0001464423 pmt:MortgageLoansAcquiredForSaleMember 2021-12-31

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, ~~2018~~2021

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

For the transition period from to

Commission file number: 001-34416

PennyMac Mortgage Investment Trust

(Exact name of registrant as specified in its charter)

Maryland

27-0186273

(State or other jurisdiction of

incorporation or organization)

(IRS Employer

Identification No.)


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

(818) 224-7442

(Registrant’s telephone number, including area code)

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


Title of Each Class	Trading Symbol (s)	Name of Each Exchange on Which Registered
8.125% Series A Cumulative Redeemable Preferred Shares of Beneficial Interest, $0.01 Par Value	PMT/PA	New York Stock Exchange
8.00% Series B Cumulative Redeemable Preferred Shares of Beneficial Interest, $0.01 Par Value 6.75% Series C Cumulative Redeemable Preferred Shares of Beneficial Interest, $0.01 Par Value Common Shares of Beneficial Interest, $0.01 Par Value	PMT/PB PMT/PC PMT	New York Stock Exchange New York Stock Exchange New York Stock Exchange

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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ☒

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

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

Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☒

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 30, ~~2018~~2021 the aggregate market value of the registrant’s common shares of beneficial interest, $0.01 par value (“common shares”), held by nonaffiliates was ~~$1,127,888,552~~$2,045,388,883 based on the closing price as reported on the New York Stock Exchange on that date.

As of February ~~25, 2019,~~22, 2022, there were ~~67,954,635~~97,374,345 common shares of the registrant outstanding.

Documents Incorporated By Reference

Document		Parts Into Which Incorporated
Definitive Proxy Statement for ~~2019~~2022 Annual Meeting of Shareholders		Part III

PENNYMAC MORTGAGE INVESTMENT TRUST

FORM 10-K

December 31, ~~2018~~2021

TABLE OF CONTENTS

		Page
Special Note Regarding Forward-Looking Statements		3
PART I		6
Item 1	Business	6
Item 1A	Risk Factors	1317
Item 1B	Unresolved Staff Comments	4447
Item 2	Properties	4447
Item 3	Legal Proceedings	4447
Item 4	Mine Safety Disclosures	47
PART II		44
~~PART II~~		4548
Item 5	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	4548
Item 6	~~Selected Financial Data~~Reserved	4748
Item 7	Management’s Discussion and Analysis of Financial Condition and Results of Operations	4849
Item 7A	Quantitative and Qualitative Disclosures About Market Risk	9683
Item 8	Financial Statements and Supplementary Data	9686
Item 98	Changes in and Disagreements With Accountants on Accounting and Financial Disclosure	9686
Item 9A	Controls and Procedures	9786
Item 9B	Other Information	88
Item 9C	Disclosure Regarding Foreign Jurisdictions that Prevent Inspections	88
PART III		99
~~PART III~~		~~100~~89
Item 10	Directors, Executive Officers and Corporate Governance	~~100~~89
Item 11	Executive Compensation	~~100~~89
Item 12	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	~~100~~89
Item 13	Certain Relationships and Related Transactions, and Director Independence	~~100~~90
Item 14	Principal Accounting Fees and Services	90
PART IV		~~100~~
~~PART IV~~		~~101~~91
Item 15	Exhibits and Financial Statement Schedules	~~101~~91
Item 16	Form 10-K Summary	~~112~~95
	Signatures
		70

SPECIAL NOTE REGARDING F~~ORWARD-LOOKING~~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;~~

•

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;~~

•

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~~

•

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.~~

•

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

~~the occurrence of natural disasters or other events or circumstances that could impact our operations;~~

~~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 mortgage loans and mortgage-related assets that satisfy our investment objectives;~~

~~the inherent difficulty in winning bids to acquire mortgage 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 impact to our CRT arrangements and agreements of increased borrower requests for forbearance under the Coronavirus Aid, Relief and Economic Security Act (“CARES Act”);

•

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

•

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

•

changes in general business, economic, market, employment and domestic and international political conditions, or in consumer confidence and spending habits from those expected;

•

declines in real estate or significant changes in U.S. housing prices or activity in the U.S. housing market;

•

the availability of, and level of competition for, attractive risk-adjusted investment opportunities in loans and mortgage-related assets that satisfy our investment objectives;

•

the inherent difficulty in winning bids to acquire loans, and our success in doing so;

•

the concentration of credit risks to which we are exposed;

•

the degree and nature of our competition;

•

our dependence on our manager and servicer, potential conflicts of interest with such entities and their affiliates, and the performance of such entities;

•

changes in personnel and lack of availability of qualified personnel at our manager, servicer or their affiliates;

•

the availability, terms and deployment of short-term and long-term capital;

•

the adequacy of our cash reserves and working capital;

•

our substantial amount of debt;

•

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

•

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

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

~~the performance, financial condition and liquidity of borrowers;~~

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

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

~~our indemnification and repurchase obligations in connection with mortgage 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 mortgage 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 failure to maintain appropriate internal control over financial reporting;~~

~~Our exposure to risks of loss and disruptions in operations resulting from adverse weather conditions and ma-made or natural disasters;~~

~~technologies for loans and our ability to mitigate security 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 mortgage loan products;~~

~~legislative and regulatory changes that impact the mortgage 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 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;

•

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;

•

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

•

our ability to maintain appropriate internal control over financial reporting;

•

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

•

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

•

our ability to detect misconduct and fraud;

•

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

•

developments in the secondary markets for our loan products;

•

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

•

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

•

the Consumer Financial Protection Bureau and its issued and future rules and the enforcement thereof;

•

changes in government support of homeownership;

•

our ability to effectively identify, manage and hedge our credit, interest rate, prepayment, liquidity, and climate risks;

•

changes in government or government-sponsored home affordability programs;

•

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 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 failure to deal appropriately with issues that may give rise to reputational risk; and~~

~~our organizational structure and certain requirements in our charter documents.~~

•

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.

~~PAR~~TPART 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 ~~residential mortgage loans and~~ 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 ~~U.S. mortgage~~ 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.

•

We are managed by PNMAC Capital Management, LLC (“PCM” or our “Manager”), a wholly-owned subsidiary of PFSI 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 mortgage 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 loan production and servicing activities (as described below) are performed on our behalf by another wholly-owned PFSI 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~~, non-Agency MBS, credit risk transfer (“CRT”) ~~investments, including~~ agreements (“CRT ~~Agreements~~Agreements”), and CRT ~~securities.~~securities (together, “CRT arrangements”). We have acquired ~~these~~our mortgage-related asset investments largely by purchasing, pooling and selling newly originated prime credit quality residential ~~mortgage~~ loans (“correspondent production”), retaining the MSRs relating to such ~~mortgage~~ loans and investing in CRT arrangements or non-Agency MBS associated with certain of such ~~mortgage~~ loans.

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

~~The~~ correspondent production, ~~segment represents the Company’s~~and corporate.

•

The credit sensitive strategies segment represents our investments in CRT arrangements, non-Agency subordinated bonds, distressed loans and real estate.

•

The interest rate sensitive strategies segment represents our 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 our 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 PCM and PLS.

We primarily sell the loans we acquire through our correspondent production activities to government-sponsored entities such as the Federal National Mortgage Association (“Fannie Mae”) and the Federal Home Loan Mortgage Corporation (“Freddie Mac”) or to PLS for sale into securitizations guaranteed by the Government National Mortgage Association (“Ginnie Mae”). Fannie Mae, Freddie Mac and Ginnie Mae are each referred to as an ~~intermediary between mortgage lenders~~“Agency” and, ~~the capital markets by purchasing, pooling and reselling newly originated prime credit quality mortgage loans either directly or in the form of MBS. Assets resulting from these activities serve~~collectively, as the ~~source for our investments in MSRs and CRT arrangements.~~“Agencies.”

•

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

The credit sensitive strategies segment represents the Company’s investments in CRT Agreements, firm commitment to purchase CRT securities, distressed mortgage loans, real estate acquired in settlement of mortgage loans (“REO”) and non-Agency subordinated bonds and small balance commercial real estate mortgage loans.

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

~~The corporate segment includes certain interest income and management fee and other corporate expenses.~~

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

	For the year ended December 31,															Year ended December 31,
	2018			2017			2016			2015			2014			2021			2020			2019
	(in thousands)															(in thousands)
Net investment income:
Correspondent production	$	105,606		$	131,981		$	168,530		$	100,400		$	62,897
Credit sensitive strategies		110,271			133,400			66,256			108,315			254,922		$	323,121		$	(305,340	)	$	191,865
Interest rate sensitive strategies		133,613			51,777			36,651			39,447			38,269			(204,665	)		174,558			50,650
Correspondent production																	298,925			597,222			242,762
Corporate		1,577			782			651			603			653			2,916			2,911			3,538
	$	351,067		$	317,940		$	272,088		$	248,765		$	356,741		$	420,297		$	469,351		$	488,815
Pre-tax income:
Correspondent production	$	16,472		$	42,938		$	73,842		$	36,390		$	10,960
Pretax income:
Credit sensitive strategies		87,251			102,214			17,288			66,038			206,738		$	306,643		$	(317,143	)	$	182,176
Interest rate sensitive strategies		98,432			22,683			14,041			20,516			23,371			(290,065	)		105,697			1,148
Correspondent production																	86,936			344,639			64,593
Corporate		(44,167	)		(43,289	)		(43,408	)		(49,640	)		(61,605	)		(58,853	)		(53,463	)		(57,276	)
	$	157,988		$	124,546		$	61,763		$	73,304		$	179,464		$	44,661		$	79,730		$	190,641
Total assets at year end:
Correspondent production	$	1,698,656		$	1,302,245		$	1,734,290		$	1,298,968		$	665,489
Credit sensitive strategies		1,602,776			1,791,447			2,288,886			2,787,064			2,655,500		$	1,848,294		$	2,920,558		$	2,364,749
Interest rate sensitive strategies		4,373,488			2,414,423			2,177,024			1,640,062			1,359,409			7,363,878			4,593,127			4,993,840
Correspondent production																	4,325,750			3,781,010			4,216,806
Corporate		138,441			96,818			157,302			100,830			216,860			234,786			197,316			195,956
	$	7,813,361		$	5,604,933		$	6,357,502		$	5,826,924		$	4,897,258		$	13,772,708		$	11,492,011		$	11,771,351

In our correspondent production ~~activities,~~segment, we purchase Agency-eligible ~~mortgage loans~~ and jumbo ~~mortgage~~ loans. A jumbo ~~mortgage~~ loan is a loan in an amount that exceeds the maximum loan amount for loans that are eligible ~~loans~~for sale to the Agencies under ~~Agency~~their guidelines. We then sell Agency-eligible mortgage loans meeting the guidelines of Fannie Mae and Freddie Mac on a servicing-retained basis whereby we retain the related MSRs; government mortgage 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 mortgage loans, which we generally sell on a servicing-retained basis.either:

•

sell Agency-eligible loans meeting the guidelines of Fannie Mae and Freddie Mac on a servicing-retained basis whereby we retain the related MSRs;

•

sell government loans (insured by the Federal Housing Administration or guaranteed by the Veterans Administration or U.S. Department of Agriculture), on a servicing-released basis to PLS, a Ginnie Mae approved issuer and servicer, for which we earn sourcing fees as described in Note 4 – Transactions with Related Parties to the consolidated financial statements included in this Report; or

•

create and issue pass-through MBS, retain a portion of the subordinate securities and sell the senior pass-through MBS to nonaffiliates.

•

sell loans with certain specified characteristics to banks or other investors, generally on a servicing retained basis

Our correspondent production ~~business~~segment involves purchases of ~~mortgage~~ loans from approved mortgage originators that meet specific criteria related to management experience, financial strength, risk management controls and ~~mortgage~~ loan quality. During 2021, we were the largest correspondent aggregator in the United States as ranked by Inside Mortgage Finance. As of December 31, ~~2018,~~2021, we ~~have 710~~had 768 approved sellers with delegated underwriting authority, primarily independent mortgage originators and small banks located across the United States. ~~During 2018, we were the second largest~~PLS also serves as a source of correspondent ~~aggregator in the United States as ranked by Inside Mortgage Finance.~~

production to us.

Following is a summary of our correspondent production activities:

	Year ended December 31,
	2021		2020		2019
	(in thousands)
Correspondent loan purchases at fair value:
Agency-eligible (1)	$	113,667,618	$	106,472,654	$	63,989,938
Government-insured or guaranteed-for sale to PLS		67,702,945		63,574,547		50,499,641
Jumbo		—		—		12,839
Home equity lines of credit		—		2,569		5,182
	$	181,370,563	$	170,049,770	$	114,507,600
Interest rate lock commitments issued	$	172,953,139	$	185,414,040	$	114,895,643
Fair value of loans at year end pending sale to:
Nonaffiliates	$	3,856,030	$	3,085,910	$	3,653,410
PLS		314,995		460,414		490,383
	$	4,171,025	$	3,546,324	$	4,143,793
Number of approved sellers at year-end (2)		768		714		676

Year ended December 31,

2018

2017

2016

2015

2014

(in thousands)

Correspondent mortgage loan purchases at fair value:

Government-insured or guaranteed

$
37,764,019

$
42,087,007

$
42,171,914

$
31,945,396

$
16,523,216

Agency-eligible

30,176,215

23,742,999

23,930,186

14,360,888

11,474,345

Jumbo

67,501

—

10,227

117,714

383,854

Commercial

7,263

69,167

18,112

14,811

—

$
68,014,998

$
65,899,173

$
66,130,439

$
46,438,809

$
28,381,415

Interest rate lock commitments issued

$
66,723,338

$
65,926,958

$
67,139,108

$
48,138,062

$
27,815,464

Fair value of mortgage loans at year end pending sale to:

Nonaffiliates

$
1,557,649

$
989,944

$
868,496

$
614,507

$
428,397

PLS

86,308

279,571

804,616

669,288

209,325

$
1,643,957

$
1,269,515

$
1,673,112

$
1,283,795

$
637,722

Number of approved sellers at year-end

710

613

522

432

344

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

(2)	Includes only sellers with delegated underwriting authority.

The sale of ~~mortgage~~ loans to nonaffiliates from our correspondent production activities serves as the source of our investments in MSRs, ~~and~~ CRT arrangements and subordinate non-Agency MBS which are summarized below:

		Year ended December 31,
		2021		2020			2019
	(in thousands)
Sales of loans acquired for sale:
To nonaffiliates		$	110,919,477	$	106,306,805		$	61,128,081
To PennyMac Financial Services, Inc.			67,851,630		63,618,185			50,110,085
		$	178,771,107	$	169,924,990		$	111,238,166
Net gains on loans acquired for sale		$	87,273	$	379,922		$	170,164
Investment activities resulting from correspondent production:
Receipt of MSRs as proceeds from sales of loans		$	1,484,629	$	1,158,475		$	837,706
Retention of interests in securitizations of loans secured by investment properties, net of associated asset-backed financings			42,256		—			—
Purchase of subordinate bonds backed by previously-sold loans secured by investment properties held in consolidated variable interest entities			28,815		—			—
Investments in CRT arrangements:
Deposits securing CRT arrangements			—		1,700,000			933,370
Recognition of firm commitment to purchase CRT securities (1)			—		(38,161	)		99,305
Change in face amount of firm commitment to purchase CRT securities and commitment to fund Deposits securing CRT arrangements			—		(1,502,203	)		897,151
Total investments in CRT arrangements			—		159,636			1,929,826
Total investments resulting from correspondent activities		$	1,526,885	$	1,318,111		$	2,767,532

Year ended December 31,

2018

2017

2016

2015

2014

(in thousands)

Sales of mortgage loans acquired for sale:

To nonaffiliates

$
29,369,656

$
24,314,165

$
23,525,952

$
14,206,816

$
11,703,015

To PennyMac Financial Services, Inc.

37,967,724

42,624,288

42,051,505

31,490,920

16,431,338

$
67,337,380

$
66,938,453

$
65,577,457

$
45,697,736

$
28,134,353

Net gain on mortgage loans acquired for sale

$
59,185

$
74,516

$
106,442

$
51,016

$
35,647

Investment activities driven by correspondent production:

Receipt of MSRs as proceeds from sales of mortgage loans

$
356,755

$
290,309

$
275,092

$
154,474

$
121,333

Investments in CRT Agreements

Deposits of cash securing CRT Agreements

$
596,626

$
152,641

$
306,507

$
147,446

$
—

Change in commitments to fund Deposits securing
   CRT Agreements resulting from sale of mortgage
   loans under CRT Agreements and settlement of
   outstanding commitments

(482,471
)

390,362

92,109

—

—

Total investments in CRT Agreements

$
114,155

$
543,003

$
398,616

$
147,446

$
—

Increase in face amount of firm commitment to
   purchase CRT securities

$
605,052

$
—

$
—

$
—

$
—

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

We also invest in MBS and ESS on MSRs acquired by ~~PLS and real estate held for investment.~~PLS. We historically invested in distressed mortgage assets ~~(mortgage~~(loans and real estate acquired in settlement of loans ~~and REO), which are no longer~~(“REO”)). We have substantially liquidated our ~~primary focus for new investments.~~investment in distressed mortgage assets.

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

Year ended December 31,

2018

2017

2016

2015

2014

(in thousands)

MBS

$
1,810,877

$
251,872

$
765,467

$
84,828

$
185,972

ESS

2,688

5,244

6,603

278,282

103,235

Distressed mortgage loans

—

—

—

241,981

554,604

$
1,813,565

$
257,116

$
772,070

$
605,091

$
843,811

	Year ended December 31,
	2021			2020		2019
	(in thousands)
MBS, net of sales	$	932,270		$	352,307	$	546,111
ESS, net of repurchase		(129,304	)		2,093		1,757
	$	802,966		$	354,400	$	547,868

Our portfolio of mortgage investments was comprised of the following:

December 31,

2018

2017

2016

2015

2014

(in thousands)

Credit Sensitive Assets

CRT Agreements (1)

$
1,270,488

$
687,507

$
465,669

$
147,593

$
—

Firm commitment to purchase CRT securities

37,994

—

—

—

—

Distressed mortgage loans at fair value

Performing

28,806

414,785

611,584

877,438

664,266

Nonperforming

88,926

353,648

742,988

1,222,956

1,535,317

117,732

768,433

1,354,572

2,100,394

2,199,583

REO and real estate held for investment

128,791

207,089

303,393

350,642

303,228

Subordinated interest in mortgage loans held in VIE

9,365

9,661

8,925

35,484

35,663

Small balance commercial mortgage loans

8,559

9,898

8,961

14,590

—

1,534,935

1,682,588

2,141,520

2,648,703

2,538,474

Interest Rate Sensitive Assets

Agency MBS

2,610,422

989,461

865,061

225,150

195,518

Non-Agency senior MBS

—

—

—

97,323

111,845

MSRs

1,162,369

844,781

656,567

459,741

357,780

ESS

216,110

236,534

288,669

412,425

191,166

Interest rate hedges (2)

25,276

9,303

4,749

2,282

3,016

Mortgage loans held in a VIE, net of asset-backed
financing and subordinated interest

4,709

3,960

4,346

172,220

325,786

4,018,886

2,084,039

1,819,392

1,369,141

1,185,111

$
5,553,821

$
3,766,627

$
3,960,912

$
4,017,844

$
3,723,585

	December 31,
	2021			2020			2019
	(in thousands)
Credit sensitive assets:
CRT arrangements, net (1)	$	1,686,445		$	2,617,509		$	2,114,868
Firm commitment to purchase credit risk transfer securities		—			—			109,513
Subordinate interests in loans held in VIEs, net of associated asset-backed financings		85,266			8,981			13,007
Distressed loans at fair value		4,161			8,027			14,426
REO and real estate held for investment		14,382			28,709			65,583
Other (2)		4,229			6,576			5,647
		1,794,483			2,669,802			2,323,044
Interest rate sensitive assets:
MBS		2,666,768			2,213,922			2,839,633
MSRs		2,892,855			1,755,236			1,535,705
ESS		—			131,750			178,586
Net interest rate lock commitments		2,451			72,386			11,154
Net interest rate hedges (3)		(2,546	)		(123,490	)		195,895
		5,559,528			4,049,804			4,760,973
	$	7,354,011		$	6,719,606		$	7,084,017

(1)	Investments in CRT ~~Agreements~~arrangements include deposits securing CRT ~~Agreements~~arrangements, CRT strips, CRT derivatives and ~~CRT derivatives.~~interest-only security payable.

(2)	Comprised of home equity lines of credit and a small balance commercial loan.

(3)	Derivative assets, net of derivative liabilities, excluding interest rate lock ~~commitment~~commitments (“~~IRLC”~~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 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~~

•

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.~~

•

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~~PFSI 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~~Following is a summary of our ~~investment portfolio by using~~financing, including borrowings and the assets pledged to secure those borrowings as of December 31, 2021:

	Assets financed
Financing	MBS		Loans acquired for sale		Loans at fair value		CRT assets		MSRs		REO		Total
	(in thousands)
Borrowings
Short term
Assets sold under agreements to repurchase	$	2,651,559	$	3,757,480	$	62,851	$	—	$	200,000	$	—	$	6,671,890
Mortgage loan participation purchase and sale agreements		—		49,988		—		—		—		—		49,988
Long term
Notes payable secured by CRT arrangements and MSRs		—		—		—		1,200,206		1,271,755		—		2,471,961
Asset-backed financings at fair value		—		—		1,469,999		—		—		—		1,469,999
Interest-only security payable		—		—		—		10,593		—		—		10,593
Total secured borrowings	$	2,651,559	$	3,807,468	$	1,532,850	$	1,210,799	$	1,471,755	$	—	$	10,674,431
Exchangeable senior notes														502,459
Total borrowings	$	2,651,559	$	3,807,468	$	1,532,850	$	1,210,799	$	1,471,755	$	—		11,176,890
Shareholders' equity														2,367,518
Total financing													$	13,544,408

Assets pledged to secure financing		2,666,768		4,059,479		1,564,924		1,697,038		2,956,999		7,293		12,952,501

Debt-to equity ratio													4.72:1

Debt

Our current debt financing strategy is to finance our assets in such a ~~combination~~way as to match the liabilities used to finance them to the expected life of ~~equity~~the underlying assets where we believe such borrowing is prudent, appropriate and available. Our borrowings are primarily collateralized borrowings in the form of sales of assets under agreements to repurchase, loan and security agreements, and loan participation purchase and sale agreements. We supplement these borrowings with long-term securitized notes, including secured term financing for our MSRs and our CRT arrangements.

Terms of our borrowings are summarized in Notes 13 and 14 to our consolidated financial statements included in this Report. A significant portion of our balance sheet is comprised of longer-lived assets - such as MSRs, servicing advances, CRT arrangements and distressed loans - that have historically been less liquid, and more difficult to finance than our newly originated mortgage loans. As a result, we have historically relied on shorter-term arrangements, primarily sales of the assets under agreements to repurchase, to finance our longer-lived assets. As we have grown, our ability to finance more of our assets under longer term arrangements that more closely align the term of the borrowings with the expected life of the corresponding assets, on terms that are economically viable for us has increased.

Following is a summary of the types of debt we use to finance our investing and operating activities:

Short-term debt

Sales of assets under agreements to repurchase

Our largest source of debt financing is the sale of assets under agreements to repurchase. ~~We use borrowings~~Under these agreements, we sell assets or participation certificates to ~~finance our investments~~a lender under a commitment to repurchase the asset or participation certificate within a specified period - generally ranging from 30 days for MBS, 60 to 120 days for mortgage loans and ~~not~~two to ~~speculate on changes in interest rates.~~

~~Equity financing~~five years for participation certificates secured by MSRs.

During ~~2014, we issued 3.8 million common shares under an ATM Equity Offering Sales Agreement~~^sm ~~and received net proceeds totaling $89.5 million. We used~~ the ~~proceeds~~period the agreement to repurchase is outstanding, our lender is generally contractually authorized to repledge the assets underlying the repurchase agreement. The repurchase agreements generally contain margin provisions that require us to maintain our borrowings at a specified percentage of the ~~2014 offerings~~fair value of the assets pledged to ~~fund~~secure the borrowings. As a result, we are subject to margin calls during the period the repurchase agreements are outstanding and, therefore, may be required to repay a portion of the ~~purchase price~~borrowings before the respective repurchase agreements mature if the fair value (as determined by the applicable lender) of ~~our mortgage-related investments,~~the assets securing those repurchase agreements decreases.

We are exposed to loss in the event a lender makes a margin call to us and we are unable to fund the ~~continued growth~~margin call. In such a circumstance, the lender is contractually allowed to liquidate the assets securing the repurchase agreement and pursue repayment from us for any balance not satisfied through the sale of the collateral. To the extent we finance long-lived assets with repurchase agreements, we are also exposed to the risk of our ~~correspondent production business~~being unable to refinance these assets under terms that are reasonable to us when the repurchase agreements mature.

Our repurchase agreement facilities include a mix of committed and ~~for general business purposes.~~

~~During 2015, our board~~uncommitted facilities. Committed facilities contractually bind the lender to purchase assets meeting the criteria of ~~trustees authorized a common share repurchase program under which, as amended, we may repurchase~~the credit facility up to ~~$300 million~~a committed amount, whereas the lender is not required to fund repurchase agreements on uncommitted amounts. We pay a facility commitment fee to maintain committed amounts and endeavor to minimize our borrowing costs while maintaining adequate committed amounts to fund our expected loan inventory levels during the facility commitment period.

Mortgage loan participation purchase and sale agreements

We finance a portion of our ~~outstanding common shares. Repurchased common shares~~inventory of loans acquired for sale using mortgage loan participation purchase and sale agreements. Under mortgage loan participation purchase and sale agreements, we sell participation certificates to a lender, representing undivided beneficial ownership interests in pools of loans deemed eligible to back pass-through MBS issued and guaranteed by Fannie Mae or Freddie Mac, while the pools are ~~canceled upon settlement~~pending securitization and the sale of the ~~repurchase transactions and returned~~resulting securities. As part of the sale of the participation certificates, we arrange to deliver the resulting securities to the ~~authorized but unissued share pool. Repurchases under this program are summarized below:~~lender, and assign the commitments between us and nonaffiliates to sell the securities.

Year ended December 31,

Cumulative

2018

2017

2016

2015

total

(in thousands, except per-share amounts)

Common shares repurchased

671

5,647

7,368

1,045

14,731

Cost of common shares repurchased

$
10,719

$
91,198

$
98,370

$
16,338

$
216,625

Average cost per share

$
15.96

$
16.15

$
13.35

$
15.65

$
14.71

~~During 2017, we issued 4.6 million~~Mortgage loan participation purchase and sale certificates generally have a term of our 8.125% Series A Fixed-to-Floating Rate Cumulative Redeemable Preferred Shares of Beneficial Interest, $0.01 par value per share (“Series A Preferred Shares”) and 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”). We received proceeds of $299.7 million net of issuance costs from these issuances. From, and including, the date of original issuanceup to but not including, March 15, 2024 and June 15, 2024, respectively, the Company pays cumulative dividends on the Series A Preferred Shares at a fixed rate of 8.125% and on the Series B Preferred Shares at a fixed rate of 8.00% per annum45 days based on the ~~$25.00 per share liquidation preference. Thereafter, dividends are paid at rates indexed to the U.S. Dollar LIBOR rate.~~

~~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 2020 (the “Exchangeable Notes”). The net proceeds were used to fund our business and investment activities, including the acquisition of distressed mortgage loans or other investments; the fundinganticipated delivery date of the ~~continued growth of our correspondent production business, including~~related MBS and are repaid when the nonaffiliated investors purchase ~~of jumbo loans;~~ the ~~repayment of other indebtedness; and general business purposes.~~securities.

~~We maintain multiple master repurchase agreements and~~Our mortgage loan participation purchase and sale ~~agreements with money center banks to fund newly originated prime mortgage loans purchased from correspondent sellers. The total unpaid principal balance (“UPB”) outstanding under the~~agreement facilities ~~in existence as of December 31, 2018 was $1.5 billion.~~

~~During 2016, our wholly-owned subsidiary, PennyMac Holdings, LLC (“PMH”) entered into a master repurchase agreement with PLS, pursuant to which PMH sells to PLS~~are both committed and uncommitted facilities. Mortgage loan participation certificates ~~representing a beneficial interest~~do not contain margin call provisions. However, in ~~Ginnie Mae ESS under an agreement to repurchase. The purchase price is based upon a percentage~~the event the purchasers of the ~~market value of~~securities fail to settle the ~~ESS. Pursuant~~purchase, we are obligated to purchase the ~~master repurchase agreement, PMH grants to PLS a security interest in all of its right, title and interest in, to and under~~securities from 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 UPB outstanding under this facility as of December 31, 2018 was $131.0 million.lender.

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 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 total UPB outstanding under such agreement to repurchase as of December 31, 2018 was $5.0 million. 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.

~~During 2018, the Company, through PMC and PMH, entered into a~~ Loan and ~~Security Agreement with Credit Suisse First Boston Mortgage Capital LLC (“Credit Suisse”), pursuant to which PMC and PMH may~~security agreements

We finance ~~certain mortgage servicing rights (inclusive of any~~our MSRs 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,~~using a loan and security agreement with a term to maturity of two years from its original effective date. Under the ~~“Freddie MSRs”), in an aggregate loan amount~~agreement, we borrow amounts collateralized by the MSRs, the fair value of which is determined by a third party agent, on a monthly basis, or at the discretion of the lender. The lender makes available both committed and uncommitted amounts, with the maximum maturity of borrowed balances not to exceed ~~$175 million, all~~the term to maturity of ~~which is committed.~~ the loan and security agreement.

The ~~note matures on February 1, 2020.~~

~~Our~~agreements includes provisions that require us to maintain our borrowings ~~are made under agreements that include various covenants, including~~at a level not to exceed a specified percentage of the ~~maintenance~~fair value 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~~MSRs pledged to secure the borrowings. As a result, we are subject to margin calls during the period any amount is outstanding under the agreements. We are exposed to loss in the event the lender makes a margin call to us and we are unable to fund the margin call. In such ~~borrowings~~a circumstance, the lender is contractually allowed to liquidate any portion of the MSRs securing the agreement and pursue repayment from us for any balance not satisfied through their subsequent sale of the MSRs.

Long-term debt

Notes payable secured by CRT arrangements and MSRs

Our notes payable secured by CRT arrangements and MSRs represent long-term financing of our CRT and MSR assets and include:

•

$800 million in secured term notes issued to qualified institutional buyers under Rule 144A of the Securities Act of 1933, as amended (the “Securities Act”). The term notes are secured by MSRs on Fannie Mae loans that are pledged to a subsidiary trust that has also issued variable funding notes (“VFNs”) that may be financed with certain lenders in the form of assets sold under agreements to repurchase. VFNs are typically used to finance a portion of the fair value of MSRs held by the subsidiary trust in excess of the value required to collateralize the secured term notes. The term notes include margin call provisions that require us to maintain a certain advance rate based on the fair value of the underlying MSRs. As the fair value of MSRs is subject to periodic fluctuation, we are required to either pledge additional MSRs or cash to the subsidiary trust when the fair value of the MSRs decreases even though the borrowings have a long-term maturity.

•

$1.2 billion of term notes secured by our investment in CRT assets issued to qualified institutional buyers under Rule 144A of the Securities Act. These term notes do not include margin call provisions. However, these term notes must be repaid based on the amortization of the CRT assets that collateralize them. These term notes have maturities ranging from March of 2022 through February of 2024. A portion of these term notes have terms that provide for optional extensions of two years under conditions provided in the respective agreements.

Asset-backed financings

We have participated in various transactions whereby we invest in subordinate securities issued in loan securitizations. These transactions are sponsored by us or a nonaffiliate. We acquire the loans underlying these loan securitizations through our correspondent lending activities. We then either sell the loans to a nonaffiliate which pools the loans into securities, or we pool the loans into securities issued by one of our subsidiary trusts. We purchase subordinate securities from nonaffiliate sponsored transactions and retain subordinate securities in the transactions we sponsored. Any mortgage servicing rights for the loans underlying these securities are owned by us, and sub-serviced by PLS for the subsidiary trusts issuing the securities.

Because we hold substantially all of the subordinate securities created in these transactions, we include the assets of the issuing trust on our consolidated balance sheet, primarily Loans at fair value. We alsoinclude the securities issued to nonaffiliates by the issuing trusts as Asset-backed financings at Fair Value on our consolidated balance sheet.

This debt is repaid by the issuing trust from the cash flows received on the loans underlying these subordinated securities. Cash flows from those loans represent the sole source of repayment of this debt and the holders of this debt have no recourse to other assets on our consolidated balance sheet. The maturities of these financings are based on the loan(s) with the latest maturity of the loans in the issuing subsidiary trusts.

Interest-only security payable

One of the classes of the securities issued by the trusts relating to our investments in CRT arrangements is an interest-only security that was offered to a nonaffiliate. As discussed in Note 6 – Variable Interest Entities to the consolidated financial statements included in this Report, we consolidate the trusts that issue the securities underlying our investments in the CRT arrangements. As part of the consolidation of the CRT arrangements, we recognize this interest-only security.

This debt is repaid by the issuing trust from the cash flows based on the reference loans underlying these securities. Cash flows from those loans represent the sole source of repayment of this security and its holder has no recourse to other assets on our consolidated balance sheet.

Exchangeable senior notes

We have $210 million in outstanding exchangeable senior notes due to mature on November 1, 2024, and $345 million in outstanding exchangeable senior notes due on mature March 15, 2026. The exchangeable senior notes are unsecured obligations. The exchangeable senior notes are exchangeable into 46.1063 PMT common shares per $1,000 principal amount for the notes maturing on November 1, 2024 and 40.101 PMT common shares per $1,000 principal amount for the notes maturing on March 15, 2026, subject to adjustment upon the occurrence of certain events. The exchangeable senior notes bear interest at 5.50%.

Equity

Our shareholders’ equity includes both common and cumulative preferred shares, partially offset by our accumulated deficit as summarized below:

	December 31, 2021
	(in thousands)
Paid-in capital
Preferred shares	$	541,482
Common shares		2,082,706
		2,624,188
Accumulated deficit		(256,670	)
	$	2,367,518

We actively manage our equity financing and endeavor to obtain an equity structure that optimizes the returns to our common shareholders. This approach to managing our equity includes supplementing our common shares with issuances of preferred shares and share repurchase activities. At December 31, 2021, we had $200 million of common shares available for issuance under our at-the-market equity-offering program and $89.3 million authorized for share repurchases.

Following is a summary of our offerings and repurchases of common shares:

Year ended December 31,		Share offerings		Share repurchases
		(in thousands)
	2021	$	—	$	56,855
	2020	$	5,597	$	37,267
	2019	$	829,457	$	—

Our preferred shares are comprised of three series of $25 par value cumulative preferred shares that have dividend rates ranging from 6.75% to 8.125% of their par values and liquidation preferences totaling $560 million. Our preferred shares have no stated

maturity, are not subject to any sinking fund or mandatory redemption and will remain outstanding indefinitely unless we redeem or repurchase the shares or the shares are converted into common shares in connection with a change of control by the holders of the preferred shares, as provided in the respective articles supplementary establishing the terms of each series of preferred shares. The preferred shares become redeemable between March 15, 2024 and August 24, 2026.

As a REIT, we face limits on our ability to ~~fund any applicable margin requirements. We~~finance our operations and investments with retained earnings, as we are ~~not otherwise~~generally required to ~~maintain any specific debt-to-equity ratio,~~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. To the extent we satisfy the 90% distribution requirement but distribute less than 100% of our taxable income, we are subject to U.S. federal corporate income tax on our undistributed taxable income. We establish the level of our periodic common share distributions based on this requirement as well as our earnings, our financial condition and ~~we believe the appropriate leverage for the particular assets we finance depends on, among~~such 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~~factors as our board of trustees ~~has discretion~~may deem relevant from time 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 loans and~~ mortgage-related assets for our investment ~~portfolio, and developing the appropriate approach to be taken by PLS for each loan as it performs its specialty servicing.~~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 ~~mortgage~~ loans and MSRs. PLS’ ~~mortgage~~ loan servicing activities include collecting principal, interest and escrow account payments, accounting for and remitting collections to investors in the ~~mortgage~~ 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 ~~mortgage~~ loans serviced and total servicing compensation is established at levels that ~~our Manager believes~~we believe 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 ~~mortgage~~ loans with UPB totaling approximately ~~$299.3~~$509.7 billion, of which ~~$94.7~~$221.9 billion was subserviced for us as of December 31, ~~2018.~~2021.

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 ~~our~~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~~Compliance and Regulatory

WeOur business is subject to extensive federal, state and ~~PLS~~local regulation. The Consumer Financial Protection Bureau (“CFPB”) was established on July 21, 2010 under Title X of the Dodd-Frank Wall Street Reform and Consumer Protection Act. The CFPB is responsible for ensuring consumers are provided with timely and understandable information to make responsible decisions about financial transactions, federal consumer financial laws are enforced and consumers are protected from unfair, deceptive, or abusive acts and practices and from discrimination. Although the CFPB’s actions may improve consumer protection, such actions also have resulted in a meaningful increase in costs to consumers and financial services companies including mortgage originators and servicers.

Our and our Manager’s loan production and loan servicing operations are regulated at the state level by state licensing authorities and administrative agencies. Our Manager’s employees who engage in regulated activities must apply for licensing as a mortgage banker or lender, loan servicer and debt collector pursuant to applicable state law. These state licensing requirements typically require an application process, the payment of fees, background checks and administrative review. Our Manager’s servicing operations are licensed (or exempt or otherwise not required to be ~~licensed~~licensed) to ~~conduct~~service mortgage loans in all 50 states, the District of Columbia, Guam and the U.S. Virgin Islands. From time to time, we or our Manager receive requests from states and Agencies and various investors for records, documents and information regarding our policies, procedures and practices regarding our loan production and loan servicing business activities, and undergo periodic examinations by federal and state regulatory agencies.

The Secure and Fair Enforcement for Mortgage Licensing Act of 2008 (the “SAFE Act”) requires all states to enact laws that require all individuals acting in ~~certain jurisdictions. PLS is, or is taking steps~~the United States as mortgage loan originators 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~~be individually licensed or ~~are taking steps~~registered if they intend to ~~become licensed,~~offer mortgage loan products. These licensing requirements include enrollment in ~~those jurisdictions~~the Nationwide Mortgage Licensing System, application to state regulators for individual licenses and ~~for those activities where we believe it is cost effective~~the completion of pre‑licensing education, annual education 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,~~successful completion of both national and state exams.

We must comply with ~~applicable licensing~~a number of federal consumer protection laws, ~~or satisfy~~including, among others:

•

the Real Estate Settlement Procedures Act (“RESPA”), and Regulation X thereunder, which require certain disclosures to mortgagors regarding the costs of mortgage loans, the administration of tax and insurance escrows, the transferring of servicing of mortgage loans, the response to consumer complaints, and payments between lenders and vendors of certain settlement services;

•

the Truth in Lending Act (“TILA”), and Regulation Z thereunder, which require certain disclosures to mortgagors regarding the terms of their mortgage loans, notices of sale, assignments or transfers of ownership of mortgage loans, new servicing rules involving payment processing, and adjustable rate mortgage change notices and periodic statements;

•

the Equal Credit Opportunity Act and Regulation B thereunder, which prohibit discrimination on the basis of age, race and certain other characteristics, in the extension of credit;

•

the Fair Housing Act, which prohibits discrimination in housing on the basis of race, sex, national origin, and certain other characteristics;

•

the Home Mortgage Disclosure Act and Regulation C thereunder, which require financial institutions to report certain public loan data;

•

the Homeowners Protection Act, which requires the cancellation of private mortgage insurance once certain equity levels are reached, sets disclosure and notification requirements, and requires the return of unearned premiums;

•

the Servicemembers Civil Relief Act, which provides, among other things, interest and foreclosure protections for service members on active duty;

•

the Gramm‑Leach‑Bliley Act and Regulation P thereunder, which require us to maintain privacy with respect to certain consumer data in our possession and to periodically communicate with consumers on privacy matters;

•

the Fair Debt Collection Practices Act, which regulates the timing and content of debt collection communications;

•

the Fair Credit Reporting Act and Regulation V thereunder, which regulate the use and reporting of information related to the credit history of consumers;

•

the National Flood Insurance Reform Act of 1994, which provides for lenders to require borrowers/owners of properties in special flood hazard areas to purchase flood insurance for such properties, or for lenders to purchase flood insurance on behalf of such borrowers/owners; and

•

the CARES Act, which allows borrowers with federally-backed loans to request temporary payment forbearance in response to the increased borrower hardships resulting from the ongoing COVID-19 pandemic.

Many of these laws are further impacted by the ~~various requirements or to maintain them over time could materially~~SAFE Act and ~~adversely impact our business.~~implementation of new rules by the CFPB.

Competition

In our correspondent production activities, we compete with large financial institutions, the government-sponsored enterprise (“GSE”) cash windows and ~~with~~ other independent residential ~~mortgage~~ loan producers and ~~servicers.~~servicers such as Wells Fargo, JP Morgan Chase, US Bank, Western Alliance Bancorporation, Mr. Cooper, New Residential Investment Corp., Truist Financial and Ocwen Financial. 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 such as Arbor Realty Trust, Inc., ARMOUR Residential REIT, Inc., Ladder Capital Corp., MFA Financial, Inc., New Residential Investment Corp., New York Mortgage Trust and Redwood Trust, Inc., 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 ~~restraints~~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 ~~mortgage~~ 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~~Human Capital Resources

We have ~~three employees.~~one employee. All of our officers are employees of ~~PennyMac~~PFSI or its affiliates. Our long-term growth and success is highly dependent upon PFSI’s employees and PFSI’s ability to maintain a diverse, equitable and inclusive workplace representing a broad spectrum of backgrounds, ideas and perspectives. As part of these efforts, PFSI strives to offer competitive compensation and benefits, foster a community where everyone feels a greater sense of belonging and purpose, and provide employees with the opportunity to give back and make an impact in the communities where we live and serve.

PFSI had over 6,900 domestic employees as of the end of fiscal year 2021. In addition, as of the end of fiscal year 2021, PFSI’s workforce was 51.7%% female and 48.3% male, and the ethnicity of PFSI’s workforce was 42.9% White, 22.3% Hispanic or Latino, 17.2% Black or African American, 11.5% Asian and 6.1% other (which includes American Indian or Alaska Native, Native Hawaiian or Other Pacific Islander, and “Two or More Races”).

Recruiting and Employee Retention

We ~~do not pay~~and PFSI believe in attracting, developing and engaging the best talent, while providing a supportive work environment that prioritizes the health and safety of PFSI’s and our ~~officers any~~employees. PFSI’s and our compensation programs are designed to motivate and reward those who possess the necessary skills to support business strategy and create long-term shareholder value. PFSI employee compensation may include base salary, annual cash ~~compensation under~~incentives, long-term equity incentives as well as life and health insurance and 401(k) plan matching contributions.

PFSI employees receive regular business and compliance training to help further enhance their career development objectives. For example, the ~~terms~~average PFSI employee business and compliance training completion rate was 97% company-wide in 2021. PFSI also actively manages enterprise-wide and divisional mentoring programs and has partnered with an external vendor to establish a comprehensive, fully integrated wellness program designed to enhance productivity. PFSI also supports the U.S. military through its continued focus on recruiting and creating opportunities for veterans. For example, PFSI maintains the SERVE (Support & Engagement for Reservist & Veteran Employees) Business Resource Group (“BRG”) to further its efforts to attract, develop and engage an inclusive community of veterans and veteran families.

Diversity, Equity and Inclusion

We and PFSI believe that building a diverse, equitable and inclusive, high-performing workforce where PFSI’s employees bring varied perspectives and experiences to work every day creates a positive influence in PFSI’s workplace, community and business operations. Our Board of Trustees, our Nominating and Corporate Governance Committee, our Compensation Committee, and our Risk Committee provide regular oversight on our and PFSI’s corporate sustainability program, including our diversity, equity and inclusion programs and initiatives. We and PFSI are also taking proactive measures to strategically and sustainably advance equity in the workplace through the establishment of several BRGs, a diversity hiring initiative, mentorship programs, and external partnerships with organizations such as the Mortgage Bankers Association and the National Association of Minority Mortgage Bankers of America. PFSI established leadership goals and created customized initiatives that focused on PFSI’s continued effort to increase the number of women and underrepresented minorities in management ~~agreement.~~positions throughout the company and its business divisions. As it relates to our inclusive culture, PFSI established the following BRGs to emphasize career growth, networking, and learning opportunities for PFSI employees and allies with shared backgrounds and experiences: the BOLD BRG (for Black and African American employees and allies), the HOLA BRG (for Hispanic, Latino and Latinx employees and allies, the InspirASIAN BRG (for Asian American and Pacific Islander employees and allies), the Pennymac PRIDE BRG (for LGBTQIA employees and allies), the SERVE BRG (for veteran and military family employees and allies), and the wEMRG BRG (for women employees and allies). We and PFSI also foster a more inclusive culture through a variety of initiatives, including corporate training, special events, community outreach and corporate philanthropy.

Community Involvement

PFSI has a corporate philanthropy program that is governed by a philosophy of giving that prioritizes the support of causes and issues that are important in our local communities, and drives a culture of employee engagement and collaboration throughout our and PFSI’s organization. We and PFSI are committed to empowering our employees to be a positive influence in the communities where we live and serve, and believe that this commitment supports our efforts to attract and engage employees and improve retention. PFSI’s philanthropy program consists of three key components: an employee matching gift program, a charitable grants program and a corporate sponsorship program. PFSI’s five philanthropic focus areas are: community development and equitable housing, financial literacy and economic inclusion, human and social services, health and medical research, and environmental sustainability. PFSI has established a separate donor advised fund to facilitate donations to various local and national charitable organizations and has provided funding to several charitable organizations located near our office sites and national organizations that support missions such as sustainable homeownership, mortgage and rental assistance, food insecurity, disaster recovery, family and child advocacy, and community empowerment.

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.pennymacmortgageinvestmenttrust.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

Summary Risk Factors

We are subject to a number of risks that, if realized, could have a material adverse effect on our business, financial condition, liquidity, results of operations and our ability to make distributions to our shareholders. Some of our more significant challenges and risks include, but are not limited to, the following, which are described in greater detail below:

•

Our business, financial condition and results of operations may be adversely affected by the ongoing COVID-19 pandemic.

•

The COVID-19 pandemic and the CARES Act have significantly increased the number of borrowers in forbearance whose loans are in our CRT arrangements which may lead to significant future credit or fair value losses.

•

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.

•

New CFPB and state 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.

•

We are highly dependent on U.S. government-sponsored entities and government agencies, and any organizational or pricing changes at such entities or their regulators could materially and adversely affect our business, liquidity, financial condition 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.

•

Our or PLS’ 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.

•

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.

•

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

•

We have a substantial amount of indebtedness, which may limit our financial and operating activities, expose us to substantial increases in costs due to interest rate fluctuations, expose us to the risk of default under our debt obligations and adversely affect our ability to incur additional debt to fund future needs.

•

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

•

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

•

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

•

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.

•

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

•

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.

•

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

•

Government-sponsored entities have wound down lender risk share transactions such as CRT investments since the end of 2020. If we are unable to find a suitable alternative investment to investing in CRTs with similar returns, our business, liquidity, financial condition and results of operations could be materially and adversely affected.

•

A portion of our investments is in the form of loans, and the loans 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.

•

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

•

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

•

Our operations, businesses and customers could be materially adversely affected by the impacts related to climate change and related environmental sustainability matters.

•

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.

•

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.

•

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.

•

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.

•

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.

•

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

•

Termination of our management agreement is difficult and costly.

•

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.

•

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

•

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

•

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 taxable REIT subsidiaries, or TRSs, that are subject to U.S. federal 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.

•

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

•

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.

The above list is not exhaustive, and we face additional challenges and risks. Please carefully consider all of the information in this Report, including the matters set forth below in this 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 adversely affect our business, ~~liquidity,~~ financial condition, liquidity and 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, orliquidity and 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 mortgage 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 mortgage 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.

~~BlackRock and HC Partners, PFSI’s strategic investors, could compete with us or transact business with us, which could result in a conflict of interest.~~

PFSI’s strategic investors, BlackRock and HC Partners, each own significant investments in PFSI. Affiliates of each of BlackRock and HC Partners currently manage investment vehicles and separate accounts that may compete directly or indirectly with us. BlackRock and HC Partners are under no obligation to provide us with any financial or operational assistance, or to present opportunities to us for matters in which they may become involved. We may enter into transactions with BlackRock or HC Partners or with market participants with which BlackRock or HC Partners has business relationships, and such transactions and/or relationships could influence the decisions made by PCM with respect to the purchase or sale of assets and the terms of such purchase or sale. Such activities could have an adverse effect on the value of the positions held by us, or may result in BlackRock and/or HC Partners having interests adverse to ours.

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.

The experience of PFSI’s senior managers is valuable to us. PFSI’s management team has significant experience in the mortgage loan production, servicing and investment management industries. Neither we nor PFSI maintains life insurance policies relating to our or PFSI’s senior managers. The loss of the services of PFSI’s senior managers for any reason could adversely affect our business.

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

Maintaining our reputation is critical to attracting and retaining customers, trading counterparties, investors and employees. If we fail to deal with, or appear to fail to deal with, various issues that may give rise to reputational risk, we could significantly harm our business. Such issues include, but are not limited to, conflicts of interest, legal and regulatory requirements, and any of the other risks discussed in this Item 1A.

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 must 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 risk from negative public opinion is inherent in our business and can result from a number of factors. Negative public opinion can result from our actual or alleged conduct in any number of activities, including lending and debt collection practices, corporate governance, and actions taken by government regulators and community organizations in response to those activities. Negative public opinion can also result from social media and media coverage, whether accurate or not. These factors could tarnish or otherwise strain 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 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.

Risks Related to Our Business

~~Regulatory Risks~~Our business, financial condition and results of operations may be adversely affected by the ongoing COVID-19 pandemic.

The COVID-19 pandemic, inclusive of resurgences and any variants, has created unprecedented economic, financial and public health disruptions that have adversely affected, and are likely to continue to adversely affect, our business, financial condition and results of operations. The extent to which the COVID-19 pandemic continues to negatively affect our business, financial condition and

results of operations will depend on future developments, which are highly uncertain and cannot be predicted, including the scope and duration of the pandemic and actions taken by governmental authorities and other third parties in response to the COVID-19 pandemic.

The federal government enacted the CARES Act, which allows borrowers with federally-backed loans to request temporary payment forbearance in response to the increased borrower hardships resulting from the ongoing COVID-19 pandemic. As a result of the CARES Act and other forbearance requirements, we expect to experience continued delinquencies in our servicing portfolio that may require us to finance substantial amounts of advances of principal and interest payments to the investors holding those loans, as well as advances of property taxes, insurance premiums and other expenses to protect investors’ interests in the properties securing the loans. Prepayment activity has thus far been sufficient to cover principal and interest payment advances required under the CARES Act and other requirements. However, in the future, prepayment activity may be insufficient to cover required principal and interest advances. The CARES Act and other forbearance requirements have reduced our servicing fee income and increased our servicing expenses due to the increased number of delinquent loans, significant levels of forbearance that we have granted and continue to grant, as well as the resolution of loans that we expect to ultimately default as the result of the ongoing COVID-19 pandemic. Future servicing advances will be driven by a number of factors, including: the number of borrower delinquencies, including those resulting from payment forbearance; the amount of time borrowers remain delinquent; and the level of successful resolution of delinquent payments, all of which will be impacted by the pace at which the economy recovers from the ongoing COVID-19 pandemic. As of December 31, 2021, 0.4% of the loans in our MSR portfolio were in COVID-19 related forbearance plans and delinquent, resulting in an increase in the level of servicing advances we have been required to make due to borrower delinquencies.

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

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

In addition, our business could be disrupted if our Manager is unable to operate due to changing governmental restrictions, such as travel bans and quarantines placed or reinstituted on its employees or operations, including successfully operating its and our business from remote locations, ensuring the protection of its employees’ health, and maintaining its information technology infrastructure. Further, increased operational expenses to address these restrictions and widespread employee illnesses could negatively affect staffing within our various businesses and geographies.

