336</td><td>(4,831)</td><td>16,505</td></tr><tr><td></td><td>$ 153,666</td><td>$ (6,278)</td><td>$ 147,388</td><td>$ 171,996</td><td>$ (4,831)</td><td>$ 167,165</td></tr></table>

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.

<table><tr><td rowspan="2"></td><td colspan="3">December 31, 2019</td><td colspan="3">December 31, 2018</td></tr><tr><td>Net amount of assets presented in the consolidated balance sheet</td><td>Gross amounts not offset in the consolidated balance sheet</td><td>Cash collateral received</td><td>Net amount of assets presented in the consolidated balance sheet</td><td>Gross amounts not offset in the Consolidated balance sheet</td><td>Net amount</td></tr><tr><td>CRT derivatives</td><td>$ 115,863</td><td>$ —</td><td>$ —</td><td>$ 115,863</td><td>$ 123,987</td><td>$ —</td></tr><tr><td>Interest rate lock commitments</td><td>11,726</td><td>—</td><td>—</td><td>11,726</td><td>12,162</td><td>—</td></tr><tr><td>RJ O&#x27;Brien &amp; Associates, LLC</td><td>6,668</td><td>—</td><td>—</td><td>6,668</td><td>5,315</td><td>—</td></tr><tr><td>Deutsche Bank Securities LLC</td><td>5,398</td><td>—</td><td>—</td><td>5,398</td><td>14,511</td><td>—</td></tr><tr><td>Bank of America, N.A.</td><td>2,489</td><td>—</td><td>—</td><td>2,489</td><td>—</td><td>—</td></tr><tr><td>Wells Fargo Securities, LLC</td><td>1,882</td><td>—</td><td>—</td><td>1,882</td><td>2,800</td><td>—</td></tr><tr><td>J.P. Morgan Securities LLC</td><td>1,551</td><td>—</td><td>—</td><td>1,551</td><td>107</td><td>—</td></tr><tr><td>Morgan Stanley &amp; Co. LLC</td><td>821</td><td>—</td><td>—</td><td>821</td><td>243</td><td>—</td></tr><tr><td>Federal National Mortgage Association</td><td>—</td><td>—</td><td>—</td><td>—</td><td>5,619</td><td>—</td></tr><tr><td>Citigroup Global Markets Inc.</td><td>—</td><td>—</td><td>—</td><td>—</td><td>971</td><td>—</td></tr><tr><td>Other</td><td>990</td><td>—</td><td>—</td><td>990</td><td>1,450</td><td>—</td></tr><tr><td></td><td>$ 147,388</td><td>$ —</td><td>$ —</td><td>$ 147,388</td><td>$ 167,165</td><td>$ —</td></tr></table>



## 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.

<table><tr><td rowspan="2"></td><td colspan="3">December 31, 2019</td><td colspan="3">December 31, 2018</td></tr><tr><td>Gross amounts of recognized liabilities</td><td>Gross amounts offset in the consolidated balance sheet</td><td>Net amounts of liabilities presented in the consolidated balance sheet</td><td>Gross amounts of recognized liabilities</td><td>Gross amounts offset in the consolidated balance sheet</td><td>Net amount of liabilities presented in the consolidated balance sheet</td></tr><tr><td>Derivative liabilities:</td><td></td><td></td><td></td><td></td><td></td><td></td></tr><tr><td>Not subject to master netting arrangements — Interest rate lock commitments</td><td>$ 572</td><td>$ —</td><td>$ 572</td><td>$ 174</td><td>$ —</td><td>$ 174</td></tr><tr><td>Subject to master netting arrangements:</td><td></td><td></td><td></td><td></td><td></td><td></td></tr><tr><td>Forward purchase contracts</td><td>3,600</td><td>—</td><td>3,600</td><td>43</td><td>—</td><td>43</td></tr><tr><td>Forward sales contracts</td><td>15,644</td><td>—</td><td>15,644</td><td>29,273</td><td>—</td><td>29,273</td></tr><tr><td>Netting</td><td>—</td><td>(13,393)</td><td>(13,393)</td><td>—</td><td>(23,576)</td><td>(23,576)</td></tr><tr><td></td><td>19,244</td><td>(13,393)</td><td>5,851</td><td>29,316</td><td>(23,576)</td><td>5,740</td></tr><tr><td></td><td>19,816</td><td>(13,393)</td><td>6,423</td><td>29,490</td><td>(23,576)</td><td>5,914</td></tr><tr><td>Assets sold under agreements to repurchase:</td><td></td><td></td><td></td><td></td><td></td><td></td></tr><tr><td>UPB</td><td>6,649,179</td><td>—</td><td>6,649,179</td><td>4,777,486</td><td>—</td><td>4,777,486</td></tr><tr><td>Unamortized debt issuance costs</td><td>(289)</td><td>—</td><td>(289)</td><td>(459)</td><td>—</td><td>(459)</td></tr><tr><td></td><td>6,648,890</td><td>—</td><td>6,648,890</td><td>4,777,027</td><td>—</td><td>4,777,027</td></tr><tr><td></td><td>$6,668,706</td><td>$ (13,393)</td><td>$6,655,313</td><td>$4,806,517</td><td>$ (23,576)</td><td>$4,782,941</td></tr></table>



## 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.

<table><tr><td rowspan="3"></td><td colspan="5">December 31, 2019</td><td colspan="5">December 31, 2018</td></tr><tr><td rowspan="2">Net amount of liabilities presented in the consolidated balance sheet</td><td colspan="2">Gross amounts not offset in the consolidated balance sheet</td><td rowspan="2">Net amount of liabilities presented in the consolidated balance sheet</td><td rowspan="2">Net amount of liabilities presented in the Consolidated balance sheet</td><td rowspan="2">Gross amounts not offset in the consolidated balance sheet</td><td rowspan="2">Net amount of liabilities presented in the Consolidated balance sheet</td><td rowspan="2">Net amount of liabilities presented in the Consolidated balance sheet</td><td></td><td></td></tr><tr><td>Financial instruments</td><td>Cash collateral pledged</td><td>Financial instruments</td><td>Cash collateral pledged</td><td>Net amount</td></tr><tr><td>Interest rate lock commitments</td><td>$ 572</td><td>$ —</td><td>$ —</td><td>$ 572</td><td>$ 174</td><td>$ —</td><td>$ —</td><td>$ —</td><td>$ 174</td><td></td></tr><tr><td>J.P. Morgan Securities LLC</td><td>1,736,829</td><td>(1,736,829)</td><td>—</td><td>—</td><td>1,441,934</td><td>(1,441,934)</td><td>—</td><td>—</td><td>—</td><td></td></tr><tr><td>Bank of America, N.A.</td><td>1,339,291</td><td>(1,339,291)</td><td>—</td><td>—</td><td>1,307,923</td><td>(1,307,584)</td><td>—</td><td>—</td><td>339</td><td></td></tr><tr><td>Daiwa Capital Markets</td><td>906,439</td><td>(906,439)</td><td>—</td><td>—</td><td>254,332</td><td>(254,332)</td><td>—</td><td>—</td><td>—</td><td></td></tr><tr><td>Credit Suisse Securities (USA) LLC</td><td>720,411</td><td>(719,902)</td><td>—</td><td>509</td><td>512,662</td><td>(512,662)</td><td>—</td><td>—</td><td>—</td><td></td></tr><tr><td>Morgan Stanley &amp; Co. LLC</td><td>656,728</td><td>(656,728)</td><td>—</td><td>—</td><td>105,366</td><td>(105,366)</td><td>—</td><td>—</td><td>—</td><td></td></tr><tr><td>Citigroup Global Markets Inc.</td><td>412,999</td><td>(411,933)</td><td>—</td><td>1,066</td><td>99,626</td><td>(98,644)</td><td>—</td><td>982</td><td></td><td></td></tr><tr><td>Mizuho Securities</td><td>392,038</td><td>(391,627)</td><td>—</td><td>411</td><td>270,708</td><td>(270,708)</td><td>—</td><td>—</td><td></td><td></td></tr><tr><td>RBC Capital Markets, L.P.</td><td>290,388</td><td>(290,388)</td><td>—</td><td>—</td><td>57,795</td><td>(57,795)</td><td>—</td><td>—</td><td></td><td></td></tr><tr><td>BNP Paribas</td><td>116,155</td><td>(115,733)</td><td>—</td><td>422</td><td>162,636</td><td>(162,357)</td><td>—</td><td>279</td><td></td><td></td></tr><tr><td>Amherst Pierpont Securities LLC</td><td>80,309</td><td>(80,309)</td><td>—</td><td>—</td><td>—</td><td>—</td><td>—</td><td>—</td><td></td><td></td></tr><tr><td>Federal National Mortgage Association</td><td>1,996</td><td>—</td><td>—</td><td>1,996</td><td>12</td><td>—</td><td>—</td><td>12</td><td></td><td></td></tr><tr><td>Deutsche Bank Securities LLC</td><td>—</td><td>—</td><td>—</td><td>—</td><td>495,974</td><td>(495,974)</td><td>—</td><td>—</td><td></td><td></td></tr><tr><td>Wells Fargo Securities, LLC</td><td>—</td><td>—</td><td>—</td><td>—</td><td>70,130</td><td>(70,130)</td><td>—</td><td>—</td><td></td><td></td></tr><tr><td>Other</td><td>1,447</td><td>—</td><td>—</td><td>1,447</td><td>4,128</td><td>—</td><td>—</td><td>4,128</td><td></td><td></td></tr><tr><td></td><td>$6,655,602</td><td>$(6,649,179)</td><td>$ —</td><td>$ 6,423</td><td>$4,783,400</td><td>$(4,777,486)</td><td>$ —</td><td>$ 5,914</td><td></td><td></td></tr></table>

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

<table><tr><td rowspan="3">Derivative activity</td><td rowspan="3">Income statement line</td><td colspan="4">Year ended December 31,</td></tr><tr><td>2019</td><td>2018</td><td>2017</td><td></td></tr><tr><td colspan="4">(in thousands)</td></tr><tr><td>Interest rate lock commitments</td><td>Net gain on loans acquired for sale</td><td>$ (834)</td><td>$ 7,356</td><td>$ 81,309</td><td></td></tr><tr><td>CRT derivatives</td><td>Net gain on investments</td><td>$ 70,048</td><td>$ 112,275</td><td>$ 134,761</td><td></td></tr><tr><td>Repurchase agreement derivatives</td><td>Interest expense</td><td>$ 24</td><td>$ 191</td><td>$ 116</td><td></td></tr><tr><td>Hedged item:</td><td></td><td></td><td></td><td></td><td></td></tr><tr><td>Interest rate lock commitments and loans acquired for sale</td><td>Net gain on loans acquired for sale</td><td>$ (91,084)</td><td>$ 25,334</td><td>$ (31,245)</td><td></td></tr><tr><td>Mortgage servicing rights</td><td>Net loan servicing fees</td><td>$ 80,622</td><td>$ (35,550)</td><td>$ (2,512)</td><td></td></tr><tr><td>Fixed-rate assets and LIBOR-indexed repurchase agreements</td><td>Net gain on investments</td><td>$ 28,785</td><td>$ (4,152)</td><td>$ (18,468)</td><td></td></tr></table>



## Note 12—Real Estate Acquired in Settlement of Loans

Following is a summary of financial information relating to REO:

<table><tr><td rowspan="3"></td><td colspan="4">Year ended December 31,</td></tr><tr><td rowspan="2">2019</td><td colspan="2">2018</td><td>2017</td></tr><tr><td colspan="3">(in thousands)</td></tr><tr><td>Balance at beginning of year</td><td>$     85,681</td><td>$     162,865</td><td>$     274,069</td><td></td></tr><tr><td>Transfers:</td><td></td><td></td><td></td><td></td></tr><tr><td>From loans at fair value and advances</td><td>23,672</td><td>32,578</td><td>87,202</td><td></td></tr><tr><td>From real estate held for investment (1)</td><td>30,432</td><td>3,401</td><td>—</td><td></td></tr><tr><td>To real estate held for investment</td><td>—</td><td>(5,183)</td><td>(16,530)</td><td></td></tr><tr><td>Results of REO:</td><td></td><td></td><td></td><td></td></tr><tr><td>Valuation adjustments, net</td><td>(6,527)</td><td>(17,323)</td><td>(27,505)</td><td></td></tr><tr><td>Gain on sale, net</td><td>7,298</td><td>8,537</td><td>12,550</td><td></td></tr><tr><td></td><td>771</td><td>(8,786)</td><td>(14,955)</td><td></td></tr><tr><td>Sales</td><td>(74,973)</td><td>(99,194)</td><td>(166,921)</td><td></td></tr><tr><td>Balance at end of year</td><td>$     65,583</td><td>$     85,681</td><td>$     162,865</td><td></td></tr><tr><td></td><td></td><td></td><td></td><td></td></tr><tr><td></td><td colspan="2">December 31, 2019</td><td>December 31, 2018</td><td></td></tr><tr><td></td><td colspan="3">(in thousands)</td><td></td></tr><tr><td>REO pledged to secure assets sold under agreements to repurchase</td><td>$     40,938</td><td>$     1,939</td><td></td><td></td></tr><tr><td>REO held in a consolidated subsidiary whose stock is pledged to secure financings of such properties</td><td>—</td><td>38,259</td><td></td><td></td></tr><tr><td></td><td>$     40,938</td><td>$     40,198</td><td></td><td></td></tr></table>