Federal, state, and local executive, legislative and regulatory responses to the ongoing COVID-19 pandemic are rapidly evolving, may be inconsistent and conflict in scope or application, and may be subject to change without advance notice. These regulatory responses may impose additional compliance obligations, and may extend existing CARES Act and other forbearance requirements and delay our licensing efforts, which may negatively impact our business. In addition, the CARES Act and other federal, state and local regulations are subject to interpretation given the existing ambiguities in the rules and regulations, which may result in future class action and other litigation risk.

Governmental authorities have taken additional measures to stabilize the financial markets and support the economy, including providing monetary relief and extending foreclosure and eviction moratoria. The outcomes of these measures are unknown and they may not be sufficient to address the current market dislocations or avert severe and prolonged reductions in economic activity. We may also face increased risks of disputes with our business partners, litigation and governmental and regulatory scrutiny as a result of the effects of the COVID-19 pandemic. Although vaccines for COVID-19, and boosters thereof, have been approved for use that are generally effective, there can be no assurance that the continuing efforts to vaccinate the public will be successful in ending the pandemic or that vaccines and boosters will continue to be effective against variants. Even after the COVID-19 pandemic subsides, the economy may not fully recover for some time and we may be materially and adversely affected by a prolonged recession or economic downturn.

To the extent the COVID-19 pandemic adversely affects our business, financial condition and results of operations, it may also have the effect of heightening many of the other risks described in this Item 1A.

The COVID-19 pandemic and the CARES Act have significantly increased the number of borrowers who are in forbearance whose loans are in our CRT arrangements which may lead to significant future credit or fair value losses.

The CARES Act allows borrowers with federally-backed loans to request temporary payment forbearance if they attest that they are directly or indirectly experiencing any financial hardship resulting from the COVID-19 pandemic. The CARES Act also precludes loan servicers like us from reporting borrowers subject to forbearance plans as delinquent to the credit reporting agencies even though the federally-backed loans may still be characterized as delinquent for the purposes of our CRT arrangements with Fannie Mae. Our CRT arrangements are structured such that we retain a portion of the credit risk and an interest-only ownership interest in the reference loans and, under certain of our CRT Agreements, may be required to realize losses in the event of a loan delinquency of 180 days or more even where there is ultimately no loss realized with respect to such loan (e.g., as a result of a borrower’s re-performance). Although these CRT Agreements were amended in 2018 to ensure that forbearances resulting from Hurricane Harvey and Hurricane Irma were not considered to be delinquent for the purposes of the 180 day delinquency fixed loss severity schedule, Fannie Mae and its regulator, the Federal Housing Finance Authority, announced that they will not provide similar treatment for forbearances resulting from the COVID-19 pandemic for certain of our CRT Agreements.

Given the federal government mandate to approve requested forbearances upon the request of a borrower and subject only to his or her attestation of the COVID-19 pandemic impact, we expect the number of forbearances requested and approved under our CRT arrangements will result in credit and fair value losses that may be material and that may require us to write down the value of the assets significantly. In the event of a foreclosure, the proceeds upon the sale of such underlying real estate may not be sufficient to repay the borrower’s mortgage loan obligation, which could result in losses to our CRT arrangements and to us. Any such losses we incur may reduce distributions to our shareholders and may materially and adversely affect our results of operations, our financial condition, and the market value of our common shares.

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.

Federal, state and local governments have proposed or enacted numerous new laws, regulations and rules related to mortgage loans. Laws, regulations, rules and judicial and administrative decisions relating to mortgage loans include those pertaining to real estate settlement procedures, equal credit opportunity, fair lending, fair credit reporting, truth in lending, fair debt collection practices, service members protections, compliance with net worth and financial statement delivery requirements, compliance with federal and state disclosure and licensing requirements, the establishment of maximum interest rates, finance charges and other charges, qualified mortgages, licensing of loan officers and other personnel, loan officer compensation, secured transactions, property valuations, servicing transfers, payment processing, escrow, communications with consumers, loss mitigation, collection, foreclosure, bankruptcies, repossession and claims-handling procedures, and other trade practices and privacy regulations providing for the use and safeguarding of non-public personal financial information of borrowers. 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 ~~mortgage~~ loans, permanent forgiveness of debt, delays in the foreclosure process, increased servicing advances, litigation, reputational damage, enforcement actions, and repurchase and indemnification obligations.

We and PLS must also comply with a number of federal, state and local consumer protection and state foreclosure laws. These statutes apply to loan origination, servicing, debt collection, marketing, use of credit reports, safeguarding of non-public, personally identifiable information about our clients, foreclosure and claims handling, investment of and interest payments on escrow balances and escrow payment features, and mandate certain disclosures and notices to customers.

~~Our service providers~~Because neither we nor PLS is a federally chartered depository institution, we generally do not benefit from federal pre-emption of state mortgage loan banking, loan servicing or debt collection licensing and ~~vendors~~regulatory requirements and must comply with multiple state licensing and compliance requirements. These state rules and regulations generally provide for, but are ~~also required~~not limited to: originator, servicer and debt collector licensing requirements, requirements as to ~~operate in compliance with applicable laws, regulations~~the form and ~~rules. Our failure to adequately manage service providers~~content of contracts and ~~vendors in order to mitigate risks of noncompliance with applicable laws may also have these negative results.~~other documentation, employee licensing and background check requirements, fee requirements, interest rate limits, and disclosure and record-keeping requirements.

The failure of ~~the mortgage lenders from which loans were acquired through~~ our correspondent ~~production activities~~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 ~~these acquired~~ loans ~~including, without limitation, compliance with underwriting guidelines and applicable laws or regulations.~~we acquire from such correspondent sellers. However, ~~PLS~~we may not detect every violation of law ~~by these mortgage lenders. Further,~~and, to the extent any correspondent sellers, third party originators, servicers or ~~servicers~~brokers with ~~whom~~which we do business fail to comply with applicable laws or regulations and any of their ~~mortgage~~ loans or MSRs become part of our assets, it could subject us, as an assignee or purchaser of the related ~~mortgage~~ loans or MSRs, to monetary penalties or other losses. In general, if any of our loans are found to have been originated, acquired or serviced by us or a third party in violation of applicable laws or regulations, we could be subject to lawsuits or governmental actions, or we could be fined or incur losses. While we may have contractual rights to seek indemnity or repurchase from certain of these lenders, ~~and~~ third party originators, ~~and~~ servicers or brokers, if any of them isare unable to fulfill ~~its~~their indemnity or repurchase obligations to us to a material extent, our business, liquidity, financial condition ~~liquidity,~~and results of operations could be materially and adversely affected. Our service providers and other vendors are also required to operate in compliance with applicable laws, regulations and rules. Our failure to adequately manage service providers and other vendors to mitigate risks of noncompliance with applicable laws may also have these negative results.

Regulatory agencies and consumer advocacy groups are becoming more aggressive in asserting fair lending, fair housing and other claims that the practices of lenders and loan servicers result in a disparate impact on protected classes. Anti-discrimination

statutes, such as the Fair Housing Act and the Equal Credit Opportunity Act, prohibit creditors from discriminating against loan applicants and borrowers based on certain characteristics, such as race, religion and national origin. Various federal regulatory agencies and departments take the position that these laws apply not only to intentional discrimination, but also to neutral practices that have a “disparate impact” on a group that shares a characteristic that a creditor may not consider in making credit decisions (i.e., creditor or servicing practices that have a disproportionately negative affect on a protected class of individuals).

Federal and state administrations could enact significant policy changes increasing regulatory scrutiny and enforcement actions 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 current 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 could be materially~~shareholders. To the extent any such state regulators impose new minimum net worth, capital ratio and ~~adversely affected.~~liquidity standards that are overly burdensome, such actions may have a material adverse effect on our business, financial condition and results of operations.

The ~~CFPB is active~~Financial Stability Oversight Council (“FSOC”) and Conference of State Bank Supervisors (“CSBS”) have been reviewing whether state chartered nonbank mortgage servicers should be subject to “safety and soundness” standards similar to those imposed by federal law on insured depository institutions, even though nonbank mortgage servicers do not have any federally insured deposit accounts. For example, on July 26, 2021, the CSBS released model state regulatory prudential standards for state oversight of nonbank mortgage servicers. The model CSBS prudential standards include revised minimum net worth, capital ratio and liquidity standards similar to existing Federal Housing Finance Agency (“FHFA”) requirements and require servicers to maintain sufficient allowable assets to cover normal operating expenses in ~~its monitoring~~addition to the amounts required for servicing expenses. The FSOC has also encouraged state regulators to work to develop prudential and corporate governance standards for nonbank mortgage servicers and has issued guidance describing the process FSOC would follow if it were to consider making a determination to subject a nonbank financial company to supervision by the Board of Governors of the ~~residential mortgage origination~~Federal Reserve System and ~~servicing sectors. Revised~~prudential standards. To the extent any such state regulators impose new minimum net worth, capital ratio and liquidity standards that are overly burdensome, such actions may have a material adverse effect on our business, financial condition and results of operations.

New CFPB and state rules and regulations ~~and~~or 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 is empowered with broad supervision, rulemaking and examination authority to enforce laws involving consumer financial products and services and to ensure, among other things, that consumers receive clear and accurate disclosures regarding financial products and are protected from hidden fees and unfair, deceptive or abusive acts or practices. The CFPB has ~~adopted~~regulatory authority over certain aspects of our business as a ~~number~~result of ~~final regulations under~~our residential mortgage banking activities, including, without limitation, the Dodd-Frank Act regarding truth in lending, “ability to repay,” home mortgage loan disclosure, home mortgage loan origination, fair credit reporting, fair debt collection practices, foreclosure protections, and mortgage servicing rules, including provisions regarding loss mitigation, early intervention, periodic statement requirements and lender-placed insurance.

~~The CFPB also has enforcement~~ authority with respect to the conduct of third-party service providers of financial institutions. The CFPB has made it clear that it expects non-bank entities to maintain an effective process for managing risks associated with third-party vendor relationships, including compliance-related risks. In connection with this vendor risk management process, we are expected to perform due diligence reviews of potential vendors, review vendors’ policies and procedures and internal training materials to confirm compliance-related focus, include enforceable consequences in contracts with vendors regarding failure to comply with consumer protection requirements, and take prompt action, including terminating the relationship, in the event that vendors fail to meet our expectations. The CFPB is also applying scrutiny to compensation payments to third-party providers for marketing services and may issue guidance that narrows the range of acceptable payments to third-party providers as part of marketing services agreements, lead generation agreements and other third-party marketer relationships.

~~In addition to its supervision and examination authority, the CFPB is authorized~~ to conduct investigations, ~~to determine whether any person is engaging in, or has engaged in, conduct that violates federal consumer financial protection laws, and to initiate~~bring enforcement actions, for such violations, regardless of its direct supervisory authority. Investigations may be conducted jointly with other regulators. In furtherance of its supervision and examination powers, the CFPB has the authority to impose monetary penalties, ~~for violations of applicable federal consumer financial laws,~~ require remediation of practices, ~~and~~ pursue administrative proceedings or litigation, and obtain cease and desist orders for violations of applicable federal consumer financial laws. The current CFPB ~~also~~administration has ~~the authority~~stated its intention to ~~obtain cease~~aggressively supervise, investigate and, desist orders (which can include orders for restitution or rescission of contracts, as well as other kinds of affirmative relief) and monetary penalties ranging from $5,000 per day for ordinary violations of federal consumer financial laws to $25,000 per day for reckless violations and $1 million per day for knowing violations.

~~Rules and regulations promulgated under the Dodd-Frank Act or by~~where it deems appropriate, bring enforcement actions against servicers the CFPB ~~uncertainty regarding recent interim~~believes are engaged in activities that violate federal laws and ~~permanent changes~~regulations. In addition, examinations by state regulators and enforcement actions in ~~leadership or authority levels within~~the residential mortgage and servicing sectors by state attorneys general have increased and may continue to increase. Failure to comply with the CFPB and ~~actions taken~~state laws, rules or ~~not taken by the CFPB~~regulations to which we are subject, whether actual or alleged, could ~~result in heightened federal and state regulation and oversight of~~have a material adverse effect on our business, ~~activities, materially~~liquidity, financial condition and ~~adversely affect the manner in which we conduct our business, and increase costs and potential litigation associated with our business activities.~~ results of operations.

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 ~~the Agencies~~U.S. government-sponsored entities and ~~the Federal Housing Finance Agency (“FHFA”), as the conservator of Fannie Mae and Freddie Mac,~~government agencies, and any ~~changes in these entities~~organizational or ~~their current roles or the leadership~~pricing changes 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 ~~mortgage~~ loan sales depends ~~to a significant degree~~ on programs administered by the Agencies and others that facilitate the issuance of MBS in the secondary market. ~~These Agencies play a critical role in the mortgage industry and we have significant business relationships with them. Presently, almost all of the newly originated conforming~~We acquire loans ~~that we acquire~~ from mortgage lenders through our correspondent production activities that 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 through structured transactions that lower our guarantee fees, 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 prior federal administration to end the conservatorship and privatize Fannie Mae and Freddie Mac. On November 18, 2020, the FHFA finalized new regulatory capital rules for Fannie Mae and Freddie Mac that requires them to increase their capital to $280 billion. The FHFA did not specify how the new regulatory capital requirements will be achieved or a timeframe for meeting the capital target, however, any increase in guaranty fees or other costs imposed by Fannie Mae and Freddie Mac to raise additional capital may have a negative impact on the mortgage market and could reduce Fannie Mae and Freddie Mac’s future role in the

mortgage industry. It is not possible to predict the scope and nature of the actions that the U.S. government, including the current federal 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. Although the U.S. Treasury has committed capital to Fannie Mae and Freddie Mac, these actions may not be adequate for their needs. If Fannie Mae and Freddie Mac are adversely affected by events such as ratings downgrades, inability to obtain necessary government funding, lack of success in resolving repurchase demands to lenders, foreclosure problems and delays and problems with mortgage insurers, they could suffer losses and fail to honor their guarantees and other obligations. 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.

The roles of Fannie Mae and Freddie Mac could be significantly restructured, reduced or eliminated and the nature of the guarantees could be considerably limited relative to historical measurements. 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, such as increases in the guarantee fees we are required to pay, initiatives that increase the number of repurchase demands and/or the manner in which they are pursued, or possible limits on delivery volumes imposed upon us and other sellers/servicers, 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 ~~these~~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,~~In addition, under certain Agency capital rules, loan aggregators such as us have higher capital requirements and may incur higher Agency fees for third party originated loans that we aggregate and deliver to the Agencies as compared to individual loans delivered by third party mortgage lenders directly to the Agencies’ cash windows without the assistance of a loan aggregator. 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.

Because we and PLS are not federally chartered depository institutions, neither we nor PLS ~~benefits~~benefit 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 ~~mortgage~~ loans to the Agencies and service such ~~mortgage~~ 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~~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~~PLS’ 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~~servicer 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 below under Management’s Discussion and Analysis of Financial Condition and Results of Operations— 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 ~~mortgage~~ loans and MBS and cover the associated financial obligations and risks.

In order to meet these minimum financial requirements, we and ~~our Servicer~~PLS 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,~~PLS, 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,~~PLS, which could cause us or ~~our Servicer~~PLS 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.

~~Mortgage loan modification~~22

Market and ~~refinance programs, future legislative action, and other actions and changes may materially and adversely affect the value of, and the returns on, the assets in which we invest.~~

The U.S. government, primarily through the Agencies, has established loan modification and refinance programs designed to provide homeowners with assistance in avoiding residential mortgage loan foreclosures. [We can provide no assurance that we will be eligible to use any government programs or, if eligible, that we will be able to utilize them successfully.] Further, the incentives provided by such programs may increase competition for, and the pricing of, our targeted assets. These programs, future U.S. federal, state and/or local legislative or regulatory actions that result in the modification of outstanding mortgage loans, as well as changes in the requirements necessary to qualify for modifications or refinancing mortgage loans with the Agencies may adversely affect the value of, and the returns on, residential mortgage loans, residential MBS, real estate-related securities and various other asset classes in which we invest.

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~~Financial 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. AThe ongoing impact of the COVID-19 pandemic, 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~~real estate and financial markets and the economy generally. Continuing concerns over factors including the ongoing impact of the COVID-19 pandemic, 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~~Mortgage markets ~~have been and continue to~~may 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 ~~mortgage~~ 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.

~~Exposure to United Kingdom political developments, including the United Kingdom’s vote to leave the European Union, could have a material adverse effect on us.~~

On June 23, 2016, a referendum was held on the United Kingdom’s membership in the European Union, the outcome of which was a vote in favor of leaving the European Union. On March 29, 2017, the United Kingdom provided its official notice to the European Council that it intends to leave the European Union, triggering the two-year transitionary period, which is expiring on March 29, 2019. The United Kingdom’s vote to leave the European Union creates an uncertain political and economic environment in the United Kingdom and potentially across other European Union member states, which may last for a number of months or years.

The result of the referendum means that the long-term nature of the United Kingdom’s relationship with the European Union is unclear and that there is considerable uncertainty as to when any such relationship will be agreed and implemented. In the interim, there is a risk of instability for both the United Kingdom and the European Union, which could adversely affect our results, financial condition, and prospects.

The political and economic instability created by the United Kingdom’s vote to leave the European Union has caused and may continue to cause significant volatility in global financial markets and the value of the British Pound Sterling currency or other currencies, including the Euro. Depending on the terms reached regarding any exit from the European Union, it is possible that there may be adverse practical or operational implications on our business.

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 ~~mortgage~~ 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~~In addition, while the ~~general~~Federal Reserve has loosened monetary policies due to the ongoing COVID-19 pandemic by purchasing securities and MBS on the open market, future interest rates and the liquidity of the MBS market ~~have occurred in~~could be impacted as the ~~past.~~Federal Reserve increases the federal fund rate and tapers future MBS purchases. 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.

As of December 31, 2021, we had $11.2 billion of total indebtedness outstanding (approximately $10.7 billion of which was secured) and up to $5.2 billion of additional capacity under our secured borrowings and other secured debt financing arrangements. This substantial indebtedness and any future indebtedness we incur could have adverse consequences and, for example, could:

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require us to dedicate a substantial portion of cash flow from operations and investments to the payment of principal and interest on indebtedness, including indebtedness we may incur in the future, thereby reducing the funds available for operations, investments and other general corporate purposes;

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make it more difficult for us to satisfy our obligations with respect to our indebtedness, and any failure to comply with the obligations of any of our debt instruments, including any restrictive covenants, could result in an event of default under the agreements governing our other indebtedness which, if not cured or waived, could result in the acceleration of our indebtedness;

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subject us to increased sensitivity to interest rate increases;

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make us more vulnerable to economic downturns, adverse industry conditions or catastrophic external events, including the COVID-19 pandemic and climate change;

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reduce our flexibility in planning for or responding to changing business, industry and economic conditions or restrict our ability to carry on activities important to our growth; and/or

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place us at a competitive disadvantage to competitors that have relatively less debt than we have.

In addition, our substantial level of indebtedness could limit our ability to obtain additional financing on acceptable terms, or at all, for working capital and general corporate purposes. Our liquidity needs vary significantly from time to time and may be affected by general economic conditions, industry trends, performance and many other factors outside our control.

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, we intend to continue to leverage our investments through borrowings, the level of which may vary based on ~~the particular characteristics of~~ our investment portfolio characteristics and on market conditions. We generally finance our investments with relatively short-term facilities until 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 may sell securities ~~(including securities we retain through our CRT investments)~~ or ~~mortgage~~ loans to lenders (i.e., repurchase agreement counterparties) and receive cash from the lenders. The lenders are obligated to resell the same assets back to us at the end of the term of the transaction. Because the cash we receive from the lender when we initially sell the assets to the lender is less than the fair value of those assets (this difference is referred to as the haircut), if the lender defaults on its obligation to resell the same assets back to us we could incur a loss on the transaction equal to the amount of the haircut reduced by interest accrued on the financing (assuming there was no change in the fair value of the assets). In addition, repurchase agreements generally allow the counterparties, to varying degrees, to determine a new fair value of the collateral to reflect current market conditions. If a counterparty lender determines that the fair value of the collateral has decreased, it may initiate a margin call and require us to either post additional collateral to cover such decrease or repay a portion of the outstanding borrowing. Should this occur, in order to obtain cash to satisfy a margin call, we may be required to liquidate assets at a disadvantageous time, which could cause us to incur further losses. In the event we are unable to satisfy a margin call, our counterparty may sell the collateral, which may result in significant losses to us.

~~One of the assets in which we invest is CRT, a newer asset class for which financing is and has been limited. We currently finance our~~ CRT investments have been financed through term notes and repurchase agreements. Unlike MBS and other ~~securities~~investments we finance under repurchase agreements, our CRT ~~investment is~~investments are generally more illiquid ~~in nature~~ and ~~may be~~ subject to greater fluctuations in fair ~~value. Further,~~value and the ~~size~~term notes we issue to finance these assets may not be callable and may otherwise prohibit the disposition 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.~~assets securing the financing.

We also ~~invest in other assets, including MSRs and ESS, for which financing has historically been difficult to obtain. We~~ currently ~~leverage~~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 our Ginnie Mae 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, similar to our repurchase agreements, the cash that we receive under these secured financing arrangements is less than the fair value of the assets and aPennyMac Corp. (“PMC”). A decrease in the fair value of the pledged collateral can result in a margin call. ~~Should a~~Any such margin call ~~occur,~~may require that we ~~may be required to~~ liquidate assets at a disadvantageous time ~~which could cause us to incur further losses. If we are unable to satisfy a margin call,~~or provide that the secured parties may sell the collateral, either of which ~~may~~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. Accordingly, the exercise by either Fannie Mae, Freddie Mac or Ginnie Mae of its rights under the applicable acknowledgment agreement, including at the direction of the secured parties or as a result of any action or inaction of PLS and whether or not we are in breach of our repurchase agreement with PLS, could result in theAny extinguishment of our and the secured parties’ rights in the related collateral ~~and~~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 ~~impose~~contain certain events of default and other financial and non‑financial covenants and restrictions ~~on us~~ that impact our flexibility to determine our operating policies and investment ~~strategies~~ by limiting our ability to incur certain types of indebtedness; grant liens; engage in consolidations, mergers and asset sales, make restricted payments and investments; and enter into transactions with affiliates. In our credit and financing agreements, we agree to certain covenants and restrictions and we make representations about the assets sold or pledged under these agreements. We also agree to certain events of default (subject to certain materiality thresholds and grace periods), including payment defaults, breaches of financial and other covenants and/or certain representations and warranties, cross-defaults, servicer termination events, ratings downgrades, guarantor defaults, bankruptcy or insolvency proceedings and other events of default and remedies customary for these types of agreements.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.

Until non-recourse long-term financing structures become more readily available to us and we utilize them, we rely heavily on short-term repurchase and loan and security agreements with maturities that do not match the assets being financed and are thus exposed to risks which could result in losses to us.

We have used and, in the future, may use securitization and other non-recourse long-term financing for our investments. In such structures, our lenders typically have only a claim against the assets included in the securitizations rather than a general claim against us as an entity. Such long-term financing has been limited and, in certain instances, unavailable for certain of our investments, including our investments in CRT. Prior to any such future financing, we generally finance our investments with relatively short-term facilities until a sufficient portfolio is accumulated or such 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 would not be able 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 future 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. In addition, conditions in the capital markets may make the issuance of

any securitization less attractive to us even when we do have sufficient eligible assets or securities. While we would intend to retain the unrated equity component of securitizations and, therefore, still have exposure to any investments included in such securitizations, our inability to enter into such securitizations may increase our overall exposure to risks associated with direct ownership of such investments, including the risk of default.

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 ~~distressed loans and REO, as well as~~ MSRs, ~~and ESS,~~ for which financing has historically been difficult to obtain. Our inability to continue to maintain debt financing for ~~distressed loans and REO, or~~ 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, 2018, we had $83.4 million of our common shares 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.

During March 2017, we issued 4.6 million of 8.125% Series A Fixed-to-Floating Rate Cumulative Redeemable Preferred Shares of Beneficial Interest, $0.01 par value per share. During July 2017, we also issued 7.8 million of 8.00% Series B Fixed-to-Floating Rate Cumulative Redeemable Preferred Shares of Beneficial Interest, $0.01 par value per share. 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.

In 2013, our wholly-owned subsidiary, PMC, issued $250 million of Exchangeable 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 Exchangeable Notes could receive a distribution of PMC’s available assets before holders of our common shares.

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 property, 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.

In addition, while the Federal Reserve loosed monetary policies due to the ongoing COVID-19 pandemic by purchasing securities and MBS on the open market, future interest rates and the liquidity of the MBS market could be impacted as the Federal Reserve increases the federal fund rate and tapers future MBS purchases. 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, the fair value of our investments (including our pipeline of ~~mortgage~~ 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. ~~In addition, with respect to the MSRs and ESS we own, decreasing~~Decreasing interest rates may cause a large number of borrowers to refinance, which may result in the loss of ~~any such~~ mortgage servicing business and ~~associated~~ write-downs of ~~such MSRs and ESS.~~the associated MSRs. Any such scenario could materially and adversely affect us.

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

As of December 31, 2021, one-week and two-month U.S. dollar LIBOR (and certain non-U.S. dollar LIBOR settings) were discontinued, while the remaining non-U.S. dollar LIBOR settings ceased to be representative and thereafter began to be published only on a “synthetic basis”. In addition, the UK Financial Conduct Authority (the “FCA”), which is the regulator of the LIBOR administrator, has announced that the principal U.S. dollar LIBOR tenors (overnight and one, three, six and 12 months) will cease to be published by any administrator or will no longer be representative as of June 30, 2023. \In addition, despite the expected publication of the principal U.S. dollar LIBOR settings through June 30, 2023, the FCA has prohibited the firms it regulates from

using such settings in new contracts after December 31, 2021 (subject to limited exceptions), and certain U.S. (and other) regulators have stated that no new contracts using U.S. dollar LIBOR should be entered into after that date.

Accordingly, many LIBOR obligations have transitioned to another benchmark or will do so. Different types of financial products have transitioned, or are expected to transition, to different alternative benchmarks; and there is no assurance that any alternative benchmark will be the economic equivalent of any LIBOR setting. For some existing LIBOR-based obligations, the contractual consequences of the discontinuation of LIBOR may not be clear. Although the foregoing reflects the timing (or expected timing) of LIBOR discontinuation and certain consequences, there is no assurance that LIBOR, of any particular currency or tenor, will continue to be published until any particular date or in any particular form, and there is no assurance regarding the consequences of LIBOR discontinuation. Uncertainty as to the foregoing and the nature of alternative reference rates may adversely impact the availability and costs of borrowings.

The discontinuation of LIBOR could have a significant impact on the financial markets and our business activities. We rely 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 is measured by reference to LIBOR. We anticipate significant challenges as it relates to the transition away from LIBOR for all of our LIBOR based assets, financing arrangements, securities and liabilities, whether their maturity dates (as applicable) fall before or after the discontinuation date after June 30, 2023. These challenges include, but are not limited to, amending agreements or instruments underlying our existing and/or new LIBOR-based assets, financing arrangements, securities and liabilities with appropriate fallback language in such a way as to ensure economic equivalence with our LIBOR-based assets, financing arrangements and securities 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 determination of fair value for certain of our assets and hedges using LIBOR as a benchmark rate or used to develop a market discount rate. In addition, the transition to using any new benchmark rate or other financial metric may require changes to existing transaction data, products, systems, models, operations and pricing processes.

We also anticipate additional risks to our current business activities as they relate to the discontinuation of LIBOR. We service LIBOR-based adjustable rate mortgages (“ARMs”) for which the underlying mortgage notes incorporate fallback provisions, but we cannot anticipate the response of our borrowers or note holders to such risks. We may also incorporate LIBOR methodologies for financial planning and reporting in our financial models.

In the United States, there have been efforts to identify alternative reference interest rates to replace U.S. dollar LIBOR. The Alternative Reference Rates Committee has recommended that U.S. dollar LIBOR be replaced by rates based on the Secured Overnight Financing Rate (“SOFR”) plus, in the case of existing LIBOR contracts and obligations, a spread adjustment. The derivatives markets are also expected to use SOFR-based rates to replace U.S. dollar LIBOR. SOFR-based rates differ from LIBOR, and the differences may be material. SOFR is intended to be a broad measure of the cost of borrowing funds overnight in transactions that are collateralized by U.S. Treasury securities. LIBOR is intended to be an unsecured rate that represents interbank funding costs for different short-term tenors and, other than its overnight setting, reflects expectations regarding future interest rates. Thus, LIBOR is generally intended to be sensitive to bank credit risk and to short-term interest rate expectations and SOFR is intended to be insensitive to credit risk and to risks related to interest rates other than overnight rates. SOFR has also been more volatile than such benchmark rates as three-month LIBOR from time to time. These fundamental differences between LIBOR and SOFR mean we are unable to clearly assess the risk of transitioning from LIBOR to SOFR for any of our LIBOR-based liabilities or assets.

Due to these risks, we expect 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. Furthermore, the transition away from widely used benchmark rates like LIBOR could result in customers or other market participants challenging the determination of their interest or dividend payments, disputing the interpretations or implementation of contract or instrument “fallback” provisions and other transition related changes. 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 ongoing impact of the COVID-19 pandemic, 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 changing 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 that is consistent with the REIT qualification requirements to reduce our exposure to interest rates. The strategies are intended to mitigate the effect of interest rate fluctuations on the fair value of the assets at our TRS as well as debt used to acquire or carry real estate assets at entities other than our TRS. To manage this price risk, we use derivative financial instruments acquired with the intention of moderating the risk that changes in market interest ~~rates.~~ rates will result in unfavorable changes in the fair value of our assets, primarily prepayment exposure on our MSR investments as well as IRLCs and our inventory of loans held for sale as well as MBS and CRTs. For example, with respect to our IRLCs and inventory of loans held for sale, we may use MBS forward sale contracts to lock in the price at which we will sell the mortgage loans or resulting MBS, and MBS put options to mitigate the risk of our IRLCs not closing at the rate we expect. In addition, with respect to our MSRs, we may use MBS forward purchase and sale contracts to address exposures to smaller interest rate shifts with Treasury and interest rate swap futures, and use options and swaptions to achieve target coverage levels for larger interest rate shocks.

Our hedging activity ~~varies~~will vary in scope based on the risks being mitigated, the level of interest rates, the type of investments held, and other changing market ~~conditions. However,~~conditions such as those resulting from the ongoing COVID-19 pandemic. Hedging instruments involve risk because they often are not traded on regulated exchanges, guaranteed by an exchange or its clearing house, or regulated by any U.S. or foreign governmental authorities, and our interest rate hedging may fail to protect or could adversely affect us because, among other things:

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interest rate hedging can be expensive, particularly during periods of rising and volatile interest rates;

•

available interest rate hedging may not correspond directly with the interest rate risk for which protection is sought;

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the duration of the hedge may not match the duration of the related liability or asset;

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the credit quality of the hedging counterparty owing money on the hedge may be downgraded to such an extent that it impairs our ability to sell or assign our side of the hedging transaction; and

•

the hedging counterparty owing the money in the hedging transaction may default on its obligation to pay.

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the federal tax regulations applicable to REITs limit our hedge activity outside of the TRS to hedging interest rate fluctuations with respect to debt used to acquire or carry real estate assets.

In addition, we may fail to recalculate, re‑adjust and execute hedges in an efficient manner. Any hedging activity, which is intended to limit losses, may materially and adversely affect our results of operations and cash flows. Therefore, while we may enter into such transactions seeking to reduce interest rate risk, unanticipated changes in interest rates may result in ~~poorer~~worse 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.

We are exposed to a number of risks relating to holding derivative instruments. A liquid secondary market may not exist for a hedging instrument purchased or sold, and we may be required to maintain a position until exercise or expiration, which could result in significant losses. In addition, the degree of correlation between price movements of the instruments used in hedging strategies and price movements in the portfolio positions or liabilities being hedged may vary materially. Moreover, for a variety of reasons, we may not establish an effective correlation between such hedging instruments and the portfolio positions or liabilities being hedged. Any such ineffective correlation may prevent us from achieving the intended hedge and expose us to risk of loss. Numerous regulations currently apply to hedging and any new regulations or changes in existing regulations may significantly increase our administrative or compliance costs. Our derivative agreements generally provide for the daily mark to market of our hedge exposures. If a hedge counterparty determines that its exposure to us exceeds its exposure threshold, it may initiate a margin call and require us to post

collateral. If we are unable to satisfy a margin call, we would be in default of our agreement, which could have a material adverse effect on our business, financial condition, liquidity and results of operations.

The use of derivative instruments is also subject to an increasing number of laws and regulations, including the Dodd-Frank Act and ~~its implementing~~other federal 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~~Our correspondent production activities ~~or investment strategies, developing new products or significantly expanding existing business activities or investment strategies may expose~~could subject us to ~~new risks and will increase~~increased risk of loss.

In 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 activities, we acquire newly originated 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 ~~acquisition of new mortgage~~behalf or ~~mortgage-related products,~~ such as non-qualified mortgage 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 continue to be able to ~~manage~~capitalize on these ~~risks~~opportunities on favorable terms or at all. In particular, we have committed, and ~~compliance requirements effectively. Furthermore, our efforts may not succeed~~expect to continue to commit, capital and ~~any revenues we earn from any new or expanded business initiative or investment strategy may not be sufficient~~other resources to ~~offset the initial and ongoing costs of that initiative, which would result in a loss with respect to that initiative or strategy.~~

Wethis operation; however, PLS may not be able to ~~successfully operate our business or generate~~continue to source sufficient ~~operating cash flows~~asset acquisition opportunities to ~~make or sustain distributions~~justify the expenditure of such capital and other resources. In the event that PLS is unable to ~~our shareholders.~~

~~There~~continue to source sufficient opportunities for this operation, there can be no assurance that we ~~will~~would be able to ~~generate sufficient cash~~acquire such assets on favorable terms or at all, or that such assets, if acquired, would be profitable to ~~pay~~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 ~~operating expenses~~business, financial condition, liquidity, results of operations and ability to make distributions to our shareholders.

The ~~results~~success and growth of our ~~operations~~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 ~~ability~~correspondent sellers expect and require certain conveniences and service levels. In this regard, PLS has transitioned 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.~~a workflow-driven, cloud-based loan acquisition platform. While we ~~try to diversify our investments among various types of mortgages~~anticipate that PLS’ cloud-based system will increase scalability 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~~produce other efficiencies, there can be no assurance that wePLS’ cloud-based system will prove to be ~~able to successfully transition out of investments producing lower returns into investments that produce better returns,~~effective or that wesuch correspondent sellers will ~~not seek investments with greater risk~~easily adapt to ~~obtain~~PLS’ cloud-based system. Any failure to effectively or timely transition to the ~~same level~~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.

~~returns. Any or all~~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 37% of our purchases in 2021. 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.

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 previously 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 CRT-related investments subject us to credit 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 ~~could cause~~including unemployment, weak economic conditions or real estate values, or catastrophic events such as man-made or natural disaster, the ongoing COVID-19 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.

Government-sponsored entities have wound down lender risk share transactions such as CRT investments since the end of 2020. If we are unable to find a suitable alternativeinvestment to investing in CRTs with similar returns, our business, liquidity, financial condition and results of operations could be materially and adversely affected.

The FHFA instructed government-sponsored entities to gradually wind down lender risk share transactions such as CRT investments as of the end of 2020 and, accordingly, we are no longer creating new CRT arrangements. As of December 31, 2021, we continued to hold net CRT-related investments (comprised of deposits securing CRT arrangements, CRT derivatives, CRT strips, interest-only security payable) totaling $1.7 billion. If we are unable to find suitable alternative investments comparable to CRTs, our business, liquidity, financial condition and results of operations could be materially and adversely affected.

We invest in residential loans that 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 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, including those resulting from the ongoing COVID-19 pandemic; (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 as well as the ongoing impact of the COVID-19 pandemic. 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 that 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 ~~and~~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.

~~Competition for mortgage~~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 ~~limit~~fail to protect or could adversely affect us. To the ~~availability~~extent we do not utilize derivative financial instruments to hedge against changes in fair value of ~~desirable investments~~MSRs or the derivatives we use in our hedging activities do not perform as expected, our business, financial condition, liquidity, results of operations and ~~result~~ability to make distributions to our shareholders would be more susceptible to volatility due to changes in ~~reduced risk-adjusted returns.~~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. For example, the CARES Act allows borrowers with federally-backed loans to request temporary payment forbearance in response to the increased borrower hardships resulting from the COVID-19 pandemic.

Our ~~profitability depends, in part,~~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 ~~continue~~make distributions 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 pre-emption 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.shareholders.

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 one or more 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.~~

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. Maintaining and improving new technology and becoming proficient with it may also require significant capital expenditures by PLS. PLS will have to continue to develop and invest in these technological capabilities to remain competitive and its failure to do so 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 servicer, and an increase in the percentage or amount of government loans we acquire could be detrimental to us.~~

We are not approved as a Ginnie Mae issuer and servicer. As a result, we are unable to produce or acquire 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 mortgage 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. For example, non-bank loan servicers may try to leverage their servicing operations to develop or expand a correspondent production business. Since the withdrawal of a number of large participants from these markets following the financial crisis in 2008, there have been relatively few large non-bank participants; however, the loosening of regulatory standards could result in a significant investment of capital and attract more non-banks to participate. As 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.

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 mortgage loans we sell to Fannie Mae 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 mortgage loans into Fannie Mae-guaranteed securitizations while retaining a portion of the credit risk and an interest-only (“IO”) ownership interest in such mortgage loans or purchasing Agency securities that absorb losses incurred by such mortgage loans. Our retention of credit risk subjects us to risks associated with delinquency and foreclosure similar to the risks associated with owning the underlying mortgage loans, and exposes us to risk of loss greater than the risks associated with selling the mortgage loans to Fannie Mae without the retention of such credit risk. Further, the risks associated with delinquency and foreclosure may in some instances be greater than the risks associated with owning the underlying mortgage 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.

CRT Agreements also represent a type of investment that is new to the market and, as such, inherently uncertain and illiquid. There can be no assurance that this investment type will continue to be offered by Fannie Mae or 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.

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.

We expect that our future investments in CRT securities will be structured with the intention of satisfying our REIT qualification requirements. Accordingly, in general we expect that we will 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 mortgage loans, and the mortgage loans in which we invest and the mortgage 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 mortgage loans and, through our correspondent production business, newly originated prime credit quality residential mortgage loans. Residential mortgage 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 mortgage 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) the general deterioration of the borrower’s ability to keep a rehabilitated nonperforming mortgage loan current; (vi) increases in property taxes and operating expenses; (vii) changes in zoning laws; (viii) costs resulting from the clean-up of, and liability to third parties for damages resulting from, environmental problems, such as indoor mold; (ix) casualty or condemnation losses; (x) uninsured damages from floods, earthquakes or other natural disasters; (xi) limitations on and variations in rents; (xii) fluctuations in interest rates; (xiii) fraud by borrowers, originators and/or sellers of mortgage loans; (xiv) undetected deficiencies and/or inaccuracies in underlying mortgage loan documentation and calculations; and (xv) failure of the borrower to adequately maintain the property, particularly during times of financial difficulty. 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 mortgage 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 mortgage loan borrower, the mortgage 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 mortgage 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.

~~A significant portion of the residential mortgage loans that we hold are or may become nonperforming loans, which increases our risk of loss of our investment.~~

We historically acquired distressed residential mortgage loans and mortgage-related assets where the borrower had failed to make timely payments of principal and/or interest or where the loan was performing but subsequently could or did become nonperforming, and there are no limits on the percentage of nonperforming assets we may hold. A portion of these loans still have current loan-to-value ratios in excess of 100%, meaning the amount owed on the loan exceeds the value of the underlying real estate. Further, the borrowers on such loans may be in economic distress and/or may have become unemployed, bankrupt or otherwise unable or unwilling to make payments when due. Moreover, as we continue to liquidate our portfolio of distressed mortgage loans and mortgage-related assets and transition into other investment types, the distressed assets remaining in our portfolio often entail characteristics that make disposition or liquidation more challenging, including, among other things, severe document deficiencies or underlying real estate located in states with extended foreclosure timelines. If PLS as our primary and special servicer is not able to adequately address or mitigate the issues concerning these loans, we may incur significant losses. 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 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 mortgage loans that we service on their behalf. We generally acquire MSRs in connection with our sale of mortgage loans to the Agencies where we assume the obligation to service such loans on their behalf. We may also purchase MSRs from third-party sellers. 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 mortgage 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 and the rate of amortization of those assets on, among other things, our projection of the cash flows from the related pool of mortgage 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 mortgage 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, the result 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. 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 and, as a result, 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 a tiered recapture fee ranging from 30% to 40% of the fair value of the MSRs relating to ~~mortgage~~ loans it refinances, we are not independently capable of protecting our MSR ~~asset~~assets 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 ~~mortgage~~ 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~~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 mortgage 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 mortgage 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 mortgage loans. Its failure to do so, or the termination of our spread acquisition agreements, could result in accelerated repayment of the mortgage 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. The contractual restrictions on transfer, risk retention requirements or the illiquidity of our investments may make it difficult for us to sell such investments if the need or desire arises. 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~~real estate assets securing a ~~mortgage~~ 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~~value of ~~these types of lower credit quality~~subordinated investments are generally more sensitive to adverse actual or perceived economic downturns or individual issuer developments than more highly rated investments. Also, while the Federal Reserve has loosened monetary policies due to the ongoing COVID-19 pandemic by purchasing securities and MBS on the open market, future interest rates and the liquidity of the MBS market could be impacted as the Federal Reserve increases the federal fund rate and tapers future MBS purchases. 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 ~~mortgage~~ 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 ~~mortgage~~ loans, as well as managing loss mitigation, which may include, among other things, collection activities, loan workouts, modifications, foreclosures, short sales and sales of REO. The ability of PLS or any other servicer or subservicer to effectively service our portfolio of ~~mortgage~~ loans is critical to our success, particularly given our large investment in MSRs and our strategy of maximizing the fair value of the distressed mortgage 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 ~~mortgage~~ loans would adversely impact our business, financial condition, liquidity, results of operations and our ability to make distributions to our shareholders.

~~Our inability~~In addition, our ability, through PLS, to promptly foreclose upon defaulted ~~mortgage loans could increase our cost of doing business and/or diminish our expected return on investments.~~

~~Our ability to promptly foreclose upon defaulted mortgage~~ 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 ~~mortgage~~ 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. These factors~~law, and this could increase our cost of doing business and/or diminish the expected return on investment.

Our operations, businesses and customers could be materially adversely affected by the impacts related to climate change and related environmental sustainability matters.

There is an increasing concern over the risks of climate change and related environmental sustainability matters. The physical risks of climate change include without limitation: extended foreclosure timelines in states that require judicial foreclosure, including states where we hold high concentrations of mortgage loans; significant collateral documentation deficiencies; federal, state or local laws that are borrower friendly, including legislative action or initiatives designed to provide homeowners with assistance in avoiding residential mortgage loan foreclosuresrising average global temperatures, rising sea levels and that serve to delay the foreclosure process; continuing obligations under the Home Affordable Modification Plan (“HAMP”) and similar programs that require specific procedures to be followed to explore the refinancing of a mortgage loan prior to the commencement of a foreclosure proceeding; and declines in real estate values and sustained high levels of unemployment thatan increase ~~the number of foreclosures and place additional pressure on the judicial and administrative systems.~~

~~A decline~~ in the ~~fair value~~frequency and severity of ~~the real estate underlying~~extreme weather events and natural disasters, including floods, wildfires, hurricanes and tornados, and could impact our ~~mortgage loans or that we acquire, whether through foreclosure or otherwise, may result in reduced risk-adjusted returns or losses.~~

The fair value of the real estate that we own or that underlies mortgage loans that we own is subject to market conditions. Changes in the real estate market may adversely affect the fair value of the collateral and thereby lower the cash to be received from its liquidation. In addition, adverse changes in the real estate market increase the probability of default, as the incentive of the borrower to retain and protect its interest in the property declines.

We have also implemented an REO rental program, whereby we are the lessor of real estate, generally REO acquired in settlement of distressed loans, to the extent we determine that renting the property would produce a better return on investment than liquidation. There can be no assurance that this investment strategy will prove to be either profitable or more successful than liquidation. Further, our ongoing investment in the real estate will be subject to the market risk described above, as well as other risks associated with the rental business, including, without limitation, extended periods of vacancy, unfavorable landlord-tenant laws, and contractual disputes with our property managers. Any or all of these risks could subject us to loss, materially and adversely affect the fair value of our real estate investments and reduce or eliminate the returns we might have otherwise realized upon liquidation of the real estate.

~~We are subject to certain risks associated with investing in~~owned real estate and real estate related assets, including risks of loss from adverse weather conditions and man-made or natural disasters, 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 damage properties that we own or that collateralize loans we own or service. In addition, the properties ~~where~~ collateralizing our loan assets or underlying our MSR assets and the local economies of certain areas in which

we conduct business could be adversely impacted. 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.operate. Although we believe our owned real estate and the properties collateralizing our loan assets or underlying our MSR assets are ~~adequately~~appropriately covered by ~~appropriate~~ insurance, we cannot predict at this time if we or our borrowers will be able to obtain ~~such~~appropriate coverage at a reasonable cost in the future, or if we will be able to continue to pass along all of the costs of insurance. ~~In addition, there~~There also is a risk that one or more of ~~the~~our property insurers ~~of property on which we held an interest~~ 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. Additionally, climate change concerns could result in transition risk. Changes in consumer preferences and additional legislation and regulatory requirements, including those associated with the transition to a low-carbon economy, could increase expenses or otherwise adversely impact our operations and business.

Adverse weather conditions, climate change, man-made or natural disasters, pandemics, such as COVID-19, terrorist attacks, floods, droughts, fires and other environmental conditions could adversely impact properties that we own or that collateralize loans we own or service, as well as properties where we conduct business. In addition, such adverse conditions could impact the demand for, and value of, our assets, as well as the cost to service or manage such assets, or 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. Real estate value declines could also decrease the value supporting certain of our assets, such as CRTs and subordinated bonds, where we may provide a credit guaranty or otherwise be responsible for all or a portion of any credit losses. Terrorist attacks and other acts of violence may cause disruptions in U.S. financial markets and negatively impact the U.S. economy in general.

Our corporate headquarters is located in Westlake Village, California and our Manager has 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 in the past several years. California and the other states 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.

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 and pandemics, such as COVID-19, 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.~~

~~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. In 2018, many areas of California, including the immediate area around our corporate headquarters, experienced extensive damage and property, loss due to a series of very 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, 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.~~business, financial condition, liquidity and results of operations.

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 these

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.

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 mortgage loans,~~ MSRs, ~~ESS,~~ CRT, ~~Agreements,~~and securities and ~~mortgage~~ loans held in a consolidated variable interest ~~entity~~entities 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 certain of our investments, including subordinated securities we are required to hold under applicable risk retention rules, 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.

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. If any third party information is intentionally or negligently misrepresented and not detected, then our model and data results could be materially impacted. 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 may acquire or the properties underlying 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 ~~mortgage~~ 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 ~~mortgage~~ 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 ~~mortgage~~ 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 ~~mortgage~~ 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 ~~mortgage~~ 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 ~~mortgage~~ 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 ~~mortgage~~ loan. The remedies available to the Agencies, other purchasers and insurers of ~~mortgage~~ 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.

During any period in which a borrower is not making payments, we ~~are~~may be 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 ~~mortgage~~ loan serviced by us is in default or becomes delinquent, the repayment to us of the advance may be delayed until the ~~mortgage~~ loan is repaid or refinanced or a liquidation occurs.

Federal, state or local regulatory actions may increase the amount of servicing advances that we are required to make, lengthen the time it takes for us to be reimbursed for such advances and increase the costs incurred while the loan is delinquent. The federal government enacted the CARES Act, which allows borrowers with federally-backed loans to request temporary payment forbearance in response to the increased borrower hardships resulting from the COVID-19 pandemic.

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 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.

We are externally advised and managed by PCM, which, pursuant to our management agreement, 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 limited in-house capabilities and employees to perform the activities independently.

In addition, the terms of these agreements extend until June 30, 2025, 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. See “Termination of our management agreement is difficult and costly” below. If any agreement is terminated or not 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 common shares and/or our ability to make distributions to our shareholders.

The servicing fee structure could create a conflict of interest.

Termination of our management agreement is difficult and costly.

Our relationship with PCM may 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 policies 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. We are also limited in our ability to acquire assets that are not qualifying real estate assets and/or real estate related assets. 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.

Our failure to appropriately address 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 whose 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 continue to scrutinize 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 result from our actual or alleged conduct in any number of activities, including lending and debt collection practices, corporate governance, and actions taken by government regulators and community organizations in response to those activities. Negative public opinion can also result from social media and media coverage, whether accurate or not. Our reputation may also be negatively impacted by our environmental, social and governance ("ESG") practices and disclosures, including climate change practices and disclosures. In addition, various private third party organizations have developed ratings processes for evaluating companies on their approach to ESG matters. These third party ESG ratings may be used by some investors to assist with their investment and voting decisions. Any unfavorable ESG ratings may lead to reputational damage and negative sentiment among our investors and other stakeholders. These factors could impair our working relationships with government agencies and investors, expose us to litigation and regulatory action, negatively affect our ability to attract and retain customers, trading counterparties and employees, significantly harm our stock price and ability to raise capital, and adversely affect our results of operations.

PCM and PLS both have limited liability and indemnity rights.

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~~the 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”), to the extent it does not qualify~~PMC, qualifies for one or more exemptions under ~~Section 3(c)(5)(C) of the Investment Company Act, would qualify for the exemption provided in Section 3(c)(6) of~~ the Investment Company Act because ~~it has been,~~of the historical and is expected to continue to be, primarily engaged, directly or through majority-owned subsidiaries, in (1) the business of purchasing or otherwise acquiring mortgages or other liens on and interests in real estate (from which not less than 25%current composition of its ~~gross income during its last fiscal year was~~assets and will continue to be derived), together with (2) an additional business or businesses other than investing, reinvesting, owning, holding, or trading in securities, namely the business of servicing mortgages. Although we expect not less than 25% of PMC’s gross income to be derived from originating, purchasing, or acquiring mortgages or liens on and interests in real estate,income; however, there can be no assurances that the composition of PMC’s ~~gross~~assets and income will remain the same over ~~time.~~

To date, the SEC staff has provided limited guidance with respect to the applicability of Section 3(c)(6), and PMC has not sought a no-action letter from the SEC staff respecting its position. If PMC is ultimately unable to rely on the Section 3(c)(6) exemption due to a failure to meet the 25% of gross income testtime such that one or to the extent that the SEC staff provides negative guidance regarding the applicability or scope of the exemption, we may be required to either (a) register as an investment company, or (b) substantially restructure our business, change our investment strategy and/or the manner in which we conduct our operations in order to qualify for another ~~Investment Company Act~~ exemption and avoid being required to register as an investment company, either of which could materially and adversely affect our business, financial condition, liquidity, results of operations, and ability to make distributions to our shareholders.

In the case of a restructuring, PMC could temporarily rely on Rule 3a-2 for its exemption from registration. Rule 3a-2 provides a safe harbor exemption, not to exceed one year, for companies that have a bona fide intentmore exemptions will continue to be engaged in an excepted activity but temporarily fail to meet the requirements for an exemption. In such case, PMC would likely be required to restructure its business by acquiring and/or disposing of assets in order to meet an exemption under Section 3(c)(5)(C), depending on the composition of its assets at the time. The SEC staff’s position on Section 3(c)(5)(C) generally requires that an issuer maintain at least 55% of its assets in mortgages and other liens on and interests in real estate (qualifying assets) and at least 80% of its assets in qualifying assets plus real estate-related assets. PMC would be more limited in its ability to hold MSRs or would be required to acquire and hold more mortgage loans and real estate to adjust the composition of its assets to meet the 55% and 80% tests.

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 ~~mortgage~~ 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~~. 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 taxable REIT subsidiaries, or TRSs that are subject to U.S. federal income ~~taxation.~~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~~taxes 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.

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~~this 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.

Some of our early CRT investments may not be eligible REIT assets and are held by 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.

Some of our recent CRT investments have been structured to satisfy our REIT qualification requirements. However, our other CRT investments may not be considered eligible REIT assets and are therefore held by our TRS in order not to jeopardize our REIT status. Income from CRT investments that are held in the TRS may be subject to U.S. federal and state income taxation. In the future we may consider holding other CRT investments in the REIT, 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.

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, or that future dividends might not be a combination of stock and cash, as permitted under IRS guidelines, 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 ~~mortgage~~ 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 or a subsequent 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 outstanding 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,~~provided, that, 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 ~~mortgage~~ 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 ~~mortgage~~ 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.

We acquire and hold residential mortgage-backed securities (“RMBS”) and have engaged, and expect to continue to engage, in RMBS trading activity as we evaluate our RMBS portfolio on a regular basis and reposition it from time to time as a trader. We acquire RMBS positions with the intention of holding them for investment and not for sale to customers in the ordinary course of business. We intend to conduct such trading activities under internal guidelines that we believe are sufficient to demonstrate that this is the case. We therefore believe that we will not be treated as engaging in “prohibited transactions” that would be subject to a 100% tax on any net gain derived from RMBS sales. However, we do not expect that such trading activities will fall within a statutory “safe harbor” that would conclusively protect us against an assertion by the IRS to the contrary. If the IRS were successfully to require treatment of sales made in the course of such trading activities as “prohibited transactions,” it would subject any net gain derived from such sales to this 100% tax, but would not affect our qualification as a REIT.

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 ~~mortgage~~ loans that we ~~have~~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 ~~mortgage~~ loans.

Treasury Regulation Section 1.856-5(c) (the “interest apportionment regulation”) provides rules for determining what portion of the interest income from ~~mortgage~~ 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 ~~mortgage~~ loans that we ~~acquire~~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 ~~mortgage~~ 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.

General Risks

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

We could incur substantial losses and our business operations could be disrupted if we are unable to effectively identify, manage, monitor, and mitigate financial risks, such as credit risk, interest rate risk, prepayment risk, liquidity risk, climate 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 laws, regulations and rules that are not industry specific, including employment laws related to employee hiring and termination practices, health and safety laws, environmental laws and other federal, state and local laws, regulations and rules in the jurisdictions in which we operate. Our 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. Our risk management framework is designed to identify, monitor and mitigate risks that could have a negative impact on our financial condition or reputation. This framework includes divisions or groups dedicated to enterprise risk management, credit risk, climate risk, corporate sustainability and ESG, information security, disaster recovery and other information technology-related risks, business continuity, legal and compliance, compensation structures and other human resources matters, vendor management and internal audit, among others. 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 we may not effectively identify, manage, monitor, and mitigate these risks as our business activities change or increase.

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

We are exposed to risks relating to misconduct by our and our Manager’s employees, 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 our Manager and its subsidiaries, affiliates, 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. In addition, the ongoing COVID-19 pandemic has created unique challenges resulting from employees working remotely. 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.

As our reliance on rapidly changing technologies 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, malware, natural disasters and other similar events may interrupt or delay our ability to provide services to our customers.

Despite our Manager’s efforts to ensure the integrity of our systems and our investment in significant physical and technological security measures, employee training, contractual precautions, policies and procedures, board oversight and business continuity plans, 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 may not be recognized until after such attack has been 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. Our data security management program includes identity, trust, vulnerability and threat management business processes as well as the adoption of standard data protection policies. We are also held accountable for the actions and inactions of our third-party vendors regarding cybersecurity and other consumer-related matters.

We operate in a highly competitive market and decreased margins resulting from increased competition or our inability to compete successfully could adversely affect our business, financial condition, liquidity and results of operations.

We operate in a highly competitive industry that could become even more competitive as a result of economic, legislative, regulatory and technological changes. 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. In addition, 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 competitive advantages over us, including size, financial strength, access to capital, cost of funds, federal pre-emption and higher risk tolerance. Additionally, our existing and potential competitors may decide to modify their business models to compete more directly with our correspondent production business. Competition may result in fewer investments, higher prices, acceptance of greater risk, lower yields and a narrower spread of yields over our financing costs. Moreover, 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.

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. For example, during August 2021, PMT raised $250 million by issuing 10 million shares of 6.75% Series C 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.

In addition, during March 2021, our wholly-owned subsidiary, PMC, issued $345 million of exchangeable senior notes (“2026 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 2026 Notes could receive a distribution of PMC’s available assets before holders of our common shares.

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. During June 2021, we filed a shelf registration statement allowing us to issue additional common shares and preferred shares, including, without limitation, common shares through our “at-the-market” equity program and, as of December 31, 2021, we have approximately $100 million of common shares available for issuance under that 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.

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 increase our cost of doing business.

Initiating new business activities or investment strategies, developing new products, or significantly expanding existing business activities or investment strategies, 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. For example, in the third and fourth quarters of fiscal year 2021, we reported net losses attributable to common

shareholders of $43.9 million and $27.3 million, respectively. 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.

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,~~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, ~~2018,~~2021, 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 ~~20, 2019,~~18, 2022, our common shares were held by ~~25,066 beneficial~~118 registered 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 Part I, Item 1A of this Report in ~~the~~ section entitled ~~Risk Factors~~“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~~quarter ended December 31, ~~2018.~~2021.

Repurchase of our Common Shares

The following table ~~provides information about our common share repurchases during~~summarized the stock repurchase activity for the quarter ended December 31, ~~2018:~~2021:

Period

Total
number of
shares
purchased

Average
price paid
per share

Total number of
shares
purchased as
part of publicly
announced plans
or programs (1)

Amount
available for
future share
repurchases
under the
plans or
programs (1)

(in thousands)

October 1, 2018 – October 31, 2018

—

$
—

—

$
83,375

November 1, 2018 – November 30, 2018

—

$
—

—

$
83,375

December 1, 2018 – December 31, 2018

—

$
—

—

$
83,375

—

$
—

—

Period	Total number of shares purchased		Average price paid per share		Total number of shares purchased as part of publicly announced plans or programs (1)		Amount available for future share repurchases under the plans or programs (1)
							(in thousands)
October 1, 2021 – October 31, 2021		—	$	—		—	$	128,407
November 1, 2021 – November 30, 2021		981	$	18.35		981	$	110,402
December 1, 2021 – December 31, 2021		1,186	$	17.83		1,186	$	89,253

(1)

~~During 2015, our~~On June 11, 2021, the Company’s board of trustees ~~authorized a~~approved an increase to the Company’s common share repurchase ~~program.~~authorization from $300 million to $400 million. Under the repurchase program, as amended, wethe Company may repurchase up to ~~$300~~$400 million of ~~our~~its outstanding common shares. Under the program, we have discretion to determine the dollar amount of common shares to be repurchased and the timing of any repurchases in compliance with applicable law and regulation. The program does not have an expiration date. Amounts presented reflect balances as of the end of the applicable period.

~~Equity Compensation Plan Information~~

We have adopted an equity incentive plan which 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 equity incentive 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. Our equity incentive 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 plan cannot exceed 40 million.

~~The following table provides information as of December 31, 2018 concerning our common shares authorized for issuance under our equity incentive plan:~~

(a)

(b)

(c)

Plan category

Number of securities to
be issued upon exercise
of outstanding options,
warrants and rights

Weighted average
exercise price of
outstanding options,
warrants and rights

Number of securities
remaining available for
future issuance under
equity compensation
plans excluding
securities reflected
in column(a))

Equity compensation plans approved by
security holders (1)

596,899

$
—

4,326,968

Equity compensation plans not approved
by security holders (2)

—

—

—

Total

596,899

—

4,326,968

~~(1)~~Item 6.

~~Represents our 2009 Equity Incentive Plan.~~ Reserved

~~(2)~~

~~We do not have any equity plans that have not been approved by our shareholders.~~

Item 6.7.

~~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, 2018, 2017, and 2016 and the condensed consolidated balance sheets data at December 31, 2018, and 2017 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, 2015 and 2014 and the condensed consolidated balance sheets data at December 31, 2016, 2015, and 2014 have been derived from our Company’s audited consolidated financial statements that are not included in this Report.

Year ended December 31,

2018

2017

2016

2015

2014

(dollars in thousands, except per common share data)

Condensed Consolidated Statements of Income:

Net investment income:

Net mortgage loan servicing fees

$
120,587

$
69,240

$
54,789

$
49,319

$
37,893

Net gain on investments

81,926

96,384

7,175

53,985

201,809

Net gain on mortgage loans acquired for sale

59,185

74,516

106,442

51,016

35,647

Net interest income

47,601

43,805

72,354

76,637

86,759

Other

41,768

33,995

31,328

17,808

(5,367
)

351,067

317,940

272,088

248,765

356,741

Expenses:

Expenses payable to PennyMac Financial Services, Inc.

147,860

146,007

157,737

129,224

136,276

Other

45,219

47,387

52,588

46,237

41,001

193,079

193,394

210,325

175,461

177,277

Income before provision for income taxes

157,988

124,546

61,763

73,304

179,464

Provision for (benefit from) income taxes

5,190

6,797

(14,047
)

(16,796
)

(15,080
)
Net income

$
152,798

$
117,749

$
75,810

$
90,100

$
194,544

Pre-tax income (loss) by segment:

Correspondent production

$
16,472

$
42,938

$
73,842

$
36,390

$
10,960

Credit sensitive strategies

87,251

102,214

17,288

66,038

206,738

Interest rate sensitive strategies

98,432

22,683

14,041

20,516

23,371

Corporate

(44,167
)

(43,289
)

(43,408
)

(49,640
)

(61,605
)

$
157,988

$
124,546

$
61,763

$
73,304

$
179,464

Return on average common shareholders' equity

10.2
%

7.8
%

5.4
%

5.9
%

12.6
%
Condensed Consolidated Balance Sheets:

Investments:

Short-term

$
74,850

$
18,398

$
122,088

$
41,865

$
139,900

Mortgage-backed securities at fair value

2,610,422

989,461

865,061

322,473

307,363

Mortgage loans acquired for sale at fair value

1,643,957

1,269,515

1,673,112

1,283,795

637,722

Mortgage loans at fair value

408,305

1,089,473

1,721,741

2,555,788

2,726,952

Excess servicing spread purchased from PFSI

216,110

236,534

288,669

412,425

191,166

Firm commitment to purchase CRT securities

37,994

—

—

—

—

Credit risk transfer agreement deposits and derivatives

1,270,488

687,507

465,669

147,593

—

Real estate

128,791

207,089

303,393

350,642

303,228

Mortgage servicing rights

1,162,369

844,781

656,567

459,741

357,780

7,553,286

5,342,758

6,096,300

5,574,322

4,664,111

Other assets

260,075

262,175

261,202

252,602

233,147

Total assets

$
7,813,361

$
5,604,933

$
6,357,502

$
5,826,924

$
4,897,258

Short-term debt

$
5,081,691

$
3,269,462

$
4,017,232

$
3,323,534

$
2,634,471

Long-term debt

1,011,433

661,715

821,893

867,005

524,777

6,093,124

3,931,177

4,839,125

4,190,539

3,159,248

Other liabilities

154,105

129,171

167,263

140,272

159,838

Total liabilities

6,247,229

4,060,348

5,006,388

4,330,811

3,319,086

Shareholders' equity

1,566,132

1,544,585

1,351,114

1,496,113

1,578,172

Total liabilities and shareholders' equity

$
7,813,361

$
5,604,933

$
6,357,502

$
5,826,924

$
4,897,258

Per Common Share Data:

Earnings:

Basic

$
2.09

$
1.53

$
1.09

$
1.19

$
2.62

Diluted

$
1.99

$
1.48

$
1.08

$
1.16

$
2.47

Cash dividends:

Declared

$
1.88

$
1.88

$
1.88

$
2.16

$
2.40

Paid

$
1.88

$
1.88

$
1.88

$
2.30

$
2.38

Year-end:

Share price

$
18.62

$
16.07

$
16.37

$
15.26

$
21.09

Book value

$
20.61

$
20.13

$
20.26

$
20.28

$
21.18

~~Item 7.~~

Management’s Discussion and Analysis of Financial Condition and Results of Operations

We are a specialty finance company that invests primarily in ~~residential mortgage loans and~~ 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”), ~~credit risk transfer agreements~~non-Agency subordinate Mortgage-backed securities (“~~CRT Agreements”~~MBS”), and credit risk transfer ~~securities~~(“CRT”) arrangements, which include CRT Agreements and CRT strips that absorb credit losses on certain of the ~~mortgage~~ loans we ~~sell.~~sold. We also invest in ~~mortgage-backed securities (“MBS”), and hold excess servicing spread (“ESS”) on MSRs acquired by PennyMac Loan Services, LLC (“PLS”).~~Agency MBS. We have also historically invested in distressed mortgage assets ~~(mortgage loans~~(loans and real estate acquired in settlement of ~~mortgage loans) as well as other credit sensitive assets, including~~ loans ~~that finance multifamily and other commercial real estate,~~(“REO”)), which ~~are no longer our primary focus for new investments.~~we have substantially liquidated.

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

During the year ended December 31, ~~2018,~~2021, we purchased newly originated prime credit quality residential ~~mortgage~~ loans with fair values totaling ~~$68.0~~$181.4 billion, as compared to ~~$66.7~~$170.0 billion for the ~~same period~~year ended December 31, 2020, in ~~2017, in furtherance of~~ our correspondent production business. To the extent that we purchase ~~mortgage~~ 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 ~~mortgage~~ loans, as PLS is a Government National Mortgage Association (“Ginnie ~~Mae-approved~~Mae”) approved issuer and we are not. This arrangement has enabled us to compete with other correspondent aggregators that purchase both government and conventional ~~mortgage~~ 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 mortgage loans are held by us prior to purchase by PLS,~~ on the unpaid principal balance (“UPB”) of each ~~mortgage~~ loan that we sell to PLS under such arrangement, and earn interest income on the ~~mortgage~~ loan for the period we hold it before the sale to PLS. During the year ended December 31, ~~2018,~~2021, we received sourcing fees totaling ~~$10.9~~$6.5 million, relating to ~~$36.4~~$64.8 billion in UPB of ~~mortgage~~ loans that we sold to PLS.

We operate our business in four segments: Correspondent production, Interest rate sensitive strategies, Credit sensitive strategies and our Corporate operations as described below.

Correspondent Production

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

		Year ended December 31,
		2021		2020			2019
	(in thousands)
Sales of loans acquired for sale:
To nonaffiliates		$	110,919,477	$	106,306,805		$	61,128,081
To PennyMac Financial Services, Inc.			67,851,630		63,618,185			50,110,085
		$	178,771,107	$	169,924,990		$	111,238,166
Net gains on loans acquired for sale		$	87,273	$	379,922		$	170,164
Investment activities resulting from correspondent production:
Receipt of MSRs as proceeds from sales of loans		$	1,484,629	$	1,158,475		$	837,706
Retention of interests in securitizations of loans secured by investment properties, net of associated asset-backed financings			42,256		—			—
Purchase of subordinate bonds backed by previously-sold loans secured by investment properties held in consolidated variable interest entities			28,815		—			—
Investments in CRT arrangements:
Deposits securing CRT arrangements			—		1,700,000			933,370
Recognition of firm commitment to purchase CRT securities (1)			—		(38,161	)		99,305
Change in face amount of firm commitment to purchase CRT securities and commitment to fund Deposits securing CRT arrangements			—		(1,502,203	)		897,151
Total investments in CRT arrangements			—		159,636			1,929,826
Total investments resulting from correspondent activities		$	1,526,885	$	1,318,111		$	2,767,532

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

Interest Rate Sensitive Investments

Our interest rate sensitive investments include:

•

Mortgage servicing rights. During the year ended December 31, 2021, we received approximately $1.5 billion of MSRs as proceeds from sales of loans acquired for sale. We held $2.9 billion of MSRs at fair value at December 31, 2021.

•

REIT-eligible mortgage-backed or mortgage-related securities. We purchased approximately $2.2 billion and sold approximately $1.3 billion of Agency MBS during the year ended December 31, 2021. We held Agency MBS with fair values totaling approximately $2.7 billion at December 31, 2021. The purchases and sales during the period reflect a rebalancing of our investment in Agency MBS aimed at reducing prepayment and price risk relating to these assets.

Credit Sensitive Investments

CRT Arrangements

At present, we are no longer creating new CRT investments as the Federal Housing Finance Agency (“FHFA”) instructed the Federal National Mortgage Association (“Fannie Mae”) and the Federal Home Loan Mortgage Corporation (“Freddie Mac”) to gradually wind down new front-end lender risk share transactions such as CRT investments. During the year ended December 31, ~~2018,~~2021, we ~~received MSRs arising from~~recognized investment gains of $369.6 million relating to our ~~loan sales activities with fair values at initial recognition~~holdings of CRT investments. We held net CRT-related investments (comprised of deposits securing CRT arrangements, CRT derivatives, CRT strips and interest-only security payable) totaling ~~$356.8 million and held MSRs with a fair value totaling $1.2~~approximately $1.7 billion at December 31, ~~2018.~~2021.

~~We believe that CRT Agreements and CRT securities are long-term investments that can produce attractive risk-adjusted returns through our own mortgage~~Investments in Subordinate MBS Backed by Loans Secured by Investment Properties

Beginning in the quarter ended June 30, 2021, the Company purchased or retained approximately $71.1 million of subordinate MBS backed by loans secured by investment properties sourced from the Company’s conventional correspondent production ~~while aligning~~activities. The subordinate MBS provide us 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~~a higher yield than senior securities. However, we retain credit risk ~~transfer (“CRT”) and MSRs that result from our correspondent production activities as we reinvest capital returned from~~in the ~~liquidation of distressed mortgage loans. During~~subordinate MBS since they are the year ended December 31, 2018, we made investments in CRT Agreements totaling $596.6 million, and held CRT-related investments (composed of deposits securing CRT Agreements, derivative assets and firm commitmentfirst securities to ~~purchase CRT securities) totaling $1.3 billion at December 31, 2018.~~

During the year ended December 31, 2018, we fulfilled our commitments to sell mortgage loans into CRT Agreements and we began selling mortgage loans under agreements that included our firm commitment to purchase CRT securities that absorb credit losses ~~on such mortgage loans. We have recognized $38.0 million at fair value related~~relating to the ~~firm commitments to purchase~~underlying loans.

As the ~~CRT securities during the year ended December 31, 2018.~~

~~We also participate in other mortgage-related activities, including:~~

~~Mortgage-backed or mortgage-related securities. During 2018, we purchased $1.8 billion of mortgage-backed or mortgage-related securities. We held MBS with fair values totaling $2.6 billion at December 31, 2018.~~

~~ESS relating to MSRs held by PFSI~~. During the year ended December 31, 2018, we did not purchase any ESS from PFSI. However, pursuant to a recapture agreement with PLS we received ESS with a fair value totaling $2.7 million. We held ESS with a fair value totaling $216.1 million at December 31, 2018.

~~Retention of certain securities created in securitization transactions. To the extent that we transfer correspondent production loans into private label securitizations, retention of a portion~~result of the ~~securities created~~Company’s consolidation of the variable interest entities that issued the subordinate MBS as described in Note 6 – Variable Interest Entities – Investment in Securities Backed by Loans Secured by investment Properties to the ~~securitization transaction. Our private label securitization is accounted for as a financing arrangement. Sales of securities~~consolidated financial statements included in ~~the securitization are treated as issuances of debt. We held $14.1 million of such securities (which~~this Report, we ~~account for as mortgage~~include loans ~~at fair value, net of the related asset-backed financing),~~underlying these and similar transactions with UPBs totaling approximately $1.5 billion on our consolidated balance sheet as of December 31, ~~2018.~~

We have invested in distressed mortgage loans through direct acquisitions of mortgage loan portfolios from institutions such as banks and mortgage companies. We seek to maximize the fair value of the distressed mortgage loans that we acquired using means that are appropriate for the particular loan, including both proprietary and nonproprietary loan modification programs, special servicing and other initiatives focused on avoiding foreclosure, when possible. When we are unable to effect a cure for a mortgage loan delinquency, our objective is timely acquisition and/or liquidation of the property securing the mortgage loan through the use, in part, of short sales and deed-in-lieu-of-foreclosure programs. We may elect to hold certain real estate acquired in settlement of loans (“REO”) as income-producing properties for extended periods as a means of maximizing our returns on such properties. 2021.

We seek to maximize our returns on distressed mortgage assets through individual loan and property resolutions, as well as bulk sales. During the year ended December 31, 2018, we reduced our investments in distressed mortgage loans and REO by $727.9 million, or 78%. We received proceeds from liquidations, payoffs, paydowns and sales from our portfolio of distressed mortgage loans and REO totaling $721.9 million, including sales totaling $563.4 million in fair value of distressed mortgage loans. At December 31, 2018, we held $203.4 million of distressed mortgage assets (comprised of distressed mortgage loans and REO).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 ~~our Manager~~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 ~~our Manager has~~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:

At December 31, 2018

Level
Description

Carrying value
of assets
measured (1)

% total
assets

%
shareholders'
equity

(in thousands)

Level 1:
Prices determined using quoted prices in active markets for identical assets or liabilities.

$
80,165

1
%

5
%
Level 2:
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 Manager.

4,543,499

58
%

290
%
Level 3:
Prices determined using significant unobservable inputs. Unobservable inputs reflect our Manager’s 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.

1,788,020

23
%

114
%

Total assets measured at or based on fair value

$
6,411,684

82
%

409
%

Total assets

$
7,813,361

��

Total shareholders’ equity

$
1,566,132

		December 31, 2021
				Percentage of
Level	Description	Carrying value of assets measured (1)		Total assets			Total shareholders' equity
		(in thousands)
1	Prices determined using quoted prices in active markets for identical assets or liabilities.	$	174,007		1	%		7	%
2	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.		8,388,043		61	%		354	%
3	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)		4,669,962		34	%		197	%
	Total assets measured at or based on fair value	$	13,232,012		96	%		558	%
	Total assets	$	13,772,708
	Total shareholders’ equity	$	2,367,518

(1)	Includes assets measured on both a recurring and nonrecurring basis based on the accounting principles applicable to the specific asset or liability and whether we have elected to carry the item at its fair value.

(2)

For ~~assets~~purposes of this discussion, includes Deposits securing credit risk transfer arrangements which are carried at ~~lower~~amortized cost. These deposits along with the related CRT derivatives and CRT strips are held in the form of ~~amortized cost or fair value, carrying value represents~~securities which are the ~~assets’ amortized cost reduced by any applicable~~basis for valuation ~~allowance; for assets carried at fair value, carrying value is represented by such assets’ fair value.~~of the CRT derivatives and strips.

At December 31, ~~2018, $6.3~~2021, $13.2 billion, or ~~81%~~96%, of our total assets were carried at fair value on a recurring basis and ~~$85.7~~$14.4 million, or less than 1% (consisting of REO), were carried based on ~~its~~ fair value on a non-recurring ~~basis when fair value indicates evidence of impairment.~~basis. Of these assets, ~~$1.8~~$4.7 billion, or ~~23%~~34%, of total assets are measured using “Level 3” fair value inputs, ~~– significant inputs that~~which are difficult to observe ~~due to illiquidity of the markets in which the assets are traded.~~ and require significant management judgment.

Changes in inputs to measurement of ~~these~~Level 3 fair value 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.~~income as summarized below:

		Change in fair value
Year ended December 31,		Loans at fair value (1)			Excess servicing spread			Interest rate lock commitments			CRT Assets			Mortgage servicing rights (2)			Total			Pre-tax income (loss)

	2021	$	1,182			1,037			(156,840	)		163,290			(39,056	)	$	(30,387	)	$	44,661
	2020	$	(1,578	)		(24,970	)		536,943			(267,969	)		(706,107	)	$	(463,681	)	$	79,730
	2019	$	(6,099	)		(9,256	)		80,133			59,800			(262,031	)	$	(137,453	)	$	190,641

(1)	Includes loans held for sale and loans at fair value.

(2)	Excluding changes in fair value attributable to realization of cash flows.

As a result of the difficulty in observing certain significant valuation inputs affecting “Level 3” fair value assets and liabilities, ~~our Manager is~~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 ~~Manager’s~~ valuation process is conducted by specialized staff and receives significant executive management oversight. ~~Our Manager has~~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 2018,~~ PFSI’s valuation committee ~~included~~includes the Company’s ~~executive chairman, chief executive,~~ chief financial, chief investment and risk officers as well as other senior members of the Company’s finance, capital markets and ~~deputy chief financial officers.~~risk management staffs.

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.~~responsibilities.

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

~~Mortgage~~ Loans

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

Our Manager categorizes mortgage loans that are saleable into active markets as “Level 2” fair value assets. Such mortgage loans include substantially all of our mortgage loans acquired for sale and our mortgage loans held in a VIE. Our Manager estimates such loans’ fair values using their quoted market price or market price equivalent.

•

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 VIEs. We estimate such loans’ fair values using their quoted market price or market price equivalent. We held $5.7 billion of such loans at fair value at December 31, 2021.

Our Manager categorizes mortgage loans that are not saleable into active markets as “Level 3” fair value assets. Such mortgage loans include substantially all of our investments in distressed mortgage loans and certain of the mortgage loans acquired for sale which we subsequently repurchased pursuant to representations and warranties or that our Manager identified as non-salable to the Agencies.

•

We categorize loans that are not saleable into active markets as “Level 3” fair value assets. Such loans include of our investments in distressed loans, home equity and commercial loans held for sale 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 $34.3 million of such loans at fair value at December 31, 2021.

~~Our Manager estimates~~We estimate the fair value of our “Level 3” fair value ~~mortgage~~ loans based on the expected resolution of individual loans for distressed loans and using a discounted cash flow valuation ~~model.~~model for loans held for sale. 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.

A shift in the market for “Level 3” fair value mortgage loans or a change in our Manager’s assessment of an input to the valuation of such fair value mortgage loans can have a significant effect on the fair value of our mortgage loans at fair value and in our income for the period. Our Manager believes that the fair value of distressed mortgage loans is most sensitive to changes in underlying property values. Following is a summary of the effect on fair value of changes to the property value inputs used by our Manager to make its fair value estimates as of December 31, 2018:

Effect on fair value of a change in property value

Change in input

Effect on fair value

(in thousands)

5%

$
3,726

10%

$
7,167

15%

$
10,374

(5%)

$
(4,001
)
(10%)

$
(8,321
)
(15%)

$
(12,951
)

~~Excess Servicing Spread~~

We acquire the right to receive the ESS cash flows relating to certain MSRs over the life of the underlying mortgage 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. Our Manager uses the same discounted cash flow approach to measuring the ESS as it uses to value the related MSRs except that certain inputs relating to the cost to service the mortgage loans underlying the MSRs and certain ancillary income are not included as these cash flows do not accrue to the holder of the ESS.

A shift in the market for ESS or a change in our Manager’s 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. 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, 2018:

Effect on fair value of a change in input

Change in input

Pricing spread

Prepayment speed

(in thousands)

5%

$
(1,461
)

$
(4,607
)
10%

$
(2,904
)

$
(9,040
)
20%

$
(5,735
)

$
(17,418
)
(5%)

$
1,481

$
4,792

(10%)

$
2,980

$
9,779

(20%)

$
6,040

$
20,385

Derivative Assets

Interest Rate Lock Commitments

Our net gain on ~~mortgage~~ loans acquired for sale includes our estimates of gains or losses we expect to realize upon the sale of ~~mortgage~~ loans we have committed to purchase but have not yet purchased or sold. Therefore, we recognize a substantial portion of our net gain on ~~mortgage~~ loans acquired for sale at fair value before we purchase the ~~mortgage~~ loan. In the course of our correspondent production activities, we make contractual commitments to correspondent sellers to purchase ~~mortgage~~ 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 ~~IRLCs~~an IRLC is transferred to the fair value of ~~mortgage~~ loans acquired for sale at fair value when the ~~mortgage~~ loan is funded.

An active, observable market for IRLCs does not exist. Therefore, ~~our Manager measures~~we measure the fair value of IRLCs using methods and inputs ~~it believes~~we believe that market participants use in pricing IRLCs. ~~Our Manager estimates~~We estimate the fair value of an IRLC based on quoted Agency MBS prices, ~~its~~our estimates of the fair value of the MSRs we expect to receive in the sale of the ~~mortgage~~ loans and the probability that the ~~mortgage~~ 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 ~~Manager’s~~ estimates as these inputs are difficult to observe in the mortgage marketplace. Changes in our ~~Manager’s~~ estimate of the probability that a ~~mortgage~~ 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~~gains on ~~mortgage~~ loans acquired for sale and may be included in Net ~~mortgage~~ loan servicing fees ~~— from~~– From nonaffiliates – Mortgage servicing rights hedging results when ~~the Manager includes~~we include the IRLCs in ~~its~~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 ~~mortgage~~ loans that decrease in fair value.

A shift in the market for IRLCs or a change in our ~~Manager’s~~ assessment of an input to the valuation of IRLCs can have ~~a significant~~an effect on the amount of gain on sale of ~~mortgage~~ loans acquired for sale for the period. ~~Our Manager believes~~We believe that the fair value of IRLCs is most sensitive to changes in

pull-through rate inputs. We held $2.5 million of net IRLC assets at December 31, 2021. Following is a quantitative summary of the effect of changes in pull-through inputs on the fair value of IRLCs at December 31, ~~2018:~~2021:

Effect on fair value of a change in pull-through rate	Effect on fair value of a change in pull-through rate				Effect on fair value of a change in pull-through rate
Change in input (1)	Change in input (1)	Effect on fair value			Change in input (1)	Effect on fair value
		(in thousands)				(in thousands)
(20%)					(20%)	$	(617	)
(10%)					(10%)	$	(309	)
(5%)					(5%)	$	(154	)
5%	5%	$	372		5%	$	131
10%	10%	$	687		10%	$	247
20%	20%	$	1,253		20%	$	445
(5%)		$	(682	)
(10%)		$	(1,367	)
(20%)		$	(2,738	)

(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 ~~Agreements~~Arrangements

~~We have entered into~~Through late 2020, we had CRT ~~Agreements~~arrangements with Fannie Mae, pursuant to which we ~~sell~~sold pools of ~~mortgage~~ loans into Fannie Mae-guaranteed securitizations while retaining recourse obligations as part of the retention of an interest-only ownership interest in such ~~mortgage~~ loans. We carry the strip or derivative asset or liability relating to ~~this transaction~~these transactions at fair value and recognize changes in the ~~derivative’s~~respective assets’ or liability’s fair ~~value~~values in Net ~~gain (loss)~~gains (losses) on investments and financings in the consolidated statements of income.

A shift in the market for CRT ~~Agreements~~arrangements or a change in our ~~Manager’s~~ assessment of an input to the valuation of CRT ~~Agreements~~arrangements can have a significant effect on the fair value of CRT ~~Agreements~~arrangements and in our income for the period. We believe that the most significant “Level 3” fair value ~~input~~inputs to the valuation of CRT ~~Agreements is~~arrangements are the pricing spread (discount rate). and the remaining loss expectation, which is influenced by the changes in the fair value of the properties securing the loans in the reference pool.

We held $1.7 billion of net CRT arrangement assets at December 31, 2021. Following is a summary of the effect on fair value of various changes to the pricing spread and property value shifts (which is used in the determination of estimated remaining credit losses) input used to estimate the fair value of our CRT ~~Agreements~~arrangements as of December 31, ~~2018:~~2021:

Effect on fair value of a change in pricing spread input	Effect on fair value of a change in pricing spread input				Effect on fair value of a change in pricing spread input				Effect on fair value of a shift in property value
Change in input (in basis points)		Effect on fair value				Effect on fair value			Property value shift	Effect on fair value
		(in thousands)				(in thousands)				(in thousands)
(100)						$	59,927		(15%)	$	(47,775	)
(50)						$	29,443		(10%)	$	(28,673	)
(25)						$	14,594		(5%)	$	(13,120	)
25		$	(13,918	)		$	(14,347	)	5%	$	11,427
50		$	(27,605	)		$	(28,449	)	10%	$	21,105
100		$	(54,295	)		$	(55,944	)	15%	$	29,369
(25)		$	14,171
(50)		$	28,563
(100)		$	58,115

~~Firm commitment to purchase CRT securities~~

~~Similar to the CRT Agreements above, we have entered into an agreement with Fannie Mae to purchase CRT securities related to mortgage 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 mortgage loans. The firm commitment to purchase CRT securities is recognized initially as a component of ~~Net gain on mortgage 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 Manager’s 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).

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, 2018:

Effect on fair value of a change in pricing spread input

Change in input (in basis points)

Effect on fair value

(in thousands)

25

$
(7,162
)
50

$
(14,200
)
100

$
(27,915
)
(25)

$
7,289

(50)

$
14,707

(100)

$
29,943

~~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. Our Manager determines 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 ~~mortgage~~ 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 ~~mortgage~~ loan servicing ~~fees—from~~fees – From nonaffiliates – Change in fair value of mortgage servicing rights.

A shift in the market for MSRs or a change in our ~~Manager’s~~ 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. ~~Our Manager believes~~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

$2.9 billion of MSRs at December 31, 2021. Following is a summary of the effect on fair value of various changes to these key inputs that ~~our Manager uses~~we use in making ~~its~~our fair value estimates as of December 31, ~~2018:~~2021:

		Effect on fair value of a change in input value										Effect on fair value of a change in input
Change in input	Change in input	Pricing spread			Prepayment speed			Servicing cost			Change in input	Pricing spread			Prepayment speed			Servicing cost
		(in thousands)										(in thousands)
(20%)											(20%)	$	170,478		$	264,842		$	70,338
(10%)											(10%)	$	82,921		$	126,905		$	35,169
(5%)											(5%)	$	40,902		$	62,159		$	17,585
5%	5%	$	(13,872	)	$	(21,661	)	$	(8,298	)	5%	$	(39,826	)	$	(59,726	)	$	(17,585	)
10%	10%	$	(27,428	)	$	(42,458	)	$	(16,597	)	10%	$	(78,613	)	$	(117,162	)	$	(35,169	)
20%	20%	$	(53,626	)	$	(81,660	)	$	(33,194	)	20%	$	(153,220	)	$	(225,672	)	$	(70,338	)
(5%)		$	14,200		$	22,580		$	8,298
(10%)		$	28,738		$	46,140		$	16,597
(20%)		$	58,872		$	96,469		$	33,194

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 ~~Manager’s~~ 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 mortgage 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 mortgage loans and considers a combination of factors, including, but not limited to, estimated future default and mortgage 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 mortgage loan to us. We establish a liability at the time we sell the mortgage 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 mortgage loan repurchase losses is dependent on economic factors, investor behavior, and other external conditions that may change over the lives of the underlying mortgage loans. Our estimate of the liability for representations and warranties is developed by our Manager’s credit administration staff. The liability estimate is reviewed and approved by our Manager’s senior management credit committee which includes its 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 mortgage loans acquired for sale-from nonaffiliates~~.

Consolidation—Variable Interest Entities

We enter 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.~~purposes. Generally, SPEs are formed in connection with securitization transactions. In a securitization transaction, we transfer ~~mortgage~~ 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 anthe 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 ~~consolidate~~include the assets and liabilities of the VIE ~~onto~~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 consolidated 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 ~~Mortgage loans~~Loans at fair value, Derivative ~~assets~~and credit risk transfer strip assets and liabilities and Deposits securing credit risk transfer agreements on our consolidated balance sheets:

•

The VIEs that hold loans we have securitized are shown as their constituent assets and liabilities- Loans at fair value, and the securities issued to third parties by the consolidated VIE are shown as Asset-backed financings at fair value on our consolidated balance sheets. We include the interest earned on the loans held by the VIEs in Interest income and interest attributable to the asset-backed securities issued by the VIEs in Interest expense in our consolidated income statements. Changes in the fair value of loans held in the VIEs and the associated asset-backed financings are included in Net gains (losses) on investments and financings in our consolidated income statements.

•

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 assetsand liabilities 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 and liabilities and Interest-only security payable at fair value in Net gains (losses) on investments and financings in our consolidated income statements.

~~The VIE~~54

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 ~~holds assets relating~~we will not be subject to federal income tax on that portion of our ~~CRT Agreements, shown~~REIT taxable income that is distributed to shareholders as ~~constituent~~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 – ~~the~~ ~~Deposit securing credit risk transfer agreements~~Significant Accounting Policies – Recently Issued Accounting Pronouncement to our consolidated financial statements for a discussion of recent accounting developments and the ~~Derivative assets~~ ~~which represent~~expected effect of these developments on us.

Non-Cash Investment Income

A substantial portion of our ~~Recourse Obligation, Interest-only (“IO”) ownership interest, and~~ ~~Interest-only security payable at~~net investment income is comprised of non-cash items, including fair value~~. We include~~ adjustments, recognition of the ~~income we receive from the IO ownership interests and changes in~~ fair value of assets created and liabilities incurred in loan sale transactions and the ~~Derivative Assets~~capitalization and ~~Interest-only~~amortization of certain assets and liabilities. Because we have elected, or are required by GAAP, to record certain of our financial assets (comprised of MBS, loans acquired for sale at fair value, loans at fair value and ESS), our firm commitment to purchase CRT securities, our derivatives and CRT strips, our MSRs, and our asset-backed financings 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 ~~Net gain~~fair value.

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

		Year ended December 31,
		2021			2020			2019
	(dollars in thousands)
Net gains (losses) on investments and financings:
Mortgage-backed securities		$	(74,354	)	$	87,852		$	77,283
Loans:
Held in variable interest entities			(12,536	)		(6,617	)		7,883
Distressed			(206	)		(87	)		(7,169	)
ESS			1,651			(22,729	)		(7,530	)
CRT arrangements			163,126			(161,854	)		(11,445	)
Firm commitment to purchase CRT securities			—			(121,067	)		60,943
Interest-only security payable at fair value			164			14,952			10,302
Asset-backed financings at fair value			19,708			5,519			(7,553	)
			97,553			(204,031	)		122,714
Net gains on loans acquired for sale (1)			1,379,717			1,199,605			931,733
Net loan servicing fees—MSR valuation adjustments			(337,186	)		(938,937	)		(464,353	)
Net interest income—Capitalization of interest pursuant to loan modifications			251			—			2,318
		$	1,140,335		$	56,637		$	592,412
Net investment income		$	420,297		$	469,351		$	488,815
Non-cash items as a percentage of net investment income			271	%		12	%		121	%

(1)	Amount represents MSRs received, fair value of firm commitment to purchase CRT securities recognized, provision for losses on representations and warranties and changes in fair value of loans, IRLCs and hedging derivatives held at year end.

We receive or pay cash relating to:

•

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

•

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

•

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

•

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

•

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

•

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

•

MSRs in the form of loan servicing fees and placement fees on the deposits we manage on behalf of the borrowers and investors in the loans we service.

Results of Operations

The following is a summary of our key performance measures:

	Year ended December 31,
	2021			2020			2019
	(dollar amounts in thousands, except per common share amounts)
Net investment income	$	420,297		$	469,351		$	488,815
Expenses		375,636			389,621			298,174
Pretax income		44,661			79,730			190,641
(Benefit from) provision for income taxes		(12,193	)		27,357			(35,716	)
Net income		56,854			52,373			226,357
Dividends on preferred shares		30,891			24,938			24,938
Net income attributable to common shareholders	$	25,963		$	27,435		$	201,419
Pretax income by segment:
Credit sensitive strategies	$	306,643		$	(317,143	)	$	182,176
Interest rate sensitive strategies		(290,065	)		105,697			1,148
Correspondent production		86,936			344,639			64,593
Corporate		(58,853	)		(53,463	)		(57,276	)
	$	44,661		$	79,730		$	190,641
Annualized return on average common shareholder's equity		1.3	%		1.4	%		12.0	%
Earnings per common share:
Basic	$	0.26		$	0.27		$	2.54
Diluted	$	0.26		$	0.27		$	2.42
Dividends per common share	$	1.88		$	1.52		$	1.88
At year end:
Total assets	$	13,772,708		$	11,492,011		$	11,771,351
Book value per common share (1)	$	19.05		$	20.30		$	21.37
Closing price per common share	$	17.33		$	17.47		$	22.29

(1)

As described in Note 3 – Significant Accounting Policies – Recently Issued Accounting Pronouncement to the consolidated financial statements included in this Report, beginning in 2022, a portion of PMT’s exchangeable senior notes that are exchangeable for PMT common shares (“Common Shares”) (the “Exchangeable Notes”) originally allocated to additional paid-in capital will be reclassified to the carrying value of the Exchangeable Notes. Giving effect to this change on the pro forma basis, PMT’s book value as of December 31, 2021 would have been $18.60. This reclassification will also require inclusion of the consideration of common shares issuable pursuant to conversion of the Exchangeable Notes in the Company’s diluted earnings per share calculation.

The United States continues to be significantly impacted by the effects of the COVID-19 pandemic and the effects of market and government responses to the COVID-19 pandemic. These developments have resulted in continued economic uncertainty, financial hardships and unemployment for some of our borrowers.

As part of its response to the COVID-19 pandemic, the federal government included requirements in the Coronavirus Aid, Relief and Economic Security Act (“CARES Act”) that we provide borrowers with loans we service subject to Agency securitizations with substantial payment forbearance. As a result of this requirement, we initially experienced a large increase in delinquencies in our servicing portfolio which has increased our cost to service those loans. Through the year ended December 31, 2021, the level of such delinquency has gradually decreased. As of December 31, 2021, 0.4% of the loans in our MSR portfolio were in COVID-19 related forbearance provided for under the CARES Act.

The emergence of COVID-19 created significant disruption in the financial markets as well as changing market perceptions of future credit losses to be incurred on investments in mortgage loans. The primary effect of this disruption on the Company has been on our credit sensitive strategies. The credit markets have substantially recovered, as reflected most recently in the $369.0 million in fair value gains we recognized on our CRT arrangements in 2021.

The origination market is expected to shrink in 2022. Inside Mortgage Finance estimates the 2021 origination market was $4.8 trillion and current forecasts for 2022 average approximately $3.1 trillion. The uncertainties and strains on many mortgage lenders induced by COVID-19 and resulting disruptions in the financial markets caused some market participants to scale back or exit mortgage loan production activities early in the course of the COVID-19 pandemic, which, combined with constraints on mortgage industry origination capacity that existed before the COVID-19 pandemic, allowed us to realize higher gain-on sale margins in our correspondent production activities during most of 2020. With the return of other market participants with increasing interest rates

reducing demand for mortgage loans, and with increased direct competition from the Agencies our gain-on-sale margins in our correspondent production activities have experienced significant gain on sale margin compression.

Due to certain capital rules, the GSEs have higher capital requirements to guarantee loans delivered by loan aggregators and may charge higher fees for third party originated loans that we aggregate and deliver to the GSEs as compared to individual loans delivered by third party mortgage lenders directly to the GSEs’ cash windows without the assistance of a loan aggregator. To the extent the GSEs increase the number of purchases and sales for their own accounts, our business and results of operations could be materially and adversely affected.

The current environment caused by the COVID-19 pandemic in the United States is historically unprecedented and the source of much uncertainty surrounding future economic and market prospects and the ongoing effects of this continuing situation on our future prospects are difficult to anticipate. For further discussion of the potential impacts of the COVID-19 pandemic please also see “Risk Factors” in Part II. Item 1A.

Our consolidated net income ~~statements.~~during the year ended December 31, 2021 increased by $4.5 million, reflecting the effect of the improved fair value performance of our CRT-related investments partially offset by decreases in our correspondent production and interest rate sensitive strategies results during the year ended December 31, 2021, as compared to the same period in 2020. The increase in pretax results is summarized below:

•

During the year ended December 31, 2021, we recognized a $636.0 million increase in net gains on our CRT arrangements as compared to 2020, which reflected the severe impact of the market disruption caused by the COVID-19 pandemic on our investments in CRT arrangements during 2020 and the subsequent recovery in 2021.

•

Our interest rate sensitive strategies segment was negatively affected by a decrease in net servicing fees of $189.7 million caused by negative fair value changes in our investment in MSRs and hedging results, a $162.2 million decrease in gains on MBS and a $50.7 million increase in net interest expense.

•

Growth in production volume in our correspondent production segment was more than offset by reductions in our gain on sale margins as increased market competition compressed such margins, resulting in a $257.7 million decrease in our pretax income.

•

We recorded income tax benefit of $12.2 million due to fair value losses on MSRs held in our TRS.

Our consolidated net income during the year ended December 31, 2020 decreased by $174.0 million, reflecting the effect of the COVID-19 pandemic on the fair value of our CRT-related investments and a $63.1 million increase in provision for income taxes, partially offset by gains in our correspondent production and interest rate sensitive strategies segments during the year ended December 31, 2020, as compared to the same period in 2019. The decrease in pretax results is summarized below:

•

Our credit sensitive strategies segment reflects the severe impact of the market conditions on our investments in CRT arrangements; we recognized a $438.6 million reduction in the net investment gains on our CRT arrangements and initial recognition of firm commitment to purchase CRT securities.

•

During the year ended December 31, 2020, our interest rate sensitive strategies segment was positively affected by growth in its servicing portfolio and performance of its interest rate hedges. We recognized a $212.6 million increase in net servicing fees caused by growth in servicing fees due to an increase in our servicing portfolio and improved hedging performance in relation to MSR fair value changes.

•

Our correspondent production segment benefited from increases in loan production volume and gain on sale margins due to the increase in loan demand resulting from historically low interest rates that prevailed throughout 2020, compounded by existing mortgage industry capacity constraints, resulting in a $280.0 million increase in our pretax income.

Net Investment Income

Our net investment income is summarized below:

		Year ended December 31,
		2021			2020			2019
	(in thousands)
Net gains (losses) on investments and financings		$	304,079		$	(170,885	)	$	263,318
Net gains on loans acquired for sale			87,273			379,922			170,164
Net loan origination fees			170,672			147,272			87,997
Net loan servicing fees			(36,022	)		153,696			(58,918	)
Net interest (expense) income			(109,498	)		(48,635	)		20,439
Other			3,793			7,981			5,815
		$	420,297		$	469,351		$	488,815

Net Gains (Losses) on Investments and Financings

Net gains (losses) on investments and financings is summarized below:

		Year ended December 31,
		2021			2020			2019
	(in thousands)
From nonaffiliates:
Mortgage-backed securities		$	(74,354	)	$	87,852		$	77,283
Loans at fair value:
Held in VIEs			(12,536	)		(6,617	)		7,883
Distressed			611			(837	)		(7,169	)
CRT arrangements			368,999			(145,938	)		110,676
Firm commitment to purchase CRT securities			—			(121,067	)		60,943
Asset-backed financings at fair value			19,708			5,519			(7,553	)
Hedging derivatives			—			32,932			28,785
			302,428			(148,156	)		270,848
From PFSI—ESS			1,651			(22,729	)		(7,530	)
		$	304,079		$	(170,885	)	$	263,318

The increase in net gain on investments for the year ended December 31, 2021, as compared to 2020, was caused primarily by increased gains from our CRT arrangements. The increase in gains from CRT arrangements reflects the recovery in fair value from the dislocation in the credit markets experienced during the year ended December 31, 2020. This increase was partially offset by the effects of rising interest rates on the fair value of our investments in MBS.

The shift in net gain on investments to a net loss during the year ended December 31, 2020, as compared to 2019, reflects the effect of the disruption in the credit markets during 2020 on our CRT investments including expectations for increased losses to be absorbed by those investments as a result of the COVID-19 pandemic.

Mortgage-Backed Securities

During 2021, we recognized net valuation losses on MBS of $74.4 million, as compared to net valuation gains of $87.9 million during 2020. The losses we recognized during the year ended December 31, 2021 reflect rising interest rates. The gains recognized during the year ended December 31, 2020, reflect the significant decrease in interest rates that was experienced during the year.

Loans at fair value – Held in VIEs and Asset-Backed Financings at Fair Value

Loans at fair value held in VIEs and Asset-backed financings at fair value recorded a net gain of $7.2 million during the year ended December 31, 2021, as compared to a net loss of $1.1 million during the year ended December 31, 2020. The net gain during the year ended December 31, 2021 reflect the gains on the asset-backed financing exceeding the losses on the underlying assets as the result of tightening credit spreads on our net investments secured by jumbo loans and investment properties. The loss during the year ended December 31, 2020 is attributable to the effect of uncertainties surrounding borrower credit performance experienced in the mortgage market as the result of the COVID-19 pandemic. Unlike our investments in MBS which carry Agency guarantees of security payment performance, the loans held in a VIE are the sole source of repayment of the securities. Therefore, uncertainties about borrower performance are more directly reflected in the fair value of these loans and more than offset the positive effect of decreasing interest rates for the year ended December 31, 2020.

CRT Arrangements

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

		Year ended December 31,
		2021			2020			2019
	(in thousands)
UPB of loans sold					$	18,277,263		$	47,748,300
Investments:
Deposits securing CRT arrangements					$	1,700,000		$	933,370
Change in expected face amount of firm commitment to purchase CRT securities						(1,502,203	)		897,151
					$	197,797		$	1,830,521
Investment income (loss):
Net gains on loans acquired for sale — Fair value of firm commitment to purchase CRT securities recognized upon sale of loans					$	(38,161	)	$	99,305
Net gains (losses) on investments and financings:
Derivative and CRT strips:
CRT derivatives
Realized		$	93,837			(53,965	)		79,619
Valuation changes			(12,829	)		(82,633	)		(9,571	)
			81,008			(136,598	)		70,048
CRT strips
Realized			111,872			54,929			32,200
Valuation changes			175,955			(79,221	)		(1,874	)
			287,827			(24,292	)		30,326
Interest-only security payable at fair value			164			14,952			10,302
			368,999			(145,938	)		110,676
Firm commitments to purchase CRT securities			—			(121,067	)		60,943
			368,999			(267,005	)		171,619
Interest income — Deposits securing CRT arrangements			559			7,012			34,229
		$	369,558		$	(298,154	)	$	305,153

Net (recoveries received) payments made to settle (recoveries) losses on CRT arrangements		$	(62,387	)	$	115,475		$	5,165

	December 31, 2021			December 31, 2020
	(in thousands)
Carrying value of CRT arrangements:
Derivative and credit risk transfer strip assets (liabilities), net
CRT derivatives	$	18,964		$	31,795
CRT strips		(26,837	)		(202,792	)
	$	(7,873	)	$	(170,997	)

Deposits securing CRT arrangements	$	1,704,911		$	2,799,263
Interest-only security payable at fair value	$	10,593		$	10,757

CRT arrangement assets pledged to secure borrowings:
Derivative and credit risk transfer assets	$	19,627		$	58,699
Deposits securing CRT arrangements (1)	$	1,704,911		$	2,799,263

UPB of loans — underlying CRT arrangements	$	30,808,907		$	58,697,942
Collection status (UPB):
Delinquency (2)
Current	$	29,581,803		$	54,990,381
30-89 days delinquent	$	349,291		$	710,872
90-180 days delinquent	$	120,775		$	693,315
180 or more days delinquent	$	748,576		$	2,297,365
Foreclosure	$	8,462		$	6,009
Bankruptcy	$	64,694		$	75,700
Delinquent loans in COVID-19 pandemic-related forbearance plans:
30-89 days delinquent	$	44,015		$	383,028
90-180 days delinquent	$	57,815		$	546,344
180 or more days delinquent	$	174,041		$	1,944,663

(1)	For purposes of this discussion, includes Deposits securing credit risk transfer strip liabilities securing $27.5 million and $229.7 million in CRT strip and CRT derivative liabilities at December 31, 2021 and December 31, 2020, respectively.

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

The performance of our investments in CRT arrangements during the year ended December 31, 2021 reflects a recovery of the credit markets from the dislocation experienced during the first quarter of 2020 as a result of the onset of the COVID-19 pandemic and continuing improvement in the performance of the loans underlying this investment.

ESS Purchased from PFSI

We recognized fair value gains relating to our investment in ESS totaling $1.7 million for the year ended December 31, 2021, as compared to fair value losses of $22.7 million during 2020. The gains were driven by the positive influence on expected future cash flows of the generally rising interest rates during the portion of 2021 that ~~holds~~the ESS was outstanding. The change in valuation results during 2020, as compared to 2019, resulted from increased prepayment experience and expectations for the loans underlying the ESS and the effect of uncertainties surrounding future cash flows on the discount rate used to develop the assets’ fair value. The remaining balance of the ESS was sold to PLS during the quarter ended March 31, 2021.