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



## Note 13—Mortgage Servicing Rights

Carried at Fair Value:

Following is a summary of MSRs carried at fair value:

<table><tr><td rowspan="3"></td><td colspan="4">Year ended December 31,</td></tr><tr><td>2019</td><td colspan="2">2018</td><td>2017</td></tr><tr><td colspan="4">(in thousands)</td></tr><tr><td>Balance at beginning of year</td><td>$     1,162,369</td><td>$     91,459</td><td>$     64,136</td><td></td></tr><tr><td>Transfer of mortgage servicing rights from mortgage servicing rights carried at lower of amortized cost or fair value pursuant to a change in accounting principle</td><td>—</td><td>773,035</td><td>—</td><td></td></tr><tr><td>Balance after reclassification</td><td>1,162,369</td><td>864,494</td><td>64,136</td><td></td></tr><tr><td>Purchases</td><td>—</td><td>—</td><td>79</td><td></td></tr><tr><td>Sales</td><td>(17)</td><td>(100)</td><td>—</td><td></td></tr><tr><td>MSRs resulting from loan sales</td><td>837,706</td><td>356,755</td><td>41,379</td><td></td></tr><tr><td>Changes in fair value:</td><td></td><td></td><td></td><td></td></tr><tr><td>Due to changes in valuation inputs used in valuation model (1)</td><td>(262,031)</td><td>60,772</td><td>(9,762)</td><td></td></tr><tr><td>Other changes in fair value (2)</td><td>(202,322)</td><td>(119,552)</td><td>(4,373)</td><td></td></tr><tr><td></td><td>(464,353)</td><td>(58,780)</td><td>(14,135)</td><td></td></tr><tr><td>Balance at end of year</td><td>$     1,535,705</td><td>$     1,162,369</td><td>$     91,459</td><td></td></tr><tr><td></td><td>December 31, 2019</td><td>December 31, 2018</td><td></td><td></td></tr><tr><td></td><td colspan="2">(in thousands)</td><td></td><td></td></tr><tr><td>Fair value of mortgage servicing rights pledged to secure Assets sold under agreements to repurchase and Notes payable</td><td>$     1,510,651</td><td>$     1,139,582</td><td></td><td></td></tr></table>

(1) Primarily reflects changes in pricing spread (discount rate) and prepayment speed inputs, primarily due to changes in market interest rates.

(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 income and are summarized below:

<table><tr><td rowspan="3"></td><td colspan="4">Year ended December 31,</td></tr><tr><td>2019</td><td colspan="2">2018</td><td>2017</td></tr><tr><td colspan="4">(in thousands)</td></tr><tr><td>Contractually-specified servicing fees</td><td>$     295,390</td><td>$     204,663</td><td>$     164,776</td><td></td></tr><tr><td>Ancillary and other fees:</td><td></td><td></td><td></td><td></td></tr><tr><td>Late charges</td><td>1,658</td><td>974</td><td>718</td><td></td></tr><tr><td>Other</td><td>22,441</td><td>7,088</td><td>5,805</td><td></td></tr><tr><td></td><td>$     319,489</td><td>$     212,725</td><td>$     171,299</td><td></td></tr></table>



## Carried at Lower of Amortized Cost or Fair Value:

Following is a summary of MSRs carried at lower of amortized cost or fair value:

<table><tr><td rowspan="3"></td><td colspan="3">Year ended December 31,</td></tr><tr><td>2018</td><td>2017</td><td></td></tr><tr><td colspan="3">(in thousands)</td></tr><tr><td>Amortized cost:</td><td></td><td></td><td></td></tr><tr><td>Balance at beginning of year</td><td>$     772,870</td><td>$     606,103</td><td></td></tr><tr><td>Transfer of mortgage servicing right to mortgage servicing rights carried at fair value pursuant to a change in accounting principle</td><td>(772,870)</td><td>—</td><td></td></tr><tr><td>Balance after reclassification</td><td>—</td><td>606,103</td><td></td></tr><tr><td>MSRs resulting from mortgage loan sales</td><td>—</td><td>248,930</td><td></td></tr><tr><td>Amortization</td><td>—</td><td>(81,624)</td><td></td></tr><tr><td>Sales</td><td>—</td><td>(539)</td><td></td></tr><tr><td>Balance at end of year</td><td>—</td><td>772,870</td><td></td></tr><tr><td>Valuation allowance:</td><td></td><td></td><td></td></tr><tr><td>Balance at beginning of year</td><td>(19,548)</td><td>(13,672)</td><td></td></tr><tr><td>Reduction pursuant to a change in accounting principle</td><td>19,548</td><td>—</td><td></td></tr><tr><td>Balance after reclassification</td><td>—</td><td>(13,672)</td><td></td></tr><tr><td>Additions to valuation allowance</td><td>—</td><td>(5,876)</td><td></td></tr><tr><td>Balance at end of year</td><td>—</td><td>(19,548)</td><td></td></tr><tr><td>MSRs, net</td><td>$     753,322</td><td></td><td></td></tr><tr><td>Fair value at beginning of year</td><td>$     626,334</td><td></td><td></td></tr><tr><td>Fair value at end of year</td><td>$     772,940</td><td></td><td></td></tr></table>

## Note 14—Assets Sold Under Agreements to Repurchase

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

<table><tr><td rowspan="3"></td><td colspan="4">Year ended December 31,</td></tr><tr><td rowspan="2">2019</td><td colspan="2">2018</td><td>2017</td></tr><tr><td colspan="3">(dollars in thousands)</td></tr><tr><td>Weighted average interest rate (1)</td><td>3.25%</td><td>3.25%</td><td>2.49%</td><td></td></tr><tr><td>Average balance</td><td>$ 5,600,469</td><td>$ 3,901,772</td><td>$ 3,332,084</td><td></td></tr><tr><td>Total interest expense (2)</td><td>$ 178,211</td><td>$ 115,383</td><td>$ 93,580</td><td></td></tr><tr><td>Maximum daily amount outstanding</td><td>$ 8,577,065</td><td>$ 6,665,118</td><td>$ 4,242,600</td><td></td></tr></table>

(1) Excludes the effect of amortization of net debt issuance premiums of $4.0 million and $11.7 million for the years ended December 31, 2019 and 2018, respectively, and net debt issuance costs of $8.3 million for the year ended December 31, 2017.

(2) The Company’s interest expense relating to assets sold under agreements to repurchase for the years ended December 31, 2019, 2018, and 2017 includes recognition of incentives it received for financing certain of its loans acquired for sale satisfying certain consumer debt relief characteristics under a master repurchase agreement. During the years ended December 31, 2019, 2018, and 2017, the Company recognized $10.8 million, $19.7 million, and $3.1 million, respectively, in such incentives as a reduction of interest expense. The master repurchase agreement expired on August 21, 2019.



<table><tr><td rowspan="2">Carrying value:</td><td colspan="2">December 31, 2019</td><td colspan="2">December 31, 2018</td></tr><tr><td colspan="4">(dollars in thousands)</td></tr><tr><td>Unpaid principal balance</td><td>$     6,649,179</td><td>$     4,777,486</td><td></td><td></td></tr><tr><td>Unamortized debt issuance costs, net</td><td>(289)</td><td>(459)</td><td></td><td></td></tr><tr><td></td><td>$     6,648,890</td><td>$     4,777,027</td><td></td><td></td></tr><tr><td>Weighted average interest rate</td><td>2.85%</td><td>3.38%</td><td></td><td></td></tr><tr><td>Available borrowing capacity (1):</td><td></td><td></td><td></td><td></td></tr><tr><td>Committed</td><td>$     2,278,264</td><td>$     783,415</td><td></td><td></td></tr><tr><td>Uncommitted</td><td>$     2,278,264</td><td>$     2,325,246</td><td></td><td></td></tr><tr><td></td><td>$     2,278,264</td><td>$     3,108,661</td><td></td><td></td></tr><tr><td>Margin deposits placed with counterparties included in Other assets</td><td>$     91,871</td><td>$     43,676</td><td></td><td></td></tr><tr><td>Assets securing agreements to repurchase:</td><td></td><td></td><td></td><td></td></tr><tr><td>Mortgage-backed securities</td><td>$     2,839,633</td><td>$     2,610,422</td><td></td><td></td></tr><tr><td>Loans acquired for sale at fair value</td><td>$     4,070,134</td><td>$     1,436,437</td><td></td><td></td></tr><tr><td>Loans at fair value</td><td>$     12,390</td><td>$     108,693</td><td></td><td></td></tr><tr><td>CRT strips</td><td>$     27,073</td><td>$     87,976</td><td></td><td></td></tr><tr><td>CRT derivatives</td><td>$     40,938</td><td>$     40,198</td><td></td><td></td></tr><tr><td>Real estate acquired in settlement of loans</td><td>$     1,354,907</td><td>$     1,139,582</td><td></td><td></td></tr><tr><td>Real estate held for investment</td><td>$     445,194</td><td>$     1,146,501</td><td></td><td></td></tr><tr><td>MSRs (2)</td><td>$     1,354,907</td><td>$     1,139,582</td><td></td><td></td></tr><tr><td>Deposits securing CRT arrangements</td><td>$     445,194</td><td>$     1,146,501</td><td></td><td></td></tr></table>

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

(2) Beneficial interests in Freddie Mac and Fannie Mae MSRs are pledged as collateral under both Assets sold under agreements to repurchase and notes payable.

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

<table><tr><td>Remaining maturity at December 31, 2019</td><td>Unpaid principal balance (in thousands)</td></tr><tr><td>Within 30 days</td><td>$ 3,322,037</td></tr><tr><td>Over 30 to 90 days</td><td>3,036,754</td></tr><tr><td>Over 90 days to 180 days</td><td>290,388</td></tr><tr><td>Over 180 days to one year</td><td>—</td></tr><tr><td></td><td>$ 6,649,179</td></tr><tr><td>Weighted average maturity (in months)</td><td>1.4</td></tr></table>

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 December 31, 2019:

Loans, REO and MSRs

<table><tr><td>Counterparty</td><td>Amount at risk (in thousands)</td><td>Weighted average maturity</td><td>Facility maturity</td></tr><tr><td>Citibank, N.A.</td><td>$ 283,315</td><td>March 22, 2020</td><td>August 4, 2020</td></tr><tr><td>Credit Suisse First Boston Mortgage Capital LLC</td><td>$ 227,577</td><td>March 18, 2020</td><td>April 24, 2020</td></tr><tr><td>JPMorgan Chase &amp; Co.</td><td>$ 84,911</td><td>February 18, 2020</td><td>October 9, 2020</td></tr><tr><td>Bank of America, N.A.</td><td>$ 43,604</td><td>January 30, 2020</td><td>March 12, 2020</td></tr><tr><td>Morgan Stanley</td><td>$ 41,672</td><td>March 17, 2020</td><td>August 21, 2020</td></tr><tr><td>Royal Bank of Canada</td><td>$ 15,902</td><td>April 13, 2020</td><td>February 28, 2020</td></tr><tr><td>BNP Paribas</td><td>$ 6,370</td><td>March 16, 2020</td><td>July 31, 2020</td></tr></table>

Securities

<table><tr><td>Counterparty</td><td>Amount at risk (in thousands)</td><td>Weighted average maturity</td></tr><tr><td>JPMorgan Chase &amp; Co.</td><td>$ 22,279</td><td>January 21, 2020</td></tr><tr><td>Bank of America, N.A.</td><td>$ 12,078</td><td>January 14, 2020</td></tr><tr><td>Daiwa Capital Markets America Inc.</td><td>$ 28,234</td><td>January 17, 2020</td></tr><tr><td>Mizuho Securities</td><td>$ 12,214</td><td>January 11, 2020</td></tr><tr><td>Amherst Pierpont Securities LLC</td><td>$ 2,404</td><td>February 14, 2020</td></tr></table>

CRT arrangements

<table><tr><td>Counterparty</td><td>Amount at risk (in thousands)</td><td>Weighted average maturity</td></tr><tr><td>JPMorgan Chase &amp; Co.</td><td>$ 88,089</td><td>January 31, 2020</td></tr></table>

## Note 15—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:

<table><tr><td rowspan="3"></td><td colspan="4">Year ended December 31,</td></tr><tr><td>2019</td><td colspan="2">2018</td><td>2017</td></tr><tr><td colspan="4">(dollars in thousands)</td></tr><tr><td>Weighted average interest rate (1)</td><td>3.53%</td><td>3.42%</td><td>2.34%</td><td></td></tr><tr><td>Average balance</td><td>$ 40,036</td><td>$ 64,512</td><td>$ 61,807</td><td></td></tr><tr><td>Total interest expense</td><td>$ 1,570</td><td>$ 2,422</td><td>$ 1,593</td><td></td></tr><tr><td>Maximum daily amount outstanding</td><td>$ 207,065</td><td>$ 287,862</td><td>$ 136,854</td><td></td></tr></table>

(1) Excludes the effect of amortization of debt issuance costs of $158,000, $217,000 and $125,000 for the years ended December 31, 2019, 2018 and 2017, respectively.