Net Gains on Loans Acquired for Sale

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

		Year ended December 31,
		2021			2020			2019
	(in thousands)
From non-affiliates:
Cash loss:
Loans		$	(1,487,649	)	$	(326,214	)	$	(687,317	)
Hedging activities			188,733			(504,506	)		(88,633	)
			(1,298,916	)		(830,720	)		(775,950	)
Non-cash gain:
Receipt of MSRs in loan sale transactions			1,484,629			1,158,475			837,706
Provision for losses relating to representations and warranties provided in loan sales:
Pursuant to loan sales			(25,029	)		(19,316	)		(3,778	)
Reduction in liability due to change in estimate			5,812			4,457			3,550
			(19,217	)		(14,859	)		(228	)
Recognition of fair value of commitment to purchase credit risk transfer securities relating to loans sold			—			(38,161	)		99,305
Change in fair value during the year of financial instruments:
IRLCs			(69,935	)		61,232			(834	)
Loans			31,072			(12,279	)		(1,765	)
Hedging derivatives			(46,832	)		45,197			(2,451	)
			(85,695	)		94,150			(5,050	)
			1,379,717			1,199,605			931,733
Total from nonaffiliates			80,801			368,885			155,783
From PFSI—cash			6,472			11,037			14,381
		$	87,273		$	379,922		$	170,164

Interest rate lock commitments issued on loans acquired for sale to nonaffiliates		$	108,458,880		$	117,727,579		$	63,323,599
Acquisition of loans for sale (UPB):
To nonaffiliates		$	110,003,574		$	106,898,339		$	57,396,037
To PFSI			64,641,218			62,413,089			49,116,781
		$	174,644,792		$	169,311,428		$	106,512,818

The changes in net gain on loans acquired for sale during the year ended December 31, 2021, as compared to 2020, reflect the tightening of gain on sale margins, as well as decreasing interest rate lock commitments. The changes in net gain on loans acquired for sale during the year ended December 31, 2020, as compared to 2019, reflects both the effects of increasing demand in the mortgage market on our loan sales volume and of constraints in mortgage industry capacity on our gain on sale margins, partially offset by losses on the fair value of our commitment to invest in the CRT assets created through our current loan sales. We incurred $38.2 million in fair value losses related to our firm commitment to purchase CRT securities arising from loan sales during the year ended December 31, 2020, as compared to $99.3 million in gain on such loan sales in 2019.

Non-cash elements of gain on sale of loans

Interest Rate Lock Commitments

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

The MSRs and liability for representations and warranties we recognize represent our estimate of the fair value of future benefits and costs we will realize for years in the future. These estimates change as circumstances change, and changes in these estimates are ~~classified~~recognized in our results of operations in subsequent periods. Subsequent changes in the fair value of our MSRs significantly affect our results of operations.

Mortgage Servicing Rights

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

Firm Commitment to Purchase CRT Securities

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

Liability for Losses Under Representations and Warranties

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

We recorded provisions for losses relating to representations and warranties relating to current loan sales of $25.0 million, $19.3 million and $3.8 million as ~~secured borrowings~~part of our loan sales in each of the years ended December 31, 2021, 2020 and ~~are shown~~2019, respectively. The increase in the provision relating to current loan sales reflects the increase of our loan sales volume as ~~Asset-backed financing~~ well as loan sales no longer being subject to credit risk transfer arrangements for which our representation and warranty loss estimates were less than for other loan sales.

In the event of a ~~variable interest entity at fair value~~ onbreach of our ~~consolidated balance sheets. We include the interest earned on~~representations and warranties, we may be required to either repurchase the loans ~~held by~~with the ~~VIE in~~ ~~Interest income~~ ~~and interest~~identified defects or indemnify the investor or insurer against credit losses attributable to the ~~asset-backed securities issued~~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:

	Year ended December 31,
	2021		2020		2019
	(in thousands)
Indemnification activity unpaid principal balance ("UPB"):
Loans indemnified at beginning of year	$	4,583	$	5,697	$	7,075
New indemnifications		345		450		583
Less: Indemnified loans repaid or refinanced		2,146		1,564		1,961
Loans indemnified at end of year	$	2,782	$	4,583	$	5,697
Indemnified loans indemnified by correspondent lenders at end of year	$	1,112	$	1,497	$	1,941
UPB of loans with deposits received from correspondent sellers collateralizing prospective indemnification losses at end of year	$	213	$	213	$	603
Repurchase activity (UPB):
Loans repurchased	$	86,954	$	72,535	$	22,648
Less:
Loans repurchased by correspondent sellers		52,787		31,306		13,745
Loans resold or repaid by borrowers		33,950		24,837		4,830
Net loans repurchased with losses chargeable to liability to representations and warranties	$	217	$	16,392	$	4,073
Net losses charged to liability for representations and warranties	$	861	$	580	$	128
At end of year:
Loans subject to representations and warranties	$	213,944,023	$	163,592,788	$	122,163,186
Liability for representations and warranties	$	40,249	$	21,893	$	7,614

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 ~~VIE~~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 ~~Interest expense~~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 $5.8 million, $4.5 million and $3.6 million during each of the three years ended December 31, 2021, 2020 and 2019, 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 2021, as compared to 2020 and 2019, reflects an increase in our purchases of loans with delivery fees.

Net Loan Servicing Fees

Our net loan servicing fees have two primary components: fees earned for servicing loans and the effects of MSR valuation changes, net of hedging results, as summarized below:

		Year ended December 31,
		2021			2020			2019
	(in thousands)
Loan servicing fees		$	595,346		$	462,517		$	319,489
Effect of MSRs and hedging results			(631,368	)		(308,821	)		(378,407	)
Net loan servicing fees		$	(36,022	)	$	153,696		$	(58,918	)

Following is a summary of our loan servicing fees:

		Year ended December 31,
		2021		2020		2019
	(in thousands)
Contractually-specified servicing fees		$	526,245	$	406,060	$	295,390
Ancillary and other fees:
Late charges			1,701		1,498		1,658
Other			67,400		54,959		22,441
			69,101		56,457		24,099
		$	595,346	$	462,517	$	319,489
Average MSR servicing portfolio		$	196,996,623	$	147,832,880	$	110,075,179

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

The changes in contractually-specified fees during the year ended December 31, 2021, as compared to 2020, is due primarily to increased servicing fees resulting from the growth in our loan servicing portfolio. The changes in other loan servicing fees for the

same comparative periods is due primarily to an increase in the volume of fees charged to correspondent lenders for loans repaid shortly after purchase during the year ended December 31, 2021, as compared to 2020, as the result of the significant volume of refinancing activity experienced in the first part of 2021.

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

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

		Year ended December 31,
		2021			2020			2019
	(in thousands)
Change in fair value of MSRs
Realization of cash flows		$	(298,130	)	$	(232,830	)	$	(202,322	)
Changes in valuation inputs used in valuation model			(39,056	)		(706,107	)		(262,031	)
			(337,186	)		(938,937	)		(464,353	)
Hedging results			(345,041	)		601,743			80,622
Total change in fair value of mortgage servicing rights and hedging results			(682,227	)		(337,194	)		(383,731	)
Recapture income from PFSI			50,859			28,373			5,324
		$	(631,368	)	$	(308,821	)	$	(378,407	)
Average balance of mortgage servicing rights		$	2,506,678		$	1,354,508		$	1,215,866

Changes in realization of cash flows are influenced by changes in the level of servicing assets and liabilities and changes in estimates of remaining cash flows to be realized. During the year ended December 31, 2021, as compared to 2020, realization of cash flows decreased primarily due to the addition of MSRs backed with loans with lower interest rates than those held during 2020, which, combined with rising interest rates, combine to result in slower prepayment expectations which reduced the rate at which cash flow realization was recognized during the year ended December 31, 2021.

Changes in fair value due to changes in valuation inputs used in our valuation model during the year ended December 31, 2021, reflect the negative effects of elevated prepayment speeds experienced during 2021, exceeding the offsetting effect on our fair value estimate of slower prepayment speed expectations due to generally increasing interest rates during 2021.

Hedging results produced a loss during the year ended December 31, 2021, as compared to the gains produced during the years ended December 31, 2020 and 2019, due to the negative effect on the fair value of our interest rate hedging instruments of interest rate increases during 2021.

The increase in loan servicing fees from PFSI reflects the increase in refinancing activity in our MSR portfolio during the year ended December 31, 2021, as compared to 2020. We have an agreement with PFSI that requires that when PFSI refinances a loan for which we held the MSRs, we receive a recapture fee. The MSR recapture agreement is summarized in Note 4 ‒ Transactions with Related Parties – Operating Activities to the consolidated financial statements included in this Report.

Following is a summary of our loan servicing portfolio:

	December 31, 2021		December 31, 2020
	(in thousands)
UPB of loans outstanding	$	215,927,495	$	170,502,361
Collection status (UPB) (1)
Delinquency:
30-89 days delinquent	$	1,148,542	$	1,235,981
90 or more days delinquent:
Not in foreclosure	$	1,726,488	$	4,428,915
In foreclosure	$	36,658	$	27,494
Bankruptcy	$	130,582	$	148,866
Delinquent loans in COVID-19 pandemic-related forbearance:
30-89 days	$	169,654	$	530,353
90 days or more	$	614,882	$	3,123,288
Custodial funds managed by the Company (2)	$	3,823,527	$	6,086,724

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

(2)

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

Net Interest (Expense) Income

Net interest (expense) income ~~statements. Gains~~is summarized below:

	Year ended December 31, 2021								Year ended December 31, 2020								Year ended December 31, 2019
	Interest					Interest			Interest					Interest			Interest				Interest
	income/			Average		yield/			income/			Average		yield/			income/		Average		yield/
	expense			balance		cost %			expense			balance		cost %			expense		balance		cost %
	(dollars in thousands)
Assets:
Cash and short-term investments	$	938		$	243,548		0.38	%	$	3,804		$	650,630		0.58	%	$	4,559	$	164,577		2.73	%
Mortgage-backed securities		36,180			2,210,940		1.61	%		59,461			2,921,879		2.00	%		78,450		2,591,828		2.99	%
Loans acquired for sale at fair value		125,438			4,135,140		2.99	%		103,221			3,469,392		2.93	%		121,387		2,754,955		4.35	%
Loans at fair value:
Held by variable interest entities		17,014			474,808		3.53	%		10,609			214,596		4.86	%		11,734		281,449		4.11	%
Distressed		369			6,625		5.49	%		493			9,032		5.37	%		3,848		75,251		5.04	%
		17,383			481,433		3.56	%		11,102			223,628		4.88	%		15,582		356,700		4.31	%
ESS from PFSI		1,280			21,563		5.85	%		8,418			153,768		5.38	%		10,291		197,273		5.15	%
Deposits securing CRT arrangements		559			2,307,155		0.02	%		7,012			1,772,762		0.39	%		34,229		1,639,885		2.06	%
		181,778			9,399,779		1.91	%		193,018			9,192,059		2.07	%		264,498		7,705,218		3.39	%
Placement fees relating to custodial funds		13,366								28,804								52,587
Other		95								313								800
		195,239		$	9,399,779		2.05	%		222,135		$	9,192,059		2.38	%		317,885	$	7,705,218		4.07	%
Liabilities:
Assets sold under agreements to repurchase	$	97,078		$	6,161,755		1.55	%	$	102,131		$	5,508,147		1.82	%	$	178,211	$	5,600,469		3.14	%
Mortgage loan participation purchase and sale agreements		606			33,827		1.77	%		902			44,432		2.00	%		1,570		40,036		3.87	%
Notes payable secured by credit risk transfer and mortgage servicing assets		86,753			2,635,601		3.25	%		59,261			1,771,370		3.29	%		53,968		1,101,501		4.83	%
Exchangeable senior notes		36,747			445,064		8.14	%		18,847			269,247		6.89	%		17,037		279,207		6.02	%
Asset-backed financings at fair value		15,076			447,247		3.32	%		10,971			203,795		5.30	%		11,324		267,539		4.17	%
Assets sold to PFSI under agreement to repurchase		387			13,020		2.93	%		3,325			93,264		3.56	%		6,302		118,264		5.33	%
		236,647			9,736,514		2.40	%		195,437			7,890,255		2.44	%		268,412		7,407,016		3.57	%
Interest shortfall on repayments of loans serviced for Agency securitizations		64,519								71,516								25,776
Interest on loan impound deposits		3,571								3,817								3,258
		304,737		$	9,736,514		3.09	%		270,770		$	7,890,255		3.38	%		297,446	$	7,407,016		3.96	%
Net interest (expense) income	$	(109,498	)						$	(48,635	)						$	20,439
Net interest margin							-1.15	%							-0.52	%						0.26	%
Net interest spread							-1.04	%							-1.00	%						0.11	%

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

		Year ended December 31, 2021									Year ended December 31, 2020
		vs.									vs.
		Year ended December 31, 2020									Year ended December 31, 2019
		Increase (decrease) due to changes in									Increase (decrease) due to changes in
		Rate			Volume			Total			Rate			Volume			Total
	(in thousands)
Assets:
Cash and short-term investments		$	(1,008	)	$	(1,858	)	$	(2,866	)	$	(5,855	)	$	5,100		$	(755	)
Mortgage-backed securities			(10,318	)		(12,963	)		(23,281	)		(28,146	)		9,157			(18,989	)
Loans acquired for sale at fair value			2,321			19,896			22,217			(45,316	)		27,150			(18,166	)
Loans at fair value:
Held by variable interest entities			(3,540	)		9,945			6,405			1,940			(3,065	)		(1,125	)
Distressed			11			(135	)		(124	)		235			(3,590	)		(3,355	)
			(3,529	)		9,810			6,281			2,175			(6,655	)		(4,480	)
ESS from PFSI			673			(7,811	)		(7,138	)		467			(2,340	)		(1,873	)
Deposits securing CRT arrangements			(8,075	)		1,622			(6,453	)		(29,802	)		2,585			(27,217	)
			(19,936	)		8,696			(11,240	)		(106,477	)		34,997			(71,480	)
Placement fees relating to custodial funds			—			(15,438	)		(15,438	)		—			(23,783	)		(23,783	)
Other			—			(218	)		(218	)		—			(487	)		(487	)
			(19,936	)		(6,960	)		(26,896	)		(106,477	)		10,727			(95,750	)
Liabilities:
Assets sold under agreements to repurchase			(16,219	)		11,166			(5,053	)		(73,199	)		(2,881	)		(76,080	)
Mortgage loan participation purchase and sale agreement			(96	)		(200	)		(296	)		(826	)		158			(668	)
Notes payable secured by credit risk transfer and mortgage servicing assets			(808	)		28,300			27,492			(20,827	)		26,120			5,293
Exchangeable senior notes			3,914			13,986			17,900			2,428			(618	)		1,810
Asset-backed financings of at fair value			(5,234	)		9,339			4,105			2,679			(3,032	)		(353	)
Assets sold to PFSI under agreement to repurchase			(470	)		(2,468	)		(2,938	)		(1,821	)		(1,156	)		(2,977	)
			(18,913	)		60,123			41,210			(91,566	)		18,591			(72,975	)
Interest shortfall on repayments of loans serviced for Agency securitizations			—			(6,997	)		(6,997	)		—			45,740			45,740
Interest on loan impound deposits			—			(246	)		(246	)		—			559			559
			(18,913	)		52,880			33,967			(91,566	)		64,890			(26,676	)
Net interest expense		$	(1,023	)	$	(59,840	)	$	(60,863	)	$	(14,911	)	$	(54,163	)	$	(69,074	)

The increase in net interest expense during the year ended December 31, 2021, as compared to 2020, is due to:

•

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

•

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

The decrease in net interest income during the year ended December 31, 2020, as compared to 2019, is due to:

•

An increase in interest shortfall on repayments of loans serviced for Agency securitizations resulting from the increased levels of prepayment activity in our MSR portfolio. In many cases, 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.

•

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

•

Included in net interest income for the year ended December 31, 2019 was $10.8 million of incentives we recognized relating to a master repurchase agreement that provided us with incentives to finance loans approved for satisfying certain consumer characteristics. The master repurchase agreement expired on August 21, 2019.

Expenses

Our expenses are summarized below:

		Year ended December 31,
		2021		2020		2019
	(in thousands)
Earned by PennyMac Financial Services, Inc.:
Loan fulfillment fees		$	178,927	$	222,200	$	160,610
Loan servicing fees			80,658		67,181		48,797
Management fees			37,801		34,538		36,492
Loan origination			28,792		26,437		15,105
Loan collection and liquidation			11,279		10,363		4,600
Professional services			11,148		6,405		5,556
Safekeeping			9,087		7,090		5,097
Compensation			4,000		3,890		6,897
Other			13,944		11,517		15,020
		$	375,636	$	389,621	$	298,174

Expenses decreased $14.0 million, or 4%, during the year ended December 31, 2021, as compared to 2020, primarily due to reduced fees relating to fulfillment activities performed by PFSI on our behalf, partially offset by an increase in loan servicing fees. Expenses increased $91.4 million, or 31% during 2020, as compared to the same period in 2019, due primarily 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.

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 decrease in loan fulfillment fees of $43.3 million during 2021, as compared to 2020, is due to a decrease in loan commitment volume and an increase in discretionary reductions in the PFSI fee schedule, partially offset by an increase in our loan production volume. The increase in loan fulfillment fees of $61.6 million during the year ended December 31, 2020, compared to 2019, is primarily due to an increase in the volume of loans fulfilled for us by PFSI, partially offset by a change in the fulfillment fee structure described in Note 4 – Transactions with Related Parties to the consolidated financial statements included in this Report.

Loan Servicing Fees

Loan servicing fees payable to PLS are summarized below:

	Year ended December 31,
	2021		2020		2019
	(in thousands)
Loan servicing fees:
Loans acquired for sale at fair value	$	2,363	$	2,067	$	1,772
Loans at fair value		505		807		2,207
MSRs		77,790		64,307		44,818
	$	80,658	$	67,181	$	48,797
Average investment in:
Loans acquired for sale at fair value	$	4,135,140	$	3,469,392	$	2,754,955
Loans at fair value	$	481,433	$	223,628	$	356,700
Average MSR portfolio UPB	$	196,996,623	$	147,832,880	$	110,075,179

Loan servicing fees increased by $13.5 million during the year ended December 31, 2021, as compared to 2020, and $18.4 million during the year ended December 31, 2020, as compared to 2019. We incur loan servicing fees primarily in support of our MSR portfolio. The increase in loan servicing fees during the years ended December 31, 2021 and 2020, was due to the growth in our portfolio of MSRs and the fees we incur relating to CARES Act loan forbearance and modification activities.

Management Fees

Management fees payable to PCM are summarized below:

	Year ended December 31,
	2021		2020		2019
	(in thousands)
Base	$	34,794	$	34,538	$	29,303
Performance incentive		3,007		—		7,189
	$	37,801	$	34,538	$	36,492
Average shareholders' equity amounts used to calculate base management fee expense	$	2,348,395	$	2,330,154	$	1,958,970

Management fees increased by $3.3 million during the year ended December 31, 2021, as compared to 2020, due to the recognition of a performance incentive resulting from our increased profitability during certain of the rolling twelve-month measurement periods ended December 31, 2021, on which the performance incentive fee was based, as compared to our profitability for the year ended December 31, 2020.

Management fees decreased by $2.0 million during the year ended December 31, 2020, as compared to 2019, due to the offsetting effects of an increase in base management fees and the recognition of no performance incentive fees during 2020 as compared to 2019. The increase in base management fees during the year ended December 31, 2020, as compared to 2019, reflects an increase in average shareholder’ equity in 2020 as a result of common shares issuances through 2019. The elimination of the performance incentive fee during 2020, as compared to 2019, reflects the negative effects on our earnings from COVID-19 pandemic-related losses incurred from our investment in CRT arrangements.

Loan origination

Loan origination expenses increased $2.4 million or 9% during 2021, as compared to 2020, and $11.3 million during 2020 as compared to 2019, reflecting the increases in our loan originations produced through our correspondent production activities.

Loan collection and liquidation

Loan collection and liquidation expenses increased by $916,000 and $5.8 million during 2021 and 2020, respectively, due to continuing collection and liquidation efforts relating to our portfolio of nonperforming mortgage loans ~~held in a consolidated VIE~~ and the ~~associated asset-backed financing are~~borrower assistance expenses we incurred relating to loans in our CRT reference pools. We incurred this expense to assist certain borrowers in mitigating loan delinquencies they incurred as a result of dislocations arising from the COVID-19 pandemic as an alternative to incurring losses in the CRT arrangements.

Compensation

Compensation expense increased $110,000 during the year ended December 31, 2021, as compared to 2020, primarily due to improved expectations in achieving performance targets included in ~~Net gain on investments~~.certain performance-based restricted share awards. Compensation expense decreased $3.0 million during the year ended December 31, 2020, as compared to 2019, primarily due to a decrease in expected future vesting of equity awards as a result of our projected earnings performance not achieving the targets included in the outstanding performance-based awards.

Other Expenses

Other expenses are summarized below:

	Year ended December 31,
	2021		2020		2019
	(in thousands)
Common overhead allocation from PFSI	$	4,906	$	5,172	$	5,340
Technology		1,787		1,440		1,616
Bank service charges		1,731		1,924		2,552
Insurance		1,671		1,351		1,239
Other		3,849		1,630		4,273
	$	13,944	$	11,517	$	15,020

~~Income Taxes~~Mortgage-Backed Securities

~~We have elected~~During 2021, we recognized net valuation losses on MBS of $74.4 million, as compared 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.

~~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 includes non-cash items, including fair value adjustments, recognition of the fair value of assets created and liabilities incurred in mortgage 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 our financial assets (comprised of MBS, mortgage loans and ESS), our firm commitment to purchase CRT securities, our derivatives, our MSRs, our asset-backed financing, interest-only security payable and derivative liabilities 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:~~

Year ended December 31,

2018

2017

2016

(dollars in thousands)

Net mortgage loan servicing fees—MSR valuation adjustments

$
60,772

$
(10,249
)

$
(5,938
)
Net gain on mortgage loans acquired for sale:

Receipt of MSRs in mortgage loan sale transactions

356,755

290,309

275,092

Fair value of commitment to purchase credit risk transfer securities

30,595

—

—

Provision for losses relating to representations and
   warranties provided in mortgage loan sales:

Pursuant to mortgage loans sales

(2,531
)

(3,147
)

(3,254
)
Reduction in liability due to change in estimate

3,707

9,679

7,564

Change in fair value during the year of financial instruments held
     at year end:

IRLCs

7,356

855

(869
)
Mortgage loans acquired for sale

(9,685
)

5,879

(1,846
)
Hedging derivatives

16,162

(15,957
)

19,347

402,359

287,618

296,034

Net gain (loss) on investments:

Mortgage-backed securities

(11,262
)

5,498

(13,168
)
Mortgage loans:

Distressed

(11,514
)

(5,711
)

(8,342
)
Held in a variable interest entity

(8,499
)

4,266

(1,748
)
ESS

11,084

(14,530
)

(17,394
)
CRT Agreements

6,015

71,997

11,202

Firm commitment to purchase CRT securities

7,399

—

—

Interest-only security payable at fair value

(19,332
)

(11,033
)

(4,114
)
Asset-backed financing of a VIE

9,610

(3,426
)

3,238

(16,499
)

47,061

(30,326
)
Net interest income—Capitalization of interest
   pursuant to mortgage loan modifications

7,439

30,795

84,820

$
454,071

$
355,225

$
344,590

Net investment income

$
351,067

$
317,940

$
272,088

Non-cash items as a percentage of net investment income

129
%

112
%

127
%

~~We received cash relating to our investments as follows:~~

~~We receive cash related to MSRs in the form of mortgage loan servicing fees~~

•

We receive proceeds on the sale of mortgage loans acquired for sale that include both cash and our estimate of the fair value of MSRs and a firm commitment to purchase CRT securities, and we recognize a liability for potential losses

relating to representations and warranties created in the mortgage loan sales transactions. We pay cash relating to our provision for representations and warranties when we repurchase mortgage loans or settle loss claims from investors.

~~We receive cash relating to our investments in MBS through monthly principal and interest payments from the issuer of such securities.~~

Cash is generated with respect to CRT Agreements through a portion of both the interest payments collected on mortgage loans in the CRT Agreements’ reference pools and the deposits securing the agreements that are released as principal on such mortgage loans is repaid.

~~Cash flows relating to hedging instruments are generally produced when the instruments mature or when we effectively cancel the transactions through an offsetting trade.~~

Cash is generated when mortgage loan investments are paid down, paid off or sold, when payments of principal and interest occur on such mortgage loans or when the property securing the mortgage loan has been sold. The following table illustrates the proceeds received during the period from dispositions and paydowns of distressed mortgage loan and REO investments, net gain in fair value that we accumulated over the period during which we owned such investments liquidated during the period, and additional net gain realized upon liquidation of such assets:

Year ended December 31,

2018

2017

2016

Proceeds

Accumulated
gains (losses) (1)

Net gain on
liquidation (2)

Proceeds

Accumulated
gains (losses) (1)

Net gain on
liquidation (2)

Proceeds

Accumulated
gains (losses) (1)

Net gain on
liquidation (2)

(in thousands)

Mortgage loans

$
37,441

$
3,936

$
742

$
101,253

$
11,010

$
3,254

$
142,301

$
17,805

$
4,739

REO

99,195

(17,143
)

6,188

171,293

(19,125
)

11,203

234,629

(7,631
)

17,075

136,636

(13,207
)

6,930

272,546

(8,115
)

14,457

376,930

10,174

21,814

Distressed mortgage
loan sales (3)

563,403

59,010

(4,425
)

415,157

50,949

1,790

483,813

86,720

92

$
700,039

$
45,803

$
2,505

$
687,703

$
42,834

$
16,247

$
860,743

$
96,894

$
21,906

~~(1)~~

Represents valuation gains and losses recognized during the period we held the respective asset, including expected gains or losses upon sale of assets subject to contract of sale, but excludes the gain or loss recorded upon sale or repayment of the respective asset.

~~(2)~~

~~Represents the gain or loss recognized upon sale or repayment of the respective asset.~~

~~(3)~~

~~Excludes $14.8 million in proceeds received during the year ended December 31, 2017, from the sale of seasoned loans originally acquired in our correspondent production business.~~

~~Accumulated gains include the amount of accumulated~~ valuation gains ~~and~~of $87.9 million during 2020. The losses recognized throughout the holding period and, in the case of REO, include estimated direct transaction costs to be incurred in the sale of the property. The amounts included in accumulated gains and gains on liquidation do not include the cost of managing the liquidated assets which may be substantial depending on the collection status of the mortgage loan at acquisition and on our success in working with the borrower to resolve the distress in the mortgage loan. The primary expenses incurred at a loan level in managing our portfolio of distressed assets are servicing and activity fees. From the time of acquisition of the distressed assets through their deboarding dates, we incurred servicing and activity fees of $33.3 million, $31.8 million and $37.3 million for assets liquidated during the years ended December 31, 2018, 2017 and 2016, respectively. Accordingly, the preceding amounts do not represent periodic earnings on a cash basis and the amount of gain will have accumulated over varying periods depending on the holding periods for individual assets.

~~Results of~~ ~~Operations~~

~~The following is a summary of our key performance measures:~~

Year ended December 31,

2018

2017

2016

(in thousands, except per common share amounts)

Net investment income

$
351,067

$
317,940

$
272,088

Expenses

(193,079
)

(193,394
)

(210,325
)
Pre-tax income

157,988

124,546

61,763

(Provision for) benefit from income taxes

(5,190
)

(6,797
)

14,047

Net income

152,798

117,749

75,810

Dividends on preferred shares

24,938

15,267

—

Net income attributable to common shareholders

$
127,860

$
102,482

$
75,810

Pre-tax income (loss) by segment:

Correspondent production

$
16,472

$
42,938

$
73,842

Credit sensitive strategies

87,251

102,214

17,288

Interest rate sensitive strategies

98,432

22,683

14,041

Corporate

(44,167
)

(43,289
)

(43,408
)

$
157,988

$
124,546

$
61,763

Return on average common shareholder's equity

10.2
%

7.8
%

5.4
%
Earnings per common share:

Basic

$
2.09

$
1.53

$
1.09

Diluted

$
1.99

$
1.48

$
1.08

Dividends per common share declared & paid

$
1.88

$
1.88

$
1.88

Per common share closing prices:

During the year:

High

$
21.29

$
18.45

$
17.21

Low

$
15.57

$
14.97

$
11.21

At year end

$
18.62

$
16.07

$
16.37

At year end:

Total assets

$
7,813,361

$
5,604,933

$
6,357,502

Book value per common share

$
20.61

$
20.13

$
20.26

~~Our net income increased~~recognized during the year ended December 31, ~~2018, as compared to the same period in 2017, primarily due to an increase in pretax income in our~~2021 reflect rising interest ~~rate sensitive strategies segment of $75.7 million. During~~rates. The gains recognized during the year ended December 31, ~~2018, our~~2020, reflect the significant decrease in interest ~~rate sensitive strategies segment recognized net investment income totaling $133.6 million, an increase of $81.8 million from $51.8 million~~rates that was experienced 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~~year.

Loans at fair value – Held in VIEs and Asset-Backed Financings at Fair Value

Loans at fair value held in VIEs and Asset-backed financings at fair value recorded a net gain of ~~hedging results, of our servicing assets, resulting from the generally increasing interest rates in 2018 as opposed to 2017.~~

~~In our correspondent production activities, our net investment income decreased by $26.4~~$7.2 million during the year ended December 31, ~~2018,~~2021, as compared to ~~the same period in 2017, from $132.0 million to $105.6 million. Our~~a net gain on mortgage loans acquired for sale decreased due to tightening gain on sale margins, resulting from a smaller mortgage market size. However, we maintained our mortgage loan production volume in a smaller mortgage market in part due to the continued growthloss of ~~our correspondent seller network.~~

~~Credit sensitive strategies segment pretax income decreased by $15.0~~$1.1 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 mortgage loans.~~

~~Our~~2020. The net ~~income increased~~gain during the year ended December 31, ~~2017,~~2021 reflect the gains on the asset-backed financing exceeding the losses on the underlying assets as ~~compared to~~ the ~~same period in 2016, primarily due to an increase in pretax income in~~result of tightening credit spreads on our ~~credit sensitive strategies segment of $84.9 million. During the year ended December 31, 2017, our credit sensitive strategies segment recognized~~ net investments secured by jumbo loans and investment ~~income totaling $133.4 million, an increase of $67.1 million from $66.3 million~~properties. The loss during the year ended December 31, ~~2016, primarily due~~2020 is attributable to ~~gains from~~the effect of uncertainties surrounding borrower credit performance experienced in the mortgage market as the result of the COVID-19 pandemic. Unlike our investments in MBS which carry Agency guarantees of security payment performance, the loans held in a VIE are the sole source of repayment of the securities. Therefore, uncertainties about borrower performance are more directly reflected in the fair value of these loans and more than offset the positive effect of decreasing interest rates for the year ended December 31, 2020.

CRT Arrangements

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

		Year ended December 31,
		2021			2020			2019
	(in thousands)
UPB of loans sold					$	18,277,263		$	47,748,300
Investments:
Deposits securing CRT arrangements					$	1,700,000		$	933,370
Change in expected face amount of firm commitment to purchase CRT securities						(1,502,203	)		897,151
					$	197,797		$	1,830,521
Investment income (loss):
Net gains on loans acquired for sale — Fair value of firm commitment to purchase CRT securities recognized upon sale of loans					$	(38,161	)	$	99,305
Net gains (losses) on investments and financings:
Derivative and CRT strips:
CRT derivatives
Realized		$	93,837			(53,965	)		79,619
Valuation changes			(12,829	)		(82,633	)		(9,571	)
			81,008			(136,598	)		70,048
CRT strips
Realized			111,872			54,929			32,200
Valuation changes			175,955			(79,221	)		(1,874	)
			287,827			(24,292	)		30,326
Interest-only security payable at fair value			164			14,952			10,302
			368,999			(145,938	)		110,676
Firm commitments to purchase CRT securities			—			(121,067	)		60,943
			368,999			(267,005	)		171,619
Interest income — Deposits securing CRT arrangements			559			7,012			34,229
		$	369,558		$	(298,154	)	$	305,153

Net (recoveries received) payments made to settle (recoveries) losses on CRT arrangements		$	(62,387	)	$	115,475		$	5,165

	December 31, 2021			December 31, 2020
	(in thousands)
Carrying value of CRT arrangements:
Derivative and credit risk transfer strip assets (liabilities), net
CRT derivatives	$	18,964		$	31,795
CRT strips		(26,837	)		(202,792	)
	$	(7,873	)	$	(170,997	)

Deposits securing CRT arrangements	$	1,704,911		$	2,799,263
Interest-only security payable at fair value	$	10,593		$	10,757

CRT arrangement assets pledged to secure borrowings:
Derivative and credit risk transfer assets	$	19,627		$	58,699
Deposits securing CRT arrangements (1)	$	1,704,911		$	2,799,263

UPB of loans — underlying CRT arrangements	$	30,808,907		$	58,697,942
Collection status (UPB):
Delinquency (2)
Current	$	29,581,803		$	54,990,381
30-89 days delinquent	$	349,291		$	710,872
90-180 days delinquent	$	120,775		$	693,315
180 or more days delinquent	$	748,576		$	2,297,365
Foreclosure	$	8,462		$	6,009
Bankruptcy	$	64,694		$	75,700
Delinquent loans in COVID-19 pandemic-related forbearance plans:
30-89 days delinquent	$	44,015		$	383,028
90-180 days delinquent	$	57,815		$	546,344
180 or more days delinquent	$	174,041		$	1,944,663

(1)	For purposes of this discussion, includes Deposits securing credit risk transfer strip liabilities securing $27.5 million and $229.7 million in CRT strip and CRT derivative liabilities at December 31, 2021 and December 31, 2020, respectively.

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

The performance of our investments in CRT Agreements which reflects 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 a U.S. Treasury security).

~~In our correspondent production activities, our net investment income decreased by $36.5 million~~arrangements during the year ended December 31, ~~2017,~~2021 reflects a recovery of the credit markets from the dislocation experienced during the first quarter of 2020 as ~~compared~~a result of the onset of the COVID-19 pandemic and continuing improvement in the performance of the loans underlying this investment.

ESS Purchased from PFSI

We recognized fair value gains relating to our investment in ESS totaling $1.7 million for the year ended December 31, ~~2016, from $168.5~~2021, as compared to fair value losses of $22.7 million ~~to $132.0 million. Our net gain~~during 2020. The gains were driven by the positive influence on mortgage loans acquired for sale decreased due to tightening gain on sale margins, resulting from a smaller mortgage market size. However, we maintained our mortgage loan production volume in a smaller mortgage market throughexpected future cash flows of the ~~continued growth of our correspondent seller network.~~

~~Net Investment Income~~

~~Our net investment income is summarized below:~~

Year ended December 31,

2018

2017

2016

(in thousands)

Net mortgage loan servicing fees

$
120,587

$
69,240

$
54,789

Net gain on mortgage loans held for sale

59,185

74,516

106,442

Net mortgage loan origination fees

43,321

40,184

41,993

Net gain on investments

81,926

96,384

7,175

Net interest income

47,601

43,805

72,354

Results of real estate acquired in settlement of loans

(8,786
)

(14,955
)

(19,118
)
Other

7,233

8,766

8,453

$
351,067

$
317,940

$
272,088

~~Our net investment income reflects the effects of~~generally rising interest rates ~~on our net mortgage loan servicing fees~~during the portion of 2021 that the ESS was outstanding. The change in valuation results during 2020, as compared to 2019, resulted from increased prepayment experience and ~~our net gains on mortgage~~expectations for the loans ~~held for sale, as well as~~underlying the ESS and the effect of uncertainties surrounding future cash flows on the ~~growth~~discount rate used to develop the assets’ fair value. The remaining balance of ~~our investments in MBS and CRT Agreements.~~

~~Net Mortgage Loan Servicing Fees~~

~~Our correspondent production activity is~~ the ~~primary source of our mortgage loan servicing portfolio. When we sell mortgage loans, we generally enter into a contract~~ESS was sold to service those loans and we recognize the fair value of such contracts as MSRs. Under these contracts, we are required to perform mortgage 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 mortgage loan payments; responding to borrower inquiries; accounting for the mortgage 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 mortgage loan servicing fees are summarized below:~~

Year ended December 31,

2018

2017

2016

(in thousands)

From non-affiliates:

Servicing fees (1)

$
204,663

$
164,776

$
125,961

Ancillary and other fees

8,062

6,523

5,872

Effect of MSRs:

Amortization and realization of cashflows

(119,552
)

(91,386
)

(74,961
)
Market changes affecting fair value

60,772

(10,249
)

(5,938
)

(58,780
)

(101,635
)

(80,899
)
Gain on sale

—

660

11

(Losses) gains on hedging derivatives

(35,550
)

(2,512
)

2,271

(94,330
)

(103,487
)

(78,617
)

118,395

67,812

53,216

From PFSI—MSR recapture income

2,192

1,428

1,573

Net mortgage loan servicing fees

$
120,587

$
69,240

$
54,789

Average servicing portfolio UPB

$
80,500,212

$
63,836,843

$
49,626,758

~~(1)~~

~~Includes contractually specified servicing fees, net of guarantee fees.~~

~~Net mortgage loan servicing fees increased~~ during the ~~year~~quarter ended ~~December~~March 31, 2018 as compared to 2017 by $51.3 million. The increase in net mortgage 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 2017.2021.

Net mortgage loan servicing fees increased during the year ended December 31, 2017 as compared to 2016 by $14.5 million. The increase in net mortgage loan servicing fees during the year ended December 31, 2017, as compared to the year ended December 31, 2016, was primarily attributable to a 29% increase in the average size of our servicing portfolio measured in UPB during 2017, as compared to 2016, partially offset by an increase in amortization and changes in fair value of the MSRs resulting from the realization of cash flows and a provision for impairment as a result of the effect of a fluctuation in interest rates throughout 2017.

6061

Net ~~Gain~~Gains on ~~Mortgage~~ Loans Acquired for Sale

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

Year ended December 31,

2018

2017

2016

(in thousands)

From non-affiliates:

Cash loss:

Mortgage loans

$
(363,271
)

$
(209,898
)

$
(229,743
)
Hedging activities

9,172

(15,288
)

30,927

(354,099
)

(225,186
)

(198,816
)
Non-cash gain:

Receipt of MSRs in mortgage loan sale transactions

356,755

290,309

275,092

Provision for losses relating to representations and
   warranties provided in mortgage loan sales:

Pursuant to mortgage loan sales

(2,531
)

(3,147
)

(3,254
)
Reduction in liability due to change in estimate

3,707

9,679

7,564

1,176

6,532

4,310

Recognition of fair value of commitment to purchase
   credit risk transfer security relating to loans sold

30,595

—

—

Change in fair value during the year of financial
   instruments held at year end:

IRLCs

7,356

855

(869
)
Mortgage loans

(9,685
)

5,879

(1,846
)
Hedging derivatives

16,162

(15,957
)

19,347

13,833

(9,223
)

16,632

Total from non—affiliates

48,260

62,432

97,218

From PFSI—cash gain

10,925

12,084

9,224

$
59,185

$
74,516

$
106,442

Interest rate lock commitments issued:

Loans acquired for sale to nonaffiliates

$
29,341,579

$
24,855,512

$
25,447,021

Loans acquired for sale to PFSI

37,381,759

41,071,446

41,692,087

$
66,723,338

$
65,926,958

$
67,139,108

		Year ended December 31,
		2021			2020			2019
	(in thousands)
From non-affiliates:
Cash loss:
Loans		$	(1,487,649	)	$	(326,214	)	$	(687,317	)
Hedging activities			188,733			(504,506	)		(88,633	)
			(1,298,916	)		(830,720	)		(775,950	)
Non-cash gain:
Receipt of MSRs in loan sale transactions			1,484,629			1,158,475			837,706
Provision for losses relating to representations and warranties provided in loan sales:
Pursuant to loan sales			(25,029	)		(19,316	)		(3,778	)
Reduction in liability due to change in estimate			5,812			4,457			3,550
			(19,217	)		(14,859	)		(228	)
Recognition of fair value of commitment to purchase credit risk transfer securities relating to loans sold			—			(38,161	)		99,305
Change in fair value during the year of financial instruments:
IRLCs			(69,935	)		61,232			(834	)
Loans			31,072			(12,279	)		(1,765	)
Hedging derivatives			(46,832	)		45,197			(2,451	)
			(85,695	)		94,150			(5,050	)
			1,379,717			1,199,605			931,733
Total from nonaffiliates			80,801			368,885			155,783
From PFSI—cash			6,472			11,037			14,381
		$	87,273		$	379,922		$	170,164

Interest rate lock commitments issued on loans acquired for sale to nonaffiliates		$	108,458,880		$	117,727,579		$	63,323,599
Acquisition of loans for sale (UPB):
To nonaffiliates		$	110,003,574		$	106,898,339		$	57,396,037
To PFSI			64,641,218			62,413,089			49,116,781
		$	174,644,792		$	169,311,428		$	106,512,818

The changes in net gain on ~~mortgage~~ loans acquired for sale during the year ended December 31, ~~2018,~~2021, as compared to 2020, reflect the ~~same period~~tightening of gain on sale margins, as well as decreasing interest rate lock commitments. The changes in ~~2017,~~net gain on loans acquired for sale during the year ended December 31, 2020, as compared to 2019, reflects both the effects of increasing demand in the mortgage market on our loan sales volume and of constraints in mortgage industry capacity on our gain on sale margins, partially offset by losses on the fair value of our commitment to invest in the ~~credit risk of~~CRT assets created through our ~~mortgage~~current loan ~~production.~~sales. We ~~included $30.6~~incurred $38.2 million in ~~gain on sale of mortgage loans acquired for sale~~fair value losses related to our investment in the credit risk on the mortgage loans we sold during the year ended December 31, 2018. The fair value we recognized associated with this commitment was offset by the negative effect on mortgage loan profitability caused by generally rising interest rates in the mortgage market, which has a negative effect on demand for mortgage lending and which has not yet been matched by reduced production capacity in the mortgage marketplace.

The decrease in gain on mortgage loans acquired for sale during the year ended December 31, 2017, as compared to the year ended December 31, 2016, was due to tightening of gain on sale margins, which resulted from increased competition in the mortgage market resulting from decreased mortgage loan demand. We maintained our production volume, in part, through the continued growth of our correspondent seller network.

Our net gain on mortgage loans acquired for sale includes both cash and non-cash elements. We receive proceeds on sale that include cash and our estimates of the fair value of both the MSRs we received and our firm commitment to purchase CRT securities ~~relating~~arising from loan sales during the year ended December 31, 2020, as compared to $99.3 million in gain on such loan sales in 2019.

Non-cash elements of gain on sale of loans

Interest Rate Lock Commitments

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

The MSRs and liability for representations and warranties we recognize represent our estimate of the fair value of future benefits and costs we will realize for years in the future. These estimates change as circumstances change, and changes in these estimates are recognized in our results of operations in subsequent periods. Subsequent changes in the fair value of our MSRs significantly affect our results of operations.

Mortgage Servicing Rights

Firm Commitment to Purchase CRT Securities

Liability for Losses Under Representations and Warranties

We ~~also~~ recognize a liability for ~~potential~~ losses we expect to incur relating to the representations and warranties ~~created~~we provide to purchasers in ~~the mortgage~~our loan sales transactions.

~~Provision for Losses on Representations and Warranties~~

We provide for our estimate of the future losses that we may be required to incur as a result of our breach of representations and warranties. Our agreements with the purchasers include representations and warranties related to the mortgage 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 ~~mortgage~~ loan, property eligibility, borrower credit, income and asset requirements, and compliance with applicable federal, state and local law.

We recorded provisions for losses relating to representations and warranties relating to current loan sales of $25.0 million, $19.3 million and $3.8 million as part of our loan sales in each of the years ended December 31, 2021, 2020 and 2019, respectively. The increase in the provision relating to current loan sales reflects the increase of our loan sales volume as well as loan sales no longer being subject to credit risk transfer arrangements for which our representation and warranty loss estimates were less than for other loan sales.

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

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

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

Year ended December 31,

2018

2017

2016

(in thousands)

Indemnification activity:

Mortgage loans indemnified at beginning of year

$
5,926

$
4,856

$
5,566

New indemnifications

1,937

2,069

645

Less: Indemnified mortgage loans repaid or refinanced

788

999

1,355

Mortgage loans indemnified at end of year

$
7,075

$
5,926

$
4,856

Mortgage loans with deposits received from correspondent sellers
   collateralizing prospective indemnification losses at end of year

$
781

$
1,145

$
645

Repurchase activity:

Mortgage loans repurchased

$
12,208

$
11,596

$
11,380

Less:

Mortgage loans repurchased by correspondent sellers

8,455

7,669

8,808

Mortgage loans repaid by borrowers

2,713

4,133

2,734

Net mortgage loans repurchased (repurchased by
   correspondent sellers or repaid by borrowers)

$
1,040

$
(206
)

$
(162
)
Net (recovery credited) losses charged to liability for
   representations and warranties

$
(12
)

$
140

$
511

At end of year:

Mortgage loans subject to representations and warranties

$
90,427,100

$
71,416,333

$
56,114,162

Liability for representations and warranties

$
7,514

$
8,678

$
15,350

	Year ended December 31,
	2021		2020		2019
	(in thousands)
Indemnification activity unpaid principal balance ("UPB"):
Loans indemnified at beginning of year	$	4,583	$	5,697	$	7,075
New indemnifications		345		450		583
Less: Indemnified loans repaid or refinanced		2,146		1,564		1,961
Loans indemnified at end of year	$	2,782	$	4,583	$	5,697
Indemnified loans indemnified by correspondent lenders at end of year	$	1,112	$	1,497	$	1,941
UPB of loans with deposits received from correspondent sellers collateralizing prospective indemnification losses at end of year	$	213	$	213	$	603
Repurchase activity (UPB):
Loans repurchased	$	86,954	$	72,535	$	22,648
Less:
Loans repurchased by correspondent sellers		52,787		31,306		13,745
Loans resold or repaid by borrowers		33,950		24,837		4,830
Net loans repurchased with losses chargeable to liability to representations and warranties	$	217	$	16,392	$	4,073
Net losses charged to liability for representations and warranties	$	861	$	580	$	128
At end of year:
Loans subject to representations and warranties	$	213,944,023	$	163,592,788	$	122,163,186
Liability for representations and warranties	$	40,249	$	21,893	$	7,614

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 ~~mortgage~~ loans from the correspondent sellers. As the outstanding balance of ~~mortgage~~ loans we purchase and sell subject to representations and warranties increases, as the ~~mortgage~~ loans sold season, as our investors’ and guarantors’ loss mitigation strategies change and as our correspondent sellers’ ability and willingness to repurchase ~~mortgage~~ loans ~~and our investors’ and guarantors’ loss mitigation strategies~~ change, we expect that the level of repurchase activity and associated losses may increase.

62The 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 ~~mortgage~~ loan repurchase losses is dependent on economic factors, investor loss mitigation strategies, our ability to recover any losses inherent in the repurchased ~~mortgage~~ loan from the correspondent seller and other external conditions that ~~may~~ change over the lives of the underlying ~~mortgage~~ loans. We may be required to incur losses related to such representations and warranties for several periods after the ~~mortgage~~ loans are sold or liquidated.

We record adjustments to our ~~recorded~~ 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 ~~mortgage~~ loans acquired for sale at fair value. We recorded ~~a $3.7 million reduction~~reductions in liabilities for representations and warranties for previously sold loans totaling $5.8 million, $4.5 million and $3.6 million during each of the ~~year~~three years ended December 31, ~~2018~~2021, 2020 and 2019, respectively, due to the effects of certain ~~mortgage~~ loans reaching specified performance histories identified by the Agencies as sufficient to limit repurchase claims relating to such ~~mortgage~~ loans.

~~Mortgage~~ Loan Origination Fees

~~Mortgage loan~~Loan origination fees represent fees we charge correspondent sellers relating to our purchase of ~~mortgage~~ loans from those sellers. The increase in fees during ~~2018,~~2021, as compared to ~~2017,~~2020 and 2019, reflects an increase in our ~~purchase~~purchases of loans with delivery fees. ~~During 2017,~~

Net Loan Servicing Fees

Our net loan servicing fees have two primary components: fees earned for servicing loans and the effects of MSR valuation changes, net of hedging results, as summarized below:

		Year ended December 31,
		2021			2020			2019
	(in thousands)
Loan servicing fees		$	595,346		$	462,517		$	319,489
Effect of MSRs and hedging results			(631,368	)		(308,821	)		(378,407	)
Net loan servicing fees		$	(36,022	)	$	153,696		$	(58,918	)

Following is a summary of our loan servicing fees:

		Year ended December 31,
		2021		2020		2019
	(in thousands)
Contractually-specified servicing fees		$	526,245	$	406,060	$	295,390
Ancillary and other fees:
Late charges			1,701		1,498		1,658
Other			67,400		54,959		22,441
			69,101		56,457		24,099
		$	595,346	$	462,517	$	319,489
Average MSR servicing portfolio		$	196,996,623	$	147,832,880	$	110,075,179

The changes in contractually-specified fees during the year ended December 31, 2021, as compared to ~~2016,~~2020, is due primarily to increased servicing fees resulting from the ~~change~~growth in our loan servicing portfolio. The changes in other loan servicing fees for the

same comparative periods is ~~reflective of the changes~~due primarily to an increase in the volume of ~~mortgage~~fees charged to correspondent lenders for loans ~~we purchased~~repaid shortly after purchase during ~~2017~~the year ended December 31, 2021, as compared to ~~2016.~~2020, as the result of the significant volume of refinancing activity experienced in the first part of 2021.

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

		Year ended December 31,
		2021			2020			2019
	(in thousands)
Change in fair value of MSRs
Realization of cash flows		$	(298,130	)	$	(232,830	)	$	(202,322	)
Changes in valuation inputs used in valuation model			(39,056	)		(706,107	)		(262,031	)
			(337,186	)		(938,937	)		(464,353	)
Hedging results			(345,041	)		601,743			80,622
Total change in fair value of mortgage servicing rights and hedging results			(682,227	)		(337,194	)		(383,731	)
Recapture income from PFSI			50,859			28,373			5,324
		$	(631,368	)	$	(308,821	)	$	(378,407	)
Average balance of mortgage servicing rights		$	2,506,678		$	1,354,508		$	1,215,866

Following is a summary of our loan servicing portfolio:

	December 31, 2021		December 31, 2020
	(in thousands)
UPB of loans outstanding	$	215,927,495	$	170,502,361
Collection status (UPB) (1)
Delinquency:
30-89 days delinquent	$	1,148,542	$	1,235,981
90 or more days delinquent:
Not in foreclosure	$	1,726,488	$	4,428,915
In foreclosure	$	36,658	$	27,494
Bankruptcy	$	130,582	$	148,866
Delinquent loans in COVID-19 pandemic-related forbearance:
30-89 days	$	169,654	$	530,353
90 days or more	$	614,882	$	3,123,288
Custodial funds managed by the Company (2)	$	3,823,527	$	6,086,724

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

(2)

Net Interest (Expense) Income

Net ~~Gain (Loss)~~interest (expense) income is summarized below:

	Year ended December 31, 2021								Year ended December 31, 2020								Year ended December 31, 2019
	Interest					Interest			Interest					Interest			Interest				Interest
	income/			Average		yield/			income/			Average		yield/			income/		Average		yield/
	expense			balance		cost %			expense			balance		cost %			expense		balance		cost %
	(dollars in thousands)
Assets:
Cash and short-term investments	$	938		$	243,548		0.38	%	$	3,804		$	650,630		0.58	%	$	4,559	$	164,577		2.73	%
Mortgage-backed securities		36,180			2,210,940		1.61	%		59,461			2,921,879		2.00	%		78,450		2,591,828		2.99	%
Loans acquired for sale at fair value		125,438			4,135,140		2.99	%		103,221			3,469,392		2.93	%		121,387		2,754,955		4.35	%
Loans at fair value:
Held by variable interest entities		17,014			474,808		3.53	%		10,609			214,596		4.86	%		11,734		281,449		4.11	%
Distressed		369			6,625		5.49	%		493			9,032		5.37	%		3,848		75,251		5.04	%
		17,383			481,433		3.56	%		11,102			223,628		4.88	%		15,582		356,700		4.31	%
ESS from PFSI		1,280			21,563		5.85	%		8,418			153,768		5.38	%		10,291		197,273		5.15	%
Deposits securing CRT arrangements		559			2,307,155		0.02	%		7,012			1,772,762		0.39	%		34,229		1,639,885		2.06	%
		181,778			9,399,779		1.91	%		193,018			9,192,059		2.07	%		264,498		7,705,218		3.39	%
Placement fees relating to custodial funds		13,366								28,804								52,587
Other		95								313								800
		195,239		$	9,399,779		2.05	%		222,135		$	9,192,059		2.38	%		317,885	$	7,705,218		4.07	%
Liabilities:
Assets sold under agreements to repurchase	$	97,078		$	6,161,755		1.55	%	$	102,131		$	5,508,147		1.82	%	$	178,211	$	5,600,469		3.14	%
Mortgage loan participation purchase and sale agreements		606			33,827		1.77	%		902			44,432		2.00	%		1,570		40,036		3.87	%
Notes payable secured by credit risk transfer and mortgage servicing assets		86,753			2,635,601		3.25	%		59,261			1,771,370		3.29	%		53,968		1,101,501		4.83	%
Exchangeable senior notes		36,747			445,064		8.14	%		18,847			269,247		6.89	%		17,037		279,207		6.02	%
Asset-backed financings at fair value		15,076			447,247		3.32	%		10,971			203,795		5.30	%		11,324		267,539		4.17	%
Assets sold to PFSI under agreement to repurchase		387			13,020		2.93	%		3,325			93,264		3.56	%		6,302		118,264		5.33	%
		236,647			9,736,514		2.40	%		195,437			7,890,255		2.44	%		268,412		7,407,016		3.57	%
Interest shortfall on repayments of loans serviced for Agency securitizations		64,519								71,516								25,776
Interest on loan impound deposits		3,571								3,817								3,258
		304,737		$	9,736,514		3.09	%		270,770		$	7,890,255		3.38	%		297,446	$	7,407,016		3.96	%
Net interest (expense) income	$	(109,498	)						$	(48,635	)						$	20,439
Net interest margin							-1.15	%							-0.52	%						0.26	%
Net interest spread							-1.04	%							-1.00	%						0.11	%

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

		Year ended December 31, 2021									Year ended December 31, 2020
		vs.									vs.
		Year ended December 31, 2020									Year ended December 31, 2019
		Increase (decrease) due to changes in									Increase (decrease) due to changes in
		Rate			Volume			Total			Rate			Volume			Total
	(in thousands)
Assets:
Cash and short-term investments		$	(1,008	)	$	(1,858	)	$	(2,866	)	$	(5,855	)	$	5,100		$	(755	)
Mortgage-backed securities			(10,318	)		(12,963	)		(23,281	)		(28,146	)		9,157			(18,989	)
Loans acquired for sale at fair value			2,321			19,896			22,217			(45,316	)		27,150			(18,166	)
Loans at fair value:
Held by variable interest entities			(3,540	)		9,945			6,405			1,940			(3,065	)		(1,125	)
Distressed			11			(135	)		(124	)		235			(3,590	)		(3,355	)
			(3,529	)		9,810			6,281			2,175			(6,655	)		(4,480	)
ESS from PFSI			673			(7,811	)		(7,138	)		467			(2,340	)		(1,873	)
Deposits securing CRT arrangements			(8,075	)		1,622			(6,453	)		(29,802	)		2,585			(27,217	)
			(19,936	)		8,696			(11,240	)		(106,477	)		34,997			(71,480	)
Placement fees relating to custodial funds			—			(15,438	)		(15,438	)		—			(23,783	)		(23,783	)
Other			—			(218	)		(218	)		—			(487	)		(487	)
			(19,936	)		(6,960	)		(26,896	)		(106,477	)		10,727			(95,750	)
Liabilities:
Assets sold under agreements to repurchase			(16,219	)		11,166			(5,053	)		(73,199	)		(2,881	)		(76,080	)
Mortgage loan participation purchase and sale agreement			(96	)		(200	)		(296	)		(826	)		158			(668	)
Notes payable secured by credit risk transfer and mortgage servicing assets			(808	)		28,300			27,492			(20,827	)		26,120			5,293
Exchangeable senior notes			3,914			13,986			17,900			2,428			(618	)		1,810
Asset-backed financings of at fair value			(5,234	)		9,339			4,105			2,679			(3,032	)		(353	)
Assets sold to PFSI under agreement to repurchase			(470	)		(2,468	)		(2,938	)		(1,821	)		(1,156	)		(2,977	)
			(18,913	)		60,123			41,210			(91,566	)		18,591			(72,975	)
Interest shortfall on repayments of loans serviced for Agency securitizations			—			(6,997	)		(6,997	)		—			45,740			45,740
Interest on loan impound deposits			—			(246	)		(246	)		—			559			559
			(18,913	)		52,880			33,967			(91,566	)		64,890			(26,676	)
Net interest expense		$	(1,023	)	$	(59,840	)	$	(60,863	)	$	(14,911	)	$	(54,163	)	$	(69,074	)

The increase in net interest expense during the year ended December 31, 2021, as compared to 2020, is due to:

•

The decrease in net interest income during the year ended December 31, 2020, as compared to 2019, is due to:

•

Expenses

~~Net gain (loss)~~Our expenses are summarized below:

		Year ended December 31,
		2021		2020		2019
	(in thousands)
Earned by PennyMac Financial Services, Inc.:
Loan fulfillment fees		$	178,927	$	222,200	$	160,610
Loan servicing fees			80,658		67,181		48,797
Management fees			37,801		34,538		36,492
Loan origination			28,792		26,437		15,105
Loan collection and liquidation			11,279		10,363		4,600
Professional services			11,148		6,405		5,556
Safekeeping			9,087		7,090		5,097
Compensation			4,000		3,890		6,897
Other			13,944		11,517		15,020
		$	375,636	$	389,621	$	298,174

Expenses decreased $14.0 million, or 4%, during the year ended December 31, 2021, as compared to 2020, primarily due to reduced fees relating to fulfillment activities performed by PFSI on ~~investments~~our behalf, partially offset by an increase in loan servicing fees. Expenses increased $91.4 million, or 31% during 2020, as compared to the same period in 2019, due primarily 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.

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 decrease in loan fulfillment fees of $43.3 million during 2021, as compared to 2020, isdue to a decrease in loan commitment volume and an increase in discretionary reductions in the PFSI fee schedule, partially offset by an increase in our loan production volume. The increase in loan fulfillment fees of $61.6 million during the year ended December 31, 2020, compared to 2019, is primarily due to an increase in the volume of loans fulfilled for us by PFSI, partially offset by a change in the fulfillment fee structure described in Note 4 – Transactions with Related Parties to the consolidated financial statements included in this Report.

Loan Servicing Fees

Loan servicing fees payable to PLS are summarized below:

	Year ended December 31,
	2021		2020		2019
	(in thousands)
Loan servicing fees:
Loans acquired for sale at fair value	$	2,363	$	2,067	$	1,772
Loans at fair value		505		807		2,207
MSRs		77,790		64,307		44,818
	$	80,658	$	67,181	$	48,797
Average investment in:
Loans acquired for sale at fair value	$	4,135,140	$	3,469,392	$	2,754,955
Loans at fair value	$	481,433	$	223,628	$	356,700
Average MSR portfolio UPB	$	196,996,623	$	147,832,880	$	110,075,179

Management Fees

Management fees payable to PCM are summarized below:

	Year ended December 31,
	2021		2020		2019
	(in thousands)
Base	$	34,794	$	34,538	$	29,303
Performance incentive		3,007		—		7,189
	$	37,801	$	34,538	$	36,492
Average shareholders' equity amounts used to calculate base management fee expense	$	2,348,395	$	2,330,154	$	1,958,970

Loan origination

Loan collection and liquidation

Loan collection and liquidation expenses increased by $916,000 and $5.8 million during 2021 and 2020, respectively, due to continuing collection and liquidation efforts relating to our portfolio of nonperforming mortgage loans and the borrower assistance expenses we incurred relating to loans in our CRT reference pools. We incurred this expense to assist certain borrowers in mitigating loan delinquencies they incurred as a result of dislocations arising from the COVID-19 pandemic as an alternative to incurring losses in the CRT arrangements.

Compensation

Compensation expense increased $110,000 during the year ended December 31, 2021, as compared to 2020, primarily due to improved expectations in achieving performance targets included in certain performance-based restricted share awards. Compensation expense decreased $3.0 million during the year ended December 31, 2020, as compared to 2019, primarily due to a decrease in expected future vesting of equity awards as a result of our projected earnings performance not achieving the targets included in the outstanding performance-based awards.

Other Expenses

Other expenses are summarized below:

Year ended December 31,

2018

2017

2016

(in thousands)

From non-affiliates:

Mortgage-backed securities

$
(11,262
)

$
5,498

$
(13,168
)
Mortgage loans at fair value:

Distressed

(15,197
)

(684
)

(3,504
)
Held in a VIE

(8,499
)

4,266

(1,748
)
CRT Agreements

92,943

123,728

32,500

Firm commitment to purchase CRT securities

7,399

—

—

Asset-backed financings of a VIE at fair value

9,610

(3,426
)

3,238

Hedging derivatives

(4,152
)

(18,468
)

7,251

70,842

110,914

24,569

From PFSI—ESS

11,084

(14,530
)

(17,394
)

$
81,926

$
96,384

$
7,175

	Year ended December 31,
	2021		2020		2019
	(in thousands)
Common overhead allocation from PFSI	$	4,906	$	5,172	$	5,340
Technology		1,787		1,440		1,616
Bank service charges		1,731		1,924		2,552
Insurance		1,671		1,351		1,239
Other		3,849		1,630		4,273
	$	13,944	$	11,517	$	15,020

The decrease in net gain on investments during 2018 as compared to 2017, was caused primarily by decreased gains from our CRT Agreements during 2018, as compared to 2017. The decrease in gains from CRT Agreements reflects continued reductions in the credit spreads included in discount rates used in valuation of CRT Agreements during 2018. However, the decreases in credit spreads were not as significant during 2018 as compared to 2017.

The increase in net gain on investments during 2017, as compared to 2016, was caused primarily by increased gains from our CRT Agreements during 2017, as compared to 2016. The increase in gains from CRT Agreements reflects both an increased investment in the agreements and reduced credit spreads.

Mortgage-Backed Securities

During ~~2018,~~2021, we recognized net valuation losses on MBS of ~~$11.3~~$74.4 million, as compared to net valuation gains of ~~$5.5~~$87.9 million during ~~2017.~~2020. The losses we ~~recorded~~recognized during ~~2018 reflect the effects of rising interest rates during 2018 on a larger average portfolio balance of MBS as compared to 2017.~~

During 2017, we recognized net valuation gains on MBS of $5.5 million, as compared to losses of $13.2 million during 2016. The gains we recorded during 2017 reflect the effects of more stable mortgage interest rates during 2017 on a larger average portfolio balance of MBS as compared to 2016, when interest rates rose significantly at the end of the year.

~~Mortgage Loans at Fair Value – Distressed~~

~~Net (losses) gains on our investment in distressed mortgage loans at fair value are summarized below:~~

Year ended December 31,

2018

2017

2016

(dollars in thousands)

Valuation changes:

Performing loans

$
2,331

$
30,721

$
(20,443
)
Nonperforming loans

(13,845
)

(36,432
)

12,101

(11,514
)

(5,711
)

(8,342
)
Gain on payoffs

677

3,101

4,229

(Loss) gain on sale

(4,360
)

1,926

609

$
(15,197
)

$
(684
)

$
(3,504
)
Average portfolio balance at fair value

$
473,458

$
1,152,930

$
1,731,638

Interest and fees capitalized

$
7,439

$
30,795

$
84,820

Number of mortgage loans relating to gain recognized
  on payoffs

142

325

462

UPB of mortgage loans relating to gain recognized
  on payoffs

$
38,396

$
104,337

$
139,481

Number of mortgage loans relating to gain/(loss) recognized
  on sales

2,528

1,767

2,102

UPB of mortgage loans relating to gain/(loss) recognized
  on sales

$
733,167

$
546,089

$
580,648

Because we have elected to record our mortgage loans at fair value, a substantial portion of the income we record with respect to such mortgage loans results from changes in fair value. Valuation changes amounted to losses of $11.5 million in the year ended December 31, ~~2018,~~2021 reflect rising interest rates. The gains recognized during the year ended December 31, 2020, reflect the significant decrease in interest rates that was experienced during the year.

Loans at fair value – Held in VIEs and Asset-Backed Financings at Fair Value

Loans at fair value held in VIEs and Asset-backed financings at fair value recorded a net gain of $7.2 million during the year ended December 31, 2021, as compared to a net loss of $1.1 million during the year ended December 31, 2020. The net gain during the year ended December 31, 2021 reflect the gains on the asset-backed financing exceeding the losses on the underlying assets as the result of ~~$5.7 million~~tightening credit spreads on our net investments secured by jumbo loans and investment properties. The loss during the year ended December 31, 2020 is attributable to the effect of uncertainties surrounding borrower credit performance experienced in the mortgage market as the result of the COVID-19 pandemic. Unlike our investments in MBS which carry Agency guarantees of security payment performance, the loans held in a VIE are the sole source of repayment of the securities. Therefore, uncertainties about borrower performance are more directly reflected in the fair value of these loans and more than offset the positive effect of decreasing interest rates for the year ended December 31, 2017 and losses of $8.3 million for the year ended December 31, 2016. We recognize estimated gain (loss) relating to mortgage loans subject to pending sales contracts in the valuation changes. Gains and losses on sales represent settlement adjustments realized at the date of sale.2020.

We recognized valuation losses on both performing and nonperforming mortgage loans during the year ended December 31, 2018 due to the negative effect of observed increased yield requirements for comparable or related assets and to reduced cash flow expectations from our nonperforming loans during the year ended December 31, 2018.

During the three year period ended December 31, 2018, we continued to reduce our investment in distressed mortgage assets. During this period we received proceeds from liquidations, payoffs, paydowns and sales from our portfolio of mortgage loans and REO as shown below:

Year ended December 31,

2018

2017

2016

(in thousands)

Mortgage loans at fair value

$
600,844

$
516,410

$
626,114

Real estate acquired in settlement of loans

99,195

171,293

234,629

$
700,039

$
687,703

$
860,743

6459

Implementing long-term, sustainable loan modification is one means by which we endeavor to increase the fair value of the distressed mortgage loans which we have typically purchased at discounts to their UPB. Loan modifications typically include capitalization of delinquent interest on such mortgage loans.

The valuation changes on performing mortgage loans reflect the effects of capitalization of delinquent interest on loans we modify. When we capitalize interest in a loan modification, we increase the carrying value of the mortgage loan. The interest income we recognize is offset by a valuation loss of corresponding magnitude. Changes in other inputs may result in further valuation changes to the mortgage loan, and subsequent performance of a modified mortgage loan will be reflected in its future fair value.

~~Following is a summary of interest capitalized in mortgage loan modifications:~~

Year ended December 31,

2018

2017

2016

(in thousands)

Amount capitalized

$
7,439

$
30,795

$
84,820

UPB of mortgage loans before interest capitalization

$
149,023

$
309,703

$
372,626

Our disposition strategy for mortgage loans at fair value includes identification of the most financially beneficial resolution for each loan. Such resolutions may include modification or sale of the mortgage loan or acquisition of the property securing the distressed mortgage loan. During recent periods, loan sales have been our primary method of disposition. During 2018, 2017 and 2016, we received proceeds from the sale of mortgage loans at fair value totaling $563.4 million, $415.2 million and $483.8 million, respectively. We believe that while future resolution activity will include mortgage loan sales, a significant portion of our remaining portfolio of distressed mortgage loans will require resolution through ongoing collection activities and borrower performance.

Absent sale of mortgage loans, and unlike liquidation of a defaulted mortgage loan, we expect that recovery of our investment in a performing modified mortgage loan will take place generally over a period of several years, during which we earn and collect interest income on such mortgage loan. Our current expectation is that we will receive cash on modified mortgage loans through monthly borrower payments, payoffs or acquisition of the property securing the mortgage loans and liquidation of the property in the event the borrower subsequently defaults.

CRT Arrangements

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

Year ended December 31,

2018

2017

2016

(in thousands)

CRT Agreements

UPB of mortgage loans sold under CRT Agreements

$
5,546,977

$
14,529,548

$
11,190,933

Deposits of cash securing CRT Agreements

$
596,626

$
152,641

$
306,507

(Decrease) increase in commitments to fund Deposits securing credit
   risk transfer agreements resulting from sale of mortgage loans

(482,471
)

390,362

92,109

Total new investments in CRT Agreements

$
114,155

$
543,003

$
398,616

Interest earned on Deposits securing CRT Agreements

$
15,441

$
4,291

$
930

Gains recognized on CRT Agreements included in:
   Net gain (loss) on investments:

Realized

$
86,928

$
51,731

$
21,298

Resulting from valuation changes

25,347

83,030

15,316

112,275

134,761

36,614

Change in fair value of Interest-only security
    payable at fair value

(19,332
)

(11,033
)

(4,114
)

$
92,943

$
123,728

$
32,500

Payments made to settle losses

$
2,133

$
1,396

$
90

At year end:

UPB of mortgage loans subject to Recourse Obligations

$
29,934,003

$
26,845,392

Carrying value of investments in CRT Agreements (1)

$
1,270,488

$
687,507

CRT Interest-only security payable at fair value

$
36,011

$
7,070

Commitments to fund Deposits securing CRT Agreements

$
—

$
482,471

Commitment to purchase credit risk transfer security (UPB)

$
605,052

$
—

Fair value of firm commitment to purchase credit risk
   transfer security

$
37,994

$
—

Credit Risk Transfer Security

UPB of mortgage loans sold subject to Firm commitment
   to purchase credit risk transfer security

$
16,392,300

$
—

$
—

		Year ended December 31,
		2021			2020			2019
	(in thousands)
UPB of loans sold					$	18,277,263		$	47,748,300
Investments:
Deposits securing CRT arrangements					$	1,700,000		$	933,370
Change in expected face amount of firm commitment to purchase CRT securities						(1,502,203	)		897,151
					$	197,797		$	1,830,521
Investment income (loss):
Net gains on loans acquired for sale — Fair value of firm commitment to purchase CRT securities recognized upon sale of loans					$	(38,161	)	$	99,305
Net gains (losses) on investments and financings:
Derivative and CRT strips:
CRT derivatives
Realized		$	93,837			(53,965	)		79,619
Valuation changes			(12,829	)		(82,633	)		(9,571	)
			81,008			(136,598	)		70,048
CRT strips
Realized			111,872			54,929			32,200
Valuation changes			175,955			(79,221	)		(1,874	)
			287,827			(24,292	)		30,326
Interest-only security payable at fair value			164			14,952			10,302
			368,999			(145,938	)		110,676
Firm commitments to purchase CRT securities			—			(121,067	)		60,943
			368,999			(267,005	)		171,619
Interest income — Deposits securing CRT arrangements			559			7,012			34,229
		$	369,558		$	(298,154	)	$	305,153

Net (recoveries received) payments made to settle (recoveries) losses on CRT arrangements		$	(62,387	)	$	115,475		$	5,165

	December 31, 2021			December 31, 2020
	(in thousands)
Carrying value of CRT arrangements:
Derivative and credit risk transfer strip assets (liabilities), net
CRT derivatives	$	18,964		$	31,795
CRT strips		(26,837	)		(202,792	)
	$	(7,873	)	$	(170,997	)

Deposits securing CRT arrangements	$	1,704,911		$	2,799,263
Interest-only security payable at fair value	$	10,593		$	10,757

CRT arrangement assets pledged to secure borrowings:
Derivative and credit risk transfer assets	$	19,627		$	58,699
Deposits securing CRT arrangements (1)	$	1,704,911		$	2,799,263

UPB of loans — underlying CRT arrangements	$	30,808,907		$	58,697,942
Collection status (UPB):
Delinquency (2)
Current	$	29,581,803		$	54,990,381
30-89 days delinquent	$	349,291		$	710,872
90-180 days delinquent	$	120,775		$	693,315
180 or more days delinquent	$	748,576		$	2,297,365
Foreclosure	$	8,462		$	6,009
Bankruptcy	$	64,694		$	75,700
Delinquent loans in COVID-19 pandemic-related forbearance plans:
30-89 days delinquent	$	44,015		$	383,028
90-180 days delinquent	$	57,815		$	546,344
180 or more days delinquent	$	174,041		$	1,944,663

(1)

~~Carrying value~~For purposes of ~~investments in CRT Agreements~~this discussion, includes Deposits securing credit risk transfer strip liabilities securing $27.5 million and $229.7 million in CRT ~~Agreements~~strip and CRT derivative liabilities at December 31, 2021 and ~~CRT derivatives.~~December 31, 2020, respectively.

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

The ~~decrease~~performance of our investments in ~~gains recognized on~~ CRT ~~Agreements is due to~~arrangements during the ~~reduced valuation gains recognized~~year ended December 31, 2021 reflects a recovery of the credit markets from the dislocation experienced during ~~2018 resulting from smaller decreases in credit spreads during 2018~~the first quarter of 2020 as ~~compared to 2017. The decreased valuation gains were partially offset by growth~~a result of the onset of the COVID-19 pandemic and continuing improvement in the ~~realized gain on CRT Agreements resulting from growth in our CRT portfolio.~~performance of the loans underlying this investment.

ESS Purchased from PFSI

We recognized fair value gains relating to our investment in ESS totaling ~~$11.1~~$1.7 million ~~during 2018,~~for the year ended December 31, 2021, as compared to fair value losses ~~totaling $14.5~~of $22.7 million during ~~2017. Valuation~~2020. The gains ~~relating to our investment in ESS reflects~~were driven by the ~~effects of increasing interest rates~~positive influence on expected future cash flows ~~accruing to this asset. Increasing~~of the generally rising interest rates ~~discourage refinancing which slows~~during the ~~rate~~portion of ~~repayment of~~2021 that the ~~mortgage loans underlying ESS.~~

~~We recognized fair value losses relating to our investment~~ESS was outstanding. The change in ~~ESS totaling $14.5 million~~valuation results during ~~2017,~~2020, as compared to 2019, resulted from increased prepayment experience and expectations for the loans underlying the ESS and the effect of uncertainties surrounding future cash flows on the discount rate used to develop the assets’ fair ~~value losses totaling $17.4 million~~value. The remaining balance of the ESS was sold to PLS during ~~2016. Losses recognized during 2017 reflect~~ the effects of volatile interest rates and a flattening yield curve during 2017, partially offset by a decreasing investment in ESS. Our average investment in ESS decreased from $317.9 million during 2016 to $264.9 million during 2017.quarter ended March 31, 2021.

6661

Net ~~Interest Income~~Gains on Loans Acquired for Sale

~~Net interest income~~Our net gains on loans acquired for sale is summarized below:

For the year ended December 31, 2018

Interest income/expense

Discount/

Average

Interest

Coupon

fees (1)

Total

balance

yield/cost %

(dollars in thousands)

Assets:

Short-term investments

$
852

$
—

$
852

$
37,939

2.25
%
Mortgage-backed securities

60,280

(4,793
)

55,487

1,669,373

3.33
%
Mortgage loans acquired for sale at fair value

75,610

—

75,610

1,577,395

4.81
%
Mortgage loans:

Distressed

14,027

7,639

21,666

473,458

4.59
%
Held by variable interest entity

11,713

100

11,813

301,398

3.93
%

25,740

7,739

33,479

774,856

4.33
%
ESS from PFSI

15,138

—

15,138

231,448

6.56
%
Deposits securing CRT Agreements

15,441

—

15,441

751,593

2.06
%

193,061

2,946

196,007

5,042,604

3.90
%
Placement fees relating to custodial funds

26,065

—

26,065

Other

700

—

700

219,826

2,946

222,772

$
5,042,604

4.43
%
Liabilities:

Assets sold under agreements to repurchase (2)

126,675

(11,292
)

115,383

$
3,901,772

2.97
%
Mortgage loan participation purchase and sale
   agreements

2,205

217

2,422

64,512

3.76
%
Exchangeable Notes

13,437

1,164

14,601

250,000

5.86
%
Notes payable

14,027

596

14,623

300,035

4.89
%
Asset-backed financings of a VIE at fair value

10,244

577

10,821

288,244

3.76
%
Assets sold to PFSI under agreement to
   repurchase

7,462

—

7,462

138,155

5.42
%

174,050

(8,738
)

165,312

4,942,718

3.35
%
Interest shortfall on repayments of mortgage loans serviced
   for Agency securitizations

7,324

—

7,324

Interest on mortgage loan impound deposits

2,535

—

2,535

183,909

(8,738
)

175,171

$
4,942,718

3.55
%
Net interest income

$
35,917

$
11,684

$
47,601

Net interest margin

0.94
%
Net interest spread

0.88
%

		Year ended December 31,
		2021			2020			2019
	(in thousands)
From non-affiliates:
Cash loss:
Loans		$	(1,487,649	)	$	(326,214	)	$	(687,317	)
Hedging activities			188,733			(504,506	)		(88,633	)
			(1,298,916	)		(830,720	)		(775,950	)
Non-cash gain:
Receipt of MSRs in loan sale transactions			1,484,629			1,158,475			837,706
Provision for losses relating to representations and warranties provided in loan sales:
Pursuant to loan sales			(25,029	)		(19,316	)		(3,778	)
Reduction in liability due to change in estimate			5,812			4,457			3,550
			(19,217	)		(14,859	)		(228	)
Recognition of fair value of commitment to purchase credit risk transfer securities relating to loans sold			—			(38,161	)		99,305
Change in fair value during the year of financial instruments:
IRLCs			(69,935	)		61,232			(834	)
Loans			31,072			(12,279	)		(1,765	)
Hedging derivatives			(46,832	)		45,197			(2,451	)
			(85,695	)		94,150			(5,050	)
			1,379,717			1,199,605			931,733
Total from nonaffiliates			80,801			368,885			155,783
From PFSI—cash			6,472			11,037			14,381
		$	87,273		$	379,922		$	170,164

Interest rate lock commitments issued on loans acquired for sale to nonaffiliates		$	108,458,880		$	117,727,579		$	63,323,599
Acquisition of loans for sale (UPB):
To nonaffiliates		$	110,003,574		$	106,898,339		$	57,396,037
To PFSI			64,641,218			62,413,089			49,116,781
		$	174,644,792		$	169,311,428		$	106,512,818

Non-cash elements of gain on sale of loans

Interest Rate Lock Commitments

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

The MSRs and liability for representations and warranties we recognize represent our estimate of the fair value of future benefits and costs we will realize for years in the future. These estimates change as circumstances change, and changes in these estimates are recognized in our results of operations in subsequent periods. Subsequent changes in the fair value of our MSRs significantly affect our results of operations.

Mortgage Servicing Rights

Firm Commitment to Purchase CRT Securities

Liability for Losses Under Representations and Warranties

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:

	Year ended December 31,
	2021		2020		2019
	(in thousands)
Indemnification activity unpaid principal balance ("UPB"):
Loans indemnified at beginning of year	$	4,583	$	5,697	$	7,075
New indemnifications		345		450		583
Less: Indemnified loans repaid or refinanced		2,146		1,564		1,961
Loans indemnified at end of year	$	2,782	$	4,583	$	5,697
Indemnified loans indemnified by correspondent lenders at end of year	$	1,112	$	1,497	$	1,941
UPB of loans with deposits received from correspondent sellers collateralizing prospective indemnification losses at end of year	$	213	$	213	$	603
Repurchase activity (UPB):
Loans repurchased	$	86,954	$	72,535	$	22,648
Less:
Loans repurchased by correspondent sellers		52,787		31,306		13,745
Loans resold or repaid by borrowers		33,950		24,837		4,830
Net loans repurchased with losses chargeable to liability to representations and warranties	$	217	$	16,392	$	4,073
Net losses charged to liability for representations and warranties	$	861	$	580	$	128
At end of year:
Loans subject to representations and warranties	$	213,944,023	$	163,592,788	$	122,163,186
Liability for representations and warranties	$	40,249	$	21,893	$	7,614

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.

Loan Origination Fees

Net Loan Servicing Fees

Our net loan servicing fees have two primary components: fees earned for servicing loans and the effects of MSR valuation changes, net of hedging results, as summarized below:

		Year ended December 31,
		2021			2020			2019
	(in thousands)
Loan servicing fees		$	595,346		$	462,517		$	319,489
Effect of MSRs and hedging results			(631,368	)		(308,821	)		(378,407	)
Net loan servicing fees		$	(36,022	)	$	153,696		$	(58,918	)

Following is a summary of our loan servicing fees:

		Year ended December 31,
		2021		2020		2019
	(in thousands)
Contractually-specified servicing fees		$	526,245	$	406,060	$	295,390
Ancillary and other fees:
Late charges			1,701		1,498		1,658
Other			67,400		54,959		22,441
			69,101		56,457		24,099
		$	595,346	$	462,517	$	319,489
Average MSR servicing portfolio		$	196,996,623	$	147,832,880	$	110,075,179

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

		Year ended December 31,
		2021			2020			2019
	(in thousands)
Change in fair value of MSRs
Realization of cash flows		$	(298,130	)	$	(232,830	)	$	(202,322	)
Changes in valuation inputs used in valuation model			(39,056	)		(706,107	)		(262,031	)
			(337,186	)		(938,937	)		(464,353	)
Hedging results			(345,041	)		601,743			80,622
Total change in fair value of mortgage servicing rights and hedging results			(682,227	)		(337,194	)		(383,731	)
Recapture income from PFSI			50,859			28,373			5,324
		$	(631,368	)	$	(308,821	)	$	(378,407	)
Average balance of mortgage servicing rights		$	2,506,678		$	1,354,508		$	1,215,866

Following is a summary of our loan servicing portfolio:

	December 31, 2021		December 31, 2020
	(in thousands)
UPB of loans outstanding	$	215,927,495	$	170,502,361
Collection status (UPB) (1)
Delinquency:
30-89 days delinquent	$	1,148,542	$	1,235,981
90 or more days delinquent:
Not in foreclosure	$	1,726,488	$	4,428,915
In foreclosure	$	36,658	$	27,494
Bankruptcy	$	130,582	$	148,866
Delinquent loans in COVID-19 pandemic-related forbearance:
30-89 days	$	169,654	$	530,353
90 days or more	$	614,882	$	3,123,288
Custodial funds managed by the Company (2)	$	3,823,527	$	6,086,724

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

~~(2)~~

~~In 2017,~~COVID-19 pandemic-related forbearance plans that were requested by borrowers seeking payment relief in accordance with the Company entered into a master repurchase agreement that provides the Company with incentives to finance mortgage loans approved for satisfying certain consumer relief characteristics as provided in the agreement. During the year ended December 31, 2018, the Company included $19.7 million of such incentives as a reduction in ~~Interest expense~~. The master repurchase agreement is subject to a rolling six-month term through August 21, 2019, unless terminated earlier at the option of the lender. The Company expects that it will cease to accrue the incentives under the repurchase agreement beginning in the second quarter of 2019, while there can be no assurance in that regard. We expect that the loss of such incentive income will be partially offset by an improvement in pricing margins.

For the year ended December 31, 2017

Interest income/expense

Discount/

Average

Interest

Coupon

fees (1)

Total

balance

yield/cost %

(dollars in thousands)

Assets:

Short-term investments

$
576

$
—

$
576

$
34,804

1.66
%
Mortgage-backed securities

34,805

(5,367
)

29,438

1,026,850

2.87
%
Mortgage loans acquired for sale at fair value

53,164

—

53,164

1,366,017

3.90
%
Mortgage loans:

Distressed

33,106

30,507

63,613

1,152,930

5.53
%
Held by variable interest entity

12,981

1,444

14,425

344,942

4.19
%

46,087

31,951

78,038

1,497,872

5.22
%
ESS from PFSI

16,951

—

16,951

264,858

6.42
%
Deposits securing CRT Agreements

4,291

—

4,291

501,778

0.86
%

155,874

26,584

182,458

4,692,179

3.89
%
Placement fees relating to custodial funds

12,517

—

12,517

Other

201

—

201

168,592

26,584

195,176

$
4,692,179

4.17
%
Liabilities:

Assets sold under agreements to repurchase (2)

86,067

7,513

93,580

$
3,487,150

2.69
%
Mortgage loan participation purchase and sale
   agreements

1,468

125

1,593

61,807

2.58
%
Exchangeable Notes

13,438

1,097

14,535

250,000

5.83
%
Notes payable

8,429

4,205

12,634

145,638

8.70
%
Asset-backed financings of a VIE at fair value

11,403

1,781

13,184

331,409

3.99
%
Assets sold to PFSI under agreement to
   repurchase

8,084

(46
)

8,038

149,319

5.40
%

128,889

14,675

143,564

4,425,323

3.25
%
Interest shortfall on repayments of mortgage loans serviced
   for Agency securitizations

5,928

—

5,928

Interest on mortgage loan impound deposits

1,879

—

1,879

136,696

14,675

151,371

$
4,425,323

3.43
%
Net interest income

$
31,896

$
11,909

$
43,805

Net interest margin

0.93
%
Net interest spread

0.74
%

~~(1)~~

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

~~(2)~~

In 2017, the Company entered into a master repurchase agreement that provides the Company with incentives to finance mortgage loans approved for satisfying certain consumer relief characteristics as provided in the agreement. During the year ended December 31, 2017, the Company included $3.1 million of such incentives as reductions to ~~Interest expense~~. The master repurchase agreement is subject to a rolling six-month term through August 21, 2019, unless terminated earlier at the option of the lender. The Company expects that it will cease to accrue the incentives under the repurchase agreement beginning in the second quarter of 2019, while there can be no assurance in that regard. We expect that the loss of such incentive income will be partially offset by an improvement in pricing margins.

For the year ended December 31, 2016

Interest income/expense

Discount/

Average

Interest

Coupon

fees (1)

Total

balance

yield/cost %

(dollars in thousands)

Assets:

Short-term investments

$
923

$
—

$
923

$
35,194

2.62
%
Mortgage-backed securities

17,054

(2,391
)

14,663

514,847

2.85
%
Mortgage loans acquired for sale at fair value

54,750

—

54,750

1,443,587

3.79
%
Mortgage loans:

Distressed

53,916

53,128

107,044

1,731,638

6.18
%
Held by variable interest entity

15,748

1,294

17,042

422,122

4.04
%

69,664

54,422

124,086

2,153,760

5.76
%
ESS from PFSI

22,601

—

22,601

317,945

7.11
%
Deposits securing CRT Agreements

930

—

930

311,351

0.30
%

165,922

52,031

217,953

4,776,684

4.55
%
Placement fees relating to custodial funds

4,058

—

4,058

Other

111

—

111

170,091

52,031

222,122

$
4,776,684

4.65
%
Liabilities:

Assets sold under agreements to repurchase

84,009

8,829

92,838

$
3,382,528

2.74
%
Mortgage loan participation purchase and sale
agreements

1,246

130

1,376

70,391

1.95
%
Federal Home Loan Bank advances

122

—

122

24,376

0.50
%
Exchangeable Notes

13,438

1,035

14,473

250,000

5.79
%
Notes payable

9,726

3,166

12,892

202,293

6.37
%
Asset-backed financings of a VIE at fair value

11,422

669

12,091

338,582

3.57
%
Borrowing from PFSI

6,509

1,321

7,830

150,000

5.22
%

126,472

15,150

141,622

4,418,170

3.21
%
Interest shortfall on repayments of mortgage loans serviced
for Agency securitizations

6,812

—

6,812

Interest on mortgage loan impound deposits

1,334

—

1,334

134,618

15,150

149,768

$
4,418,170

3.39
%
Net interest income

$
35,473

$
36,881

$
72,354

Net interest margin

1.51
%
Net interest spread

1.26
%

~~(1)~~

6965

(2)

Net Interest (Expense) Income

Net interest (expense) income is summarized below:

	Year ended December 31, 2021								Year ended December 31, 2020								Year ended December 31, 2019
	Interest					Interest			Interest					Interest			Interest				Interest
	income/			Average		yield/			income/			Average		yield/			income/		Average		yield/
	expense			balance		cost %			expense			balance		cost %			expense		balance		cost %
	(dollars in thousands)
Assets:
Cash and short-term investments	$	938		$	243,548		0.38	%	$	3,804		$	650,630		0.58	%	$	4,559	$	164,577		2.73	%
Mortgage-backed securities		36,180			2,210,940		1.61	%		59,461			2,921,879		2.00	%		78,450		2,591,828		2.99	%
Loans acquired for sale at fair value		125,438			4,135,140		2.99	%		103,221			3,469,392		2.93	%		121,387		2,754,955		4.35	%
Loans at fair value:
Held by variable interest entities		17,014			474,808		3.53	%		10,609			214,596		4.86	%		11,734		281,449		4.11	%
Distressed		369			6,625		5.49	%		493			9,032		5.37	%		3,848		75,251		5.04	%
		17,383			481,433		3.56	%		11,102			223,628		4.88	%		15,582		356,700		4.31	%
ESS from PFSI		1,280			21,563		5.85	%		8,418			153,768		5.38	%		10,291		197,273		5.15	%
Deposits securing CRT arrangements		559			2,307,155		0.02	%		7,012			1,772,762		0.39	%		34,229		1,639,885		2.06	%
		181,778			9,399,779		1.91	%		193,018			9,192,059		2.07	%		264,498		7,705,218		3.39	%
Placement fees relating to custodial funds		13,366								28,804								52,587
Other		95								313								800
		195,239		$	9,399,779		2.05	%		222,135		$	9,192,059		2.38	%		317,885	$	7,705,218		4.07	%
Liabilities:
Assets sold under agreements to repurchase	$	97,078		$	6,161,755		1.55	%	$	102,131		$	5,508,147		1.82	%	$	178,211	$	5,600,469		3.14	%
Mortgage loan participation purchase and sale agreements		606			33,827		1.77	%		902			44,432		2.00	%		1,570		40,036		3.87	%
Notes payable secured by credit risk transfer and mortgage servicing assets		86,753			2,635,601		3.25	%		59,261			1,771,370		3.29	%		53,968		1,101,501		4.83	%
Exchangeable senior notes		36,747			445,064		8.14	%		18,847			269,247		6.89	%		17,037		279,207		6.02	%
Asset-backed financings at fair value		15,076			447,247		3.32	%		10,971			203,795		5.30	%		11,324		267,539		4.17	%
Assets sold to PFSI under agreement to repurchase		387			13,020		2.93	%		3,325			93,264		3.56	%		6,302		118,264		5.33	%
		236,647			9,736,514		2.40	%		195,437			7,890,255		2.44	%		268,412		7,407,016		3.57	%
Interest shortfall on repayments of loans serviced for Agency securitizations		64,519								71,516								25,776
Interest on loan impound deposits		3,571								3,817								3,258
		304,737		$	9,736,514		3.09	%		270,770		$	7,890,255		3.38	%		297,446	$	7,407,016		3.96	%
Net interest (expense) income	$	(109,498	)						$	(48,635	)						$	20,439
Net interest margin							-1.15	%							-0.52	%						0.26	%
Net interest spread							-1.04	%							-1.00	%						0.11	%

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

Year ended December 31, 2018

Year ended December 31, 2017

vs.

vs.

Year ended December 31, 2017

Year ended December 31, 2016

Increase (decrease)
due to changes in

Increase (decrease)
due to changes in

Total

Total

Rate

Volume

change

Rate

Volume

change

(in thousands)

Assets:

Short-term investments

$
220

$
56

$
276

$
(337
)

$
(10
)

$
(347
)
Mortgage-backed securities

5,289

20,760

26,049

138

14,637

14,775

Mortgage loans acquired for sale at
   fair value

13,456

8,990

22,446

1,500

(3,086
)

(1,586
)
Mortgage loans:

Distressed

(9,417
)

(32,530
)

(41,947
)

(10,383
)

(33,048
)

(43,431
)
Held by variable interest entity

(867
)

(1,745
)

(2,612
)

628

(3,245
)

(2,617
)

(10,284
)

(34,275
)

(44,559
)

(9,755
)

(36,293
)

(46,048
)
ESS from PFSI

365

(2,178
)

(1,813
)

(2,079
)

(3,571
)

(5,650
)
Deposits securing CRT Agreements

8,229

2,921

11,150

2,533

828

3,361

17,275

(3,726
)

13,549

(8,000
)

(27,495
)

(35,495
)
Placement fees relating to custodial
   funds

—

13,548

13,548

—

8,459

8,459

Other

—

499

499

—

90

90

17,275

10,321

27,596

(8,000
)

(18,946
)

(26,946
)
Liabilities:

Assets sold under agreements to
   repurchase

10,066

11,737

21,803

(1,932
)

2,674

742

Mortgage loan participation
   purchase and sale agreement

756

73

829

400

(183
)

217

Exchangeable Notes

66

—

66

62

—

62

Notes payable

(7,252
)

9,241

1,989

3,929

(4,187
)

(258
)
Asset-backed financing of a VIE at
   fair value

(713
)

(1,650
)

(2,363
)

1,358

(265
)

1,093

Assets sold to PFSI under agreement
   to repurchase

27

(603
)

(576
)

246

(38
)

208

Federal Home Loan Bank advances

—

—

—

—

(122
)

(122
)

2,950

18,798

21,748

4,063

(2,121
)

1,942

Interest shortfall on repayments of
   mortgage loans serviced for
   Agency securitizations

—

1,396

1,396

—

(884
)

(884
)
Interest on mortgage loan impound
   deposits

—

656

656

—

545

545

2,950

20,850

23,800

4,063

(2,460
)

1,603

Net interest income

$
14,325

$
(10,529
)

$
3,796

$
(12,063
)

$
(16,486
)

$
(28,549
)

		Year ended December 31, 2021									Year ended December 31, 2020
		vs.									vs.
		Year ended December 31, 2020									Year ended December 31, 2019
		Increase (decrease) due to changes in									Increase (decrease) due to changes in
		Rate			Volume			Total			Rate			Volume			Total
	(in thousands)
Assets:
Cash and short-term investments		$	(1,008	)	$	(1,858	)	$	(2,866	)	$	(5,855	)	$	5,100		$	(755	)
Mortgage-backed securities			(10,318	)		(12,963	)		(23,281	)		(28,146	)		9,157			(18,989	)
Loans acquired for sale at fair value			2,321			19,896			22,217			(45,316	)		27,150			(18,166	)
Loans at fair value:
Held by variable interest entities			(3,540	)		9,945			6,405			1,940			(3,065	)		(1,125	)
Distressed			11			(135	)		(124	)		235			(3,590	)		(3,355	)
			(3,529	)		9,810			6,281			2,175			(6,655	)		(4,480	)
ESS from PFSI			673			(7,811	)		(7,138	)		467			(2,340	)		(1,873	)
Deposits securing CRT arrangements			(8,075	)		1,622			(6,453	)		(29,802	)		2,585			(27,217	)
			(19,936	)		8,696			(11,240	)		(106,477	)		34,997			(71,480	)
Placement fees relating to custodial funds			—			(15,438	)		(15,438	)		—			(23,783	)		(23,783	)
Other			—			(218	)		(218	)		—			(487	)		(487	)
			(19,936	)		(6,960	)		(26,896	)		(106,477	)		10,727			(95,750	)
Liabilities:
Assets sold under agreements to repurchase			(16,219	)		11,166			(5,053	)		(73,199	)		(2,881	)		(76,080	)
Mortgage loan participation purchase and sale agreement			(96	)		(200	)		(296	)		(826	)		158			(668	)
Notes payable secured by credit risk transfer and mortgage servicing assets			(808	)		28,300			27,492			(20,827	)		26,120			5,293
Exchangeable senior notes			3,914			13,986			17,900			2,428			(618	)		1,810
Asset-backed financings of at fair value			(5,234	)		9,339			4,105			2,679			(3,032	)		(353	)
Assets sold to PFSI under agreement to repurchase			(470	)		(2,468	)		(2,938	)		(1,821	)		(1,156	)		(2,977	)
			(18,913	)		60,123			41,210			(91,566	)		18,591			(72,975	)
Interest shortfall on repayments of loans serviced for Agency securitizations			—			(6,997	)		(6,997	)		—			45,740			45,740
Interest on loan impound deposits			—			(246	)		(246	)		—			559			559
			(18,913	)		52,880			33,967			(91,566	)		64,890			(26,676	)
Net interest expense		$	(1,023	)	$	(59,840	)	$	(60,863	)	$	(14,911	)	$	(54,163	)	$	(69,074	)

~~During~~The increase in net interest expense during the year ended December 31, ~~2018, we earned net interest income of $47.6 million,~~2021, as compared to ~~$43.8 million for the year ended December 31, 2017 and $72.4 million for the year ended December 31, 2016. The increase in net interest income in 2018 as compared to 2017 was~~2020, is due to growth in our average investments in mortgage-backed securities and mortgage loans acquired for sale, supplemented by the benefit to our financing costs of incentives we received for financing mortgage loans satisfying certain consumer debt relief characteristics and reduced costs relating to our MSR financing. These increases were partially offset by the effect of liquidation of most of our portfolio of distressed mortgage loans, which are high yielding assets, as well as increased advance rates against our financedto:

•

The decrease in net interest income in 2017 as compared to 2016 was due to increased financing of non-interest earning assets, along with a decrease in the average balance of distressed mortgage loans at fair value. The effect of the reduction in the average balance of distressed mortgage loans at fair value was partially offset by increased investment in MBS.

During the year ended December 31, 2018, we recognized interest income on distressed mortgage loans and mortgage loans held by VIEs totaling $33.5 million, including $7.4 million of interest capitalized pursuant to loan modifications, which compares to $78.0 million, including $30.8 million of interest capitalized pursuant to loan modifications in the year ended December 31, 2017. The increase in interest income was due to growth in our portfolio of MBS and average inventory of mortgage loans held for sale, partially offset by the effect of substantial liquidation of our portfolio of distressed mortgage loans which are high yielding assets.

At December 31, 2018, approximately 76% of the fair value of our distressed mortgage loan portfolio was nonperforming, as compared to 46% at December 31, 2017. The increase in this percentage reflects the significant sales of our portfolio of performing distressed mortgage loans during 2018. We do not accrue interest on nonperforming mortgage loans and generally do not recognize revenues during the period we hold REO. We calculate the yield on our mortgage loan portfolio based on the portfolio’s average fair value, which most closely reflects our investment in the mortgage loans. Accordingly, the yield we realize is substantially higher than would be recorded based on the mortgage loans’ UPBs as the fair values of our distressed mortgage loans are generally at substantial discounts to their UPB.

Nonperforming mortgage loans and REO generally take longer than performing mortgage loans to generate cash flow due to the time required to work with borrowers to resolve payment issues through our modification programs, and to acquire and liquidate the property securing the mortgage loans. The value and returns we realize from these assets are determined by our ability to assist borrowers in curing defaults, or when curing of borrower defaults is not a viable solution, by our ability to effectively manage the liquidation process. At December 31, 2018, we held $88.9 million in fair value of nonperforming mortgage loans and $85.7 million in carrying value of REO, as compared to $353.6 million in fair value of nonperforming mortgage loans and $162.9 million in carrying value of REO at December 31, 2017.

~~During the year ended December 31, 2018, we incurred interest expense totaling $175.2 million, as compared to $151.4 million~~ during the year ended December 31, 2017. Our interest cost on interest bearing liabilities was 3.35% for the year ended December 31, 2018 and 3.25% for the year ended December 31, 2017. The increase in interest expense primarily reflects the effects of increased market interest rates during 2018 compared to 2017 and increases in the advance rates we achieved on financed assets. These increases were partially offset by the benefits we realized from the financing incentives included in the master repurchase agreement discussed above.

~~During the year ended December 31, 2017, we incurred interest expense totaling $151.4 million,~~2020, as compared to $149.8 million during the year ended December 31, 2016. Our interest cost on interest bearing liabilities was 3.25% for the year ended December 31, 2017 and 3.21% for the year ended December 31, 2016. The increase in interest expense primarily reflects higher borrowing costs associated with financing investments in MSRs and ESS and higher weighted average borrowings related to the financing of those assets in the year ended December 31, 2017, as compared to the year ended December 31, 2016.

~~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, 2018, we recorded net losses of $8.8 million, as compared to $15.0 million for 2017, in ~~Results of real estate acquired in settlement of loans.~~

~~Results of REO are summarized below:~~

2019, is due to:

Year ended December 31,

2018

2017

2016

(dollars in thousands)

Proceeds from sales of REO

$
99,194

$
166,921

$
234,684

Results of real estate acquired in settlement of loans:

Valuation adjustments, net

(17,323
)

(27,505
)

(36,193
)
Gain on sale, net

8,537

12,550

17,075

$
(8,786
)

$
(14,955
)

$
(19,118
)
Number of properties sold

570

1,158

1,497

Average carrying value of REO

$
118,461

$
211,841

$
306,930

At year end:

Carrying value

$
85,681

$
162,865

$
274,069

Number of properties

295

589

1,090

•

~~Losses from REOs during 2018 decreased from 2017 levels due to reduced levels of REO activity during 2018 as compared to 2017.~~

Expenses

Our expenses are summarized below:

	Year ended December 31,							Year ended December 31,
	2018		2017		2016			2021		2020		2019
	(in thousands)						(in thousands)
Earned by PennyMac Financial Services, Inc.:
Mortgage loan fulfillment fees	$	81,350	$	80,359	$	86,465
Mortgage loan servicing fees		42,045		43,064		50,615
Loan fulfillment fees								$	178,927	$	222,200	$	160,610
Loan servicing fees									80,658		67,181		48,797
Management fees		24,465		22,584		20,657			37,801		34,538		36,492
Mortgage loan collection and liquidation		7,852		6,063		13,436
Loan origination									28,792		26,437		15,105
Loan collection and liquidation									11,279		10,363		4,600
Professional services									11,148		6,405		5,556
Safekeeping									9,087		7,090		5,097
Compensation		6,781		6,322		7,000			4,000		3,890		6,897
Mortgage loan origination		6,562		7,521		7,108
Professional services		6,380		6,905		6,819
Real estate held for investment		6,251		6,376		3,213
Other		11,393		14,200		15,012			13,944		11,517		15,020
	$	193,079	$	193,394	$	210,325		$	375,636	$	389,621	$	298,174

Expenses decreased ~~$0.3~~$14.0 million, or 4%, during ~~2018,~~the year ended December 31, 2021, as compared to ~~2017,~~2020, primarily due to ~~the decreased size of~~reduced fees relating to fulfillment activities performed by PFSI on our ~~distressed asset portfolio~~behalf, partially offset by ~~increased management fees due to~~ an increase in ~~shareholders’ equity and~~loan servicing fees. Expenses increased ~~incentive-based fees.~~

~~Expenses decreased $16.9~~$91.4 million, or ~~8%,~~31% during ~~2017,~~2020, as compared to ~~2016,~~the same period in 2019, due primarily ~~due~~ to ~~decreased expenses relating to our portfolio of distressed mortgage loans and reduced mortgage~~increased loan fulfillment fees attributable to increases in our production volume, partially offset by ~~increased expenses related to real estate held for investment and increased management fees due to an increase~~a reduction in ~~shareholders’ equity.~~the average fulfillment fee rate we incurred.