<table><tr><td rowspan="2"></td><td>December 31, 2018</td></tr><tr><td>(dollars in thousands)</td></tr><tr><td>Carrying value:</td><td></td></tr><tr><td>Amount outstanding</td><td>$ 178,726</td></tr><tr><td>Unamortized debt issuance costs</td><td>(87)</td></tr><tr><td></td><td>$ 178,639</td></tr><tr><td>Weighted average interest rate</td><td>3.77%</td></tr><tr><td>Loans acquired for sale pledged to secure mortgage loan participation purchase and sale agreements</td><td>$ 185,442</td></tr></table>

## Note 16—Notes Payable

On October 16, 2019, the Company, through an indirect subsidiary, PMT CREDIT RISK TRANSFER TRUST 2019-3R, issued an aggregate principal amount of $375.0 million in secured term notes (the “2019-3R Notes”) to qualified institutional buyers under Rule 144A of the Securities Act of 1933, as amended (the “Securities Act”). The 2019-3R Notes bear interest at a rate equal to one-month LIBOR plus 2.70% per annum, with an initial payment date of November 27, 2019 and, with respect to each calendar month thereafter, a payment date that shall occur on the second business day following the latest underlying payment date of all of the underlying series in that calendar month. The 2019-3R Notes mature on October 27, 2022 or, if extended pursuant to the terms of the related indenture, October 29, 2024 (unless earlier redeemed in accordance with their terms).

On June 11, 2019, the Company, through its indirect subsidiary, PMT CREDIT RISK TRANSFER TRUST 2019-2R, issued an aggregate principal amount of $638.0 million in secured term notes (the “2019-2R Notes”) to qualified institutional buyers under Rule 144A of the Securities Act. The 2019-2R Notes bear interest at a rate equal to one-month LIBOR plus 2.75% per annum, with an initial payment date of June 27, 2019 and, with respect to each calendar month thereafter, a payment date that shall occur on the second business day following the latest underlying payment date of all of the underlying series in that calendar month. The 2019-2R Notes mature on May 29, 2023 or, if extended pursuant to the terms of the related indenture, June 28, 2025 (unless earlier redeemed in accordance with their terms).

On March 29, 2019, the Company, through its indirect subsidiary, PMT CREDIT RISK TRANSFER TRUST 2019-1R, issued an aggregate principal amount of $295.7 million in secured term notes (the “2019-1R Notes”) to qualified institutional buyers under Rule 144A of the Securities Act. The 2019-1R Notes bear interest at a rate equal to one-month LIBOR plus 2.00% per annum, with an initial payment date that occurred on April 29, 2019 and, with respect to each calendar month thereafter, a payment date that shall occur on the second business day following the latest underlying payment date of all of the underlying series in that calendar month. The 2019-1R Notes mature on March 27, 2022 or, if extended pursuant to the terms of the related indenture, March 29, 2024 (unless earlier redeemed in accordance with their terms).

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, payable each month beginning in May 2018, on the 25th day of such month or, if such 25th day is not a business day, the next business day. The 2018-FT1 Notes mature on April 25, 2023 or, if extended pursuant to the terms of the related term note indenture supplement, April 25, 2025 (unless earlier redeemed in accordance with their terms). The 2018-FT1 Notes rank pari passu with the Series 2017-VF1 Note dated December 20, 2017 (the “FMSR VFN”) pledged to Credit Suisse under an agreement to repurchase. The 2018-FT1 Notes and the FMSR VFN are secured by certain participation certificates relating to Fannie Mae MSRs and ESS relating to such MSRs.

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

On March 24, 2017, the Company, through PMC and PMH, entered into a Loan and Security Agreement with Barclays Bank PLC, pursuant to which PMC and PMH may finance certain mortgage servicing rights (inclusive of any related excess servicing spread arising therefrom and that may be transferred from PMC to PMH from time to time) relating to loans pooled into Freddie Mac securities (collectively, the “Freddie MSRs”), in an aggregate loan amount not to exceed $170 million. The note matured and was repaid on February 1, 2018.



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

<table><tr><td rowspan="3"></td><td colspan="4">Year ended December 31,</td></tr><tr><td>2019</td><td colspan="2">2018</td><td>2017</td></tr><tr><td colspan="4">(dollars in thousands)</td></tr><tr><td>Weighted average interest rate (1)</td><td colspan="2">4.70%</td><td>4.68%</td><td>5.71%</td></tr><tr><td>Average balance</td><td>$ 1,101,501</td><td>$ 300,035</td><td>$ 145,638</td><td></td></tr><tr><td>Total interest expense</td><td>$ 53,968</td><td>$ 14,623</td><td>$ 12,634</td><td></td></tr><tr><td>Maximum daily amount outstanding</td><td>$ 1,742,227</td><td>$ 450,000</td><td>$ 275,106</td><td></td></tr></table>

(1) Excludes the effect of amortization of debt issuance costs of $2.2 million, $681,000 and $4.2 million for the years ended December 31, 2019, 2018 and 2017, respectively.

<table><tr><td></td><td>December 31, 2019 (dollars in thousands)</td><td>December 31, 2018</td></tr><tr><td>Carrying value:</td><td></td><td></td></tr><tr><td>Amount outstanding</td><td>$ 1,702,262</td><td>$ 450,000</td></tr><tr><td>Unamortized debt issuance costs</td><td>(5,967)</td><td>(4,427)</td></tr><tr><td></td><td>$ 1,696,295</td><td>$ 445,573</td></tr><tr><td>Weighted average interest rate</td><td>4.30%</td><td>4.86%</td></tr><tr><td>Assets securing notes payable:</td><td></td><td></td></tr><tr><td>MSRs (1)</td><td>$ 1,510,651</td><td>$ 1,139,582</td></tr><tr><td>CRT Agreements:</td><td></td><td></td></tr><tr><td>Deposits securing CRT arrangements</td><td>$ 1,524,590</td><td>$ —</td></tr><tr><td>Derivative assets</td><td>$ 115,110</td><td>$ —</td></tr></table>

(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.

## Note 17—Exchangeable Notes

On November 4, 2019, PMC issued $210.0 million in principal amount of 5.50% exchangeable senior notes due 2024 (the "2024 Notes") in a private offering. The 2024 Notes will mature on November 1, 2024 unless repurchased or exchanged in accordance with their terms before such date. The 2024 Notes are fully and unconditionally guaranteed by the Company and are exchangeable for PMT common shares, cash, or a combination thereof, at PMC's election, at any time until the close of business on the second scheduled trading day immediately preceding the maturity date, subject to the satisfaction of certain conditions if the exchange occurs before August 1, 2024. The exchange rate initially equals 40.1010 common shares per $1,000 principal amount of the 2024 Notes and is subject to adjustment upon the occurrence of certain events, but will not be adjusted for any accrued and unpaid interest.

PMC issued in a private offering $250 million aggregate principal amount of exchangeable senior notes (the "2020 Notes", together with the 2024 Exchangeable Notes, the "Exchangeable Notes") due May 1, 2020. The 2020 Notes bear interest at a rate of 5.375% per year, payable semiannually. The 2020 Exchangeable Notes are exchangeable into common shares of the Company at a rate of 33.8667 common shares per $1,000 principal amount of the 2020 Notes as of December 31, 2019, which is an increase over the initial exchange rate of 33.5149. The increase in the calculated exchange rate was the result of quarterly cash dividends exceeding the quarterly dividend threshold amount of $0.57 per share, as provided in the related indenture.

Following is financial information relating to the Exchangeable Notes:

<table><tr><td rowspan="3"></td><td colspan="4">Year ended December 31,</td></tr><tr><td>2019</td><td colspan="2">2018</td><td>2017</td></tr><tr><td colspan="4">(in thousands)</td></tr><tr><td>Average balance</td><td>$ 279,207</td><td>$ 250,000</td><td>$ 250,000</td><td>$ 250,000</td></tr><tr><td>Total interest expense</td><td>$ 17,037</td><td>$ 14,601</td><td>$ 14,535</td><td></td></tr></table>



<table><tr><td rowspan="2"></td><td>December 31, 2019</td><td>December 31, 2018</td></tr><tr><td colspan="2">(in thousands)</td></tr><tr><td>Carrying value:</td><td></td><td></td></tr><tr><td>UPB</td><td>$ 460,000</td><td>$ 250,000</td></tr><tr><td>Unamortized debt issuance costs and conversion option</td><td>(16,494)</td><td>(1,650)</td></tr><tr><td></td><td>$ 443,506</td><td>$ 248,350</td></tr></table>

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

Following is a summary of financial information relating to the asset-backed financing of a VIE at fair value:

<table><tr><td rowspan="3"></td><td colspan="4">Year ended December 31,</td></tr><tr><td>2019</td><td>2018</td><td>2017</td><td></td></tr><tr><td colspan="4">(dollars in thousands)</td></tr><tr><td>Average balance</td><td>$ 267,539</td><td>$ 288,244</td><td>$ 331,409</td><td></td></tr><tr><td>Total interest expense</td><td>$ 11,324</td><td>$ 10,821</td><td>$ 13,184</td><td></td></tr><tr><td>Weighted average interest rate (1)</td><td>3.46%</td><td>3.55%</td><td>3.39%</td><td></td></tr></table>

(1) Excludes the effect of debt issuance costs of $2.1 million, $577,000 and $1.8 million, for the year ended December 31, 2019, 2018 and 2017, respectively.

<table><tr><td rowspan="3"></td><td>December 31, 2019</td><td>December 31, 2018</td></tr><tr><td colspan="2">(dollars in thousands)</td></tr><tr><td>Fair value</td><td>$ 243,360</td></tr><tr><td>UPB</td><td>$ 239,169</td><td>$ 276,499</td></tr><tr><td>Weighted average interest rate</td><td>3.51%</td><td>3.51%</td></tr></table>

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

## Note 19—Liability for Losses Under Representations and Warranties

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

<table><tr><td rowspan="3"></td><td colspan="4">Year ended December 31,</td></tr><tr><td>2019</td><td>2018</td><td>2017</td><td></td></tr><tr><td colspan="4">(in thousands)</td></tr><tr><td>Balance, beginning of year</td><td>$     7,514</td><td>$     8,678</td><td>$     15,350</td><td></td></tr><tr><td>Provision for losses:</td><td></td><td></td><td></td><td></td></tr><tr><td>Pursuant to loan sales</td><td>3,778</td><td>2,531</td><td>3,147</td><td></td></tr><tr><td>Reduction in liability due to change in estimate</td><td>(3,550)</td><td>(3,707)</td><td>(9,679)</td><td></td></tr><tr><td>(Losses incurred) recoveries, net</td><td>(128)</td><td>12</td><td>(140)</td><td></td></tr><tr><td>Balance, end of year</td><td>$     7,614</td><td>$     7,514</td><td>$     8,678</td><td></td></tr><tr><td>UPB of loans subject to representations and warranties at end of year</td><td>$122,163,186</td><td>$90,427,100</td><td>$71,416,333</td><td></td></tr></table>



## Note 20—Commitments and Contingencies

## Litigation

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

## Commitments

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

<table><tr><td rowspan="2"></td><td colspan="2">December 31, 2019</td></tr><tr><td>(in thousands)</td><td></td></tr><tr><td>Commitments to purchase loans acquired for sale</td><td>$     3,199,680</td><td></td></tr><tr><td>Face amount of firm commitment to purchase credit risk transfer securities</td><td>$     1,502,203</td><td></td></tr></table>

## Note 21—Shareholders' Equity

Preferred Shares of Beneficial Interest

Preferred shares of beneficial interest are summarized below:

<table><tr><td rowspan="2">Series</td><td rowspan="2">Description (1)</td><td rowspan="2">Number of shares</td><td rowspan="2">Liquidation preference</td><td rowspan="2">Issuance discount</td><td rowspan="2">Carrying value</td><td colspan="4">Dividends per share, year ended December 31,</td></tr><tr><td>2019</td><td>2018</td><td>2017</td><td></td></tr><tr><td>Fixed-to-floating rate cumulative redeemable preferred</td><td></td><td></td><td></td><td>(in thousands, except dividends per share)</td><td></td><td></td><td></td><td></td><td></td></tr><tr><td>A</td><td>8.125% Issued March 2017</td><td>4,600</td><td>$ 115,000</td><td>$ 3,828</td><td>$ 111,172</td><td>$ 2.03</td><td>$ 2.03</td><td>$ 2.03</td><td>$ 1.59</td></tr><tr><td>B</td><td>8.00% Issued July 2017</td><td>7,800</td><td>195,000</td><td>6,465</td><td>188,535</td><td>$ 2.00</td><td>$ 2.00</td><td>$ 2.00</td><td>$ 0.89</td></tr><tr><td></td><td></td><td>12,400</td><td>$ 310,000</td><td>$ 10,293</td><td>$ 299,707</td><td></td><td></td><td></td><td></td></tr></table>

(1) Par value is $0.01 per share.