~~Mortgage~~ Loan Fulfillment Fees

~~Mortgage loan~~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 ~~mortgage~~ loans. The ~~fee is calculated as a percentage of the UPB of the mortgage loans purchased. Mortgage loan fulfillment fees and related fulfillment volume are summarized below:~~

Year ended December 31,

2018

2017

2016

(dollars in thousands)

Fulfillment fee expense

$
81,350

$
80,359

$
86,465

UPB of mortgage loans fulfilled by PLS

$
26,194,303

$
22,971,119

$
23,188,386

Average fulfillment fee rate (in basis points)

31

35

37

~~The increase~~decrease in ~~mortgage~~ loan fulfillment fees of ~~$1.0~~$43.3 million during ~~2018,~~2021, as compared to ~~2017,~~2020, is due to a decrease in loan commitment volume and an increase in discretionary reductions in the PFSI fee schedule, partially offset by an increase in our loan production volume. The increase in loan fulfillment fees of $61.6 million during the year ended December 31, 2020, compared to 2019, is primarily due to an increase in the volume of ~~mortgage~~ loans fulfilled for us by PFSI, partially offset by a ~~decrease in the average fulfillment fee rate charged by PFSI due to discretionary reductions made by PFSI to facilitate successful loan acquisitions by us.~~

The decrease in mortgage loan fulfillment fees of $6.1 million during 2017, as compared to 2016, is primarily due to a decrease in the average fulfillment fee rate charged by PFSI due to contractual reductionschange in the fulfillment fee ~~following an amendment~~ structure described in Note 4 – Transactions with Related Parties to the ~~mortgage banking services agreement with PFSI~~consolidated financial statements included in ~~September 2016.~~this Report.

7268

~~Mortgage~~ Loan Servicing Fees

~~Mortgage loan~~Loan servicing fees payable to PLS are summarized below:

Year ended December 31,

2018

2017

2016

(in thousands)

Mortgage loan servicing fees

Mortgage loans acquired for sale at fair value:

Base

$
347

$
305

$
330

Activity-based

690

649

733

1,037

954

1,063

Mortgage loans at fair value:

Distressed mortgage loans:

Base

2,771

6,650

11,078

Activity-based

4,784

8,960

18,521

7,555

15,610

29,599

Mortgage loans held in VIE - Base

40

129

83

MSRs:

Base

32,814

25,862

19,378

Activity-based

599

509

492

33,413

26,371

19,870

$
42,045

$
43,064

$
50,615

Average investment in:

Mortgage loans acquired for sale at fair value

$
1,577,395

$
1,366,017

$
1,443,587

Mortgage loans at fair value:

Distressed mortgage loans

$
473,458

$
1,152,930

$
1,731,638

Mortgage loans held in a VIE

$
301,398

$
344,942

$
422,122

Average mortgage loan servicing portfolio UPB

$
80,500,212

$
63,836,843

$
49,626,758

	Year ended December 31,
	2021		2020		2019
	(in thousands)
Loan servicing fees:
Loans acquired for sale at fair value	$	2,363	$	2,067	$	1,772
Loans at fair value		505		807		2,207
MSRs		77,790		64,307		44,818
	$	80,658	$	67,181	$	48,797
Average investment in:
Loans acquired for sale at fair value	$	4,135,140	$	3,469,392	$	2,754,955
Loans at fair value	$	481,433	$	223,628	$	356,700
Average MSR portfolio UPB	$	196,996,623	$	147,832,880	$	110,075,179

~~Mortgage loan~~Loan servicing fees ~~decreased~~increased by ~~$1.0~~$13.5 million during the year ended December 31, ~~2018,~~2021, as compared to ~~2017.~~2020, and $18.4 million during the year ended December 31, 2020, as compared to 2019. We incur ~~mortgage~~ loan servicing fees primarily in support of our MSR ~~portfolio and investment~~portfolio. The increase in ~~mortgage loans at fair value. The decrease in mortgage~~ loan servicing fees ~~was primarily due to reductions in~~during the ~~distressed mortgage loan portfolio resulting from continuing loan sales~~years ended December 31, 2021 and ~~liquidations throughout 2018. This decrease~~2020, was partially offset by the increase in servicing fees resulting from the ongoing growth of our MSR portfolio. Servicing fee rates relating to distressed mortgage loans are significantly higher than those relating to MSRs due to the ~~higher cost~~growth in our portfolio of ~~servicing such loans. Therefore, reductions in~~MSRs and the ~~balance of distressed mortgage loans had a more significant effect on mortgage~~fees we incur relating to CARES Act loan ~~servicing fees than the additions of new MSRs.~~forbearance and modification activities.

~~Management Fees~~Correspondent Production

~~The components~~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 ~~management fee payable to PCM~~investments in MSRs, private label non-Agency securitizations, and through 2020, CRT arrangements. Our correspondent production and resulting investment activity are summarized below:

Year ended December 31,

2018

2017

2016

(in thousands)

Base

$
23,033

$
22,280

$
20,657

Performance incentive

1,432

304

—

$
24,465

$
22,584

$
20,657

Average shareholders' equity amounts used to calculate
management fee expense

$
1,535,590

$
1,484,446

$
1,377,361

		Year ended December 31,
		2021		2020			2019
	(in thousands)
Sales of loans acquired for sale:
To nonaffiliates		$	110,919,477	$	106,306,805		$	61,128,081
To PennyMac Financial Services, Inc.			67,851,630		63,618,185			50,110,085
		$	178,771,107	$	169,924,990		$	111,238,166
Net gains on loans acquired for sale		$	87,273	$	379,922		$	170,164
Investment activities resulting from correspondent production:
Receipt of MSRs as proceeds from sales of loans		$	1,484,629	$	1,158,475		$	837,706
Retention of interests in securitizations of loans secured by investment properties, net of associated asset-backed financings			42,256		—			—
Purchase of subordinate bonds backed by previously-sold loans secured by investment properties held in consolidated variable interest entities			28,815		—			—
Investments in CRT arrangements:
Deposits securing CRT arrangements			—		1,700,000			933,370
Recognition of firm commitment to purchase CRT securities (1)			—		(38,161	)		99,305
Change in face amount of firm commitment to purchase CRT securities and commitment to fund Deposits securing CRT arrangements			—		(1,502,203	)		897,151
Total investments in CRT arrangements			—		159,636			1,929,826
Total investments resulting from correspondent activities		$	1,526,885	$	1,318,111		$	2,767,532

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

~~Management fees increased~~Interest Rate Sensitive Investments

Our interest rate sensitive investments include:

•

Credit Sensitive Investments

CRT Arrangements

At present, we are no longer creating new CRT investments as the Federal Housing Finance Agency (“FHFA”) instructed the Federal National Mortgage Association (“Fannie Mae”) and the Federal Home Loan Mortgage Corporation (“Freddie Mac”) to gradually wind down new front-end lender risk share transactions such as CRT investments. During the year ended December 31, 2021, we recognized investment gains of $369.6 million relating to our holdings of CRT investments. We held net CRT-related investments (comprised of deposits securing CRT arrangements, CRT derivatives, CRT strips and interest-only security payable) totaling approximately $1.7 billion at December 31, 2021.

Investments in Subordinate MBS Backed by ~~$1.9~~Loans Secured by Investment Properties

Beginning in the quarter ended June 30, 2021, the Company purchased or retained approximately $71.1 million ~~during 2018, as compared~~of subordinate MBS backed by loans secured by investment properties sourced from the Company’s conventional correspondent production activities. The subordinate MBS provide us with a higher yield than senior securities. However, we retain credit risk in the subordinate MBS since they are the first securities to ~~2017, primarily due~~absorb credit losses relating to the ~~increase in~~underlying loans.

As 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. Management fees increased by $1.9 million during 2017, as compared to 2016, primarily due to the increase in our shareholders’ equity, as a result of the ~~issuance~~Company’s consolidation of ~~preferred shares during 2017.~~

~~Compensation~~

~~Compensation expense increased $0.5 million during 2018,~~the variable interest entities that issued the subordinate MBS as ~~compared to 2017, primarily due to an increase~~described in ~~share-based compensation expense, reflecting changes~~Note 6 – Variable Interest Entities – Investment in ~~performance expectations relating~~ Securities Backed by Loans Secured by investment Properties to the ~~performance-based restricted~~consolidated financial statements included in this Report, we include loans underlying these and similar transactions with UPBs totaling approximately $1.5 billion on our consolidated balance sheet as of December 31, 2021.

Taxation

~~Mortgage loan collection~~ownership tests. If we fail to qualify as a REIT, and ~~liquidation~~

~~Mortgage loan collection~~do not qualify for certain statutory relief provisions, our profits will be subject to income taxes and ~~liquidation expenses increased $1.8 million during 2018~~we may be precluded from qualifying as ~~compared to 2017 and decreased $7.4 million during 2017 as compared to 2016 due to~~a REIT for the four tax years following the year we lose our ~~continuing collection and liquidation efforts relating to~~REIT qualification. A portion of our ~~portfolio of nonperforming mortgage loans.~~

~~Other Expenses~~

~~Other expenses are summarized below:~~

Year ended December 31,

2018

2017

2016

(in thousands)

Common overhead allocation from PFSI

$
4,640

$
5,306

$
7,898

Safekeeping

1,805

2,918

2,675

Bank service charges

1,522

2,150

842

Technology

1,408

1,479

1,448

Insurance

1,193

1,150

1,326

Other

825

1,197

823

$
11,393

$
14,200

$
15,012

~~Income Taxes~~

~~We have elected to treat PMC as a~~activities, including our correspondent production business, is conducted in our 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 distributions of income to us. Before 2017, the TRS had made no such distributions to us. In 2017, the TRS made a $20 million distribution to us that resulted in REIT taxable income to us. A TRS, which is subject to corporate federal and state income ~~tax.~~taxes. Accordingly, we have made a provision for income taxes ~~for PMC is included in~~with respect to the ~~accompanying consolidated statements~~operations of ~~operations.~~

Our effective tax rate was 3.3% for the year ended December 31, 2018 and 5.5% for the year ended December 31, 2017. The relative values between the tax expense or benefit at the taxable REIT subsidiary and our ~~consolidated pretax income drive the fluctuation in~~TRS. We expect that 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. The effective tax~~ rate for the ~~year ended December 31, 2017 was also significantly impacted by recording~~provision for income taxes may be volatile in future periods. Our goal is to manage the ~~impact~~business to take full advantage of the ~~Tax Cuts~~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 ~~Jobs Act (the “Tax Act”) . Among~~negative evidence using a “more-likely-than-not” standard with respect to whether deferred tax assets will be realized. Our evaluation considers, among other ~~provisions,~~factors, taxable loss carryback availability, expectations of sufficient future taxable income, trends in earnings, existence of taxable income in recent years, the ~~Tax Act reduces~~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 ~~federal corporate~~periods in which the related deferred tax ~~rate to 21% from the previous maximum rate~~assets become deductible.

Critical Accounting Policies

Preparation of ~~35%, effective January 1, 2018. GAAP requires that the impact of tax legislation be recognized~~financial statements in compliance with accounting principles generally accepted in the ~~period in which such legislation is enacted. We re-measured our TRS’ deferred tax~~United States (“GAAP”) requires us to make estimates and judgments that affect the reported amounts of assets and liabilities and ~~recorded a tax benefit~~the disclosure of ~~$13.0 million~~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.

		December 31, 2021
				Percentage of
Level	Description	Carrying value of assets measured (1)		Total assets			Total shareholders' equity
		(in thousands)
1	Prices determined using quoted prices in active markets for identical assets or liabilities.	$	174,007		1	%		7	%
2	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.		8,388,043		61	%		354	%
3	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)		4,669,962		34	%		197	%
	Total assets measured at or based on fair value	$	13,232,012		96	%		558	%
	Total assets	$	13,772,708
	Total shareholders’ equity	$	2,367,518

(1)	Includes assets measured on both a recurring and nonrecurring basis based on the accounting principles applicable to the specific asset or liability and whether we have elected to carry the item at its 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, 2021, $13.2 billion, or 96%, of our total assets were carried at fair value on a recurring basis and $14.4 million, or less than 1% (consisting of REO), were carried based on fair value on a non-recurring basis. Of these assets, $4.7 billion, or 34%, of total assets are measured using “Level 3” fair value inputs, which are difficult to observe and require significant management judgment.

Changes in inputs to measurement of Level 3 fair value financial statement items have a significant effect on the amounts reported for these items including their reported balances and their effects on our net income ~~tax expense~~as summarized below:

		Change in fair value
Year ended December 31,		Loans at fair value (1)			Excess servicing spread			Interest rate lock commitments			CRT Assets			Mortgage servicing rights (2)			Total			Pre-tax income (loss)

	2021	$	1,182			1,037			(156,840	)		163,290			(39,056	)	$	(30,387	)	$	44,661
	2020	$	(1,578	)		(24,970	)		536,943			(267,969	)		(706,107	)	$	(463,681	)	$	79,730
	2019	$	(6,099	)		(9,256	)		80,133			59,800			(262,031	)	$	(137,453	)	$	190,641

(1)	Includes loans held for sale and loans at fair value.

(2)	Excluding changes in fair value attributable to realization of cash flows.

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. PFSI’s valuation committee includes the Company’s chief financial, chief investment and risk officers as well as other senior members of the Company’s finance, capital markets and risk management staffs.

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 ~~quarter and year ended December 31, 2017.~~

~~In general, cash dividends declared by us will be considered ordinary income to shareholders for income tax purposes. Some portion~~exercise of the dividends may be characterized as capital gain distributions or as return of capital. For tax years beginning after December 31, 2017, 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:~~

Taxable income (loss)

GAAP
net income

GAAP/tax
differences

Total taxable
income (loss)

Taxable
subsidiaries

REIT

Year ended December 31, 2018

(in thousands)

Net investment income (expense)

Net mortgage loan servicing fees

$
120,587

$
308,587

$
429,174

$
429,174

$
—

Net gain (loss) on mortgage loans acquired for sale

59,185

(388,386
)

(329,201
)

(329,201
)

—

Loan origination fees

43,321

—

43,321

43,321

—

Net gain (loss) on investments

81,926

(15,773
)

66,153

90,390

(24,237
)
Net interest income (expense)

47,601

(6,955
)

40,646

(64,392
)

105,038

Results of real estate acquired in settlement of loans

(8,786
)

(5,343
)

(14,129
)

(14,129
)

—

Other

7,233

—

7,232

6,068

1,164

Net investment income (loss)

351,067

(107,870
)

243,196

161,231

81,965

Expenses

193,079

(1,567
)

191,512

166,620

24,892

REIT dividend deduction

—

57,048

57,048

—

57,048

Total expenses and dividend deduction

193,079

55,481

248,560

166,620

81,940

Income (loss) before provision for income taxes

157,988

(163,351
)

(5,364
)

(5,389
)

25

Provision for (benefit from) income taxes

5,190

(5,165
)

25

—

25

Net income (loss)

$
152,798

$
(158,186
)

$
(5,389
)

$
(5,389
)

$
—

~~Balance Sheet Analysis~~their internal control responsibilities.

Following is a ~~summary~~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 ~~key balance sheet items~~loans in current period income as a component of either Net gains on loans acquired for sale or Net gains (losses) on investments and financings. We estimate fair value of loans based on whether the ~~dates presented:~~loans are saleable into active markets with observable pricing.

•

We estimate the fair value of our “Level 3” fair value loans based on the expected resolution of individual loans for distressed loans and using a discounted cash flow valuation model for loans held for sale. 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.

December 31,

December 31,

2018

2017

(in thousands)

Assets

Cash

$
59,845

$
77,647

Investments:

Short-term

74,850

18,398

Mortgage-backed securities

2,610,422

989,461

Mortgage loans acquired for sale at fair value

1,643,957

1,269,515

Mortgage loans at fair value

408,305

1,089,473

ESS

216,110

236,534

Derivative assets

167,165

113,881

Firm commitment to purchase CRT securities

37,994

—

Real estate

128,791

207,089

MSRs

1,162,369

844,781

Deposits securing CRT Agreements

1,146,501

588,867

7,596,464

5,357,999

Other

157,052

169,287

Total assets

$
7,813,361

$
5,604,933

Liabilities

Borrowings:

Short-term debt

$
5,081,691

$
3,369,502

Long-term debt

1,011,433

561,675

6,093,124

3,931,177

Other

154,105

129,171

Total liabilities

6,247,229

4,060,348

Shareholders’ equity

1,566,132

1,544,585

Total liabilities and shareholders’ equity

$
7,813,361

$
5,604,933

Derivative Assets

~~Total assets increased by approximately $2.2 billion,~~Interest Rate Lock Commitments

Our net gain on loans acquired for sale includes our estimates of gains or ~~39%, during~~losses we expect to realize upon the ~~period from December 31, 2017 through December 31, 2018, primarily due~~sale of loans we have committed to purchase but have not yet purchased or sold. Therefore, we recognize a ~~$1.6 billion increase in MBS, a $557.6 million increase in deposits securing CRT Agreements, a $374.4 million increase in mortgage~~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 ~~$317.6~~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 gains on loans acquired for sale and may be included in Net loan servicing fees – From nonaffiliates – Mortgage servicing rights hedging results 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

Effect on fair value of a change in pull-through rate
Change in input (1)	Effect on fair value
	(in thousands)
(20%)	$	(617	)
(10%)	$	(309	)
(5%)	$	(154	)
5%	$	131
10%	$	247
20%	$	445

(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

Through late 2020, we had CRT arrangements with Fannie Mae, pursuant to which we sold 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 or liability relating to these transactions at fair value and recognize changes in the respective assets’ or liability’s fair values in Net gains (losses) on investments and financings 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 inputs to the valuation of CRT arrangements are the pricing spread (discount rate) and the remaining loss expectation, which is influenced by the changes in the fair value of the properties securing the loans in the reference pool.

Effect on fair value of a change in pricing spread input				Effect on fair value of a shift in property value
Change in input (in basis points)	Effect on fair value			Property value shift	Effect on fair value
	(in thousands)				(in thousands)
(100)	$	59,927		(15%)	$	(47,775	)
(50)	$	29,443		(10%)	$	(28,673	)
(25)	$	14,594		(5%)	$	(13,120	)
25	$	(14,347	)	5%	$	11,427
50	$	(28,449	)	10%	$	21,105
100	$	(55,944	)	15%	$	29,369

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 – 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

$2.9 billion of MSRs at December 31, 2021. 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, 2021:

	Effect on fair value of a change in input
Change in input	Pricing spread			Prepayment speed			Servicing cost
	(in thousands)
(20%)	$	170,478		$	264,842		$	70,338
(10%)	$	82,921		$	126,905		$	35,169
(5%)	$	40,902		$	62,159		$	17,585
5%	$	(39,826	)	$	(59,726	)	$	(17,585	)
10%	$	(78,613	)	$	(117,162	)	$	(35,169	)
20%	$	(153,220	)	$	(225,672	)	$	(70,338	)

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

Consolidation—Variable Interest Entities

We enter into various types of transactions with special purpose entities (“SPEs”), which are trusts that are established for limited purposes. 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 the SPE in exchange for the assets we transfer.

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 consolidated balance sheet.

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 liabilities and Deposits securing credit risk transfer agreements on our consolidated balance sheets:

•

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.

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 Investment Income

A substantial portion of our net investment income is comprised of non-cash items, including fair value adjustments, recognition of the fair value of assets created and liabilities incurred in loan sale transactions and the capitalization and amortization of certain assets and liabilities. Because we have elected, or are required by GAAP, to record certain of our financial assets (comprised of MBS, loans acquired for sale at fair value, loans at fair value and ESS), our firm commitment to purchase CRT securities, our derivatives and CRT strips, our MSRs, and our asset-backed financings 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 net non-cash (loss) income items included in net investment income are as follows:

		Year ended December 31,
		2021			2020			2019
	(dollars in thousands)
Net gains (losses) on investments and financings:
Mortgage-backed securities		$	(74,354	)	$	87,852		$	77,283
Loans:
Held in variable interest entities			(12,536	)		(6,617	)		7,883
Distressed			(206	)		(87	)		(7,169	)
ESS			1,651			(22,729	)		(7,530	)
CRT arrangements			163,126			(161,854	)		(11,445	)
Firm commitment to purchase CRT securities			—			(121,067	)		60,943
Interest-only security payable at fair value			164			14,952			10,302
Asset-backed financings at fair value			19,708			5,519			(7,553	)
			97,553			(204,031	)		122,714
Net gains on loans acquired for sale (1)			1,379,717			1,199,605			931,733
Net loan servicing fees—MSR valuation adjustments			(337,186	)		(938,937	)		(464,353	)
Net interest income—Capitalization of interest pursuant to loan modifications			251			—			2,318
		$	1,140,335		$	56,637		$	592,412
Net investment income		$	420,297		$	469,351		$	488,815
Non-cash items as a percentage of net investment income			271	%		12	%		121	%

(1)	Amount represents MSRs received, fair value of firm commitment to purchase CRT securities recognized, provision for losses on representations and warranties and changes in fair value of loans, IRLCs and hedging derivatives held at year end.

We receive or pay cash relating to:

•

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

•

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

•

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

•

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

•

MSRs in the form of loan servicing fees and placement fees on the deposits we manage on behalf of the borrowers and investors in the loans we service.

Results of Operations

The following is a summary of our key performance measures:

	Year ended December 31,
	2021			2020			2019
	(dollar amounts in thousands, except per common share amounts)
Net investment income	$	420,297		$	469,351		$	488,815
Expenses		375,636			389,621			298,174
Pretax income		44,661			79,730			190,641
(Benefit from) provision for income taxes		(12,193	)		27,357			(35,716	)
Net income		56,854			52,373			226,357
Dividends on preferred shares		30,891			24,938			24,938
Net income attributable to common shareholders	$	25,963		$	27,435		$	201,419
Pretax income by segment:
Credit sensitive strategies	$	306,643		$	(317,143	)	$	182,176
Interest rate sensitive strategies		(290,065	)		105,697			1,148
Correspondent production		86,936			344,639			64,593
Corporate		(58,853	)		(53,463	)		(57,276	)
	$	44,661		$	79,730		$	190,641
Annualized return on average common shareholder's equity		1.3	%		1.4	%		12.0	%
Earnings per common share:
Basic	$	0.26		$	0.27		$	2.54
Diluted	$	0.26		$	0.27		$	2.42
Dividends per common share	$	1.88		$	1.52		$	1.88
At year end:
Total assets	$	13,772,708		$	11,492,011		$	11,771,351
Book value per common share (1)	$	19.05		$	20.30		$	21.37
Closing price per common share	$	17.33		$	17.47		$	22.29

(1)

Our consolidated net income during the year ended December 31, 2021 increased by $4.5 million, reflecting the effect of the improved fair value performance of our CRT-related investments partially offset by decreases in our correspondent production and interest rate sensitive strategies results during the year ended December 31, 2021, as compared to the same period in 2020. The increase in pretax results is summarized below:

•

We recorded income tax benefit of $12.2 million due to fair value losses on MSRs held in our TRS.

•

Net Investment Income

Our net investment income is summarized below:

		Year ended December 31,
		2021			2020			2019
	(in thousands)
Net gains (losses) on investments and financings		$	304,079		$	(170,885	)	$	263,318
Net gains on loans acquired for sale			87,273			379,922			170,164
Net loan origination fees			170,672			147,272			87,997
Net loan servicing fees			(36,022	)		153,696			(58,918	)
Net interest (expense) income			(109,498	)		(48,635	)		20,439
Other			3,793			7,981			5,815
		$	420,297		$	469,351		$	488,815

Net Gains (Losses) on Investments and Financings

Net gains (losses) on investments and financings is summarized below:

		Year ended December 31,
		2021			2020			2019
	(in thousands)
From nonaffiliates:
Mortgage-backed securities		$	(74,354	)	$	87,852		$	77,283
Loans at fair value:
Held in VIEs			(12,536	)		(6,617	)		7,883
Distressed			611			(837	)		(7,169	)
CRT arrangements			368,999			(145,938	)		110,676
Firm commitment to purchase CRT securities			—			(121,067	)		60,943
Asset-backed financings at fair value			19,708			5,519			(7,553	)
Hedging derivatives			—			32,932			28,785
			302,428			(148,156	)		270,848
From PFSI—ESS			1,651			(22,729	)		(7,530	)
		$	304,079		$	(170,885	)	$	263,318

Mortgage-Backed Securities

Loans at fair value – Held in VIEs and Asset-Backed Financings at Fair Value

CRT Arrangements

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

		Year ended December 31,
		2021			2020			2019
	(in thousands)
UPB of loans sold					$	18,277,263		$	47,748,300
Investments:
Deposits securing CRT arrangements					$	1,700,000		$	933,370
Change in expected face amount of firm commitment to purchase CRT securities						(1,502,203	)		897,151
					$	197,797		$	1,830,521
Investment income (loss):
Net gains on loans acquired for sale — Fair value of firm commitment to purchase CRT securities recognized upon sale of loans					$	(38,161	)	$	99,305
Net gains (losses) on investments and financings:
Derivative and CRT strips:
CRT derivatives
Realized		$	93,837			(53,965	)		79,619
Valuation changes			(12,829	)		(82,633	)		(9,571	)
			81,008			(136,598	)		70,048
CRT strips
Realized			111,872			54,929			32,200
Valuation changes			175,955			(79,221	)		(1,874	)
			287,827			(24,292	)		30,326
Interest-only security payable at fair value			164			14,952			10,302
			368,999			(145,938	)		110,676
Firm commitments to purchase CRT securities			—			(121,067	)		60,943
			368,999			(267,005	)		171,619
Interest income — Deposits securing CRT arrangements			559			7,012			34,229
		$	369,558		$	(298,154	)	$	305,153

Net (recoveries received) payments made to settle (recoveries) losses on CRT arrangements		$	(62,387	)	$	115,475		$	5,165

	December 31, 2021			December 31, 2020
	(in thousands)
Carrying value of CRT arrangements:
Derivative and credit risk transfer strip assets (liabilities), net
CRT derivatives	$	18,964		$	31,795
CRT strips		(26,837	)		(202,792	)
	$	(7,873	)	$	(170,997	)

Deposits securing CRT arrangements	$	1,704,911		$	2,799,263
Interest-only security payable at fair value	$	10,593		$	10,757

CRT arrangement assets pledged to secure borrowings:
Derivative and credit risk transfer assets	$	19,627		$	58,699
Deposits securing CRT arrangements (1)	$	1,704,911		$	2,799,263

UPB of loans — underlying CRT arrangements	$	30,808,907		$	58,697,942
Collection status (UPB):
Delinquency (2)
Current	$	29,581,803		$	54,990,381
30-89 days delinquent	$	349,291		$	710,872
90-180 days delinquent	$	120,775		$	693,315
180 or more days delinquent	$	748,576		$	2,297,365
Foreclosure	$	8,462		$	6,009
Bankruptcy	$	64,694		$	75,700
Delinquent loans in COVID-19 pandemic-related forbearance plans:
30-89 days delinquent	$	44,015		$	383,028
90-180 days delinquent	$	57,815		$	546,344
180 or more days delinquent	$	174,041		$	1,944,663

(1)	For purposes of this discussion, includes Deposits securing credit risk transfer strip liabilities securing $27.5 million and $229.7 million in CRT strip and CRT derivative liabilities at December 31, 2021 and December 31, 2020, respectively.

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

ESS Purchased from PFSI

We recognized fair value gains relating to our investment in ESS totaling $1.7 million for the year ended December 31, 2021, as compared to fair value losses of $22.7 million during 2020. The gains were driven by the positive influence on expected future cash flows of the generally rising interest rates during the portion of 2021 that the ESS was outstanding. The change in valuation results during 2020, as compared to 2019, resulted from increased prepayment experience and expectations for the loans underlying the ESS and the effect of uncertainties surrounding future cash flows on the discount rate used to develop the assets’ fair value. The remaining balance of the ESS was sold to PLS during the quarter ended March 31, 2021.

Net Gains on Loans Acquired for Sale

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

		Year ended December 31,
		2021			2020			2019
	(in thousands)
From non-affiliates:
Cash loss:
Loans		$	(1,487,649	)	$	(326,214	)	$	(687,317	)
Hedging activities			188,733			(504,506	)		(88,633	)
			(1,298,916	)		(830,720	)		(775,950	)
Non-cash gain:
Receipt of MSRs in loan sale transactions			1,484,629			1,158,475			837,706
Provision for losses relating to representations and warranties provided in loan sales:
Pursuant to loan sales			(25,029	)		(19,316	)		(3,778	)
Reduction in liability due to change in estimate			5,812			4,457			3,550
			(19,217	)		(14,859	)		(228	)
Recognition of fair value of commitment to purchase credit risk transfer securities relating to loans sold			—			(38,161	)		99,305
Change in fair value during the year of financial instruments:
IRLCs			(69,935	)		61,232			(834	)
Loans			31,072			(12,279	)		(1,765	)
Hedging derivatives			(46,832	)		45,197			(2,451	)
			(85,695	)		94,150			(5,050	)
			1,379,717			1,199,605			931,733
Total from nonaffiliates			80,801			368,885			155,783
From PFSI—cash			6,472			11,037			14,381
		$	87,273		$	379,922		$	170,164

Interest rate lock commitments issued on loans acquired for sale to nonaffiliates		$	108,458,880		$	117,727,579		$	63,323,599
Acquisition of loans for sale (UPB):
To nonaffiliates		$	110,003,574		$	106,898,339		$	57,396,037
To PFSI			64,641,218			62,413,089			49,116,781
		$	174,644,792		$	169,311,428		$	106,512,818

Non-cash elements of gain on sale of loans

Interest Rate Lock Commitments

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

The MSRs and liability for representations and warranties we recognize represent our estimate of the fair value of future benefits and costs we will realize for years in the future. These estimates change as circumstances change, and changes in these estimates are recognized in our results of operations in subsequent periods. Subsequent changes in the fair value of our MSRs significantly affect our results of operations.

Mortgage Servicing Rights

Firm Commitment to Purchase CRT Securities

Liability for Losses Under Representations and Warranties

We recognize a ~~$38.7~~liability for losses we expect to incur relating to the representations and warranties we provide to purchasers in our loan sales transactions. The representations and warranties require adherence to purchaser and insurer origination and underwriting guidelines, including but not limited to the validity of the lien securing the loan, property eligibility, borrower credit, income and asset requirements, and compliance with applicable federal, state and local law.

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

	Year ended December 31,
	2021		2020		2019
	(in thousands)
Indemnification activity unpaid principal balance ("UPB"):
Loans indemnified at beginning of year	$	4,583	$	5,697	$	7,075
New indemnifications		345		450		583
Less: Indemnified loans repaid or refinanced		2,146		1,564		1,961
Loans indemnified at end of year	$	2,782	$	4,583	$	5,697
Indemnified loans indemnified by correspondent lenders at end of year	$	1,112	$	1,497	$	1,941
UPB of loans with deposits received from correspondent sellers collateralizing prospective indemnification losses at end of year	$	213	$	213	$	603
Repurchase activity (UPB):
Loans repurchased	$	86,954	$	72,535	$	22,648
Less:
Loans repurchased by correspondent sellers		52,787		31,306		13,745
Loans resold or repaid by borrowers		33,950		24,837		4,830
Net loans repurchased with losses chargeable to liability to representations and warranties	$	217	$	16,392	$	4,073
Net losses charged to liability for representations and warranties	$	861	$	580	$	128
At end of year:
Loans subject to representations and warranties	$	213,944,023	$	163,592,788	$	122,163,186
Liability for representations and warranties	$	40,249	$	21,893	$	7,614

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.

Loan Origination Fees

Net Loan Servicing Fees

Our net loan servicing fees have two primary components: fees earned for servicing loans and the effects of MSR valuation changes, net of hedging results, as summarized below:

		Year ended December 31,
		2021			2020			2019
	(in thousands)
Loan servicing fees		$	595,346		$	462,517		$	319,489
Effect of MSRs and hedging results			(631,368	)		(308,821	)		(378,407	)
Net loan servicing fees		$	(36,022	)	$	153,696		$	(58,918	)

Following is a summary of our loan servicing fees:

		Year ended December 31,
		2021		2020		2019
	(in thousands)
Contractually-specified servicing fees		$	526,245	$	406,060	$	295,390
Ancillary and other fees:
Late charges			1,701		1,498		1,658
Other			67,400		54,959		22,441
			69,101		56,457		24,099
		$	595,346	$	462,517	$	319,489
Average MSR servicing portfolio		$	196,996,623	$	147,832,880	$	110,075,179

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

		Year ended December 31,
		2021			2020			2019
	(in thousands)
Change in fair value of MSRs
Realization of cash flows		$	(298,130	)	$	(232,830	)	$	(202,322	)
Changes in valuation inputs used in valuation model			(39,056	)		(706,107	)		(262,031	)
			(337,186	)		(938,937	)		(464,353	)
Hedging results			(345,041	)		601,743			80,622
Total change in fair value of mortgage servicing rights and hedging results			(682,227	)		(337,194	)		(383,731	)
Recapture income from PFSI			50,859			28,373			5,324
		$	(631,368	)	$	(308,821	)	$	(378,407	)
Average balance of mortgage servicing rights		$	2,506,678		$	1,354,508		$	1,215,866

Changes in realization of cash flows are influenced by changes in the level of servicing assets and ~~short-term investments. These~~liabilities and changes in estimates of remaining cash flows to be realized. During the year ended December 31, 2021, as compared to 2020, realization of cash flows decreased primarily due to the addition of MSRs backed with loans with lower interest rates than those held during 2020, which, combined with rising interest rates, combine to result in slower prepayment expectations which reduced the rate at which cash flow realization was recognized during the year ended December 31, 2021.

Following is a summary of our loan servicing portfolio:

	December 31, 2021		December 31, 2020
	(in thousands)
UPB of loans outstanding	$	215,927,495	$	170,502,361
Collection status (UPB) (1)
Delinquency:
30-89 days delinquent	$	1,148,542	$	1,235,981
90 or more days delinquent:
Not in foreclosure	$	1,726,488	$	4,428,915
In foreclosure	$	36,658	$	27,494
Bankruptcy	$	130,582	$	148,866
Delinquent loans in COVID-19 pandemic-related forbearance:
30-89 days	$	169,654	$	530,353
90 days or more	$	614,882	$	3,123,288
Custodial funds managed by the Company (2)	$	3,823,527	$	6,086,724

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

(2)

Net Interest (Expense) Income

Net interest (expense) income is summarized below:

	Year ended December 31, 2021								Year ended December 31, 2020								Year ended December 31, 2019
	Interest					Interest			Interest					Interest			Interest				Interest
	income/			Average		yield/			income/			Average		yield/			income/		Average		yield/
	expense			balance		cost %			expense			balance		cost %			expense		balance		cost %
	(dollars in thousands)
Assets:
Cash and short-term investments	$	938		$	243,548		0.38	%	$	3,804		$	650,630		0.58	%	$	4,559	$	164,577		2.73	%
Mortgage-backed securities		36,180			2,210,940		1.61	%		59,461			2,921,879		2.00	%		78,450		2,591,828		2.99	%
Loans acquired for sale at fair value		125,438			4,135,140		2.99	%		103,221			3,469,392		2.93	%		121,387		2,754,955		4.35	%
Loans at fair value:
Held by variable interest entities		17,014			474,808		3.53	%		10,609			214,596		4.86	%		11,734		281,449		4.11	%
Distressed		369			6,625		5.49	%		493			9,032		5.37	%		3,848		75,251		5.04	%
		17,383			481,433		3.56	%		11,102			223,628		4.88	%		15,582		356,700		4.31	%
ESS from PFSI		1,280			21,563		5.85	%		8,418			153,768		5.38	%		10,291		197,273		5.15	%
Deposits securing CRT arrangements		559			2,307,155		0.02	%		7,012			1,772,762		0.39	%		34,229		1,639,885		2.06	%
		181,778			9,399,779		1.91	%		193,018			9,192,059		2.07	%		264,498		7,705,218		3.39	%
Placement fees relating to custodial funds		13,366								28,804								52,587
Other		95								313								800
		195,239		$	9,399,779		2.05	%		222,135		$	9,192,059		2.38	%		317,885	$	7,705,218		4.07	%
Liabilities:
Assets sold under agreements to repurchase	$	97,078		$	6,161,755		1.55	%	$	102,131		$	5,508,147		1.82	%	$	178,211	$	5,600,469		3.14	%
Mortgage loan participation purchase and sale agreements		606			33,827		1.77	%		902			44,432		2.00	%		1,570		40,036		3.87	%
Notes payable secured by credit risk transfer and mortgage servicing assets		86,753			2,635,601		3.25	%		59,261			1,771,370		3.29	%		53,968		1,101,501		4.83	%
Exchangeable senior notes		36,747			445,064		8.14	%		18,847			269,247		6.89	%		17,037		279,207		6.02	%
Asset-backed financings at fair value		15,076			447,247		3.32	%		10,971			203,795		5.30	%		11,324		267,539		4.17	%
Assets sold to PFSI under agreement to repurchase		387			13,020		2.93	%		3,325			93,264		3.56	%		6,302		118,264		5.33	%
		236,647			9,736,514		2.40	%		195,437			7,890,255		2.44	%		268,412		7,407,016		3.57	%
Interest shortfall on repayments of loans serviced for Agency securitizations		64,519								71,516								25,776
Interest on loan impound deposits		3,571								3,817								3,258
		304,737		$	9,736,514		3.09	%		270,770		$	7,890,255		3.38	%		297,446	$	7,407,016		3.96	%
Net interest (expense) income	$	(109,498	)						$	(48,635	)						$	20,439
Net interest margin							-1.15	%							-0.52	%						0.26	%
Net interest spread							-1.04	%							-1.00	%						0.11	%

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

		Year ended December 31, 2021									Year ended December 31, 2020
		vs.									vs.
		Year ended December 31, 2020									Year ended December 31, 2019
		Increase (decrease) due to changes in									Increase (decrease) due to changes in
		Rate			Volume			Total			Rate			Volume			Total
	(in thousands)
Assets:
Cash and short-term investments		$	(1,008	)	$	(1,858	)	$	(2,866	)	$	(5,855	)	$	5,100		$	(755	)
Mortgage-backed securities			(10,318	)		(12,963	)		(23,281	)		(28,146	)		9,157			(18,989	)
Loans acquired for sale at fair value			2,321			19,896			22,217			(45,316	)		27,150			(18,166	)
Loans at fair value:
Held by variable interest entities			(3,540	)		9,945			6,405			1,940			(3,065	)		(1,125	)
Distressed			11			(135	)		(124	)		235			(3,590	)		(3,355	)
			(3,529	)		9,810			6,281			2,175			(6,655	)		(4,480	)
ESS from PFSI			673			(7,811	)		(7,138	)		467			(2,340	)		(1,873	)
Deposits securing CRT arrangements			(8,075	)		1,622			(6,453	)		(29,802	)		2,585			(27,217	)
			(19,936	)		8,696			(11,240	)		(106,477	)		34,997			(71,480	)
Placement fees relating to custodial funds			—			(15,438	)		(15,438	)		—			(23,783	)		(23,783	)
Other			—			(218	)		(218	)		—			(487	)		(487	)
			(19,936	)		(6,960	)		(26,896	)		(106,477	)		10,727			(95,750	)
Liabilities:
Assets sold under agreements to repurchase			(16,219	)		11,166			(5,053	)		(73,199	)		(2,881	)		(76,080	)
Mortgage loan participation purchase and sale agreement			(96	)		(200	)		(296	)		(826	)		158			(668	)
Notes payable secured by credit risk transfer and mortgage servicing assets			(808	)		28,300			27,492			(20,827	)		26,120			5,293
Exchangeable senior notes			3,914			13,986			17,900			2,428			(618	)		1,810
Asset-backed financings of at fair value			(5,234	)		9,339			4,105			2,679			(3,032	)		(353	)
Assets sold to PFSI under agreement to repurchase			(470	)		(2,468	)		(2,938	)		(1,821	)		(1,156	)		(2,977	)
			(18,913	)		60,123			41,210			(91,566	)		18,591			(72,975	)
Interest shortfall on repayments of loans serviced for Agency securitizations			—			(6,997	)		(6,997	)		—			45,740			45,740
Interest on loan impound deposits			—			(246	)		(246	)		—			559			559
			(18,913	)		52,880			33,967			(91,566	)		64,890			(26,676	)
Net interest expense		$	(1,023	)	$	(59,840	)	$	(60,863	)	$	(14,911	)	$	(54,163	)	$	(69,074	)

The increase in net interest expense during the year ended December 31, 2021, as compared to 2020, is due to:

•

The decrease in net interest income during the year ended December 31, 2020, as compared to 2019, is due to:

•

Expenses

Our expenses are summarized below:

		Year ended December 31,
		2021		2020		2019
	(in thousands)
Earned by PennyMac Financial Services, Inc.:
Loan fulfillment fees		$	178,927	$	222,200	$	160,610
Loan servicing fees			80,658		67,181		48,797
Management fees			37,801		34,538		36,492
Loan origination			28,792		26,437		15,105
Loan collection and liquidation			11,279		10,363		4,600
Professional services			11,148		6,405		5,556
Safekeeping			9,087		7,090		5,097
Compensation			4,000		3,890		6,897
Other			13,944		11,517		15,020
		$	375,636	$	389,621	$	298,174

Expenses decreased $14.0 million, or 4%, during the year ended December 31, 2021, as compared to 2020, primarily due to reduced fees relating to fulfillment activities performed by PFSI on our behalf, partially offset by an increase in loan servicing fees. Expenses increased $91.4 million, or 31% during 2020, as compared to the same period in 2019, due primarily to increased loan fulfillment fees attributable to increases in our production volume, partially offset by a ~~$681.2 million~~reduction in the average fulfillment fee rate we incurred.

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 decrease in ~~mortgage loans at fair value,~~loan fulfillment fees of $43.3 million during 2021, as compared to 2020, is due to a ~~$78.3 million~~ decrease in ~~real estate~~loan commitment volume and an increase in discretionary reductions in the PFSI fee schedule, partially offset by an increase in our loan production volume. The increase in loan fulfillment fees of $61.6 million during the year ended December 31, 2020, compared to 2019, is primarily due to an increase in the volume of loans fulfilled for us by PFSI, partially offset by a ~~$20.4 million decrease~~change in ~~ESS.~~the fulfillment fee structure described in Note 4 – Transactions with Related Parties to the consolidated financial statements included in this Report.

~~Asset Acquisitions~~68

Loan Servicing Fees

~~Our asset acquisitions~~Loan servicing fees payable to PLS are summarized ~~below.~~below:

	Year ended December 31,
	2021		2020		2019
	(in thousands)
Loan servicing fees:
Loans acquired for sale at fair value	$	2,363	$	2,067	$	1,772
Loans at fair value		505		807		2,207
MSRs		77,790		64,307		44,818
	$	80,658	$	67,181	$	48,797
Average investment in:
Loans acquired for sale at fair value	$	4,135,140	$	3,469,392	$	2,754,955
Loans at fair value	$	481,433	$	223,628	$	356,700
Average MSR portfolio UPB	$	196,996,623	$	147,832,880	$	110,075,179

Correspondent Production

		Year ended December 31,
		2021		2020			2019
	(in thousands)
Sales of loans acquired for sale:
To nonaffiliates		$	110,919,477	$	106,306,805		$	61,128,081
To PennyMac Financial Services, Inc.			67,851,630		63,618,185			50,110,085
		$	178,771,107	$	169,924,990		$	111,238,166
Net gains on loans acquired for sale		$	87,273	$	379,922		$	170,164
Investment activities resulting from correspondent production:
Receipt of MSRs as proceeds from sales of loans		$	1,484,629	$	1,158,475		$	837,706
Retention of interests in securitizations of loans secured by investment properties, net of associated asset-backed financings			42,256		—			—
Purchase of subordinate bonds backed by previously-sold loans secured by investment properties held in consolidated variable interest entities			28,815		—			—
Investments in CRT arrangements:
Deposits securing CRT arrangements			—		1,700,000			933,370
Recognition of firm commitment to purchase CRT securities (1)			—		(38,161	)		99,305
Change in face amount of firm commitment to purchase CRT securities and commitment to fund Deposits securing CRT arrangements			—		(1,502,203	)		897,151
Total investments in CRT arrangements			—		159,636			1,929,826
Total investments resulting from correspondent activities		$	1,526,885	$	1,318,111		$	2,767,532

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

Interest Rate Sensitive Investments

Our interest rate sensitive investments include:

•

Credit Sensitive Investments

CRT Arrangements

At present, we are no longer creating new CRT investments as the Federal Housing Finance Agency (“FHFA”) instructed the Federal National Mortgage Association (“Fannie Mae”) and the Federal Home Loan Mortgage Corporation (“Freddie Mac”) to gradually wind down new front-end lender risk share transactions such as CRT investments. During the year ended December 31, 2021, we recognized investment gains of $369.6 million relating to our holdings of CRT investments. We held net CRT-related investments (comprised of deposits securing CRT arrangements, CRT derivatives, CRT strips and interest-only security payable) totaling approximately $1.7 billion at December 31, 2021.

Investments in Subordinate MBS Backed by Loans Secured by Investment Properties

As the result of the Company’s consolidation of the variable interest entities that issued the subordinate MBS as described in Note 6 – Variable Interest Entities – Investment in Securities Backed by Loans Secured by investment Properties to the consolidated financial statements included in this Report, we include loans underlying these and similar transactions with UPBs totaling approximately $1.5 billion on our consolidated balance sheet as of December 31, 2021.

Taxation

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.

		December 31, 2021
				Percentage of
Level	Description	Carrying value of assets measured (1)		Total assets			Total shareholders' equity
		(in thousands)
1	Prices determined using quoted prices in active markets for identical assets or liabilities.	$	174,007		1	%		7	%
2	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.		8,388,043		61	%		354	%
3	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)		4,669,962		34	%		197	%
	Total assets measured at or based on fair value	$	13,232,012		96	%		558	%
	Total assets	$	13,772,708
	Total shareholders’ equity	$	2,367,518

(1)	Includes assets measured on both a recurring and nonrecurring basis based on the accounting principles applicable to the specific asset or liability and whether we have elected to carry the item at its fair value.

(2)

		Change in fair value
Year ended December 31,		Loans at fair value (1)			Excess servicing spread			Interest rate lock commitments			CRT Assets			Mortgage servicing rights (2)			Total			Pre-tax income (loss)

	2021	$	1,182			1,037			(156,840	)		163,290			(39,056	)	$	(30,387	)	$	44,661
	2020	$	(1,578	)		(24,970	)		536,943			(267,969	)		(706,107	)	$	(463,681	)	$	79,730
	2019	$	(6,099	)		(9,256	)		80,133			59,800			(262,031	)	$	(137,453	)	$	190,641

(1)	Includes loans held for sale and loans at fair value.

(2)	Excluding changes in fair value attributable to realization of cash flows.

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 gains on loans acquired for sale or Net gains (losses) on investments and financings. We estimate fair value of loans based on whether the loans are saleable into active markets with observable pricing.

•

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.

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”).

Effect on fair value of a change in pull-through rate
Change in input (1)	Effect on fair value
	(in thousands)
(20%)	$	(617	)
(10%)	$	(309	)
(5%)	$	(154	)
5%	$	131
10%	$	247
20%	$	445

(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 held $1.7 billion of net CRT arrangement assets at December 31, 2021. Following is a summary of the effect on fair value of various changes to the pricing spread and property value shifts (which is used in the determination of estimated remaining credit losses) input used to estimate the fair value of our ~~correspondent production acquisitions~~CRT arrangements as of December 31, 2021:

Effect on fair value of a change in pricing spread input				Effect on fair value of a shift in property value
Change in input (in basis points)	Effect on fair value			Property value shift	Effect on fair value
	(in thousands)				(in thousands)
(100)	$	59,927		(15%)	$	(47,775	)
(50)	$	29,443		(10%)	$	(28,673	)
(25)	$	14,594		(5%)	$	(13,120	)
25	$	(14,347	)	5%	$	11,427
50	$	(28,449	)	10%	$	21,105
100	$	(55,944	)	15%	$	29,369

Mortgage Servicing Rights

Year ended December 31,

2018

2017

2016

(in thousands)

Correspondent mortgage loan purchases:

Government-insured or guaranteed-for sale to PLS

$
37,718,502

$
42,087,007

$
42,171,914

Agency-eligible

30,221,732

23,742,999

23,930,186

Jumbo

67,501

—

10,227

Commercial mortgage loans

7,263

69,167

18,112

$
68,014,998

$
65,899,173

$
66,130,439

~~During 2018, we purchased for sale $68.0 billion~~value and recognize changes in fair value in current period income. Changes in fair value of ~~correspondent production loans~~MSRs are recognized as ~~compared to $65.9 billion~~a component of Net loan servicing fees – From nonaffiliates – Change in fair value of ~~correspondent production loans during 2017 and $66.1 billion during 2016. The increase~~mortgage servicing rights.

A shift in ~~correspondent acquisitions from 2017 to 2018 is primarily due~~the market for MSRs or a change in our assessment of an input to the ~~production we generated from continued growth~~valuation of MSRs can have a significant effect on the fair value of MSRs and in our ~~correspondent production seller network combined with our ability to offer competitive execution in our purchases of mortgage loans, partially offset by~~income for the ~~decreased size of~~period. We believe the ~~mortgage market during 2018 as compared to 2017. The decrease in correspondent acquisitions from 2016 to 2017 is primarily due~~most significant “Level 3” fair value inputs to the ~~decreased size~~valuation of MSRs are the ~~mortgage market during 2017 as compared to 2016, partially offset by production we generated from continued growth in our correspondent production seller network.~~pricing spread (discount rate), prepayment speed and annual per-loan cost of servicing. We held

~~Our ability to continue the expansion~~53

$2.9 billion of our correspondent production business is subject to, among other factors, our ability to source additional mortgage loan volume, our ability to obtain additional inventory financing and our ability to fund the portion of the mortgage loans not financed, either through cash flows from business activities or the raising of additional equity capital. There can be no assurance that we will be successful in increasing our borrowing capacity or in obtaining the additional equity capital necessary or that we will be able to identify additional sources of mortgage loans.

~~Other Investment Activities~~

MSRs at December 31, 2021. Following is a summary of the effect on fair value of various changes to these key inputs that we use in making our ~~acquisitions~~fair value estimates as of ~~mortgage-related investments held~~December 31, 2021:

	Effect on fair value of a change in input
Change in input	Pricing spread			Prepayment speed			Servicing cost
	(in thousands)
(20%)	$	170,478		$	264,842		$	70,338
(10%)	$	82,921		$	126,905		$	35,169
(5%)	$	40,902		$	62,159		$	17,585
5%	$	(39,826	)	$	(59,726	)	$	(17,585	)
10%	$	(78,613	)	$	(117,162	)	$	(35,169	)
20%	$	(153,220	)	$	(225,672	)	$	(70,338	)

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

Consolidation—Variable Interest Entities

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 consolidated balance sheet.

•

Income Taxes

Accounting Developments

Non-Cash Investment Income

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

		Year ended December 31,
		2021			2020			2019
	(dollars in thousands)
Net gains (losses) on investments and financings:
Mortgage-backed securities		$	(74,354	)	$	87,852		$	77,283
Loans:
Held in variable interest entities			(12,536	)		(6,617	)		7,883
Distressed			(206	)		(87	)		(7,169	)
ESS			1,651			(22,729	)		(7,530	)
CRT arrangements			163,126			(161,854	)		(11,445	)
Firm commitment to purchase CRT securities			—			(121,067	)		60,943
Interest-only security payable at fair value			164			14,952			10,302
Asset-backed financings at fair value			19,708			5,519			(7,553	)
			97,553			(204,031	)		122,714
Net gains on loans acquired for sale (1)			1,379,717			1,199,605			931,733
Net loan servicing fees—MSR valuation adjustments			(337,186	)		(938,937	)		(464,353	)
Net interest income—Capitalization of interest pursuant to loan modifications			251			—			2,318
		$	1,140,335		$	56,637		$	592,412
Net investment income		$	420,297		$	469,351		$	488,815
Non-cash items as a percentage of net investment income			271	%		12	%		121	%

(1)	Amount represents MSRs received, fair value of firm commitment to purchase CRT securities recognized, provision for losses on representations and warranties and changes in fair value of loans, IRLCs and hedging derivatives held at year end.

We receive or pay cash relating to:

•

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

•

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

•

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

•

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

•

MSRs in the form of loan servicing fees and placement fees on the deposits we manage on behalf of the borrowers and investors in the loans we service.

Results of Operations

The following is a summary of our key performance measures:

	Year ended December 31,
	2021			2020			2019
	(dollar amounts in thousands, except per common share amounts)
Net investment income	$	420,297		$	469,351		$	488,815
Expenses		375,636			389,621			298,174
Pretax income		44,661			79,730			190,641
(Benefit from) provision for income taxes		(12,193	)		27,357			(35,716	)
Net income		56,854			52,373			226,357
Dividends on preferred shares		30,891			24,938			24,938
Net income attributable to common shareholders	$	25,963		$	27,435		$	201,419
Pretax income by segment:
Credit sensitive strategies	$	306,643		$	(317,143	)	$	182,176
Interest rate sensitive strategies		(290,065	)		105,697			1,148
Correspondent production		86,936			344,639			64,593
Corporate		(58,853	)		(53,463	)		(57,276	)
	$	44,661		$	79,730		$	190,641
Annualized return on average common shareholder's equity		1.3	%		1.4	%		12.0	%
Earnings per common share:
Basic	$	0.26		$	0.27		$	2.54
Diluted	$	0.26		$	0.27		$	2.42
Dividends per common share	$	1.88		$	1.52		$	1.88
At year end:
Total assets	$	13,772,708		$	11,492,011		$	11,771,351
Book value per common share (1)	$	19.05		$	20.30		$	21.37
Closing price per common share	$	17.33		$	17.47		$	22.29

(1)

Year ended December 31,

2018

2017

2016

(in thousands)

Interest rate sensitive assets:

MBS

$
1,810,877

$
251,872

$
765,467

MSRs received in mortgage loan sales and purchased

356,755

290,388

277,831

ESS received pursuant to a recapture agreement

2,688

5,244

6,603

2,170,320

547,504

1,049,901

Credit sensitive assets:

Deposits and commitments to fund deposits relating to CRT
Agreements

114,155

543,003

398,616

Firm commitment to purchase credit risk transfer securities

Fair value

37,994

—

—

UPB

605,052

—

—

757,201

543,003

398,616

$
2,927,521

$
1,090,507

$
1,448,517

~~Our acquisitions~~results during the ~~three years~~year ended December 31, ~~2018 were financed through~~2021, as compared to the ~~use~~same period in 2020. The increase in pretax results is summarized below:

•

We recorded income tax benefit of $12.2 million due to fair value losses on MSRs held in our TRS.

Our consolidated net income during the year ended December 31, 2020 decreased by $174.0 million, reflecting the effect of ~~a combination~~the COVID-19 pandemic on the fair value of ~~proceeds from borrowings, liquidations of existing~~our CRT-related investments and ~~proceeds from equity issuances. We continue~~a $63.1 million increase in provision for income taxes, partially offset by gains in our correspondent production and interest rate sensitive strategies segments during the year ended December 31, 2020, as compared to ~~identify additional means of increasing~~the same period in 2019. The decrease in pretax results is summarized below:

•

Net Investment Income

Our net investment ~~portfolio through cash flow~~income is summarized below:

		Year ended December 31,
		2021			2020			2019
	(in thousands)
Net gains (losses) on investments and financings		$	304,079		$	(170,885	)	$	263,318
Net gains on loans acquired for sale			87,273			379,922			170,164
Net loan origination fees			170,672			147,272			87,997
Net loan servicing fees			(36,022	)		153,696			(58,918	)
Net interest (expense) income			(109,498	)		(48,635	)		20,439
Other			3,793			7,981			5,815
		$	420,297		$	469,351		$	488,815

Net Gains (Losses) on Investments and Financings

Net gains (losses) on investments and financings is summarized below:

		Year ended December 31,
		2021			2020			2019
	(in thousands)
From nonaffiliates:
Mortgage-backed securities		$	(74,354	)	$	87,852		$	77,283
Loans at fair value:
Held in VIEs			(12,536	)		(6,617	)		7,883
Distressed			611			(837	)		(7,169	)
CRT arrangements			368,999			(145,938	)		110,676
Firm commitment to purchase CRT securities			—			(121,067	)		60,943
Asset-backed financings at fair value			19,708			5,519			(7,553	)
Hedging derivatives			—			32,932			28,785
			302,428			(148,156	)		270,848
From PFSI—ESS			1,651			(22,729	)		(7,530	)
		$	304,079		$	(170,885	)	$	263,318

The increase in net gain on investments for the year ended December 31, 2021, as compared to 2020, was caused primarily by increased gains from our ~~business activities, existing~~CRT arrangements. The increase in gains from CRT arrangements reflects the recovery in fair value from the dislocation in the credit markets experienced during the year ended December 31, 2020. This increase was partially offset by the effects of rising interest rates on the fair value of our investments ~~borrowings, and transactions that minimize current cash outlays. However, we expect that, over time, our ability~~in MBS.

The shift in net gain on investments to ~~continue our investment portfolio growth will depend~~a net loss during the year ended December 31, 2020, as compared to 2019, reflects the effect of the disruption in the credit markets during 2020 on our ~~ability~~CRT investments including expectations for increased losses to ~~raise additional equity capital.~~be absorbed by those investments as a result of the COVID-19 pandemic.

~~Investment Portfolio Composition~~

Mortgage-Backed Securities

Loans at fair value – Held in VIEs and Asset-Backed Financings at Fair Value

CRT Arrangements

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

		Year ended December 31,
		2021			2020			2019
	(in thousands)
UPB of loans sold					$	18,277,263		$	47,748,300
Investments:
Deposits securing CRT arrangements					$	1,700,000		$	933,370
Change in expected face amount of firm commitment to purchase CRT securities						(1,502,203	)		897,151
					$	197,797		$	1,830,521
Investment income (loss):
Net gains on loans acquired for sale — Fair value of firm commitment to purchase CRT securities recognized upon sale of loans					$	(38,161	)	$	99,305
Net gains (losses) on investments and financings:
Derivative and CRT strips:
CRT derivatives
Realized		$	93,837			(53,965	)		79,619
Valuation changes			(12,829	)		(82,633	)		(9,571	)
			81,008			(136,598	)		70,048
CRT strips
Realized			111,872			54,929			32,200
Valuation changes			175,955			(79,221	)		(1,874	)
			287,827			(24,292	)		30,326
Interest-only security payable at fair value			164			14,952			10,302
			368,999			(145,938	)		110,676
Firm commitments to purchase CRT securities			—			(121,067	)		60,943
			368,999			(267,005	)		171,619
Interest income — Deposits securing CRT arrangements			559			7,012			34,229
		$	369,558		$	(298,154	)	$	305,153

Net (recoveries received) payments made to settle (recoveries) losses on CRT arrangements		$	(62,387	)	$	115,475		$	5,165

	December 31, 2021			December 31, 2020
	(in thousands)
Carrying value of CRT arrangements:
Derivative and credit risk transfer strip assets (liabilities), net
CRT derivatives	$	18,964		$	31,795
CRT strips		(26,837	)		(202,792	)
	$	(7,873	)	$	(170,997	)

Deposits securing CRT arrangements	$	1,704,911		$	2,799,263
Interest-only security payable at fair value	$	10,593		$	10,757

CRT arrangement assets pledged to secure borrowings:
Derivative and credit risk transfer assets	$	19,627		$	58,699
Deposits securing CRT arrangements (1)	$	1,704,911		$	2,799,263

UPB of loans — underlying CRT arrangements	$	30,808,907		$	58,697,942
Collection status (UPB):
Delinquency (2)
Current	$	29,581,803		$	54,990,381
30-89 days delinquent	$	349,291		$	710,872
90-180 days delinquent	$	120,775		$	693,315
180 or more days delinquent	$	748,576		$	2,297,365
Foreclosure	$	8,462		$	6,009
Bankruptcy	$	64,694		$	75,700
Delinquent loans in COVID-19 pandemic-related forbearance plans:
30-89 days delinquent	$	44,015		$	383,028
90-180 days delinquent	$	57,815		$	546,344
180 or more days delinquent	$	174,041		$	1,944,663

(1)	For purposes of this discussion, includes Deposits securing credit risk transfer strip liabilities securing $27.5 million and $229.7 million in CRT strip and CRT derivative liabilities at December 31, 2021 and December 31, 2020, respectively.

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

ESS Purchased from PFSI

We recognized fair value gains relating to our investment in ESS totaling $1.7 million for the year ended December 31, 2021, as compared to fair value losses of $22.7 million during 2020. The gains were driven by the positive influence on expected future cash flows of the generally rising interest rates during the portion of 2021 that the ESS was outstanding. The change in valuation results during 2020, as compared to 2019, resulted from increased prepayment experience and expectations for the loans underlying the ESS and the effect of uncertainties surrounding future cash flows on the discount rate used to develop the assets’ fair value. The remaining balance of the ESS was sold to PLS during the quarter ended March 31, 2021.

Net Gains on Loans Acquired for Sale

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

		Year ended December 31,
		2021			2020			2019
	(in thousands)
From non-affiliates:
Cash loss:
Loans		$	(1,487,649	)	$	(326,214	)	$	(687,317	)
Hedging activities			188,733			(504,506	)		(88,633	)
			(1,298,916	)		(830,720	)		(775,950	)
Non-cash gain:
Receipt of MSRs in loan sale transactions			1,484,629			1,158,475			837,706
Provision for losses relating to representations and warranties provided in loan sales:
Pursuant to loan sales			(25,029	)		(19,316	)		(3,778	)
Reduction in liability due to change in estimate			5,812			4,457			3,550
			(19,217	)		(14,859	)		(228	)
Recognition of fair value of commitment to purchase credit risk transfer securities relating to loans sold			—			(38,161	)		99,305
Change in fair value during the year of financial instruments:
IRLCs			(69,935	)		61,232			(834	)
Loans			31,072			(12,279	)		(1,765	)
Hedging derivatives			(46,832	)		45,197			(2,451	)
			(85,695	)		94,150			(5,050	)
			1,379,717			1,199,605			931,733
Total from nonaffiliates			80,801			368,885			155,783
From PFSI—cash			6,472			11,037			14,381
		$	87,273		$	379,922		$	170,164

Interest rate lock commitments issued on loans acquired for sale to nonaffiliates		$	108,458,880		$	117,727,579		$	63,323,599
Acquisition of loans for sale (UPB):
To nonaffiliates		$	110,003,574		$	106,898,339		$	57,396,037
To PFSI			64,641,218			62,413,089			49,116,781
		$	174,644,792		$	169,311,428		$	106,512,818

Non-cash elements of gain on sale of loans

Interest Rate Lock Commitments

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

The MSRs and liability for representations and warranties we recognize represent our estimate of the fair value of future benefits and costs we will realize for years in the future. These estimates change as circumstances change, and changes in these estimates are recognized in our results of operations in subsequent periods. Subsequent changes in the fair value of our MSRs significantly affect our results of operations.

Mortgage Servicing Rights

Firm Commitment to Purchase CRT Securities

Liability for Losses Under Representations and Warranties

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

	Year ended December 31,
	2021		2020		2019
	(in thousands)
Indemnification activity unpaid principal balance ("UPB"):
Loans indemnified at beginning of year	$	4,583	$	5,697	$	7,075
New indemnifications		345		450		583
Less: Indemnified loans repaid or refinanced		2,146		1,564		1,961
Loans indemnified at end of year	$	2,782	$	4,583	$	5,697
Indemnified loans indemnified by correspondent lenders at end of year	$	1,112	$	1,497	$	1,941
UPB of loans with deposits received from correspondent sellers collateralizing prospective indemnification losses at end of year	$	213	$	213	$	603
Repurchase activity (UPB):
Loans repurchased	$	86,954	$	72,535	$	22,648
Less:
Loans repurchased by correspondent sellers		52,787		31,306		13,745
Loans resold or repaid by borrowers		33,950		24,837		4,830
Net loans repurchased with losses chargeable to liability to representations and warranties	$	217	$	16,392	$	4,073
Net losses charged to liability for representations and warranties	$	861	$	580	$	128
At end of year:
Loans subject to representations and warranties	$	213,944,023	$	163,592,788	$	122,163,186
Liability for representations and warranties	$	40,249	$	21,893	$	7,614

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.

Loan Origination Fees

Net Loan Servicing Fees

Our net loan servicing fees have two primary components: fees earned for servicing loans and the effects of MSR valuation changes, net of hedging results, as summarized below:

		Year ended December 31,
		2021			2020			2019
	(in thousands)
Loan servicing fees		$	595,346		$	462,517		$	319,489
Effect of MSRs and hedging results			(631,368	)		(308,821	)		(378,407	)
Net loan servicing fees		$	(36,022	)	$	153,696		$	(58,918	)

Following is a summary of our loan servicing fees:

		Year ended December 31,
		2021		2020		2019
	(in thousands)
Contractually-specified servicing fees		$	526,245	$	406,060	$	295,390
Ancillary and other fees:
Late charges			1,701		1,498		1,658
Other			67,400		54,959		22,441
			69,101		56,457		24,099
		$	595,346	$	462,517	$	319,489
Average MSR servicing portfolio		$	196,996,623	$	147,832,880	$	110,075,179

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

		Year ended December 31,
		2021			2020			2019
	(in thousands)
Change in fair value of MSRs
Realization of cash flows		$	(298,130	)	$	(232,830	)	$	(202,322	)
Changes in valuation inputs used in valuation model			(39,056	)		(706,107	)		(262,031	)
			(337,186	)		(938,937	)		(464,353	)
Hedging results			(345,041	)		601,743			80,622
Total change in fair value of mortgage servicing rights and hedging results			(682,227	)		(337,194	)		(383,731	)
Recapture income from PFSI			50,859			28,373			5,324
		$	(631,368	)	$	(308,821	)	$	(378,407	)
Average balance of mortgage servicing rights		$	2,506,678		$	1,354,508		$	1,215,866

Following is a summary of our loan servicing portfolio:

	December 31, 2021		December 31, 2020
	(in thousands)
UPB of loans outstanding	$	215,927,495	$	170,502,361
Collection status (UPB) (1)
Delinquency:
30-89 days delinquent	$	1,148,542	$	1,235,981
90 or more days delinquent:
Not in foreclosure	$	1,726,488	$	4,428,915
In foreclosure	$	36,658	$	27,494
Bankruptcy	$	130,582	$	148,866
Delinquent loans in COVID-19 pandemic-related forbearance:
30-89 days	$	169,654	$	530,353
90 days or more	$	614,882	$	3,123,288
Custodial funds managed by the Company (2)	$	3,823,527	$	6,086,724

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

(2)

Net Interest (Expense) Income

Net interest (expense) income is summarized below:

	Year ended December 31, 2021								Year ended December 31, 2020								Year ended December 31, 2019
	Interest					Interest			Interest					Interest			Interest				Interest
	income/			Average		yield/			income/			Average		yield/			income/		Average		yield/
	expense			balance		cost %			expense			balance		cost %			expense		balance		cost %
	(dollars in thousands)
Assets:
Cash and short-term investments	$	938		$	243,548		0.38	%	$	3,804		$	650,630		0.58	%	$	4,559	$	164,577		2.73	%
Mortgage-backed securities		36,180			2,210,940		1.61	%		59,461			2,921,879		2.00	%		78,450		2,591,828		2.99	%
Loans acquired for sale at fair value		125,438			4,135,140		2.99	%		103,221			3,469,392		2.93	%		121,387		2,754,955		4.35	%
Loans at fair value:
Held by variable interest entities		17,014			474,808		3.53	%		10,609			214,596		4.86	%		11,734		281,449		4.11	%
Distressed		369			6,625		5.49	%		493			9,032		5.37	%		3,848		75,251		5.04	%
		17,383			481,433		3.56	%		11,102			223,628		4.88	%		15,582		356,700		4.31	%
ESS from PFSI		1,280			21,563		5.85	%		8,418			153,768		5.38	%		10,291		197,273		5.15	%
Deposits securing CRT arrangements		559			2,307,155		0.02	%		7,012			1,772,762		0.39	%		34,229		1,639,885		2.06	%
		181,778			9,399,779		1.91	%		193,018			9,192,059		2.07	%		264,498		7,705,218		3.39	%
Placement fees relating to custodial funds		13,366								28,804								52,587
Other		95								313								800
		195,239		$	9,399,779		2.05	%		222,135		$	9,192,059		2.38	%		317,885	$	7,705,218		4.07	%
Liabilities:
Assets sold under agreements to repurchase	$	97,078		$	6,161,755		1.55	%	$	102,131		$	5,508,147		1.82	%	$	178,211	$	5,600,469		3.14	%
Mortgage loan participation purchase and sale agreements		606			33,827		1.77	%		902			44,432		2.00	%		1,570		40,036		3.87	%
Notes payable secured by credit risk transfer and mortgage servicing assets		86,753			2,635,601		3.25	%		59,261			1,771,370		3.29	%		53,968		1,101,501		4.83	%
Exchangeable senior notes		36,747			445,064		8.14	%		18,847			269,247		6.89	%		17,037		279,207		6.02	%
Asset-backed financings at fair value		15,076			447,247		3.32	%		10,971			203,795		5.30	%		11,324		267,539		4.17	%
Assets sold to PFSI under agreement to repurchase		387			13,020		2.93	%		3,325			93,264		3.56	%		6,302		118,264		5.33	%
		236,647			9,736,514		2.40	%		195,437			7,890,255		2.44	%		268,412		7,407,016		3.57	%
Interest shortfall on repayments of loans serviced for Agency securitizations		64,519								71,516								25,776
Interest on loan impound deposits		3,571								3,817								3,258
		304,737		$	9,736,514		3.09	%		270,770		$	7,890,255		3.38	%		297,446	$	7,407,016		3.96	%
Net interest (expense) income	$	(109,498	)						$	(48,635	)						$	20,439
Net interest margin							-1.15	%							-0.52	%						0.26	%
Net interest spread							-1.04	%							-1.00	%						0.11	%

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

		Year ended December 31, 2021									Year ended December 31, 2020
		vs.									vs.
		Year ended December 31, 2020									Year ended December 31, 2019
		Increase (decrease) due to changes in									Increase (decrease) due to changes in
		Rate			Volume			Total			Rate			Volume			Total
	(in thousands)
Assets:
Cash and short-term investments		$	(1,008	)	$	(1,858	)	$	(2,866	)	$	(5,855	)	$	5,100		$	(755	)
Mortgage-backed securities			(10,318	)		(12,963	)		(23,281	)		(28,146	)		9,157			(18,989	)
Loans acquired for sale at fair value			2,321			19,896			22,217			(45,316	)		27,150			(18,166	)
Loans at fair value:
Held by variable interest entities			(3,540	)		9,945			6,405			1,940			(3,065	)		(1,125	)
Distressed			11			(135	)		(124	)		235			(3,590	)		(3,355	)
			(3,529	)		9,810			6,281			2,175			(6,655	)		(4,480	)
ESS from PFSI			673			(7,811	)		(7,138	)		467			(2,340	)		(1,873	)
Deposits securing CRT arrangements			(8,075	)		1,622			(6,453	)		(29,802	)		2,585			(27,217	)
			(19,936	)		8,696			(11,240	)		(106,477	)		34,997			(71,480	)
Placement fees relating to custodial funds			—			(15,438	)		(15,438	)		—			(23,783	)		(23,783	)
Other			—			(218	)		(218	)		—			(487	)		(487	)
			(19,936	)		(6,960	)		(26,896	)		(106,477	)		10,727			(95,750	)
Liabilities:
Assets sold under agreements to repurchase			(16,219	)		11,166			(5,053	)		(73,199	)		(2,881	)		(76,080	)
Mortgage loan participation purchase and sale agreement			(96	)		(200	)		(296	)		(826	)		158			(668	)
Notes payable secured by credit risk transfer and mortgage servicing assets			(808	)		28,300			27,492			(20,827	)		26,120			5,293
Exchangeable senior notes			3,914			13,986			17,900			2,428			(618	)		1,810
Asset-backed financings of at fair value			(5,234	)		9,339			4,105			2,679			(3,032	)		(353	)
Assets sold to PFSI under agreement to repurchase			(470	)		(2,468	)		(2,938	)		(1,821	)		(1,156	)		(2,977	)
			(18,913	)		60,123			41,210			(91,566	)		18,591			(72,975	)
Interest shortfall on repayments of loans serviced for Agency securitizations			—			(6,997	)		(6,997	)		—			45,740			45,740
Interest on loan impound deposits			—			(246	)		(246	)		—			559			559
			(18,913	)		52,880			33,967			(91,566	)		64,890			(26,676	)
Net interest expense		$	(1,023	)	$	(59,840	)	$	(60,863	)	$	(14,911	)	$	(54,163	)	$	(69,074	)

The increase in net interest expense during the year ended December 31, 2021, as compared to 2020, is due to:

•

The decrease in net interest income during the year ended December 31, 2020, as compared to 2019, is due to:

•

Expenses

Our expenses are summarized below:

		Year ended December 31,
		2021		2020		2019
	(in thousands)
Earned by PennyMac Financial Services, Inc.:
Loan fulfillment fees		$	178,927	$	222,200	$	160,610
Loan servicing fees			80,658		67,181		48,797
Management fees			37,801		34,538		36,492
Loan origination			28,792		26,437		15,105
Loan collection and liquidation			11,279		10,363		4,600
Professional services			11,148		6,405		5,556
Safekeeping			9,087		7,090		5,097
Compensation			4,000		3,890		6,897
Other			13,944		11,517		15,020
		$	375,636	$	389,621	$	298,174

Loan Fulfillment Fees

Loan Servicing Fees

Loan servicing fees payable to PLS are summarized below:

	Year ended December 31,
	2021		2020		2019
	(in thousands)
Loan servicing fees:
Loans acquired for sale at fair value	$	2,363	$	2,067	$	1,772
Loans at fair value		505		807		2,207
MSRs		77,790		64,307		44,818
	$	80,658	$	67,181	$	48,797
Average investment in:
Loans acquired for sale at fair value	$	4,135,140	$	3,469,392	$	2,754,955
Loans at fair value	$	481,433	$	223,628	$	356,700
Average MSR portfolio UPB	$	196,996,623	$	147,832,880	$	110,075,179

Management Fees

Management fees payable to PCM are summarized below:

	Year ended December 31,
	2021		2020		2019
	(in thousands)
Base	$	34,794	$	34,538	$	29,303
Performance incentive		3,007		—		7,189
	$	37,801	$	34,538	$	36,492
Average shareholders' equity amounts used to calculate base management fee expense	$	2,348,395	$	2,330,154	$	1,958,970

Loan origination

Loan collection and liquidation

Loan collection and liquidation expenses increased by $916,000 and $5.8 million during 2021 and 2020, respectively, due to continuing collection and liquidation efforts relating to our portfolio of nonperforming mortgage loans and the borrower assistance expenses we incurred relating to loans in our CRT reference pools. We incurred this expense to assist certain borrowers in mitigating loan delinquencies they incurred as a result of dislocations arising from the COVID-19 pandemic as an alternative to incurring losses in the CRT arrangements.

Compensation

Compensation expense increased $110,000 during the year ended December 31, 2021, as compared to 2020, primarily due to improved expectations in achieving performance targets included in certain performance-based restricted share awards. Compensation expense decreased $3.0 million during the year ended December 31, 2020, as compared to 2019, primarily due to a decrease in expected future vesting of equity awards as a result of our projected earnings performance not achieving the targets included in the outstanding performance-based awards.

Other Expenses

Other expenses are summarized below:

	Year ended December 31,
	2021		2020		2019
	(in thousands)
Common overhead allocation from PFSI	$	4,906	$	5,172	$	5,340
Technology		1,787		1,440		1,616
Bank service charges		1,731		1,924		2,552
Insurance		1,671		1,351		1,239
Other		3,849		1,630		4,273
	$	13,944	$	11,517	$	15,020

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 income.

Our effective tax rates were (27.3)% for the year ended December 31, 2021 and 34.3% for the year ended December 31, 2020. Our TRS recognized a tax benefit of $12.2 million on pretax loss of $175.3 million while our consolidated pretax income was $44.7 million for the year ended December 31, 2021. For 2020, the TRS recognized tax expense of $27.3 million on pretax income of $151.5 million while our consolidated pretax income was $79.7 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.

The Company assesses the available positive and negative evidence to estimate whether sufficient future taxable income will be generated to permit use of the existing deferred tax assets. On the basis of this evaluation, as of December 31, 2021, the valuation allowance was increased to $34.1 million from the $110,000 valuation allowance recorded at December 31, 2020 as the result of a GAAP loss at the TRS for the year ended December 31, 2021. The amount of deferred tax assets considered realizable could be adjusted in future periods based on future income.

The CARES Act, passed in March 2020, introduced a number of tax law changes which are generally taxpayer favorable and in December 2020, the Taxpayer Certainty and Disaster Tax Relief Act was signed into law. No material changes in our effective income tax rates resulted from either Act. While the CARES Act provides for carry back of losses from 2019, 2020 and 2021, the TRS does not have taxable income from prior years to which the losses could be carried back.

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

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:

							Taxable income (loss)
	GAAP net income			GAAP/tax differences			Total taxable income (loss)			Taxable subsidiaries			REIT
Year ended December 31, 2021	(in thousands)
Net investment income
Net loan servicing fees/ESS transactions	$	(36,022	)	$	1,332,675		$	1,296,653		$	1,296,653		$	—
Net gains on loans acquired for sale		87,273			(1,466,274	)		(1,379,001	)		(1,379,001	)		—
Loan origination fees		170,672			—			170,672			170,672			—
Net gains (losses) on investments and financings		304,079			(139,874	)		164,205			81,228			82,977
Net interest (expense) income		(109,498	)		197,626			88,127			(36,809	)		124,936
Results of real estate acquired in settlement of loans		3,075			(5,191	)		(2,116	)		(2,116	)		—
Other		718			—			718			718			—
Net investment income		420,297			(81,038	)		339,258			131,345			207,913
Expenses		375,636			940			376,576			359,576			17,000
REIT dividend deduction		—			190,902			190,902			—			190,902
Total expenses and dividend deduction		375,636			191,842			567,478			359,576			207,902
Income (loss) before (benefit from) provision for income taxes		44,661			(272,880	)		(228,220	)		(228,231	)		11
(Benefit from) provision for income taxes		(12,193	)		12,204			11			—			11
Net income	$	56,854		$	(285,084	)	$	(228,231	)	$	(228,231	)	$	—

Balance Sheet Analysis

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

	December 31,		December 31,
	2021		2020
	(in thousands)
Assets
Cash	$	58,983	$	57,704
Investments:
Short-term		167,999		127,295
Mortgage-backed securities at fair value		2,666,768		2,213,922
Loans acquired for sale at fair value		4,171,025		3,551,890
Loans at fair value		1,568,726		151,734
ESS		—		131,750
Derivative assets		34,238		164,318
Deposits securing credit risk transfer arrangements		1,704,911		2,799,263
MSRs		2,892,855		1,755,236
REO		14,382		28,709
		13,220,904		10,924,117
Other		492,821		510,190
Total assets	$	13,772,708	$	11,492,011
Liabilities
Debt:
Short-term	$	6,721,878	$	6,407,131
Long-term		4,455,012		2,267,278
		11,176,890		8,674,409
Other		228,300		520,743
Total liabilities		11,405,190		9,195,152
Shareholders’ equity		2,367,518		2,296,859
Total liabilities and shareholders’ equity	$	13,772,708	$	11,492,011

Total assets increased by approximately $2.3 billion, or 20%, from December 31, 2020 to December 31, 2021, primarily due to an increase of $1.4 billionin Loans at fair value, $1.1 billion of MSRs and $619.1 million in Loans acquired for sale at fair value,

partially offset by a $1.1 billion decrease in Deposits securing credit risk transfer arrangements. The increase in Loans at fair value reflects our increased holdings of investments in loan securitizations backed by loans held in consolidated VIEs. The growth in our investment in MSRs reflects the growth in our servicing portfolio from our correspondent lending activities.

Asset Acquisitions

Our asset acquisitions are summarized below.

Correspondent Production

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

	Year ended December 31,
	2021		2020		2019
	(in thousands)
Correspondent loan purchases:
Agency-eligible (1)	$	113,667,618	$	106,472,654	$	63,989,938
Government-insured or guaranteed - for sale to PLS		67,702,945		63,574,547		50,499,641
Jumbo		—		—		12,839
Advances to home equity lines of credit		—		2,569		5,182
	$	181,370,563	$	170,049,770	$	114,507,600

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

During 2021, we purchased for sale $181.4 billion in fair value of correspondent production loans as compared to $170.0 billion during 2020 and $114.5 billion during 2019. Our ability to increase the level of correspondent production during the three-year period ended December 31, 2021 reflects the favorable interest rate environment during 2021 and 2020, along with continuing expansion of our correspondent seller network and our efforts aimed at maximizing the share of our correspondent sellers’ production that is sold to us.

Other Investment Activities

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

	Year ended December 31,
	2021		2020			2019
	(in thousands)
Credit sensitive assets:
Credit risk transfer strips			$	(178,501	)	$	56,804
Deposits and commitments to fund deposits relating to CRT arrangements				1,700,000			933,370
Change in firm commitment to purchase CRT securities
Fair value				(159,228	)		160,248
Expected face amount				(1,502,203	)		897,151
				(1,661,431	)		1,057,399
Loans secured by investment properties, net of associated asset-backed financing	$	71,071		—			—
		71,071		(139,932	)		2,047,573
Interest rate sensitive assets:
MBS (net of sales)		932,270		352,307			546,111
ESS received pursuant to a recapture agreement		557		2,093			1,757
MSRs received in loan sales		1,484,629		1,158,475			837,706
		2,417,456		1,512,875			1,385,574
	$	2,488,527	$	1,372,943		$	3,433,147

Our acquisitions during the three years ended December 31, 2021 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:

	December 31, 2018												December 31, 2017												December 31, 2021										December 31, 2020
					Average												Average													Average									Average
	Fair				Life					Market			Fair				Life					Market			Fair					Life					Fair				Life
	value		Principal		(in years)		Coupon			yield			value		Principal		(in years)		Coupon			yield			value		Principal			(in years)		Coupon			value		Principal		(in years)		Coupon
	(dollars in thousands)																								(dollars in thousands)
Agency:																													��
Freddie Mac																									$	831,417	$	826,859			8.5		2.1	%	$	1,311,036	$	1,253,755		4.4		2.7	%
Fannie Mae	$	2,075,337	$	2,050,769		7.5		3.8	%		3.5	%	$	796,853	$	774,473		7.0		3.5	%		3.0	%		1,835,351		1,822,379			8.6		2.2	%		902,886		863,758		5.3		2.5	%
Freddie Mac		535,085		530,734		8.3		3.7	%		3.5	%		192,608		187,127		7.7		3.5	%		3.0	%
	$	2,610,422	$	2,581,503									$	989,461	$	961,600									$	2,666,768	$	2,649,238							$	2,213,922	$	2,117,513

~~Mortgage Loans at Fair Value – Distressed~~

~~Following is a summary of the distribution of our portfolio of distressed mortgage loans at fair value:~~

December 31, 2018

December 31, 2017

Performing loans

Nonperforming loans

Performing loans

Nonperforming loans

Average

Average

Average

Average

Current loan-to

Fair

%

note

Fair

%

note

Fair

%

note

Fair

%

note

-value (1)

value

total

rate

value

total

rate

value

total

rate

value

total

rate

(dollars in thousands)

Less than 80%

$
8,851

31
%

3.37
%

$
36,472

41
%

5.06
%

$
139,408

33
%

3.80
%

$
136,994

39
%

5.08
%
80% - 99.99%

7,026

24
%

2.63
%

21,630

24
%

5.41
%

107,121

26
%

3.12
%

94,538

27
%

4.90
%
100% - 119.99%

4,464

16
%

2.40
%

16,781

19
%

4.69
%

74,182

18
%

2.86
%

58,330

16
%

4.45
%
120% or greater

8,465

29
%

2.13
%

14,043

16
%

3.29
%

94,074

23
%

2.35
%

63,786

18
%

4.01
%

$
28,806

100
%

2.58
%

$
88,926

100
%

4.54
%

$
414,785

100
%

3.04
%

$
353,648

100
%

4.62
%

~~(1)~~

~~Current loan-to-value is calculated based on the unpaid principal balance of the mortgage loan and our estimate of the value of the mortgaged property.~~

December 31, 2018

December 31, 2017

Performing loans

Nonperforming loans

Performing loans

Nonperforming loans

Average

Average

Average

Average

Geographic

Fair

%

note

Fair

%

note

Fair

%

note

Fair

%

note

distribution

value

total

rate

value

total

rate

value

total

rate

value

total

rate

(dollars in thousands)

New York

$
8,273

29
%

2.27
%

$
32,819

37
%

5.21
%

$
69,401

17
%

2.61
%

$
104,667

30
%

5.25
%
Florida

3,417

12
%

1.98
%

10,446

12
%

4.77
%

20,273

5
%

2.71
%

40,518

11
%

4.76
%
California

3,995

14
%

3.08
%

7,190

8
%

4.17
%

92,435

22
%

3.06
%

44,856

13
%

3.91
%
New Jersey

4,235

15
%

2.31
%

4,055

5
%

3.71
%

38,689

9
%

2.55
%

33,857

10
%

4.36
%
Hawaii

—

0
%

—

6,605

7
%

5.41
%

3,191

1
%

3.28
%

13,547

4
%

5.92
%
Massachusetts

855

3
%

2.52
%

5,667

6
%

4.57
%

19,355

5
%

2.75
%

23,039

6
%

4.20
%
Maryland

1,549

5
%

2.53
%

2,791

3
%

3.81
%

21,424

5
%

2.99
%

10,159

3
%

4.06
%
Other

6,482

22
%

3.69
%

19,353

22
%

3.61
%

150,017

36
%

3.61
%

83,005

23
%

4.15
%

$
28,806

100
%

2.58
%

$
88,926

100
%

4.54
%

$
414,785

100
%

3.04
%

$
353,648

100
%

4.62
%

December 31, 2018

December 31, 2017

Performing loans

Nonperforming loans

Performing loans

Nonperforming loans

Average

Average

Average

Average

Fair

%

note

Fair

%

note

Fair

%

note

Fair

%

note

Payment status

value

total

rate

value

total

rate

value

total

rate

value

total

rate

(dollars in thousands)

Current

$
18,931

66
%

2.68
%

$
—

0
%

—

$
267,507

65
%

2.99
%

$
—

0
%

—

30 days delinquent

7,213

25
%

2.50
%

—

0
%

—

105,101

25
%

3.22
%

—

0
%

—

60 days delinquent

2,662

9
%

2.24
%

—

0
%

—

42,177

10
%

2.91
%

—

0
%

—

90 days or more
delinquent

—

0
%

—

37,288

42
%

4.22
%

—

0
%

—

166,749

47
%

3.97
%
In foreclosure

—

0
%

—

51,638

58
%

4.81
%

—

0
%

—

186,899

53
%

5.24
%

$
28,806

100
%

2.58
%

$
88,926

100
%

4.54
%

$
414,785

100
%

3.04
%

$
353,648

100
%

4.62
%

Credit Risk Transfer Transactions

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

CRT ~~Agreements~~Arrangements

Following is a summary of our holding of CRT ~~Agreements:~~

arrangements:

December 31, 2018

December 31, 2017

(in thousands)

Carrying value of CRT Agreements:

Derivative assets

$
123,987

$
98,640

Deposits securing CRT agreements

1,146,501

588,867

Interest-only security payable at fair value

(36,011
)

(7,070
)

$
1,234,477

$
680,437

UPB of mortgage loans subject to credit guarantee
obligations

$
29,934,003

$
26,845,392

Collection status (in UPB):

Current

$
29,633,133

$
26,540,953

30—89 days delinquent

$
228,296

$
179,144

90—180 days delinquent

$
39,826

$
101,114

180 or more days delinquent

$
4,208

$
5,146

Foreclosure

$
5,180

$
5,463

Bankruptcy

$
23,360

$
13,572

	December 31, 2021			December 31, 2020
	(in thousands)
Carrying value of CRT arrangements:
Derivative and credit risk transfer strip assets (liabilities), net
CRT strips	$	(26,837	)	$	(202,792	)
CRT derivatives		18,964			31,795
		(7,873	)		(170,997	)
Deposits securing CRT arrangements		1,704,911			2,799,263
Interest-only security payable at fair value		(10,593	)		(10,757	)
	$	1,686,445		$	2,617,509
UPB of loans subject to credit guarantee obligations	$	30,808,907		$	58,697,942

Following is a summary of the composition of the ~~mortgage~~ loans underlying our investment in CRT ~~Agreements~~arrangements as of December 31, ~~2018:~~

2021:

	Year of origination											Year of origination
	2018		2017		2016		2015		Total			2020		2019		2018		2017		2016		2015		Total
	(in millions)										(in millions)
UPB:
Outstanding	$	3,945	$	13,795	$	9,184	$	3,010	$	29,934		$	5,990	$	14,301	$	3,871	$	3,246	$	2,582	$	819	$	30,809
Originally delivered	$	4,118	$	15,307	$	11,515	$	4,928	$	35,868
Cumulative defaults	$	—	$	7	$	15	$	14	$	36		$	17	$	182	$	278	$	493	$	192	$	52	$	1,214
Cumulative losses	$	—	$	0.7	$	1.5	$	1.4	$	3.6		$	—	$	1	$	10	$	34	$	14	$	6	$	65

Year of origination

Original debt-to income ratio

2018

2017

2016

2015

Total

(in millions)

<25%

$
404

$
1,669

$
1,265

$
377

$
3,715

25 - 30%

420

1,668

1,261

399

3,748

30 - 35%

570

2,261

1,639

542

5,012

35 - 40%

680

2,735

1,855

656

5,926

40 - 45%

866

3,417

2,413

869

7,565

>45%

1,005

2,045

751

167

3,968

$
3,945

$
13,795

$
9,184

$
3,010

$
29,934

Weighted average

37.7
%

36.2
%

35.1
%

35.3
%

36.0
%

Year of origination

Origination FICO score

2018

2017

2016

2015

Total

(in millions)

600 - 649

$
58

$
106

$
72

$
42

$
278

650 - 699

719

1,854

1,084

521

4,178

700 - 749

1,344

4,613

2,978

984

9,919

750 or greater

1,817

7,203

5,049

1,462

15,531

N/A

7

19

1

1

28

$
3,945

$
13,795

$
9,184

$
3,010

$
29,934

Weighted average

740

747

750

743

746

		Year of origination
Original debt-to income ratio		2020			2019			2018			2017			2016			2015			Total
	(in millions)
<25%		$	1,209		$	2,134		$	369		$	398		$	376		$	99		$	4,585
25 - 30%			955			1,824			323			371			350			103			3,926
30 - 35%			1,066			2,210			461			498			442			145			4,822
35 - 40%			1,046			2,541			627			589			495			170			5,468
40 - 45%			1,043			3,081			899			844			690			247			6,804
>45%			671			2,511			1,192			546			229			55			5,204
		$	5,990		$	14,301		$	3,871		$	3,246		$	2,582		$	819		$	30,809
Weighted average			33.5	%		35.8	%		38.8	%		36.6	%		35.1	%		35.6	%		35.7	%

Year of origination

Origination LTV

2018

2017

2016

2015

Total

(in millions)

<80 %

$
1,357

$
4,194

$
3,599

$
1,093

$
10,243

80-85 %

1,047

3,805

2,359

761

7,972

85-90 %

216

752

541

163

1,672

90-95 %

441

1,777

1,057

391

3,666

95-100 %

884

3,267

1,628

602

6,381

$
3,945

$
13,795

$
9,184

$
3,010

$
29,934

Weighted average

82.5
%

83.1
%

81.3
%

82.1
%

82.4
%

		Year of origination
Origination FICO credit score		2020		2019		2018		2017		2016		2015		Total
	(in millions)
600 - 649		$	46	$	204	$	82	$	39	$	26	$	15	$	412
650 - 699			312		1,375		797		507		325		162		3,478
700 - 749			1,455		4,246		1,386		1,118		834		258		9,297
750 or greater			4,169		8,436		1,597		1,576		1,397		384		17,559
Not available			8		40		9		6		—		—		63
		$	5,990	$	14,301	$	3,871	$	3,246	$	2,582	$	819	$	30,809
Weighted average			763		752		735		743		750		741		750

Year of origination

Current LTV (1)

2018

2017

2016

2015

Total

(in millions)

<80 %

$
2,383

$
9,126

$
7,948

$
2,766

$
22,223

80-85 %

419

2,012

866

169

3,466

85-90 %

605

1,918

297

60

2,880

90-95 %

467

656

61

11

1,195

95-100 %

65

72

9

3

149

>100%

6

11

3

1

21

$
3,945

$
13,795

$
9,184

$
3,010

$
29,934

Weighted average

78.0
%

75.2
%

68.4
%

65.4
%

72.5
%

		Year of origination
Origination loan-to value ratio		2020			2019			2018			2017			2016			2015			Total
	(in millions)
<80%		$	2,792		$	5,077		$	1,272		$	1,036		$	1,035		$	324		$	11,536
80-85%			1,010			2,755			934			919			697			220			6,535
85-90%			391			809			179			164			143			44			1,730
90-95%			547			1,487			429			400			285			91			3,239
95-100%			1,250			4,173			1,057			727			422			140			7,769
		$	5,990		$	14,301		$	3,871		$	3,246		$	2,582		$	819		$	30,809
Weighted average			80.8	%		83.2	%		83.2	%		82.6	%		80.8	%		81.0	%		82.4	%

		Year of origination
Current loan-to value ratio (1)		2020			2019			2018			2017			2016			2015			Total
	(in millions)
<80%		$	5,337		$	13,031		$	3,714		$	3,212		$	2,577		$	818		$	28,689
80-85%			502			948			114			27			4			1			1,596
85-90%			125			264			33			4			1			—			427
90-95%			24			45			8			2			—			—			79
95-100%			2			10			1			1			—			—			14
>100%			—			3			1			—			—			—			4
		$	5,990		$	14,301		$	3,871		$	3,246		$	2,582		$	819		$	30,809
Weighted average			66.8	%		66.5	%		62.8	%		57.8	%		52.4	%		49.4	%		63.5	%

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

Year of Origination

Geographic distribution

December 31, 2018

December 31, 2017

December 31, 2016

December 31, 2015

Total

(in millions)

CA

$
555

$
1,868

$
2,201

$
606

$
5,230

TX

267

973

1,021

448

2,709

FL

331

1,156

758

223

2,468

VA

194

716

712

310

1,932

MD

215

745

556

173

1,689

Other

2,383

8,337

3,936

1,250

15,906

$
3,945

$
13,795

$
9,184

$
3,010

$
29,934

Year of origination

Regional geographic concentration (1)

2018

2017

2016

2015

Total

(in millions)

Midwest

$
306

$
1,266

$
769

$
228

$
2,569

Northeast

332

1,503

983

386

3,204

Southeast

1,254

4,421

2,668

913

9,256

Southwest

839

2,778

1,675

633

5,925

West

1,214

3,827

3,089

850

8,980

$
3,945

$
13,795

$
9,184

$
3,010

$
29,934

		Year of origination
Geographic distribution		2020		2019		2018		2017		2016		2015		Total
	(in millions)
CA		$	617	$	1,373	$	459	$	340	$	476	$	145	$	3,410
FL			662		1,404		486		346		281		74		3,253
TX			738		1,266		311		284		335		131		3,065
VA			305		627		144		153		189		77		1,495
MD			225		574		173		182		168		46		1,368
Other			3,443		9,057		2,298		1,941		1,133		346		18,218
		$	5,990	$	14,301	$	3,871	$	3,246	$	2,582	$	819	$	30,809

		Year of origination
Regional geographic distribution (1)		2020		2019		2018		2017		2016		2015		Total
	(in millions)
Northeast		$	538	$	1,658	$	442	$	453	$	322	$	119	$	3,532
Southeast			2,031		4,951		1,395		1,123		827		256		10,583
Midwest			546		1,470		318		307		228		59		2,928
Southwest			1,595		3,253		749		650		498		178		6,923
West			1,280		2,969		967		713		707		207		6,843
		$	5,990	$	14,301	$	3,871	$	3,246	$	2,582	$	819	$	30,809

(1)

~~Midwest consists of IL, IN, IA, MI, MN, NE, ND, OH, SD, WI;~~ Northeast consists of CT, DE, MA, 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; Southwest consists of AZ, AR, CO, KS, LA, MO, NM, OK, TX, UT; West consists of AK, CA, GU, HI, ID, MT, NV, OR, WA and WY.~~

Year of origination

Collection status

2018

2017

2016

2015

Total

(in millions)

Delinquency

Current - 89 Days

$
3,940

$
13,770

$
9,159

$
2,992

$
29,861

90 - 179 Days

3

15

14

9

41

180+ Days

—

1

2

1

4

Foreclosure

—

2

2

1

5

Bankruptcy

2

7

7

7

23

$
3,945

$
13,795

$
9,184

$
3,010

$
29,934

~~Firm commitment to purchase CRT securities~~Southeast consists of AL, DC, FL, GA, KY, MD, MS, NC, SC, TN, VA, WV;

~~Following is a summary~~Midwest consists of ~~our firm commitment to purchase CRT securities:~~IA, IL, IN, MI, MN, NE, ND, OH, SD, WI;

Southwest consists of AR, AZ, CO, KS, LA, MO, NM, OK, TX, UT; and

West consists of AK, CA, GU, HI, ID, MT, NV, OR, WA and WY.

Year ended

December 31, 2018

(in thousands)

UPB of mortgage loans sold

$
16,392,300

Increase in expected face amount of firm commitment to purchase CRT
   securities backed by mortgage loans sold

$
605,052

Fair value of firm commitment recognized in Gain on sale of mortgage loans

$
30,595

Gains recognized on firm commitment included in Net gain (loss) on
   investments

$
7,399

December 31, 2018

(in thousands)

Firm commitment to purchase CRT securities

$
605,052

Fair value of firm commitment

$
37,994

UPB of mortgage loans sold subject to firm commitment to purchase CRT
   securities related to such loans

$
16,392,300

Collection status (in UPB):

Current

$
16,329,044

30—89 days delinquent

$
61,035

90—180 days delinquent

$
2,221

180 or more days delinquent

$
—

Foreclosure

$
—

Bankruptcy

$
1,258

		Year of origination
Collection status		2020		2019		2018		2017		2016		2015		Total
	(in millions)
Delinquency
Current - 89 Days		$	5,917	$	13,854	$	3,633	$	3,165	$	2,552	$	810	$	29,931
90 - 179 Days			12		44		29		15		13		8		121
180+ Days			61		400		204		66		16		1		748
Foreclosure			—		3		5		—		1		—		9
		$	5,990	$	14,301	$	3,871	$	3,246	$	2,582	$	819	$	30,809
Bankruptcy		$	1	$	22	$	19	$	10	$	11	$	2	$	65

Following is a summary of the composition of the mortgage loans underlying our firm commitment to purchase CRT securities. All such mortgage loans were originated during the year ended December 31, 2018:

Original Debt-to income ratio

December 31, 2018

(in millions)

<25%

$
1,559

25 - 30%

1,580

30 - 35%

2,258

35 - 40%

2,882

40 - 45%

3,751

>45%

4,362

$
16,392

Weighted average

38.2
%

Origination FICO score

December 31, 2018

(in millions)

600 - 649

$
216

650 - 699

2,369

700 - 749

5,278

750 or greater

8,509

N/A

20

$
16,392

Weighted average

$
746

Origination LTV

December 31, 2018

(in millions)

<80

$
5,035

80-85

4,133

85-90

849

90-95

1,971

95-100

4,404

$
16,392

Weighted average

83.5
%

Current LTV (1)

December 31, 2018

(in millions)

<80

$
8,074

80-85

1,762

85-90

1,892

90-95

3,394

95-100

1,235

>100%

35

$
16,392

Weighted average

81.8
%

~~(1)~~

~~Based on current UPB compared to estimated fair value of the property securing the mortgage loan.~~

Geographic distribution

December 31, 2018

(in millions)

CA

$
2,428

FL

1,466

TX

919

AZ

873

WA

809

Other

9,897

$
16,392

Regional geographic concentration (1)

December 31, 2018

(in millions)

Midwest

$
1,312

Northeast

1,351

Southeast

5,288

Southwest

3,413

West

5,028

$
16,392

~~(1)~~

Midwest consists of IL, IN, IA, MI, MN, NE, ND, OH, SD, WI; 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; Southwest consists of AZ, AR, CO, KS, LA, MO, NM, OK, TX, UT; West consists of AK, CA, GU, HI, ID, MT, NV, OR, WA and WY.

Collection status

December 31, 2018

(in millions)

Delinquency

Current

$
16,328

30 Days Delinquent

55

60 Days Delinquent

6

90 Days Delinquent

2

Bankruptcy

1

$
16,392

~~Real Estate Acquired in Settlement of Loans~~

~~Following is a summary of our REO by property type:~~

December 31, 2018

December 31, 2017

Property type

Carrying value

% total

Carrying value

% total

(dollars in thousands)

1 - 4 dwelling units

$
71,318

83
%

$
131,576

81
%
Condominium/Townhome/Co-op

9,060

11
%

16,771

10
%
Planned unit development

5,303

6
%

14,311

9
%
5+ dwelling units

—

0
%

207

0
%

$
85,681

100
%

$
162,865

100
%

December 31, 2018

December 31, 2017

Geographic distribution

Carrying value

% total

Carrying value

% total

(dollars in thousands)

New York

$
20,068

23
%

$
34,107

21
%
New Jersey

17,060

20
%

42,795

26
%
California

11,829

14
%

17,777

11
%
Florida

7,770

9
%

15,740

10
%
Massachusetts

5,789

7
%

6,838

4
%
Illinois

4,631

5
%

8,539

5
%
Other

18,534

22
%

37,069

23
%

$
85,681

100
%

$
162,865

100
%

Cash Flows

Our cash flows for the years ended December 31, ~~2018, 2017,~~2021, 2020, and ~~2016~~2019 are summarized below:

	Year ended December 31,									Year ended December 31,
	2018			2017			2016			2021			2020			2019
	(in thousands)									(in thousands)
Operating activities	$	(573,752	)	$	223,125		$	(621,543	)	$	(2,817,660	)	$	671,656		$	(2,985,074	)
Investing activities		(1,424,292	)		681,681			193,952			1,090,959			(15,367	)		(704,677	)
Financing activities		1,980,242			(861,635	)		403,959			1,727,980			(702,641	)		3,733,962
Net cash flows	$	(17,802	)	$	43,171		$	(23,632	)	$	1,279		$	(46,352	)	$	44,211

Our cash flows resulted in a net ~~decrease~~increase in cash of ~~$17.8~~$1.3 million during ~~2018,~~2021, as discussed below.

Operating activities

~~Cash~~Net cash used in operating activities totaled ~~$573.8 million~~$2.8 billion during ~~2018,~~2021, as compared to net cash provided by operating activities of ~~$223.1~~$671.7 million during 2020 and net cash used in operating activities of ~~$621.5 million~~$3.0 billion during ~~2017 and 2016, respectively.~~2019. Cash flows from operating activities ~~primarily reflect~~are most influenced by cash flows from ~~mortgage~~ loans acquired for sale as shown below:

	Year ended December 31,								Year ended December 31,
	2018			2017		2016			2021			2020			2019
	(in thousands)								(in thousands)
Operating cash flows from:
Mortgage loans acquired for sale	$	(689,826	)	$	192,849	$	(567,780	)
Loans acquired for sale									$	(2,704,816	)	$	(165,398	)	$	(3,291,371	)
Other		116,074			30,276		(53,763	)		(112,844	)		837,054			306,297
	$	(573,752	)	$	223,125	$	(621,543	)	$	(2,817,660	)	$	671,656		$	(2,985,074	)

Cash flows from ~~mortgage~~ loans acquired for sale primarily reflect changes in the level of production inventory from the beginning to ~~the~~ end of the ~~periods presented.~~

~~Investing activities~~

~~Net cash used in our investing activities was $1.4 billion during 2018,~~years presented as ~~compared to cash provided by investing activities of $681.7 million during 2017. The decrease in~~well as cash flows ~~from investing activities reflects our new investments in CRT Agreements and MBS, which exceeded proceeds from sales and repayments~~relating to related hedging activities. Our inventory of ~~other investments. We used cash to purchase MBS of $1.8 billion and made deposits of cash collateral securing CRT Agreements transactions totaling $596.6 million~~loans acquired for sale increased during the year ended December 31, ~~2018. We realized~~2021, as compared to 2020, resulting in the cash outflow relating to loans acquired for sale. The negative cash flows relating to loans acquired for sale during 2020 reflect the significant cash hedging costs that reduced cash inflows from ~~repayments~~loan sales by more than the decrease in our inventory of ~~MBS, sales and repayments~~loans held for sale. Our inventory of ~~mortgage~~ loans ~~repayment of ESS, sales of REO and distributions from CRT Agreements totaling $1.1 billion.~~acquired for sale increased during 2019, resulting in the cash outflow relating to loans acquired for sale.