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

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

The Company pays quarterly cumulative dividends on the Preferred Shares on the 15th day of each March, June, September and December, provided that if any dividend payment date is not a business day, then the dividend that would otherwise be payable on that dividend payment date may be paid on the following business day.



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 occurs, 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

Underwritten Equity Offerings

During 2019, the Company completed the following underwritten offerings of common shares:

<table><tr><td>Date</td><td>Number of common shares</td><td>Average price per share</td><td>Gross proceeds</td><td>Net proceeds</td></tr><tr><td>February 14, 2019</td><td>7,000</td><td>$ 20.64</td><td>$ 144,480</td><td>$ 142,470</td></tr><tr><td>May 9, 2019</td><td>8,127</td><td>$ 21.15</td><td>171,877</td><td>169,605</td></tr><tr><td>August 8, 2019</td><td>9,200</td><td>$ 21.75</td><td>200,100</td><td>197,773</td></tr><tr><td>December 13, 2019</td><td>9,200</td><td>$ 22.10</td><td>203,320</td><td>200,904</td></tr><tr><td></td><td>33,527</td><td>$ 21.47</td><td>$ 719,777</td><td>$ 710,752</td></tr></table>

## “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 $200,000,000. Following is a summary of the activities under the ATM equity offering program:

<table><tr><td>Quarter ended</td><td>Number of common shares</td><td>Average price per share</td><td>Gross proceeds</td><td>Net proceeds</td></tr><tr><td colspan="5">(Amounts in thousands, except average price per share)</td></tr><tr><td>March 31, 2019</td><td>221</td><td>$ 20.76</td><td>$ 4,588</td><td>$ 4,542</td></tr><tr><td>June 30, 2019</td><td>2,068</td><td>$ 21.68</td><td>$ 44,844</td><td>$ 44,395</td></tr><tr><td>September 30, 2019</td><td>2,537</td><td>$ 22.17</td><td>$ 56,256</td><td>$ 55,694</td></tr><tr><td>December 31, 2019</td><td>637</td><td>$ 22.32</td><td>$ 14,217</td><td>$ 14,074</td></tr><tr><td></td><td>5,463</td><td>$ 21.95</td><td>$ 119,905</td><td>$ 118,705</td></tr></table>

## Common Share Repurchases

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

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

<table><tr><td rowspan="3"></td><td colspan="5">Year ended December 31,</td><td rowspan="3">Cumulative total (1)</td></tr><tr><td>2018</td><td>2017</td><td>2016</td><td>2015</td><td></td></tr><tr><td colspan="5">(in thousands)</td></tr><tr><td>Common shares repurchased</td><td>671</td><td>5,647</td><td>7,368</td><td>1,045</td><td>14,731</td><td></td></tr><tr><td>Cost of common shares repurchased</td><td>$ 10,719</td><td>$ 91,198</td><td>$ 98,370</td><td>$ 16,338</td><td>$ 216,625</td><td></td></tr></table>

(1) Amounts represent the share repurchase program total from its inception in August 2015 through December 31, 2019.

The repurchased common shares were canceled upon settlement of the repurchase transactions and returned to the authorized but unissued common share pool.



## Conditional Reimbursement of IPO Underwriting Costs

As more fully described in Note 4—Transactions with Related Parties, the Company has a Reimbursement Agreement, by and among the Company, the Operating Partnership and the Manager. The Reimbursement Agreement provides that, to the extent the Company is required to pay the Manager performance incentive fees under the management agreement, the Company will reimburse the Manager for underwriting costs it paid on the IPO offering date at a rate of $10 in reimbursement for every $100 of performance incentive fees earned. The Company paid reimbursements totaling $393,000, $68,000 and $30,000 during the years ended December 31, 2019, 2018 and 2017, respectively.

The Reimbursement Agreement also provides for the payment to the IPO underwriters of the amount that the Company agreed to pay to them at the time of the IPO if the Company satisfied certain performance measures over a specified period. As the Manager earns performance incentive fees under the management agreement, the IPO underwriters will be paid at a rate of $20 of payments for every $100 of performance incentive fees earned by PCM. The Reimbursement Agreement was amended and now expires on February 1, 2023. The Company made payments under the Reimbursement Agreement totaling $580,000, $137,000 and $61,000 during the years ended December 31, 2019, 2018 and 2017, respectively. During the year ended December 31, 2019, certain of the IPO underwriters waived their rights to approximately $1.1 million of conditional underwriting fees. The Company recorded the reduction of conditional underwriting fees in Other income during the year ended December 31, 2019.

## Note 22—Net Gain on Investments

Net gain on investments is summarized below:

<table><tr><td rowspan="3"></td><td colspan="4">Year ended December 31,</td></tr><tr><td rowspan="2">2019</td><td colspan="2">2018</td><td rowspan="2">2017</td></tr><tr><td colspan="2">(in thousands)</td></tr><tr><td>From nonaffiliates:</td><td></td><td></td><td></td><td></td></tr><tr><td>Mortgage-backed securities</td><td>$     77,283</td><td>$    (11,262)</td><td>$     5,498</td><td></td></tr><tr><td>Loans at fair value:</td><td></td><td></td><td></td><td></td></tr><tr><td>Held in a VIE</td><td>7,883</td><td>(8,499)</td><td>4,266</td><td></td></tr><tr><td>Distressed</td><td>(7,169)</td><td>(15,197)</td><td>(684)</td><td></td></tr><tr><td>CRT arrangements</td><td>110,676</td><td>92,943</td><td>123,728</td><td></td></tr><tr><td>Firm commitment to purchase CRT securities</td><td>60,943</td><td>7,399</td><td>—</td><td></td></tr><tr><td>Asset-backed financing of a VIE at fair value</td><td>(7,553)</td><td>9,610</td><td>(3,426)</td><td></td></tr><tr><td>Hedging derivatives</td><td>28,785</td><td>(4,152)</td><td>(18,468)</td><td></td></tr><tr><td></td><td>270,848</td><td>70,842</td><td>110,914</td><td></td></tr><tr><td>From PFSI—ESS</td><td>(7,530)</td><td>11,084</td><td>(14,530)</td><td></td></tr><tr><td></td><td>$     263,318</td><td>$     81,926</td><td>$     96,384</td><td></td></tr></table>



## Note 23—Net Gain on Loans Acquired for Sale

Net gain on loans acquired for sale is summarized below:

<table><tr><td rowspan="3"></td><td colspan="3">Year ended December 31,</td></tr><tr><td>2019</td><td>2018</td><td>2017</td></tr><tr><td colspan="3">(in thousands)</td></tr><tr><td>From nonaffiliates:</td><td></td><td></td><td></td></tr><tr><td>Cash loss:</td><td></td><td></td><td></td></tr><tr><td>Loans</td><td>$ (687,317)</td><td>$ (363,271)</td><td>$ (209,898)</td></tr><tr><td>Hedging activities</td><td>(88,633)</td><td>9,172</td><td>(15,288)</td></tr><tr><td></td><td>(775,950)</td><td>(354,099)</td><td>(225,186)</td></tr><tr><td>Non-cash gain:</td><td></td><td></td><td></td></tr><tr><td>Recognition of fair value of firm commitment to purchase CRT securities</td><td>99,305</td><td>30,595</td><td>—</td></tr><tr><td>Receipt of MSRs in mortgage loan sale transactions</td><td>837,706</td><td>356,755</td><td>290,309</td></tr><tr><td>Provision for losses relating to representations and warranties provided in mortgage loan sales:</td><td></td><td></td><td></td></tr><tr><td>Pursuant to loans sales</td><td>(3,778)</td><td>(2,531)</td><td>(3,147)</td></tr><tr><td>Reduction in liability due to change in estimate</td><td>3,550</td><td>3,707</td><td>9,679</td></tr><tr><td></td><td>(228)</td><td>1,176</td><td>6,532</td></tr><tr><td>Change in fair value of loans and derivatives held at end of year:</td><td></td><td></td><td></td></tr><tr><td>IRLCs</td><td>(834)</td><td>7,356</td><td>855</td></tr><tr><td>Loans</td><td>(1,765)</td><td>(9,685)</td><td>5,879</td></tr><tr><td>Hedging derivatives</td><td>(2,451)</td><td>16,162</td><td>(15,957)</td></tr><tr><td></td><td>(5,050)</td><td>13,833</td><td>(9,223)</td></tr><tr><td></td><td>931,733</td><td>402,359</td><td>287,618</td></tr><tr><td>Total from nonaffiliates</td><td>155,783</td><td>48,260</td><td>62,432</td></tr><tr><td>From PFSI—cash gain</td><td>14,381</td><td>10,925</td><td>12,084</td></tr><tr><td></td><td>$ 170,164</td><td>$ 59,185</td><td>$ 74,516</td></tr></table>

## Note 24—Net Loan Servicing Fees

Net loan servicing fees are summarized below:

<table><tr><td rowspan="3"></td><td colspan="3">Year ended December 31,</td></tr><tr><td>2019</td><td>2018</td><td>2017</td></tr><tr><td colspan="3">(in thousands)</td></tr><tr><td>From nonaffiliates:</td><td></td><td></td><td></td></tr><tr><td>Contractually specified (1)</td><td>$ 295,390</td><td>$ 204,663</td><td>$ 164,776</td></tr><tr><td>Other</td><td>24,099</td><td>8,062</td><td>6,523</td></tr><tr><td>Effect of MSRs:</td><td></td><td></td><td></td></tr><tr><td>Carried at fair value:</td><td></td><td></td><td></td></tr><tr><td>Realization of cashflows</td><td>(202,322)</td><td>(119,552)</td><td>(9,762)</td></tr><tr><td>Market changes</td><td>(262,031)</td><td>60,772</td><td>(4,373)</td></tr><tr><td></td><td>(464,353)</td><td>(58,780)</td><td>(14,135)</td></tr><tr><td>Carried at lower of amortized cost or fair value:</td><td></td><td></td><td></td></tr><tr><td>Amortization</td><td>—</td><td>—</td><td>(81,624)</td></tr><tr><td>Increase in impairment valuation allowance</td><td>—</td><td>—</td><td>(5,876)</td></tr><tr><td>Gain on sale</td><td>—</td><td>—</td><td>660</td></tr><tr><td>Gain (losses) on hedging derivatives, net</td><td>80,622</td><td>(35,550)</td><td>(2,512)</td></tr><tr><td></td><td>(383,731)</td><td>(94,330)</td><td>(103,487)</td></tr><tr><td>Net servicing fees from non-affiliates</td><td>(64,242)</td><td>118,395</td><td>67,812</td></tr><tr><td>From PFSI—MSR recapture income</td><td>5,324</td><td>2,192</td><td>1,428</td></tr><tr><td>Net loan servicing fees</td><td>$ (58,918)</td><td>$ 120,587</td><td>$ 69,240</td></tr><tr><td>Average servicing portfolio</td><td>$ 110,075,179</td><td>$ 80,500,212</td><td>$ 63,836,843</td></tr></table>



(1) Includes contractually specified servicing fees, net of Agency guarantee fees.
Note 25—Net Interest Income

Net interest income is summarized below:

<table><tr><td rowspan="3"></td><td colspan="4">Year ended December 31,</td></tr><tr><td rowspan="2">2019</td><td>2018</td><td rowspan="2">2017</td><td></td></tr><tr><td colspan="2">(in thousands)</td><td></td></tr><tr><td>Interest income:</td><td></td><td></td><td></td><td></td></tr><tr><td>From nonaffiliates:</td><td></td><td></td><td></td><td></td></tr><tr><td>Cash and short-term investments</td><td>$     4,559</td><td>$     852</td><td>$     576</td><td></td></tr><tr><td>Mortgage-backed securities</td><td>78,450</td><td>55,487</td><td>29,438</td><td></td></tr><tr><td>Loans acquired for sale at fair value</td><td>121,387</td><td>75,610</td><td>53,164</td><td></td></tr><tr><td>Loans at fair value:</td><td></td><td></td><td></td><td></td></tr><tr><td>Held in a VIE</td><td>11,734</td><td>11,813</td><td>14,425</td><td></td></tr><tr><td>Distressed</td><td>3,848</td><td>21,666</td><td>63,613</td><td></td></tr><tr><td>Deposits securing CRT arrangements</td><td>34,229</td><td>15,441</td><td>4,291</td><td></td></tr><tr><td>Placement fees relating to custodial funds</td><td>52,587</td><td>26,065</td><td>12,517</td><td></td></tr><tr><td>Other</td><td>800</td><td>700</td><td>201</td><td></td></tr><tr><td></td><td>307,594</td><td>207,634</td><td>178,225</td><td></td></tr><tr><td>From PFSI—ESS</td><td>10,291</td><td>15,138</td><td>16,951</td><td></td></tr><tr><td></td><td>317,885</td><td>222,772</td><td>195,176</td><td></td></tr><tr><td>Interest expense:</td><td></td><td></td><td></td><td></td></tr><tr><td>To nonaffiliates:</td><td></td><td></td><td></td><td></td></tr><tr><td>Assets sold under agreements to repurchase (1)</td><td>178,211</td><td>115,383</td><td>93,580</td><td></td></tr><tr><td>Mortgage loan participation purchase and sale agreements</td><td>1,570</td><td>2,422</td><td>1,593</td><td></td></tr><tr><td>Exchangeable Notes</td><td>17,037</td><td>14,601</td><td>14,535</td><td></td></tr><tr><td>Notes payable</td><td>53,968</td><td>14,623</td><td>12,634</td><td></td></tr><tr><td>Asset-backed financings of a VIE at fair value</td><td>11,324</td><td>10,821</td><td>13,184</td><td></td></tr><tr><td>Interest shortfall on repayments of loans serviced for Agency securitizations</td><td>25,776</td><td>7,324</td><td>5,928</td><td></td></tr><tr><td>Interest on loan impound deposits</td><td>3,258</td><td>2,535</td><td>1,879</td><td></td></tr><tr><td></td><td>291,144</td><td>167,709</td><td>143,333</td><td></td></tr><tr><td>To PFSI—Assets sold under agreement to repurchase</td><td>6,302</td><td>7,462</td><td>8,038</td><td></td></tr><tr><td></td><td>297,446</td><td>175,171</td><td>151,371</td><td></td></tr><tr><td>Net interest income</td><td>$     20,439</td><td>$     47,601</td><td>$     43,805</td><td></td></tr></table>

(1) In 2017, the Company entered into a master repurchase agreement that provides the Company with incentives to finance loans approved for satisfying certain consumer relief characteristics as provided in the agreement. During the years ended December 31, 2019, 2018 and 2017 the Company included $10.8 million, $19.7 million and $3.1 million, respectively, of such incentives as a reduction of Interest expense. The master repurchase agreement expired on August 21, 2019.

## Note 26—Share-Based Compensation Plans

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 the board of trustees, which has the authority to make awards to the eligible participants referenced above, and to determine what form the awards will take, and the terms and conditions of the awards.



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:

<table><tr><td rowspan="3"></td><td colspan="4">Year ended December 31,</td></tr><tr><td>2019</td><td>2018</td><td>2017</td><td></td></tr><tr><td colspan="4">(in thousands)</td></tr><tr><td>Grants:</td><td></td><td></td><td></td><td></td></tr><tr><td>Restricted share units</td><td>96</td><td>129</td><td>136</td><td></td></tr><tr><td>Performance share units</td><td>116</td><td>116</td><td>126</td><td></td></tr><tr><td>Total share units granted</td><td>212</td><td>245</td><td>262</td><td></td></tr><tr><td>Grant date fair value:</td><td></td><td></td><td></td><td></td></tr><tr><td>Restricted share units</td><td>$ 1,978</td><td>$ 2,281</td><td>$ 2,316</td><td></td></tr><tr><td>Performance share units</td><td>2,380</td><td>1,542</td><td>1,675</td><td></td></tr><tr><td>Total grant date value of share units</td><td>$ 4,358</td><td>$ 3,823</td><td>$ 3,991</td><td></td></tr><tr><td>Vestings:</td><td></td><td></td><td></td><td></td></tr><tr><td>Restricted share units</td><td>227</td><td>261</td><td>284</td><td></td></tr><tr><td>Performance share units (1)</td><td>118</td><td>27</td><td>—</td><td></td></tr><tr><td>Total share units vested</td><td>345</td><td>288</td><td>284</td><td></td></tr><tr><td>Forfeitures:</td><td></td><td></td><td></td><td></td></tr><tr><td>Restricted share units</td><td>—</td><td>2</td><td>13</td><td></td></tr><tr><td>Performance share units</td><td>1</td><td>—</td><td>—</td><td></td></tr><tr><td>Total share units forfeited</td><td>1</td><td>2</td><td>13</td><td></td></tr><tr><td>Compensation expense relating to share-based grants</td><td>$ 5,530</td><td>$ 5,318</td><td>$ 4,904</td><td></td></tr></table>

(1) The actual number of performance-based RSUs vested during the year ended December 31, 2019 was 141,000 common shares, which is approximately 119% of the 118,000 originally granted performance-based RSUs, due to the Company exceeding the established performance targets.

<table><tr><td rowspan="2"></td><td colspan="2">December 31, 2019</td></tr><tr><td>Restricted share units</td><td>Performance share units</td></tr><tr><td>Shares expected to vest:</td><td></td><td></td></tr><tr><td>Number of units (in thousands)</td><td>229</td><td>234</td></tr><tr><td>Grant date average fair value per unit</td><td>$ 19.01</td><td>$ 17.28</td></tr><tr><td>Average remaining vesting period (months)</td><td>8</td><td>8</td></tr></table>



## Note 27—Income Taxes

The Company has elected to be taxed as a REIT for U.S. federal income tax purposes under Sections 856 through 860 of the Internal Revenue Code. Therefore, PMT generally will not be subject to corporate federal or state income tax to the extent that qualifying distributions are made to shareholders and the Company meets the REIT requirements including the asset, income, distribution and share ownership tests. The Company believes that it has met the distribution requirements, as it has declared dividends sufficient to distribute substantially all of its taxable income. Taxable income will generally differ from net income. The primary differences between net income and the REIT taxable income (before deduction for qualifying distributions) are the taxable income of the TRS and the method of determining the income or loss related to valuation of the loans owned by the qualified REIT subsidiary.

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 Tax Cuts and Jobs Act (the “Tax Act”) (subject to certain limitations) provides a 20% deduction from taxable income for ordinary REIT dividends. The approximate tax characterization of the Company’s distributions is as follows:

<table><tr><td>Year ended December 31,</td><td>Ordinary income</td><td>Long term capital gain</td><td>Return of capital</td></tr><tr><td>2019</td><td>66%</td><td>0%</td><td>34%</td></tr><tr><td>2018</td><td>49%</td><td>0%</td><td>51%</td></tr><tr><td>2017</td><td>71%</td><td>29%</td><td>0%</td></tr></table>

The Company has elected to treat its subsidiary, PMC, as a 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 the Company. Before 2017, the TRS had made no such distributions to the Company. In 2017, the TRS made a $20 million distribution that resulted in dividend income to the Company. A TRS is subject to corporate federal and state income tax. Accordingly, a provision for income taxes for PMC is included in the consolidated statements of income.

The following table details the Company’s (benefit from) provision for income taxes which relates primarily to the TRS for the years presented:

<table><tr><td rowspan="3"></td><td colspan="5">Year ended December 31,</td></tr><tr><td rowspan="2">2019</td><td colspan="2">2018</td><td rowspan="2">2017</td><td rowspan="2"></td></tr><tr><td colspan="2">(in thousands)</td></tr><tr><td>Current (benefit) expense :</td><td></td><td></td><td></td><td></td><td></td></tr><tr><td>Federal</td><td>$ (120)</td><td>$ 19</td><td>$ 251</td><td></td><td></td></tr><tr><td>State</td><td>12</td><td>6</td><td>57</td><td></td><td></td></tr><tr><td>Total current (benefit) expense</td><td>(108)</td><td>25</td><td>308</td><td></td><td></td></tr><tr><td>Deferred (benefit) expense:</td><td></td><td></td><td></td><td></td><td></td></tr><tr><td>Federal</td><td>(39,592)</td><td>7,587</td><td>3,824</td><td></td><td></td></tr><tr><td>State</td><td>3,984</td><td>(2,422)</td><td>2,665</td><td></td><td></td></tr><tr><td>Total deferred (benefit) expense</td><td>(35,608)</td><td>5,165</td><td>6,489</td><td></td><td></td></tr><tr><td>Total (benefit from) provision for income taxes</td><td>$ (35,716)</td><td>$ 5,190</td><td>$ 6,797</td><td></td><td></td></tr></table>

The following table is a reconciliation of the Company’s (benefit from) provision for income taxes at statutory rates to the (benefit from) provision for income taxes at the Company’s effective rate for the years presented:

<table><tr><td rowspan="3"></td><td colspan="6">Year ended December 31,</td></tr><tr><td rowspan="2">2019</td><td colspan="2">2018</td><td colspan="2">2017</td><td rowspan="2"></td></tr><tr><td>Amount</td><td>Rate</td><td>Amount</td><td>Rate</td></tr><tr><td></td><td></td><td></td><td colspan="2">(dollars in thousands)</td><td></td><td></td></tr><tr><td>Federal income tax expense at statutory tax rate</td><td>$ 40,035</td><td>21.0%</td><td>$ 33,177</td><td>21.0%</td><td>$ 43,591</td><td>35.0%</td></tr><tr><td>Effect of non-taxable REIT income</td><td>(79,467)</td><td>(41.7%)</td><td>(26,647)</td><td>(16.9%)</td><td>(25,754)</td><td>(20.7%)</td></tr><tr><td>State income taxes, net of federal benefit</td><td>(7,417)</td><td>(3.9%)</td><td>(2,044)</td><td>(1.3%)</td><td>1,687</td><td>1.4%</td></tr><tr><td>Effect of federal statutory rate change</td><td>—</td><td>(—)%</td><td>—</td><td>(—)%</td><td>(12,992)</td><td>(10.4%)</td></tr><tr><td>Valuation allowance</td><td>13,612</td><td>7%</td><td>—</td><td>0%</td><td>—</td><td>0%</td></tr><tr><td>Other</td><td>(2,479)</td><td>(1.2)%</td><td>704</td><td>0.4%</td><td>265</td><td>0.2%</td></tr><tr><td>(Benefit from) provision for income taxes</td><td>$ (35,716)</td><td>(18.8)%</td><td>$ 5,190</td><td>3.2%</td><td>$ 6,797</td><td>5.5%</td></tr></table>



The Company’s tax expense for the year ended December 31, 2017 was significantly impacted by the enactment of the Tax Act on December 22, 2017. The Tax Act reduces the U.S. federal corporate tax rate to 21% from the previous maximum rate of 35%, effective January 1, 2018. GAAP requires that the impact of tax legislation be recognized in the period in which the law was enacted. In 2017, the Company recorded a tax benefit of $13.0 million due to a re-measurement of deferred tax assets and liabilities of the TRS resulting from the decrease in the federal tax rate. The re-measurement of the deferred tax assets and liabilities is predominantly based on the reduction to the Federal rate as described above, which will result in lower tax expense when these deferred tax assets and liabilities are realized.

The Company’s components of the (benefit from) provision for deferred income taxes are as follows:

<table><tr><td rowspan="3"></td><td colspan="4">Year ended December 31,</td></tr><tr><td rowspan="2">2019</td><td colspan="2">2018</td><td rowspan="2">2017</td></tr><tr><td colspan="2">(in thousands)</td></tr><tr><td>Real estate valuation loss</td><td>$     1,140</td><td>$     1,565</td><td>$     3,476</td><td></td></tr><tr><td>Mortgage servicing rights</td><td>(212)</td><td>4,797</td><td>15,516</td><td></td></tr><tr><td>Net operating loss carryforward</td><td>(56,339)</td><td>(1,109)</td><td>4,333</td><td></td></tr><tr><td>Liability for losses under representations and warranties</td><td>111</td><td>405</td><td>2,652</td><td></td></tr><tr><td>Excess interest expense disallowance</td><td>4,667</td><td>234</td><td>(7,304)</td><td></td></tr><tr><td>Effect of federal statutory rate change</td><td>—</td><td>—</td><td>(12,992)</td><td></td></tr><tr><td>Other</td><td>1,413</td><td>(727)</td><td>808</td><td></td></tr><tr><td>Valuation allowance</td><td>13,612</td><td>—</td><td>—</td><td></td></tr><tr><td>Total (benefit from) provision for deferred income taxes</td><td>$ (35,608)</td><td>$ 5,165</td><td>$ 6,489</td><td></td></tr></table>

The components of income taxes payable are as follows:

<table><tr><td rowspan="2"></td><td colspan="2">December 31, 2019</td><td colspan="2">December 31, 2018</td></tr><tr><td colspan="2">(in thousands)</td><td colspan="2">(in thousands)</td></tr><tr><td>Taxes currently receivable</td><td>$      (259)</td><td>$      (1,160)</td><td></td><td></td></tr><tr><td>Deferred income taxes payable</td><td>2,078</td><td></td><td>37,686</td><td></td></tr><tr><td>Income taxes payable</td><td>$     1,819</td><td>$     36,526</td><td></td><td></td></tr></table>

The tax effects of temporary differences that gave rise to deferred income tax assets and liabilities are presented below:

<table><tr><td rowspan="2"></td><td colspan="2">December 31, 2019</td><td colspan="2">December 31, 2018</td></tr><tr><td colspan="2">(in thousands)</td><td colspan="2">(in thousands)</td></tr><tr><td>Deferred income tax assets:</td><td></td><td></td><td></td><td></td></tr><tr><td>Net operating loss carryforward</td><td>$     97,236</td><td>$     40,897</td><td></td><td></td></tr><tr><td>Excess interest expense disallowance</td><td>15,234</td><td>19,901</td><td></td><td></td></tr><tr><td>REO valuation loss</td><td>1,438</td><td>2,578</td><td></td><td></td></tr><tr><td>Liability for losses under representations and warranties</td><td>1,900</td><td>2,011</td><td></td><td></td></tr><tr><td>Valuation allowance</td><td>(13,612)</td><td>—</td><td></td><td></td></tr><tr><td>Other</td><td>162</td><td>1,576</td><td></td><td></td></tr><tr><td>Gross deferred tax assets</td><td>102,358</td><td>66,962</td><td></td><td></td></tr><tr><td>Deferred income tax liabilities:</td><td></td><td></td><td></td><td></td></tr><tr><td>Mortgage servicing rights</td><td>104,436</td><td>104,648</td><td></td><td></td></tr><tr><td>Other</td><td>—</td><td>—</td><td></td><td></td></tr><tr><td>Gross deferred tax liabilities</td><td>104,436</td><td>104,648</td><td></td><td></td></tr><tr><td>Net deferred income tax liability</td><td>$     2,078</td><td>$     37,686</td><td></td><td></td></tr></table>

The net deferred income tax liability is included in Income taxes payable in the consolidated balance sheets.

The Company has net operating loss carryforwards of $365.4 million and $136.8 million at December 31, 2019 and December 31, 2018, respectively. Losses that occurred before 2018 expire between 2033 and 2036. Net operating losses arising in tax years beginning after December 31, 2017 can be carried forward indefinitely but are limited to 80% of taxable income.



We evaluated the net deferred tax asset of our TRS and established a deferred tax valuation allowance in the amount of $13.6 million. In our evaluation, we consider, among other things, 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. We establish valuation allowances based on the consideration of all available evidence using a more-likely-than-not standard.

At December 31, 2019 and December 31, 2018, the Company had no unrecognized tax benefits and does not anticipate any increase in unrecognized tax benefits. Should the accrual of any interest or penalties relative to unrecognized tax benefits be necessary, it is the Company’s policy to record such accruals in the Company’s income tax accounts. No such accruals existed at December 31, 2019 and December 31, 2018.

The Company files U.S. federal and state income tax returns for both the REIT and the TRS. These federal income tax returns for 2016 and forward are subject to examination. The Company’s state income tax returns are generally subject to examination for 2015 and forward. The TRS’s Georgia state income tax returns for tax years 2016 through 2018 are currently under examination.

## Note 28—Earnings Per Share

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

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

Diluted earnings per share is determined by dividing net income attributable to diluted shareholders, which adds back to net income the interest expense, net of applicable income taxes, on the Company’s Exchangeable Notes, by the weighted average common shares outstanding, assuming all dilutive securities were issued.

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

<table><tr><td rowspan="3"></td><td colspan="5">Year ended December 31,</td></tr><tr><td colspan="2">2019</td><td colspan="2">2018</td><td>2017</td></tr><tr><td colspan="5">(in thousands except per share amounts)</td></tr><tr><td>Net income</td><td>$     226,357</td><td>$     152,798</td><td>$     117,749</td><td></td><td></td></tr><tr><td>Dividends on preferred shares</td><td>(24,938)</td><td>(24,938)</td><td>(15,267)</td><td></td><td></td></tr><tr><td>Effect of participating securities—share-based compensation awards</td><td>(566)</td><td>(750)</td><td>(991)</td><td></td><td></td></tr><tr><td>Net income attributable to common shareholders</td><td>$     200,853</td><td>$     127,110</td><td>$     101,491</td><td></td><td></td></tr><tr><td>Net income attributable to common shareholders</td><td>$     200,853</td><td>$     127,110</td><td>$     101,491</td><td></td><td></td></tr><tr><td>Interest on Exchangeable Notes, net of income taxes (1)</td><td>11,827</td><td>10,637</td><td>8,757</td><td></td><td></td></tr><tr><td>Diluted net income attributable to common shareholders</td><td>$     212,680</td><td>$     137,747</td><td>$     110,248</td><td></td><td></td></tr><tr><td>Weighted average basic shares outstanding</td><td>78,990</td><td>60,898</td><td>66,144</td><td></td><td></td></tr><tr><td>Dilutive securities:</td><td></td><td></td><td></td><td></td><td></td></tr><tr><td>Shares issuable under share-based compensation plan</td><td>254</td><td>—</td><td>—</td><td></td><td></td></tr><tr><td>Shares issuable pursuant to exchange of the Exchangeable Notes (1)</td><td>8,467</td><td>8,467</td><td>8,467</td><td></td><td></td></tr><tr><td>Diluted weighted average number of shares outstanding</td><td>87,711</td><td>69,365</td><td>74,611</td><td></td><td></td></tr><tr><td>Basic earnings per share</td><td>$     2.54</td><td>$     2.09</td><td>$     1.53</td><td></td><td></td></tr><tr><td>Diluted earnings per share</td><td>$     2.42</td><td>$     1.99</td><td>$     1.48</td><td></td><td></td></tr></table>

(1) During 2019, the Company issued the 2024 Notes. The 2024 Notes include a cash conversion option. The Company intends to cash settle the 2024 Exchangeable Notes. Therefore, the effect of conversion of the 2024 Notes is excluded from diluted earnings per share.



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 antidilutive. 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:

<table><tr><td rowspan="3"></td><td colspan="3">Year ended December 31,</td></tr><tr><td>2019</td><td>2018</td><td>2017</td></tr><tr><td colspan="3">(in thousands)</td></tr><tr><td>Shares issuable under share-based compensation plan</td><td>152</td><td>252</td><td>157</td></tr></table>

## Note 29—Segments

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

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

- The interest rate sensitive strategies segment represents the Company’s investments in MSRs, ESS, Agency and senior non-Agency MBS and the related interest rate hedging activities.

- The correspondent production segment represents the Company’s operations aimed at serving as an intermediary between mortgage lenders and the capital markets by purchasing, pooling and reselling newly originated prime credit quality loans either directly or in the form of MBS, using the services of the Manager and PLS.

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

Financial highlights by operating segment are summarized below:

<table><tr><td>Year ended December 31, 2019</td><td>Credit sensitive strategies</td><td>Interest rate sensitive strategies</td><td>Correspondent production (in thousands)</td><td>Corporate</td><td>Total</td></tr><tr><td>Net investment income:</td><td></td><td></td><td></td><td></td><td></td></tr><tr><td>Net gain on investments</td><td>$ 164,413</td><td>$ 98,905</td><td>$ —</td><td>$ —</td><td>$ 263,318</td></tr><tr><td>Net gain on loans acquired for sale (1)</td><td>51,014</td><td></td><td>119,150</td><td>—</td><td>170,164</td></tr><tr><td>Net loan servicing fees</td><td>—</td><td>(58,918)</td><td>—</td><td>—</td><td>(58,918)</td></tr><tr><td>Net interest income (expense):</td><td></td><td></td><td></td><td></td><td></td></tr><tr><td>Interest income</td><td>39,343</td><td>155,176</td><td>120,974</td><td>2,392</td><td>317,885</td></tr><tr><td>Interest expense</td><td>(67,412)</td><td>(144,513)</td><td>(85,521)</td><td>—</td><td>(297,446)</td></tr><tr><td></td><td>(28,069)</td><td>10,663</td><td>35,453</td><td>2,392</td><td>20,439</td></tr><tr><td>Other</td><td>4,507</td><td>—</td><td>88,159</td><td>1,146</td><td>93,812</td></tr><tr><td></td><td>191,865</td><td>50,650</td><td>242,762</td><td>3,538</td><td>488,815</td></tr><tr><td>Expenses:</td><td></td><td></td><td></td><td></td><td></td></tr><tr><td>Loan fulfillment and servicing fees</td><td></td><td></td><td></td><td></td><td></td></tr><tr><td>payable to PFSI</td><td>2,213</td><td>46,584</td><td>160,610</td><td>—</td><td>209,407</td></tr><tr><td>Management fees</td><td>—</td><td>—</td><td>—</td><td>36,492</td><td>36,492</td></tr><tr><td>Other</td><td>7,476</td><td>2,918</td><td>17,559</td><td>24,322</td><td>52,275</td></tr><tr><td></td><td>9,689</td><td>49,502</td><td>178,169</td><td>60,814</td><td>298,174</td></tr><tr><td>Pretax income (loss)</td><td>$ 182,176</td><td>$ 1,148</td><td>$ 64,593</td><td>$ (57,276)</td><td>$ 190,641</td></tr><tr><td>Total assets at year end</td><td>$ 2,364,749</td><td>$ 4,993,840</td><td>$ 4,216,806</td><td>$ 195,956</td><td>$ 11,771,351</td></tr></table>

(1) During the quarter ended March 31, 2019, the chief operating decision maker began attributing a portion of the initial fair value the Company recognizes relating to its firm commitment to purchase CRT securities upon the sale of loans to the correspondent production segment in recognition of pricing changes in the correspondent production segment. Accordingly, the Company allocated $49.0 million of the initial firm commitment recognized in Net gain on loans acquired for sale in the correspondent production segment for the year ended December 31, 2019.



<table><tr><td>Year ended December 31, 2018</td><td>Credit sensitive strategies</td><td>Interest rate sensitive strategies</td><td>Correspondent production (in thousands)</td><td>Corporate</td><td>Total</td></tr><tr><td>Net investment income:</td><td></td><td></td><td></td><td></td><td></td></tr><tr><td>Net gain on investments</td><td>$ 84,943</td><td>$ (3,017)</td><td>$ —</td><td>$ —</td><td>$ 81,926</td></tr><tr><td>Net gain on loans acquired for sale</td><td>30,740</td><td>—</td><td>28,445</td><td>—</td><td>59,185</td></tr><tr><td>Net loan servicing fees</td><td>29</td><td>120,558</td><td>—</td><td>—</td><td>120,587</td></tr><tr><td>Net interest income (expense):</td><td></td><td></td><td></td><td></td><td></td></tr><tr><td>Interest income</td><td>37,786</td><td>108,366</td><td>75,068</td><td>1,552</td><td>222,772</td></tr><tr><td>Interest expense</td><td>(41,523)</td><td>(92,294)</td><td>(41,354)</td><td>—</td><td>(175,171)</td></tr><tr><td></td><td>(3,737)</td><td>16,072</td><td>33,714</td><td>1,552</td><td>47,601</td></tr><tr><td>Other</td><td>(1,704)</td><td>—</td><td>43,447</td><td>25</td><td>41,768</td></tr><tr><td></td><td>110,271</td><td>133,613</td><td>105,606</td><td>1,577</td><td>351,067</td></tr><tr><td>Expenses:</td><td></td><td></td><td></td><td></td><td></td></tr><tr><td>Loan fulfillment and servicing fees payable to PFSI</td><td>7,561</td><td>34,484</td><td>81,350</td><td>—</td><td>123,395</td></tr><tr><td>Management fees</td><td>—</td><td>—</td><td>—</td><td>24,465</td><td>24,465</td></tr><tr><td>Other</td><td>15,459</td><td>697</td><td>7,784</td><td>21,279</td><td>45,219</td></tr><tr><td></td><td>23,020</td><td>35,181</td><td>89,134</td><td>45,744</td><td>193,079</td></tr><tr><td>Pretax income (loss)</td><td>$ 87,251</td><td>$ 98,432</td><td>$ 16,472</td><td>$ (44,167)</td><td>$ 157,988</td></tr><tr><td>Total assets at year end</td><td>$ 1,602,776</td><td>$ 4,373,488</td><td>$ 1,698,656</td><td>$ 138,441</td><td>$ 7,813,361</td></tr><tr><td></td><td>Credit sensitive strategies</td><td>Interest rate sensitive strategies</td><td>Correspondent production (in thousands)</td><td>Corporate</td><td>Total</td></tr><tr><td>Year ended December 31, 2017</td><td></td><td></td><td></td><td></td><td></td></tr><tr><td>Net investment income:</td><td></td><td></td><td></td><td></td><td></td></tr><tr><td>Net gain on investments</td><td>$ 123,774</td><td>$ (27,390)</td><td>$ —</td><td>$ —</td><td>$ 96,384</td></tr><tr><td>Net gain on loans acquired for sale</td><td>208</td><td>—</td><td>74,308</td><td>—</td><td>74,516</td></tr><tr><td>Net loan servicing fees</td><td>134</td><td>69,106</td><td>—</td><td>—</td><td>69,240</td></tr><tr><td>Net interest income (expense):</td><td></td><td></td><td></td><td></td><td></td></tr><tr><td>Interest income</td><td>69,008</td><td>72,870</td><td>52,522</td><td>776</td><td>195,176</td></tr><tr><td>Interest expense</td><td>(53,434)</td><td>(62,809)</td><td>(35,128)</td><td>—</td><td>(151,371)</td></tr><tr><td></td><td>15,574</td><td>10,061</td><td>17,394</td><td>776</td><td>43,805</td></tr><tr><td>Other</td><td>(6,290)</td><td>—</td><td>40,279</td><td>6</td><td>33,995</td></tr><tr><td></td><td>133,400</td><td>51,777</td><td>131,981</td><td>782</td><td>317,940</td></tr><tr><td>Expenses:</td><td></td><td></td><td></td><td></td><td></td></tr><tr><td>Loan fulfillment and servicing fees payable to PFSI</td><td>15,611</td><td>27,446</td><td>80,366</td><td>—</td><td>123,423</td></tr><tr><td>Management fees</td><td>—</td><td>—</td><td>—</td><td>22,584</td><td>22,584</td></tr><tr><td>Other</td><td>15,575</td><td>1,648</td><td>8,677</td><td>21,487</td><td>47,387</td></tr><tr><td></td><td>31,186</td><td>29,094</td><td>89,043</td><td>44,071</td><td>193,394</td></tr><tr><td>Pretax income (loss)</td><td>$ 102,214</td><td>$ 22,683</td><td>$ 42,938</td><td>$ (43,289)</td><td>$ 124,546</td></tr><tr><td>Total assets at year end</td><td>$ 1,791,447</td><td>$ 2,414,423</td><td>$ 1,302,245</td><td>$ 96,818</td><td>$ 5,604,933</td></tr></table>



## Note 30—Selected Quarterly Results (Unaudited)

Following is a presentation of selected quarterly financial data:

<table><tr><td rowspan="3"></td><td colspan="10">Quarter ended</td></tr><tr><td colspan="5">2019</td><td colspan="5">2018</td></tr><tr><td>Dec. 31</td><td>Sept. 30</td><td>June 30</td><td>Mar. 31</td><td>Dec. 31</td><td>Sept. 30</td><td>June 30</td><td>Mar 31</td><td></td><td></td></tr><tr><td colspan="11">(dollars in thousands, except per share data)</td></tr><tr><td>Net investment income</td><td>$ 155,036</td><td>$ 130,760</td><td>$ 96,401</td><td>$ 106,618</td><td>$ 83,902</td><td>$ 108,501</td><td>$ 82,991</td><td>$ 75,673</td><td></td><td></td></tr><tr><td>Net income</td><td>$ 58,597</td><td>$ 70,000</td><td>$ 44,233</td><td>$ 53,527</td><td>$ 41,625</td><td>$ 46,562</td><td>$ 36,425</td><td>$ 28,186</td><td></td><td></td></tr><tr><td>Earnings per share:</td><td></td><td></td><td></td><td></td><td></td><td></td><td></td><td></td><td></td><td></td></tr><tr><td>Basic</td><td>$ 0.56</td><td>$ 0.75</td><td>$ 0.52</td><td>$ 0.73</td><td>$ 0.58</td><td>$ 0.66</td><td>$ 0.49</td><td>$ 0.36</td><td></td><td></td></tr><tr><td>Diluted</td><td>$ 0.55</td><td>$ 0.71</td><td>$ 0.50</td><td>$ 0.68</td><td>$ 0.55</td><td>$ 0.62</td><td>$ 0.47</td><td>$ 0.35</td><td></td><td></td></tr><tr><td>Cash dividends declared per share</td><td>$ 0.47</td><td>$ 0.47</td><td>$ 0.47</td><td>$ 0.47</td><td>$ 0 47</td><td>$ 0.47</td><td>$ 0.47</td><td>$ 47</td><td></td><td></td></tr><tr><td>At quarter end:</td><td></td><td></td><td></td><td></td><td></td><td></td><td></td><td></td><td></td><td></td></tr><tr><td>Mortgage-backed securities</td><td>$ 2,839,633</td><td>$ 2,325,010</td><td>$ 2,600,357</td><td>$ 2,589,106</td><td>$ 2,610,422</td><td>$ 2,126,507</td><td>$ 1,698,322</td><td>$ 1,436,456</td><td></td><td></td></tr><tr><td>Loans (1)</td><td>4,419,218</td><td>4,237,895</td><td>2,835,837</td><td>1,833,735</td><td>2,052,262</td><td>2,582,600</td><td>2,539,963</td><td>1,895,023</td><td></td><td></td></tr><tr><td>Excess servicing spread</td><td>178,586</td><td>183,141</td><td>194,156</td><td>205,081</td><td>216,110</td><td>223,275</td><td>229,470</td><td>236,002</td><td></td><td></td></tr><tr><td>Derivative assets</td><td>202,318</td><td>274,444</td><td>258,782</td><td>188,710</td><td>167,165</td><td>143,577</td><td>133,239</td><td>122,518</td><td></td><td></td></tr><tr><td>Real estate (2)</td><td>65,583</td><td>79,201</td><td>97,808</td><td>114,521</td><td>128,791</td><td>141,576</td><td>155,702</td><td>187,296</td><td></td><td></td></tr><tr><td>Deposits securing credit risk transfer arrangements</td><td>1,969,784</td><td>2,044,250</td><td>2,060,612</td><td>1,137,283</td><td>1,146,501</td><td>662,624</td><td>651,204</td><td>622,330</td><td></td><td></td></tr><tr><td>Mortgage servicing rights</td><td>1,535,705</td><td>1,162,714</td><td>1,126,427</td><td>1,156,908</td><td>1,162,369</td><td>1,109,741</td><td>1,010,507</td><td>957,013</td><td></td><td></td></tr><tr><td>Other assets</td><td>560,524</td><td>437,954</td><td>291,810</td><td>330,643</td><td>329,741</td><td>277,678</td><td>258,442</td><td>333,848</td><td></td><td></td></tr><tr><td>Total assets</td><td>$ 11,771,351</td><td>$ 10,744,609</td><td>$ 9,465,789</td><td>$ 7,555,987</td><td>$ 7,813,361</td><td>$ 7,267,578</td><td>$ 6,676,849</td><td>$ 5,790,486</td><td></td><td></td></tr><tr><td>Short-term debt</td><td>$ 7,005,986</td><td>$ 6,713,154</td><td>$ 5,483,267</td><td>$ 4,378,900</td><td>$ 5,081,691</td><td>$ 4,452,670</td><td>$ 3,630,843</td><td>$ 3,366,181</td><td></td><td></td></tr><tr><td>Long-term debt</td><td>2,159,286</td><td>1,646,349</td><td>1,915,465</td><td>1,295,949</td><td>1,011,433</td><td>1,086,841</td><td>1,363,886</td><td>737,289</td><td></td><td></td></tr><tr><td>Other liabilities</td><td>155,164</td><td>165,495</td><td>123,123</td><td>153,549</td><td>154,105</td><td>169,504</td><td>136,633</td><td>144,758</td><td></td><td></td></tr><tr><td>Total liabilities</td><td>9,320,436</td><td>8,524,998</td><td>7,521,855</td><td>5,828,398</td><td>6,247,229</td><td>5,709,015</td><td>5,131,362</td><td>4,248,228</td><td></td><td></td></tr><tr><td>Shareholders&#x27; equity</td><td>2,450,915</td><td>2,219,611</td><td>1,943,934</td><td>1,727,589</td><td>1,566,132</td><td>1,558,563</td><td>1,545,487</td><td>1,542,258</td><td></td><td></td></tr><tr><td>Total liabilities and shareholders&#x27; equity</td><td>$ 11,771,351</td><td>$ 10,744,609</td><td>$ 9,465,789</td><td>$ 7,555,987</td><td>$ 7,813,361</td><td>$ 7,267,578</td><td>$ 6,676,849</td><td>$ 5,790,486</td><td></td><td></td></tr></table>

(1) Includes loans acquired for sale at fair value and loans at fair value.

(2) Includes REO and real estate held for investment.



## Note 31—Supplemental Cash Flow Information

<table><tr><td rowspan="2"></td><td colspan="5">Year ended December 31,</td></tr><tr><td>2019</td><td colspan="2">2018</td><td colspan="2">2017</td></tr><tr><td>Payments:</td><td></td><td></td><td></td><td></td><td></td></tr><tr><td>Income tax, net</td><td>$ (1,009)</td><td>$</td><td>1,333</td><td>$ (2,354)</td><td></td></tr><tr><td>Interest</td><td>$ 298,591</td><td>$</td><td>170,435</td><td>$ 152,441</td><td></td></tr><tr><td>Cumulative effect on accumulated deficit of conversion to fair value accounting for mortgage servicing rights</td><td>$ —</td><td>$</td><td>(14,361)</td><td>$ —</td><td></td></tr><tr><td>Non-cash investing activities:</td><td></td><td></td><td></td><td></td><td></td></tr><tr><td>Transfer of loans and advances to real estate acquired in settlement of loans</td><td>$ 23,672</td><td>$</td><td>32,578</td><td>$ 87,202</td><td></td></tr><tr><td>Transfer of real estate acquired in settlement of mortgage loans to real estate held for investment</td><td>$ —</td><td>$</td><td>5,183</td><td>$ 16,530</td><td></td></tr><tr><td>Transfer from real estate held for investment to real estate acquired in settlement of loans</td><td>$ 30,432</td><td>$</td><td>3,401</td><td>$ —</td><td></td></tr><tr><td>Receipt of mortgage servicing rights as proceeds from sales of loans at fair value</td><td>$ 837,706</td><td>$</td><td>356,755</td><td>$ 290,309</td><td></td></tr><tr><td>Receipt of excess servicing spread pursuant to recapture agreement with PennyMac Financial Services, Inc.</td><td>$ 1,757</td><td>$</td><td>2,688</td><td>$ 5,244</td><td></td></tr><tr><td>Capitalization of servicing advances pursuant to mortgage loan modifications</td><td>$ 1,340</td><td>$</td><td>5,481</td><td>$ 18,923</td><td></td></tr><tr><td>Transfer of firm commitment to purchase CRT securities to CRT strips</td><td>$ 56,804</td><td>$</td><td>—</td><td>$ —</td><td></td></tr><tr><td>Non-cash financing activities:</td><td></td><td></td><td></td><td></td><td></td></tr><tr><td>Dividends declared, not paid</td><td>$ 47,193</td><td>$</td><td>28,816</td><td>$ 29,145</td><td></td></tr></table>

## Note 32—Regulatory Capital and Liquidity Requirements

PMC is a seller/servicer for Fannie Mae and Freddie Mac. The Company is required to comply with the following minimum capital and liquidity eligibility requirements to remain in good standing with each Agency:

• A minimum net worth of $2.5 million plus 25 basis points of UPB for all loans serviced;

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

- Liquidity equal to or exceeding 3.5 basis points multiplied by the aggregate UPB of all mortgages secured by 1-4 unit residential properties serviced for Freddie Mac and Fannie Mae (“Agency Mortgage Servicing”) plus 200 basis points multiplied by the sum of nonperforming (90 or more days delinquent) Agency Mortgage Servicing that exceeds 6% of Agency Mortgage Servicing.

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

<table><tr><td rowspan="2">Fannie Mae and Freddie Mac</td><td colspan="2">Net Worth (1)</td><td colspan="2">Tangible Net Worth / Total Assets Ratio (1)</td><td colspan="2">Liquidity (1)</td></tr><tr><td>Actual</td><td>Required</td><td>Actual</td><td>Required</td><td>Actual</td><td>Required</td></tr><tr><td>December 31, 2019</td><td>$ 627,144</td><td>$ 341,009</td><td>8%</td><td>6%</td><td>$ 128,806</td><td>$ 44,970</td></tr><tr><td>December 31, 2018</td><td>$ 528,506</td><td>$ 238,915</td><td>11%</td><td>6%</td><td>$ 58,144</td><td>$ 31,678</td></tr></table>

(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 33—Parent Company Information

The Company’s debt financing agreements require PMT and certain of its subsidiaries to comply with financial covenants that include a minimum tangible net worth as summarized below:

<table><tr><td rowspan="3">Company consolidated</td><td colspan="3">December 31, 2019</td></tr><tr><td>Debt covenant requirement</td><td>Calculated balance \( ^{(1)} \)</td><td></td></tr><tr><td colspan="3">(in thousands)</td></tr><tr><td>PennyMac Mortgage Investment Trust</td><td>$ 860,000</td><td>$ 2,450,915</td><td></td></tr><tr><td>Operating Partnership</td><td>$ 860,000</td><td>$ 2,490,553</td><td></td></tr><tr><td>PennyMac Holdings</td><td>$ 250,000</td><td>$ 730,914</td><td></td></tr><tr><td>PennyMac Corp</td><td>$ 150,000</td><td>$ 627,004</td><td></td></tr></table>

(1) Calculated in accordance with the lenders' requirements.

The Company’s subsidiaries are limited from transferring funds to the Parent by these minimum tangible net worth requirements.



## PENNYMAC MORTGAGE INVESTMENT TRUST
CONDENSED BALANCE SHEETS

Following are condensed parent-only financial statements for the Company:

<table><tr><td rowspan="3"></td><td colspan="3">December 31,</td></tr><tr><td>2019</td><td>2018</td><td></td></tr><tr><td colspan="3">(in thousands)</td></tr><tr><td>Assets</td><td></td><td></td><td></td></tr><tr><td>Short-term investment</td><td>$     2,819</td><td>$     714</td><td></td></tr><tr><td>Investments in subsidiaries</td><td>2,501,015</td><td>1,599,298</td><td></td></tr><tr><td>Due from subsidiaries</td><td>469</td><td>86</td><td></td></tr><tr><td>Other assets</td><td>595</td><td>647</td><td></td></tr><tr><td>Total assets</td><td>$     2,504,898</td><td>$     1,600,745</td><td></td></tr><tr><td>Liabilities</td><td></td><td></td><td></td></tr><tr><td>Dividends payable</td><td>$     47,193</td><td>$     28,680</td><td></td></tr><tr><td>Accounts payable and accrued liabilities</td><td>1,564</td><td>2,338</td><td></td></tr><tr><td>Due to affiliates</td><td>399</td><td>888</td><td></td></tr><tr><td>Due to subsidiaries</td><td>1</td><td>27</td><td></td></tr><tr><td>Total liabilities</td><td>49,157</td><td>31,933</td><td></td></tr><tr><td>Shareholders&#x27; equity</td><td>2,455,741</td><td>1,568,812</td><td></td></tr><tr><td>Total liabilities and shareholders&#x27; equity</td><td>$     2,504,898</td><td>$     1,600,745</td><td></td></tr></table>



## PENNYMAC MORTGAGE INVESTMENT TRUST
CONDENSED STATEMENTS OF INCOME

<table><tr><td rowspan="3"></td><td colspan="4">Year ended December 31,</td></tr><tr><td rowspan="2">2019</td><td colspan="2">2018</td><td rowspan="2">2017</td></tr><tr><td colspan="2">(in thousands)</td></tr><tr><td>Income</td><td></td><td></td><td></td><td></td></tr><tr><td>Dividends from subsidiaries</td><td>$     165,451</td><td>$     221,469</td><td>$     177,571</td><td></td></tr><tr><td>Intercompany interest</td><td>34</td><td>8</td><td>7</td><td></td></tr><tr><td>Other</td><td>2,389</td><td>1,250</td><td>1,256</td><td></td></tr><tr><td>Total income</td><td>167,874</td><td>222,727</td><td>178,834</td><td></td></tr><tr><td>Expenses</td><td></td><td></td><td></td><td></td></tr><tr><td>Intercompany interest</td><td>27</td><td>414</td><td>378</td><td></td></tr><tr><td>Other</td><td>3</td><td>—</td><td>—</td><td></td></tr><tr><td>Total expenses</td><td>30</td><td>414</td><td>378</td><td></td></tr><tr><td>Income before provision for income taxes and equity in undistributed earnings in subsidiaries</td><td>167,844</td><td>222,313</td><td>178,456</td><td></td></tr><tr><td>(Benefit from) provision for income taxes</td><td>(109)</td><td>24</td><td>308</td><td></td></tr><tr><td>Income before equity in undistributed earnings of subsidiaries</td><td>167,953</td><td>222,289</td><td>178,148</td><td></td></tr><tr><td>Equity in undistributed earnings (distributions in excess of earnings) of subsidiaries</td><td>60,937</td><td>(71,180)</td><td>(60,655)</td><td></td></tr><tr><td>Net income</td><td>$     228,890</td><td>$     151,109</td><td>$     117,493</td><td></td></tr></table>



## PENNYMAC MORTGAGE INVESTMENT TRUST
CONDENSED STATEMENTS OF CASH FLOWS

<table><tr><td rowspan="3"></td><td colspan="4">Year ended December 31,</td></tr><tr><td>2019</td><td>2018</td><td>2017</td><td></td></tr><tr><td colspan="4">(in thousands)</td></tr><tr><td>Cash flows from operating activities:</td><td></td><td></td><td></td><td></td></tr><tr><td>Net income</td><td>$ 228,890</td><td>$ 151,109</td><td>$ 117,493</td><td></td></tr><tr><td>(Distributions in excess of earnings, not yet distributed)</td><td></td><td></td><td></td><td></td></tr><tr><td>Equity in undistributed earnings of subsidiaries</td><td>(60,937)</td><td>71,180</td><td>60,655</td><td></td></tr><tr><td>Decrease in due from affiliates</td><td>261</td><td>490</td><td>620</td><td></td></tr><tr><td>Decrease (increase) in other assets</td><td>52</td><td>(58)</td><td>21</td><td></td></tr><tr><td>(Decrease) increase in accounts payable and accrued liabilities</td><td>(697)</td><td>(3,320)</td><td>2,892</td><td></td></tr><tr><td>Increase in due from affiliates</td><td>(489)</td><td>(185)</td><td>(58)</td><td></td></tr><tr><td>Increase in due to affiliates</td><td>33</td><td>84</td><td>35</td><td></td></tr><tr><td>Net cash provided by operating activities</td><td>167,113</td><td>219,300</td><td>181,658</td><td></td></tr><tr><td>Cash flows from investing activities:</td><td></td><td></td><td></td><td></td></tr><tr><td>Increase in investment in subsidiaries</td><td>(825,920)</td><td>—</td><td>(299,919)</td><td></td></tr><tr><td>Net (increase) decrease in short-term investments</td><td>(2,105)</td><td>1,159</td><td>(838)</td><td></td></tr><tr><td>Net cash (used in) provided by investing activities</td><td>(828,025)</td><td>1,159</td><td>(300,757)</td><td></td></tr><tr><td>Cash flows from financing activities:</td><td></td><td></td><td></td><td></td></tr><tr><td>Net (decrease) increase in intercompany unsecured note payable</td><td>—</td><td>(69,200)</td><td>50,791</td><td></td></tr><tr><td>Proceeds from issuance of common shares</td><td>839,682</td><td>—</td><td>—</td><td></td></tr><tr><td>Payment of issuance costs related to common shares</td><td>(10,225)</td><td>—</td><td>—</td><td></td></tr><tr><td>Payment of withholding taxes related to share-based compensation</td><td>(2,600)</td><td>—</td><td>—</td><td></td></tr><tr><td>Payment of dividends to preferred shareholders</td><td>(24,944)</td><td>(24,944)</td><td>(14,066)</td><td></td></tr><tr><td>Payment of dividends to common shareholders</td><td>(141,001)</td><td>(115,596)</td><td>(126,135)</td><td></td></tr><tr><td>Repurchases of common shares</td><td>—</td><td>(10,719)</td><td>(91,198)</td><td></td></tr><tr><td>Issuance of preferred shares</td><td>—</td><td>—</td><td>310,000</td><td></td></tr><tr><td>Payment of issuance costs related to preferred shares</td><td>—</td><td>—</td><td>(10,293)</td><td></td></tr><tr><td>Net cash provided by (used in) financing activities</td><td>660,912</td><td>(220,459)</td><td>119,099</td><td></td></tr><tr><td>Net change in cash</td><td>—</td><td>—</td><td>—</td><td></td></tr><tr><td>Cash at beginning of year</td><td>—</td><td>—</td><td>—</td><td></td></tr><tr><td>Cash at end of year</td><td>$ —</td><td>$ —</td><td>$ —</td><td></td></tr><tr><td>Non-cash investing activities:</td><td></td><td></td><td></td><td></td></tr><tr><td>Investment in subsidiary pursuant to share based compensation plan</td><td>$ 5,529</td><td>$ 5,314</td><td>$ 4,902</td><td></td></tr><tr><td>Non-cash financing activities:</td><td></td><td></td><td></td><td></td></tr><tr><td>Investment in subsidiary pursuant to share based compensation plan</td><td>$ 5,529</td><td>$ 5,314</td><td>$ 4,902</td><td></td></tr><tr><td>Dividends payable</td><td>$ 47,193</td><td>$ 28,816</td><td>$ 31,655</td><td></td></tr></table>

## Note 34—Subsequent Events

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

- During February 2020, the Company, through its indirect subsidiary, PMT CREDIT RISK TRANSFER TRUST 2020-1R, issued an aggregate principal amount of $350.0 million in secured term notes (the “2020-1R Notes”) to qualified institutional buyers under Rule 144A of the Securities Act. The 2020-1R Notes bear interest at a rate equal to one-month LIBOR plus 2.35% per annum, with an initial payment date of March 27, 2020 and, with respect to each calendar month thereafter, a payment date that shall occur on the second business day following the latest underlying payment date of all of the underlying series in that calendar month. The 2020-1R Notes mature in February 2023 or, if extended pursuant to the terms of the related indenture, February 2025 (unless earlier redeemed in accordance with their terms).

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



## 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

By: /s/ David A. Spector
David A. Spector
President and Chief Executive Officer
(Principal Executive Officer)

Dated: February 21, 2020

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the registrant in the capacities and on the dates indicated.

<table><tr><td>Signatures</td><td>Title</td><td>Date</td></tr><tr><td>/s/ David A. Spector</td><td></td><td></td></tr><tr><td>David A. Spector</td><td>President and Chief Executive Officer (Principal Executive Officer)</td><td>February 21, 2020</td></tr><tr><td>/s/ Andrew S. Chang</td><td></td><td></td></tr><tr><td>Andrew S. Chang</td><td>Senior Managing Director and Chief Financial Officer (Principal Financial Officer)</td><td>February 21, 2020</td></tr><tr><td>/s/ Gregory L. Hendry</td><td></td><td></td></tr><tr><td>Gregory L. Hendry</td><td>Chief Accounting Officer (Principal Accounting Officer)</td><td>February 21, 2020</td></tr><tr><td>/s/ Stanford L. Kurland</td><td></td><td></td></tr><tr><td>Stanford L. Kurland</td><td>Executive Chairman</td><td>February 21, 2020</td></tr><tr><td>/s/ Scott W. Carnahan</td><td></td><td></td></tr><tr><td>Scott W. Carnahan</td><td>Trustee</td><td>February 21, 2020</td></tr><tr><td>/s/ Preston DuFauchard</td><td></td><td></td></tr><tr><td>Preston DuFauchard</td><td>Trustee</td><td>February 21, 2020</td></tr><tr><td>/s/ Randall D. Hadley</td><td></td><td></td></tr><tr><td>Randall D. Hadley</td><td>Trustee</td><td>February 21, 2020</td></tr><tr><td>/s/ Nancy McAllister</td><td></td><td></td></tr><tr><td>Nancy McAllister</td><td>Trustee</td><td>February 21, 2020</td></tr><tr><td>/s/ Marianne Sullivan</td><td></td><td></td></tr><tr><td>Marianne Sullivan</td><td>Trustee</td><td>February 21, 2020</td></tr><tr><td>/s/ Stacey D. Stewart</td><td></td><td></td></tr><tr><td>Stacey D. Stewart</td><td>Trustee</td><td>February 21, 2020</td></tr><tr><td>/s/ Frank P. Willey</td><td></td><td></td></tr><tr><td>Frank P. Willey</td><td>Trustee</td><td>February 21, 2020</td></tr></table>



## EXECUTIVE OFFICERS \( ^{*} \) 

Stanford L. Kurland
Executive Chairman

David A. Spector
President and Chief Executive Officer

Andrew S. Chang
Senior Managing Director and Chief
Financial Officer

Vandad Fartaj
Senior Managing Director and Chief
Investment Officer

 \( ^{*} \) as of March 31, 2020

Jeffrey P. Grogin
Senior Managing Director and Chief
Enterprise Operations Officer

Doug Jones
Senior Managing Director and Chief
Mortgage Banking Officer

David M. Walker
Senior Managing Director and Chief
Risk Officer




Pictured left to right: Scott W. Carnahan, Frank P. Willey, Nancy McAllister, Stanford L. Kurland, David A. Spector, Stacey D. Stewart, Marianne Sullivan, Preston P. DuFauchard and Randall D. Hadley

## BOARD OF TRUSTEES \( ^{*} \) 

Stanford L. Kurland
Executive Chairman,
PennyMac Mortgage Investment Trust

David A. Spector
President and Chief Executive Officer,
PennyMac Mortgage Investment Trust

Scott W. Carnahan \( ^{(1)(3)(5)} \) 
Senior Managing Director,
FTI Consulting, Inc.

Preston P. DuFauchard \( ^{(3)(5)(6)} \) 
Independent Lead Trustee
Chief Executive Officer,
West Oakland Health Council

Randall D. Hadley \( ^{(1)(5)} \) 
Certified Public Accountant and
Partner (Retired),
Grant Thornton LLP

Nancy McAllister \( ^{(2)(3)(6)} \) 
Senior Advisor,
Star Mountain Capital, LLC
Star Mountain Stimulus Fund, L.P.

Stacey D. Stewart \( ^{(2)(4)} \) 
President,
March of Dimes Foundation

Marianne Sullivan \( ^{(1)(4)(6)} \) 
Founder and Chief Strategy Consultant,
OptimX Advisors, Inc.

Frank P. Willey \( ^{(2)(4)(5)} \) 
Partner,
Hennelly & Grossfeld LLP

Board Committees:
(1) Audit Committee
(2) Compensation Committee
(3) Finance Committee
(4) Nominating and Corporate Governance Committee
(5) Related Party Matters Committee
(6) Risk Committee