Investing activities

Net cash provided by our investing activities was ~~$681.7 million~~$1.1 billion during ~~2017,~~2021, as compared to net cash ~~provided by~~used in investing activities of ~~$194.0~~$15.4 million and $704.7 million during ~~2016. The increase in cash flows~~2020 and 2019, respectively, due primarily to the $1.3 billion of distributions from ~~investing activities reflects proceeds from sales and repayments on our investments, which exceeded our~~CRT arrangements that were not replaced by new investments in CRT ~~Agreements and MBS. During 2016, we made significant additions to our portfolio of MBS. Such additions were not as significant during 2017. We realized~~arrangements. Investing cash inflows from repayments of MBS, sales and repayments of mortgage 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 millionflows during the year ended December 31, ~~2017.~~

~~Net cash provided by~~2021 increased, as compared to 2020 and 2019, primarily due to our investing activities was $194.0 million for the year ended December 31, 2016. This source of cash reflects sales and repayments on our investments, which exceeded our investments primarily consisting of CRT Agreements andreduced investment in MBS during ~~2016. We realized cash inflows from repayments of~~the year. Reduced growth in investment in MBS ~~sales and repayments of mortgage loans, repayment of ESS, sales of REO and distributions from~~was partially offset by increased investments in CRT ~~Agreements totaling $1.3 billion. We used cash to purchase MBS of $765.5 million and made deposits of cash collateral securing CRT Agreements transactions totaling $306.5 million.~~arrangements.

Financing activities

Net cash provided by our financing activities was ~~$2.0~~$1.7 billion during ~~2018,~~2021, as compared to net cash used in financing activities ~~totaling $861.6~~of $702.6 million ~~during 2017. The~~and net cash provided by financing activities of $3.7 billion during ~~2018 as compared~~2020 and 2019, respectively. This change reflects the increased borrowings to ~~2017~~finance our investment activities. Cash provided by financing activities during 2019, reflects ~~financing obtained to secure~~ the ~~purchase of MBS, deposits~~increased borrowings and the equity issuances made to ~~secure~~finance growth in investments in MBS, CRT ~~Agreements~~arrangements and growth in our inventory of ~~mortgage~~ loans held for sale.

Net cash provided by financing activities was $404.0 million for the year ended December 31, 2016. We increased borrowings primarily for the purpose of financing growth in our inventory of mortgage loans acquired for sale.

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

Liquidity and Capital Resources

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

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

The impact of the COVID-19 pandemic on our operations, liquidity and capital resources remains uncertain and difficult to predict. For further discussion of the potential impacts of the COVID-19 pandemic please also see “Risk Factors” in Part I, Item 1A.

Our current debt financing strategy is to finance our assets where we believe such borrowing is prudent, appropriate and available. We ~~have made~~make collateralized borrowings in the form of sales of assets under agreements to repurchase, ~~mortgage~~ loan participation

purchase and sale agreements and notes ~~payable. More recently, we have~~payable, including secured term financing for our MSRs and our CRT arrangements which has allowed us to more closely match the term of our borrowings to the expected lives of the assets securing those borrowings.

Because a significant portion of our current debt facilities consists of short-term borrowings, we expect to 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 of December 31, 2018 and December 31, 2017, we financed our investments in MBS, mortgage loans acquired for sale at fair value, mortgage loans at fair value, mortgage loans at fair value held by a VIE, MSRs, ESS, REO and CRT Agreement assets with sales under agreements to repurchase, mortgage loan participation purchase and sale agreements, notes payable, asset sold to PFSI under agreement to repurchase and asset-backed financing. Our leverage ratio, defined as all borrowings divided by shareholders’ equity at the date presented, was ~~3.89~~4.72 and ~~2.55~~3.78 at December 31, ~~2018~~2021 and December 31, ~~2017,~~2020, respectively.

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

	Year ended December 31,							Year ended December 31,
Assets sold under agreements to repurchase		2018		2017		2016			2021		2020		2019
	(in thousands)						(in thousands)
Average balance outstanding	$	3,901,772	$	3,332,084	$	3,382,528		$	6,161,755	$	5,508,147	$	5,600,469
Maximum daily balance outstanding	$	6,665,118	$	4,242,600	$	5,573,021		$	8,882,538	$	10,433,609	$	8,577,065
Ending balance	$	4,777,027	$	3,180,886	$	3,784,001		$	6,671,890	$	6,309,418	$	6,648,890

The difference between the maximum and average daily amounts outstanding is primarily due to timing of loan purchases and sales in our correspondent ~~acquisition~~production business. The total facility size of our assets sold under agreements to repurchase was approximately ~~$8.4~~$11.8 billion at December 31, ~~2018.~~2021.

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

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

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

•

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

~~The transactions relating to assets under notes payable provide for terms of two to five years.~~

•

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 $75 million in unrestricted cash and cash equivalents among the Company and/or our subsidiaries; a minimum of $75 million in unrestricted cash and cash equivalents among our Operating Partnership and its consolidated subsidiaries; a minimum of $25 million in unrestricted cash and cash equivalents between PennyMac Corp. (“PMC”) and PennyMac Holdings, LLC (“PMH”); a minimum of $25 million in unrestricted cash and cash equivalents at PMC; and a minimum of $10 million in unrestricted cash and cash equivalents at PMH;

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

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

~~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.~~

•

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 $100 million;

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

•

a minimum tangible net worth of $1.25 billion;

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

•

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

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

•

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

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

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

•

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%.~~

•

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.

•

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

•

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

•

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

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

•

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

•

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

•

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

Many 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~~our debt financing agreements contain a condition precedent 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~~obtaining additional funding that requires us to maintain ~~these financial covenants pursuant~~positive net income for at least one (1) of the previous two consecutive quarters, or other similar measures. For the first quarter of 2022, we have obtained waivers of this requirement from all of the applicable lenders. We may be required to ~~our MSR financing agreements.~~obtain additional waivers in the future if this condition precedent is not met.

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, ~~2018,~~2021, we have not entered into any off-balance sheet arrangements.

~~Contractual Obligations~~

As of December 31, 2018, we had contractual obligations aggregating $8.6 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 mortgage loans from correspondent sellers. Payment obligations under these agreements, including expected interest payments on long-term debt, are summarized below:

.

Payments due by period

Contractual obligations

Total

Less than
1 year

1 - 3
years

3 - 5
years

More
than
5 years

(in thousands)

Commitments to purchase mortgage loans from
correspondent sellers

$
1,688,516

$
1,688,516

$
—

$
—

$
—

Firm commitment to purchase CRT securities

605,052

605,052

—

—

—

Short‒term debt

5,082,237

5,082,237

—

—

—

Long‒term debt

1,014,318

—

255,000

450,000

309,318

Interest expense on long term debt (1)

259,218

45,632

70,375

47,655

95,556

Total

$
8,649,341

$
7,421,437

$
325,375

$
497,655

$
404,874

~~(1)~~

~~Interest expense on long term debt includes interest for the Asset-backed financing of a VIE, the Exchangeable Notes and the Term Notes.~~

All debt financing arrangements that matured between December 31, ~~2018~~2021 and the date of this Report have been renewed, extended or replaced.

The amount at risk (the fair value of the assets pledged plus the related margin deposit, less the amount advanced by the counterparty and accrued interest) relating to our assets sold under agreements to repurchase is summarized by counterparty below as of December 31, ~~2018:~~2021:

Counterparty	Amount at risk		Amount at risk
	(in thousands)		(in thousands)
RBC Capital Markets, L.P.			$	69,095
Barclays Capital Inc.				65,905
Bank of America, N.A.				50,736
Credit Suisse First Boston Mortgage Capital LLC	$	473,012		46,355
JPMorgan Chase & Co.		284,309		29,294
Bank of America, N.A.		98,900
Morgan Stanley Bank, N.A.				24,216
Citibank, N.A.		50,845		16,902
Deutsche Bank		29,797
Daiwa Capital Markets America Inc.				13,771
Goldman Sachs & Co. LLC				13,340
BNP Paribas Corporate & Institutional Banking		23,566		8,513
Daiwa Capital Markets America Inc.		19,831
Mizuho Securities		12,312
Morgan Stanley Bank, N.A.		5,925
Wells Fargo, N.A.		4,760
Royal Bank of Canada		3,423
Wells Fargo Securities, LLC				6,183
Amherst Pierpont Securities LLC				3,848
	$	1,006,680	$	348,158

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~~June 30, 2025 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.

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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~~was reimbursed $120,000 per fiscal quarter through June 30, 2020 and is reimbursed $165,000 per fiscal quarter from and after July 1, 2020, 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 or owned by PCM and/or its affiliates 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 ~~mortgage~~ 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 ~~mortgage~~ 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 ~~mortgage~~ 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 ~~mortgage~~ loans are charged based on a monthly per-loan dollar amount, with the actual dollar amount for each loan based on the delinquency, bankruptcy and/or foreclosure status of such loan or whether the underlying mortgage property has become REO. The base servicing fee rates for distressed whole ~~mortgage~~ loans range from $30 per month for current loans up to ~~$85~~$95 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 ~~mortgage~~ 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 ~~mortgage~~ 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 ~~mortgage~~ loan is a fixed-rate or adjustable-rate loan.

The base servicing fee rates for ~~mortgage~~ loans subserviced on our behalf are $7.50 per month for fixed-rate ~~mortgage~~ loans and $8.50 per month for adjustable-rate ~~mortgage~~ loans. To the extent that these ~~mortgage~~ loans become delinquent, PLS is entitled to an additional servicing fee per ~~mortgage~~ 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.~~fees, as well as certain fees for COVID-19 related forbearance and modification activities provided for under the CARES Act.

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 ~~mortgage~~ loan modification programs). HAMP establishes standard loan modification guidelines for “at risk” homeowners and provides incentive payments to certain participants, including ~~mortgage~~ loan servicers, for achieving modifications and successfully remaining in the program. The ~~mortgage~~ 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 ~~mortgage~~ 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 ~~mortgage~~ 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 ~~mortgage~~ loans, through June 30, 2020, PLS iswas 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 ~~mortgage~~ loans purchased in such month, plus (b) in the case of all ~~mortgage~~ loans other than ~~mortgage~~ 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 ~~mortgage~~ 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 ~~mortgage~~ 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 ~~mortgage~~ loans are held by us prior to purchase by PLS.

~~In consideration for~~Effective July 1, 2020, the ~~mortgage banking services provided by PLS with respect to our acquisition of mortgage loans under PLS’ early purchase program, PLS is entitled to~~fulfillment fees ~~accruing (i) at a rate equal to $1,500 per year per early purchase facility administered by PLS,~~ and ~~(ii) in the amount of $35 for each mortgage loan that we acquire thereunder.~~sourcing fees were revised as follows:

•

Fulfillment fees shall not exceed the following:

(i)

the number of loan commitments multiplied by a pull-through factor of either .99 or .80 depending on whether the loan commitments are subject to a “mandatory trade confirmation” or a “best efforts lock confirmation”, respectively, and then multiplied by $585 for each pull-through adjusted loan commitment up to and including 16,500 per quarter and $355 for each pull-through adjusted loan commitment in excess of 16,500 per quarter, plus

(ii)

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

(iii)

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

•

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

9081

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~~Through June 30, 2020, pursuant to the terms of the MSR recapture agreement entered into by PMC with PLS, if PLS ~~refinances~~refinanced through its consumer direct lending business ~~mortgage~~ loans for which we previously held the MSRs, PLS iswas 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 ~~mortgage~~ loans so originated.

Effective July 1, 2020, the 2020 MSR recapture agreement changes the recapture fee payable by PLS to a tiered amount equal to:

•

40% of the fair market value of the MSRs relating to the recaptured loans subject to the first 15% of the “recapture rate”;

•

35% of the fair market value of the MSRs relating to the recaptured loans subject to the recapture rate in excess of 15% and up to 30%; and

•

30% of the fair market value of the MSRs relating to the recaptured loans subject to the recapture rate in excess of 30%.

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

The MSR recapture agreement expires, unless terminated earlier in accordance with ~~the~~its terms, ~~of the agreement,~~ on ~~September 12, 2020,~~June 30, 2025, subject to automatic renewal for additional 18-month periods, unless terminated ~~earlier~~ in accordance with ~~the terms of the agreement~~.its terms.

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 ~~mortgage~~ 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 ~~mortgage~~ 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 ~~mortgage~~ loans. However, under the 12/19/16 Spread Acquisition Agreement, in any month where the transferred ESS relating to newly originated Ginnie Mae ~~mortgage~~ 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 ~~mortgage~~ 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 ~~mortgage~~ 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 ~~mortgage~~ 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. The remaining balance of the ESS was repaid during the quarter ended March 31, 2021.

Master Repurchase Agreement with ~~PLS~~

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 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) 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.

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 ~~mortgage~~ loan purchase agreement with our Servicer. Currently, we use the ~~mortgage~~ loan purchase agreement for the purpose of acquiring prime jumbo and Agency-eligible residential ~~mortgage~~ loans originated by our ~~Servicer through its consumer direct lending channel.~~Servicer. 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 ~~mortgage~~ loans acquired for sale. We believe that such assets’ fair values respond primarily to changes in the market interest rates for comparable recently-originated ~~mortgage~~ loans. Our other market-risk assets are a substantial portion of our investments and are primarily comprised of ~~distressed mortgage loans,~~ MSRs, ESS, CRT ~~Agreements~~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 ~~mortgage~~ loans or yields on MBS. Changes in interest rates are reflected in the prepayment speeds underlying these investments and in the pricing spread (an element of the discount rate) used in their valuation. We believe that the primary market risks to the fair values of our investment in ~~distressed mortgage loans respond primarily to~~CRT arrangements are changes in market credit spreads and the fair value of the real estate securing the loans underlying such ~~loans.~~arrangements.

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 ~~our~~ 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 or dependent upon the performance of residential ~~mortgage~~ 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 ~~Agreements~~arrangements which involve the absorption on our part of losses relating to certain ~~mortgage~~ loans we sell that subsequently default. The fair value of the assets we carry related to these ~~agreements~~arrangements are sensitive to credit market conditions generally, perceptions of the performance of the ~~mortgage~~ loans in our CRT ~~Agreements’~~arrangements’ reference pools specifically and to the actual performance of such ~~mortgage~~ loans.

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.

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. Changes in interest rates significantly influence the prepayment speed of the loans underlying our investment in MSRs and ESS which affects those assets’ estimated lives. In general, rising interest rates negatively affect the fair value of our investments in MBS and ~~mortgage~~ 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.

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 ~~mortgage~~ loans acquired for sale, MBS, ESS, ~~mortgage~~ 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 ~~the~~such MBS investments and will accelerate the ~~amortization~~fair value decline 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 ~~the~~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.

Risk Management Activities

We engage in risk management activities primarily in an effort to mitigate the effect of changes in interest rates on the fair value of our assets. To manage this price 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 fair value of our assets, primarily on our MSR investments as well as IRLCs and our inventory of loans held for sale. Our objective is to maintain our loss coverage levels within established thresholds while minimizing our hedging expense. We do not use derivative financial instruments other than IRLCs and repurchase agreement derivatives (both of which arise from our operations) for purposes other than in support of our risk management activities.

Our strategies are reviewed daily within a disciplined risk management framework. We use a variety of interest rate and spread shifts and scenarios and define target limits for market value and liquidity loss in those scenarios. With respect to our IRLCs and inventory of loans held for sale, we use MBS forward sale contracts to lock in the price at which we will sell the mortgage loans or resulting MBS, and further use MBS put options to mitigate the risk of our IRLCs not closing at the rate we expect. With respect to

our MSRs and other interest rate sensitive assets and liabilities, we seek to mitigate mortgage-based loss exposure utilizing MBS forward purchase and sale contracts, address exposures to smaller interest rate shifts with Treasury and interest rate swap futures, and use options and swaptions to achieve target coverage levels for larger interest rate shocks.

Fair Value Risk

Our ~~mortgage~~ 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 ~~mortgage~~ loans (along with any related recognized IRLCs), MBS, MSRs and ESS are more sensitive to changes in market interest rates, while ~~distressed mortgage loans and~~ CRT ~~agreements~~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 ~~mortgage~~ 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, ~~mortgage~~ 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 ~~mortgage~~ 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 ~~mortgage~~ 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 ~~mortgage~~ 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~~inputs 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.

The following tables summarize the fair value sensitivity of the respective assets to changes in the market in puts that we believe most affect their fair values as of December 31, 2021.

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, 2018,~~ given several hypothetical (instantaneous) changes in interest rates and parallel shifts in the yield curve:

Interest rate shift in basis points

-200

-75

-50

50

75

200

(dollar in thousands)

Fair value

$
2,750,928

$
2,691,168

$
2,667,584

$
2,543,571

$
2,507,793

$
2,316,845

Change in fair value:

$

$
140,506

$
80,746

$
57,162

$
(66,851
)

$
(102,629
)

$
(293,577
)
%

5.4
%

3.1
%

2.2
%

(2.6
)%

(3.9
)%

(11.2
)%

Interest rate shift in basis points	-200		-75		-50		50			75			200
	(in thousands)
Change in fair value	$	43,220	$	51,843	$	39,424	$	(52,271	)	$	(80,616	)	$	(223,622	)

Mortgage Servicing Rights

The following tables summarize the estimated change in fair value of MSRs as ~~of December 31, 2018,~~ given several shifts in pricing spread, prepayment speeds and annual per-loan cost of servicing:

Pricing spread shift in %

-20%

-10%

-5%

+5%

+10%

+20%

(dollars in thousands)

Fair value

$
1,221,241

$
1,191,106

$
1,176,568

$
1,148,496

$
1,134,941

$
1,108,742

Change in fair value:

$

$
58,872

$
28,738

$
14,200

$
(13,872
)

$
(27,428
)

$
(53,626
)
%

5.1
%

2.5
%

1.2
%

(1.2
)%

(2.4
)%

(4.6
)%

Change in fair value attributable to shift in:	-20%		-10%		-5%		+5%			+10%			+20%
	(in thousands)
Pricing spread	$	170,478	$	82,921	$	40,902	$	(39,826	)	$	(78,613	)	$	(153,220	)
Prepayment speed	$	264,842	$	126,905	$	62,159	$	(59,726	)	$	(117,162	)	$	(225,672	)
Annual per-loan cost of servicing	$	70,338	$	35,169	$	17,585	$	(17,585	)	$	(35,169	)	$	(70,338	)

Prepayment speed shift in %

-20%

-10%

-5%

+5%

+10%

+20%

(dollars in thousands)

Fair value

$
1,258,838

$
1,208,508

$
1,184,949

$
1,140,708

$
1,119,911

$
1,080,709

Change in fair value:

$

$
96,469

$
46,140

$
22,580

$
(21,661
)

$
(42,458
)

$
(81,660
)
%

8.3
%

4.0
%

1.9
%

(1.9
)%

(3.7
)%

(7.0
)%

Per-loan servicing cost shift in %

-20%

-10%

-5%

+5%

+10%

+20%

(dollars in thousands)

Fair value

$
1,195,562

$
1,178,966

$
1,170,667

$
1,154,070

$
1,145,772

$
1,129,175

Change in fair value:

$

$
33,194

$
16,597

$
8,298

$
(8,298
)

$
(16,597
)

$
(33,194
)
%

2.9
%

1.4
%

0.7
%

(0.7
)%

(1.4
)%

(2.9
)%

~~Excess servicing spread~~

~~The following tables summarize the estimated change in fair value of our ESS as of December 31, 2018, given several shifts in pricing spread and prepayment speed:~~

Pricing spread shift in %

-20%

-10%

-5%

+5%

+10%

+20%

(dollars in thousands)

Fair value

$
222,150

$
219,091

$
217,591

$
214,649

$
213,206

$
210,375

Change in fair value:

$

$
6,040

$
2,980

$
1,481

$
(1,461
)

$
(2,904
)

$
(5,735
)
%

2.8
%

1.4
%

0.7
%

(0.7
)%

(1.3
)%

(2.7
)%

Prepayment speed shift in %

-20%

-10%

-5%

+5%

+10%

+20%

(dollars in thousands)

Fair value

$
236,495

$
225,889

$
220,902

$
211,503

$
207,070

$
198,693

Change in fair value:

$

$
20,385

$
9,779

$
4,792

$
(4,607
)

$
(9,040
)

$
(17,418
)
%

9.4
%

4.5
%

2.2
%

(2.1
)%

(4.2
)%

(8.1
)%

CRT ~~Agreements~~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 ~~Agreements~~arrangements given several shifts in pricing spread:

Pricing spread shift in basis points

-100

-50

-25

25

50

100

(dollars in thousands)

Fair value

$
1,292,592

$
1,263,040

$
1,248,648

$
1,220,558

$
1,206,872

$
1,180,182

Change in fair value:

$

$
58,115

$
28,563

$
14,171

$
(13,918
)

$
(27,605
)

$
(54,295
)
%

4.7
%

2.3
%

1.2
%

(1.1
)%

(2.2
)%

(4.4
)%

Pricing spread shift in basis points	-100		-50		-25		25			50			100
	(in thousands)
Change in fair value	$	59,927	$	29,443	$	14,594	$	(14,347	)	$	(28,449	)	$	(55,944	)

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 ~~Agreements~~arrangements given several shifts:

Property value shift in %

-15%

-10%

-5%

5%

10%

15%

(dollars in thousands)

Fair value

$
1,205,997

$
1,220,842

$
1,229,026

$
1,237,919

$
1,240,309

$
1,241,805

Change in fair value:

$

$
(28,494
)

$
(13,649
)

$
(5,465
)

$
3,428

$
5,818

$
7,314

%

(2.3
)%

(1.1
)%

(0.4
)%

0.3
%

0.5
%

0.6
%

Property value shift in %	-15%			-10%			-5%			5%		10%		15%
	(in thousands)
Change in fair value	$	(47,775	)	$	(28,673	)	$	(13,120	)	$	11,427	$	21,105	$	29,369

~~Firm commitment to purchase CRT securities~~

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

Pricing spread shift in basis points

-100

-50

-25

25

50

100

(dollars in thousands)

Fair value

$
67,937

$
52,700

$
45,282

$
30,832

$
23,794

$
10,079

Change in fair value:

$

$
29,943

$
14,707

$
7,289

$
(7,162
)

$
(14,200
)

$
(27,915
)
%

78.8
%

38.7
%

19.2
%

(18.9
)%

(37.4
)%

(73.5
)%

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:

Property value shift in %

-15%

-10%

-5%

5%

10%

15%

(dollars in thousands)

Fair value

$
25,530

$
31,921

$
35,749

$
39,398

$
40,246

$
40,660

Change in fair value:

$

$
(12,464
)

$
(6,073
)

$
(2,245
)

$
1,405

$
2,252

$
2,667

%

(32.8
)%

(16.0
)%

(5.9
)%

3.7
%

5.9
%

7.0
%

~~Mortgage Loans at Fair Value~~

The following table summarizes the estimated change in fair value of our portfolio of distressed mortgage loans (comprised of mortgage loans at fair value, excluding mortgage loans at fair value held by VIE) as of December 31, 2018, given several hypothetical (instantaneous) changes in home values from those used in estimating fair value:

Property value shift in %

-15%

-10%

-5%

+5%

+10%

+15%

(dollars in thousands)

Fair value

$
104,781

$
109,412

$
113,731

$
121,459

$
124,900

$
128,106

Change in fair value:

$

$
(12,951
)

$
(8,321
)

$
(4,001
)

$
3,726

$
7,167

$
10,374

%

(11.0
)%

(7.1
)%

(3.4
)%

3.2
%

6.1
%

8.8
%

The following table summarizes the estimated change in fair value of our mortgage loans at fair value held by VIE as of December 31, 2018, net of the effect of changes in fair value of the related asset-backed financing of the VIE at fair value, given several hypothetical (instantaneous) changes in interest rates and parallel shifts in the yield curve:

Interest rate shift in basis points

-200

-75

-50

50

100

200

(dollar in thousands)

Fair value

$
291,264

$
291,023

$
290,892

$
290,210

$
290,020

$
289,042

Change in fair value:

$

$
691

$
450

$
319

$
(363
)

$
(553
)

$
(1,531
)
%

0.2
%

0.2
%

0.1
%

(0.1
)%

(0.2
)%

(0.5
)%

Item ~~7A.~~8.

~~Quantitative and Qualitative Disclosures About Market Risk~~

~~In response to this Item 7A, the information set forth on pages 92 through 96 is incorporated herein by reference.~~

~~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, ~~2018.~~2021.

The effectiveness of our internal control over financial reporting as of December 31, ~~2018~~2021 has been audited by Deloitte & Touche LLP, an independent registered public accounting firm, as stated in their report which appears herein.

Changes in Internal Control over Financial Reporting

There have been no changes in internal control over financial reporting during the quarter ended December 31, 2021, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

9786

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Shareholders and the Board of Trustees ~~and Shareholders~~ 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, ~~2018,~~2021, 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, ~~2018,~~2021, 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, ~~2018,~~2021, of the Company and our report dated February ~~26, 2019,~~25, 2022, 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.statements.

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.

/s/Deloitte & Touche LLP

Los Angeles, California

February ~~26, 2019~~

~~Changes in Internal Control over Financial Reporting~~

There has been no change in our internal control over financial reporting during the quarter ended December 31, 2018, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

25, 2022

Item 9B.

Other Information

None.

Item 9C.

Disclosure Regarding Foreign Jurisdictions that Prevent Inspections

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 30, ~~2019,~~2022, which is within 120 days after the end of fiscal year ~~2018.~~

2021.

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 30, ~~2019,~~2022, which is within 120 days after the end of fiscal year ~~2018.~~

2021.

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 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, 2021 concerning our common shares authorized for issuance under our equity incentive plan.

	(a)		(b)		(c)
Plan category	Number of securities to be issued upon exercise of outstanding options, warrants and rights		Weighted average exercise price of outstanding options, warrants and rights		Number of securities remaining available for future issuance under equity compensation plans excluding securities reflected in column(a))
Equity compensation plans approved by security holders (1)		372,710	$	—		8,207,421
Equity compensation plans not approved by security holders (2)		—		—	—
Total		372,710		—		8,207,421

(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 30, ~~2019,~~2022, which is within 120 days after the end of fiscal year ~~2018.~~2021.

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 30, ~~2019,~~2022, which is within 120 days after the end of fiscal year ~~2018.~~

2021.

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 30, ~~2019,~~2022, which is within 120 days after the end of fiscal year ~~2018.~~2021.

~~100~~

PART IV

Item 15.

Exhibits and Financial Statement Schedules


		Incorporated by Reference from the Below-Listed Form (Each Filed under SEC File Number 14-64423)


Exhibit No.	Exhibit Description	Form	Filing Date

3.1	Declaration of Trust of PennyMac Mortgage Investment Trust, as amended and restated.	10-Q	November 6, 2009

3.2	Second Amended and Restated Bylaws of PennyMac Mortgage Investment Trust.	8-K	March 16, 2018

3.3	Articles Supplementary classifying and designating the 8.125% Series A Fixed-to-Floating Rate Cumulative Redeemable Preferred Shares of Beneficial Interest.	8-A	March 7, 2017

3.4	Articles Supplementary classifying and designating the 8.00% Series B Fixed-to-Floating Rate Cumulative Redeemable Preferred Shares of Beneficial Interest.	8-A	June 30, 2017

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

4.1	Description of Securities Registered Pursuant to Section 12 of the Securities Exchange Act of 1934.	*

4.2	Specimen Common Share Certificate of PennyMac Mortgage Investment Trust.	10-Q	November 6, 2009

~~4.2~~ 4.3	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~~ 4.4	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~~ 4.5	Specimen Certificate for 6.75% Series C Cumulative Redeemable Preferred Shares of Beneficial Interest.	8-A	August 20, 2021

4.6	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~~ 4.7	~~First~~Second Supplemental Indenture, dated as of ~~April 30, 2013,~~November 7, 2019, among PennyMac Corp., PennyMac Mortgage Investment Trust and The Bank of New York Mellon Trust Company, ~~N.A.~~N.A.	8-K	~~April 30, 2013~~November 8, 2019

~~4.6~~ 4.8	~~Form~~Third Supplemental Indenture, dated as of ~~5.375% Exchangeable Senior Notes due 2020 (included in Exhibit 4.5).~~March 5, 2021, among PennyMac Corp., PennyMac Mortgage Investment Trust and The Bank of New York Mellon Trust Company, N.A.	8-K	March 5, 2021

4.9	Form of 5.50% Exchangeable Senior Notes due 2024 (included in Exhibit 4.6).	8-K	November 8, 2019

4.10	Form of 5.50% Exchangeable Senior Notes due 2026 (included in Exhibit 4.7).	8-K	March 5, 2021

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

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

10.5	Registration Rights Agreement, dated as of August 4, 2009, among PennyMac Mortgage Investment Trust, Stanford L. Kurland, David A. Spector, BlackRock Holdco ~~II,~~2, Inc., Highfields Capital Investments LLC and Private National Mortgage Acceptance Company, LLC.	10-Q	November 6, 2009

10.6	Third Amended and Restated Management Agreement, dated as of June 30, 2020, by and among PennyMac Mortgage Investment Trust, PennyMac Operating Partnership, L.P. and PNMAC Capital Management, LLC.	8-K	July 2, 2020

10.7	Fourth Amended and Restated Flow Servicing Agreement, dated as of June 30, 2020, between PennyMac Operating Partnership, L.P. and PennyMac Loan Services, LLC.	10-Q	July 2, 2020

10.8	Amendment No. 1 to Fourth Amended and Restated Flow Servicing Agreement, dated as of March 9, 2021, by and between PennyMac Loan Services, LLC and PennyMac Operating Partnership, L.P.	10-Q	May 7, 2021

10.9	Amendment No. 2 to the Fourth Amended and Restated Flow Servicing Agreement, dated as of June 4, 2021, by and between PennyMac Loan Services, LLC and PennyMac Operating Partnership, L.P.	10-Q	August 6, 2021

10.10	Amendment No. 3 to Fourth Amended and Restated Flow Servicing Agreement, dated as of September 29, 2021, by and between PennyMac Loan Services, LLC and PennyMac Operating Partnership, L.P.	10-Q	November 5, 2021

10.11	Second Amended and Restated Mortgage Banking Services Agreement, dated as of June 30, 2020, between PennyMac Loan Services, LLC and PennyMac Corp.	8-K	July 2, 2020

10.12	Amendment No. 1 to Second Amended and Restated Mortgage Banking Services Agreement, dated as of December 8, 2020, between PennyMac Loan Services, LLC and PennyMac Corp.	10-K	February 26, 2021

10.13	Second Amended and Restated MSR Recapture Agreement, dated as of June 30, 2020, between PennyMac Loan Services, LLC and PennyMac Corp.	8-K	July 2, 2020

10.14	Amendment No. 1 to Second Amended and Restated MSR Recapture Agreement, dated as of December 8, 2020, between PennyMac Loan Services, LLC and PennyMac Corp.	10-K	February 26, 2021

10.15	Mortgage Loan Purchase Agreement, dated as of September 25, 2012, by and between PennyMac Loan Services, LLC and PennyMac Corp.	10-K	February 29, 2016

10.16	Flow Sale Agreement, dated as of June 16, 2015, by and between PennyMac Corp. and PennyMac Loan Services, LLC.	10-Q	August 10, 2015

10.17	HELOC Flow Purchase and Servicing Agreement, dated as of February 25, 2019, by and between PennyMac Loan Services, LLC and PennyMac Corp.	10-Q	May 5, 2019

10.18†	PennyMac Mortgage Investment Trust 2009 Equity Incentive Plan.	10-Q	November 6, 2009

~~10.5~~10.19†	~~Amended and Restated Underwriting Fee Reimbursement Agreement, dated as of February 1, 2013, by and among~~First Amendment to the PennyMac Mortgage Investment Trust ~~PennyMac Operating Partnership, L.P. and PNMAC Capital Management, LLC.~~	~~8-K~~	~~February 7, 2013~~

~~101~~


~~10.6~~	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.	*

~~10.7~~	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.	~~8-K~~	~~September 12, 2016~~

~~10.8~~	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.Equity Incentive Plan.	10-Q	November 8, 2017

~~10.9~~10.20†	~~Third Amended and Restated Flow Servicing Agreement, dated as of September 12, 2016, between~~Second Amendment to the PennyMac ~~Operating Partnership, L.P. and PennyMac Loan Services, LLC.~~	~~8-K~~	~~September 12, 2016~~

~~10.10~~	~~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.~~	~~10-Q~~	~~Mat 7, 2018~~

~~10.11~~	~~Amended and Restated~~ Mortgage ~~Banking Services Agreement, dated as of September 12, 2016, by and between PennyMac Loan Services, LLC and PennyMac Corp.~~	~~8-K~~	~~September 12, 2016~~

~~10.12~~	~~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.~~	~~10-Q~~	~~August 8, 2017~~

~~10.13~~	~~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.~~	~~10-Q~~	~~November 8, 2017~~

~~10.14~~	~~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.~~Investment Trust Equity Incentive Plan.	10-K	March 1, 2018

~~10.15~~10.21†	~~Amended and Restated MSR Recapture Agreement, dated as of September 12, 2016, by and between PennyMac Loan Services, LLC and PennyMac Corp~~.	~~8-K~~	~~September 12, 2016~~

~~10.16~~	~~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.~~	~~10-K~~	~~March 1, 2018~~

~~10.17~~	~~Master Spread Acquisition and MSR Servicing Agreement, dated as of December 19, 2014, by and between PennyMac Loan Services, LLC, PennyMac Holdings, LLC and PennyMac Operating Partnership, L.P.~~	~~8-K~~	~~December 24, 2014~~

~~10.18~~	Amendment No 1. to Master Spread Acquisition and MSR Servicing Agreement, dated as of March 3, 2015, by and between PennyMac Loan Services, LLC, PennyMac Operating Partnership, L.P., and PennyMac Holdings, LLC.	~~10-Q~~	~~May 8, 2015~~

~~10.19†~~	PennyMac Mortgage Investment Trust ~~2009~~2019 Equity Incentive Plan.	~~10-Q~~DEF 14A	~~November 6, 2009~~

~~10.20†~~	~~First Amendment to the PennyMac Mortgage Investment Trust Equity Incentive Plan.~~	~~10-Q~~	~~November 8, 2017~~

~~10.21†~~	~~Second Amendment to the PennyMac Mortgage Investment Trust Equity Incentive Plan.~~	~~10-K~~	~~March 1, 2018~~April 22, 2019

10.22†	~~Form of Restricted Share Unit Award Agreement under the PennyMac Mortgage Investment Trust 2009 Equity Incentive Plan.~~	~~S-11/A~~	~~July 24, 2009~~

~~102~~


~~10.23†~~	~~Form of Restricted Share Unit Award Agreement under the PennyMac Mortgage Investment Trust 2009 Equity Incentive Plan.~~	~~10-Q~~	~~May 6, 2016~~

~~10.24†~~	~~Form of Performance Share Unit Award Agreement under the PennyMac Mortgage Investment Trust 2009 Equity Incentive Plan.~~	~~10-Q~~	~~May 6, 2016~~

~~10.25†~~	~~Form of Performance Share Unit Award Agreement under the PennyMac Mortgage Investment Trust 2009 Equity Incentive Plan (2016).~~	~~10-K~~	~~March 1, 2018~~

~~10.26†~~	~~Form of Performance Share Unit Award Agreement under the PennyMac Mortgage Investment Trust 2009 Equity Incentive Plan (2017).~~	~~10-Q~~	~~November 8, 2017~~

~~10.27†~~	~~Form of Performance Share Unit Award Agreement under the PennyMac Mortgage Investment Trust 2009 Equity Incentive Plan (2018)~~.	~~10-Q~~	~~August 7, 2018~~

~~10.28†~~	Form of Restricted Share Unit Award Agreement under the PennyMac Mortgage Investment Trust 2009 Equity Incentive Plan (2019).	*10-Q	February 26, 2019

~~10.29†~~10.23†	Form of Performance Share Unit Award Agreement under the PennyMac Mortgage Investment Trust 2009 Equity Incentive Plan (2019).	*10-Q	February 26, 2019

~~10.30~~10.24†	~~Amended and Restated Master Repurchase~~Form of Restricted Share Unit Award Agreement ~~dated as of March 3, 2017, among Citibank, N.A.,~~for Non-Employee Trustee under the PennyMac ~~Corp., PennyMac Holdings, LLC and PennyMac Loan Services, LLC.~~Mortgage Investment Trust 2009 Equity Incentive Plan (2019).	~~8-K~~10-Q	~~March 8, 2017~~May 3, 2019

~~10.31~~10.25†	~~Amendment Number One to~~Form of Performance Share Unit Award Agreement under the ~~Amended and Restated Master Repurchase~~PennyMac Mortgage Investment Trust 2019 Equity Incentive Plan (2020 MBOs).	10-Q	May 8, 2020

10. 26†	Form of Performance Share Unit Award Agreement ~~dated as~~under the PennyMac Mortgage Investment Trust 2019 Equity Incentive Plan (Net Share Withholding) (2020).	10-Q	May 8, 2020

10.27†	Form of ~~March 2, 2018, among~~Restricted Share Unit Award Agreement under the PennyMac ~~Corp.,~~Mortgage Investment Trust 2019 Equity Incentive Plan (Net Share Withholding) (2020).	10-Q	May 8, 2020

10.28†	Form of Restricted Share Unit Award Agreement under the PennyMac ~~Holdings, LLC,~~Mortgage Investment Trust 2019 Equity Incentive Plan (Non Employee Trustee) (2020).	10-Q	May 8, 2020

10.29†	Form of Restricted Stock Award Agreement under the PennyMac ~~Loan Services, LLC, and Citibank, N.A.~~Mortgage Investment Trust 2019 Equity Incentive Plan (Net Share Withholding) (2021).	10-Q	May 7, ~~2018~~2021

10.30†	Form of Performance Stock Award Agreement under the PennyMac Mortgage Investment Trust 2019 Equity Incentive Plan (Net Share Withholding) (2021).	10-Q	May 7, 2021

10.31†	Form of Restricted Stock Award Agreement under the PennyMac Mortgage Investment Trust 2019 Equity Incentive Plan (Non Employee Trustee) (2021).	10-Q	May 7, 2021

10.32	Amendment Number Two to the Amended and Restated Master Repurchase Agreement, dated as of May 1, 2018, by and among PennyMac Corp., PennyMac Holdings, LLC, PPennyMac Loan Services, LLC and Citibank, N.A.	~~10-Q~~	~~August 7, 2018~~

~~10.33~~	Amendment Number Three to the Amended and Restated Master Repurchase Agreement, dated as of May 9, 2018, by and among PennyMac Corp., PennyMac Holdings, LLC, PennyMac Loan Services, LLC and Citibank, N.A.	~~10-Q~~	~~August 7, 2018~~

~~10.34~~	Amendment Number Four to the Amended and Restated Master Repurchase Agreement, dated as of May 14, 2018, by and among PennyMac Loan Services, LLLC, PennyMac Holdings, LLC, PennyMac Corp., and Citibank, N.A.	~~8-K~~	~~May 18, 2018~~

~~10.35~~	Amendment Number Five to the Amended and Restated Master Repurchase Agreement, dated as of June 8, 2018, by and among PennyMac Loan Services, LLC, PennyMac Holdings, LLC, PennyMac Corp. and Citibank, N.A	~~8-K~~	~~June 14, 2018~~

~~10.36~~	~~Guaranty Agreement, dated as of December 9, 2010, by PennyMac Mortgage Investment Trust in favor of Citibank, N.A.~~	~~8-K~~	~~December 15, 2010~~

~~10.37~~	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.	~~8-K~~	~~May 3, 2017~~

~~10.38~~	Amendment No. 1 to Second Amended and Restated Master Repurchase Agreement, dated as of June 1, 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.	~~10-Q~~	~~August 8, 2017~~

~~103~~


~~10.39~~	Amendment No. 2 to Second Amended and Restated Master Repurchase Agreement, dated December 20, 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, LLC and PennyMac Mortgage Investment Trust.	~~10-K~~	~~March 1, 2018~~

~~10.40~~	Amendment No. 3 to Second Amended and Restated Master Repurchase Agreement, dated February 1, 2018, by and among Credit Suisse First Boston Mortgage Capital LLC, Credit Suisse AG, Cayman Islands Branch, Alpine Securitization LTD, PennyMac Holdings, LLC, PennyMac Corp., PennyMac Operating Partnership, L.P., PMC REO Financing Trust, LLC and PennyMac Mortgage Investment Trust	~~8-K~~	~~February 7, 2018~~

~~10.41~~	Amendment No. 4 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 Holdings, LLC, PennyMac Corp., PennyMac Operating Partnership, L.P., PMC REO Financing Trust, and PennyMac Mortgage Investment Trust.	~~10-Q~~	~~August 7, 2018~~

~~10.42~~	Amendment No. 5 to Second Amended and Restated Master Repurchase Agreement, dated as of February 11, 2019, by and among Credit Suisse First Boston Mortgage Capital LLC, Credit Suisse AG, Cayman Islands Branch, Alpine Securitization LTD, PennyMac Holdings, LLC, PennyMac Corp., PennyMac Operating Partnership, L.P., PMC REO Financing Trust, and PennyMac Mortgage Investment Trust.	*

~~10.43~~	Second Amended and Restated Guaranty, dated as of April 28, 2017, by PennyMac Mortgage Investment Trust and PennyMac Operating Partnership, L.P., in favor of Credit Suisse First Boston Mortgage Capital LLC.	~~8-K~~	~~May 3, 2017~~

~~10.44~~	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 Operating Partnership, L.P. and PennyMac Mortgage Investment Trust.	~~8-K~~	~~May 3, 2017~~

~~10.45~~	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.	~~10-Q~~	~~August 7, 2018~~

~~10.46~~	~~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.~~	~~8-K~~	~~May 3, 2017~~

~~10.47~~	~~Amended and Restated Master Repurchase Agreement, dated as of March 3, 2017, among Citibank, N.A., PennyMac Corp., and PennyMac Loan Services, LLC.~~	~~8-K~~	~~March 8, 2017~~

~~10.48~~	~~Amendment Number One to the Amended and Restated Master Repurchase Agreement, dated as of March 2, 2018, by and among PennyMac Corp., and PennyMac Loan Services, LLC and Citibank, N.A.~~	~~10-Q~~	~~May 7, 2018~~

~~10.49~~	~~Amendment Number Two to the Amended and Restated Master Repurchase Agreement, dated as of May 1, 2018, by and among PennyMac Corp., PennyMac Loan Services, LLC and Citibank, N.A.~~	~~10-Q~~	~~August 7, 2018~~

~~10.50~~	~~Amendment Number Three to the Amended and Restated Master Repurchase Agreement, dated as of May 9, 2018, by and among PennyMac Corp. PennyMac Loan Services, LLC, and Citibank, N.A.~~	~~10-Q~~	~~August 7, 2018~~

~~10.51~~	Amendment Number Four to the Amended and Restated Master Repurchase Agreement, dated as of May 14, 2018, by and among PennyMac Corp., PennyMac Operating Partnership, L.P. and PennyMac Loan Services, LLC and Citibank, N.A.	~~8-K~~	~~May 18, 2018~~

~~104~~


~~10.52~~	Amendment Number Five to the Amended and Restated Master Repurchase Agreement, dated as of June 8, 2018, by and among PennyMac Corp., PennyMac Operating Partnership, L.P. and PennyMac Loan Services, LLC and Citibank, N.A.	~~8-K~~	~~June 14, 2018~~

~~10.53~~	~~Guaranty, dated as of May 24, 2012, by PennyMac Mortgage Investment Trust in favor of Citibank, N.A.~~	~~8-K~~	~~May 30, 2012~~

~~10.54~~	~~Master Repurchase Agreement, dated as of November 20, 2012, among PennyMac Corp., Morgan Stanley Bank, N.A. and Morgan Stanley Mortgage Capital Holdings LLC.~~	~~8-K~~	~~November 26, 2012~~

~~10.55~~	~~Amendment Number One to the Master Repurchase Agreement, dated as of August 20, 2013, among PennyMac Corp., Morgan Stanley Bank, N.A. and Morgan Stanley Mortgage Capital Holdings LLC.~~	~~10-Q~~	~~November 12, 2013~~

~~10.56~~	~~Amendment Number Two to the Master Repurchase Agreement, dated as of August 26, 2013, among PennyMac Corp., Morgan Stanley Bank, N.A. and Morgan Stanley Mortgage Capital Holdings LLC.~~	~~10-Q~~	~~November 12, 2013~~

~~10.57~~	~~Amendment Number Three to the Master Repurchase Agreement, dated as of November 14, 2013, among PennyMac Corp., Morgan Stanley Bank, N.A. and Morgan Stanley Mortgage Capital Holdings LLC.~~	~~10-K~~	~~February 28, 2014~~

~~10.58~~	~~Amendment Number Four to the Master Repurchase Agreement, dated as of December 19, 2013, among PennyMac Corp., Morgan Stanley Bank, N.A. and Morgan Stanley Mortgage Capital Holdings LLC.~~	~~10-K~~	~~February 28, 2014~~

~~10.59~~	~~Amendment Number Five to the Master Repurchase Agreement, dated as of December 18, 2014, among PennyMac Corp., Morgan Stanley Bank, N.A. and Morgan Stanley Mortgage Capital Holdings LLC.~~	~~10-K~~	~~March 2, 2015~~

~~10.60~~	~~Amendment Number Six to the Master Repurchase Agreement, dated as of July 27, 2015, among PennyMac Corp., Morgan Stanley Bank, N.A. and Morgan Stanley Mortgage Capital Holdings LLC.~~	~~8-K~~	~~July 30, 2015~~

~~10.61~~	~~Amendment Number Seven to the Master Repurchase Agreement, dated as of December 17, 2015, among PennyMac Corp., Morgan Stanley Bank, N.A. and Morgan Stanley Mortgage Capital Holdings LLC.~~	~~10-K~~	~~February 29, 2016~~

~~10.62~~	~~Amendment Number Eight to the Master Repurchase Agreement, dated as of August 26, 2016, among PennyMac Corp., Morgan Stanley Bank, N.A. and Morgan Stanley Mortgage Capital Holdings LLC.~~	~~10-Q~~	~~November 4, 2016~~

~~10.63~~	~~Amendment Number Nine to the Master Repurchase Agreement, dated as of June 30, 2017, among PennyMac Corp., Morgan Stanley Bank, N.A. and Morgan Stanley Mortgage Capital Holdings LLC.~~	~~8-K~~	~~July 7, 2017~~

~~10.64~~	~~Amendment Number Ten to the Master Repurchase Agreement, dated as of August 25, 2017, among PennyMac Corp., Morgan Stanley Bank N.A. and Morgan Stanley Mortgage Capital Holdings LLC.~~	~~8-K~~	~~August 31, 2017~~

~~10.65~~	Amendment Number Eleven to the Master Repurchase Agreement, dated as of March 20, 2018, among PennyMac Corp., PennyMac Operating Partnership, L.P., Morgan Stanley Bank N.A. and Morgan Stanley Mortgage Capital Holdings LLC.	~~10-Q~~	~~May 7, 2018~~

~~10.66~~	Amendment Number Twelve to the Master Repurchase Agreement, dated as of August 24, 2018, among PennyMac Corp., PennyMac Operating Partnership, L.P., Morgan Stanley Bank N.A. and Morgan Stanley Mortgage Capital Holdings LLC.	~~10-Q~~	~~November 7, 2018~~

~~105~~


~~10.67~~	~~Guaranty, dated as of November 20, 2012, by PennyMac Mortgage Investment Trust in favor of Morgan Stanley Bank, N.A. and Morgan Stanley Mortgage Capital Holdings LLC.~~	~~8-K~~	~~November 26, 2012~~

~~10.68~~	~~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.~~	~~8-K~~	~~December 21, 2016~~

~~10.69~~	~~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.~~	~~8-K~~	~~December 21, 2016~~

~~10.70~~	~~Guaranty, dated as of December 19, 2016, by PennyMac Mortgage Investment Trust, in favor of PennyMac Loan Services, LLC.~~	~~8-K~~	~~December 21, 2016~~

~~10.71~~	~~Subordination, Acknowledgment and Pledge Agreement, dated as of December 19, 2016, between PNMAC GMSR ISSUER TRUST, as Buyer, and PennyMac Holdings, LLC, as Pledgor.~~	~~8-K~~	~~December 21, 2016~~

~~10.72~~	Mortgage Loan Participation Purchase and Sale Agreement, dated as of December 23, 2011, among Bank of America, N.A., PennyMac Corp., PennyMac Mortgage Investment Trust and PennyMac Operating Partnership, L.P.	~~8-K~~	~~February 6, 2014~~

~~10.73~~	Amendment No. 1 to Mortgage Loan Participation Purchase and Sale Agreement, dated as of August 17, 2012, among Bank of America, N.A., PennyMac Corp., PennyMac Mortgage Investment Trust and PennyMac Operating Partnership, L.P.	~~8-K~~	~~February 6, 2014~~

~~10.74~~	Amendment No. 2 to Mortgage Loan Participation Purchase and Sale Agreement, dated as of October 29, 2012, among Bank of America, N.A., PennyMac Corp., PennyMac Mortgage Investment Trust and PennyMac Operating Partnership, L.P.	~~8-K~~	~~February 6, 2014~~

~~10.75~~	Amendment No. 3 to Mortgage Loan Participation Purchase and Sale Agreement, dated as of December 5, 2012, among Bank of America, N.A., PennyMac Corp., PennyMac Mortgage Investment Trust and PennyMac Operating Partnership, L.P.	~~8-K~~	~~February 6, 2014~~

~~10.76~~	Amendment No. 4 to Mortgage Loan Participation Purchase and Sale Agreement, dated as of January 3, 2013, among Bank of America, N.A., PennyMac Corp., PennyMac Mortgage Investment Trust and PennyMac Operating Partnership, L.P.	~~8-K~~	~~February 6, 2014~~

~~10.77~~	Amendment No. 5 to Mortgage Loan Participation Purchase and Sale Agreement, dated as of March 28, 2013, among Bank of America, N.A., PennyMac Corp., PennyMac Mortgage Investment Trust and PennyMac Operating Partnership, L.P.	~~8-K~~	~~February 6, 2014~~

~~10.78~~	Amendment No. 6 to Mortgage Loan Participation Purchase and Sale Agreement, dated as of January 2, 2014, among Bank of America, N.A., PennyMac Corp., PennyMac Mortgage Investment Trust and PennyMac Operating Partnership, L.P.	~~8-K~~	~~February 6, 2014~~

~~10.79~~	Amendment No. 7 to Mortgage Loan Participation Purchase and Sale Agreement, dated as of January 31, 2014, among Bank of America, N.A., PennyMac Corp., PennyMac Mortgage Investment Trust and PennyMac Operating Partnership, L.P.	~~8-K~~	~~February 6, 2014~~

~~10.80~~	Amendment No. 8 to Mortgage Loan Participation Purchase and Sale Agreement, dated as of March 27, 2014, among Bank of America, N.A., PennyMac Corp., PennyMac Mortgage Investment Trust and PennyMac Operating Partnership, L.P.	~~10-Q~~	~~August 11, 2014~~

~~10.81~~	Amendment No. 9 to Mortgage Loan Participation Purchase and Sale Agreement, dated as of January 30, 2015, among Bank of America, N.A., PennyMac Corp., PennyMac Mortgage Investment Trust and PennyMac Operating Partnership, L.P.	~~10-K~~	~~March 2, 2015~~

~~106~~


~~10.82~~	Amendment No. 10 to Mortgage Loan Participation Purchase and Sale Agreement, dated as of December 22, 2015, among Bank of America, N.A., PennyMac Corp., PennyMac Mortgage Investment Trust and PennyMac Operating Partnership, L.P.	~~10-K~~	~~February 29, 2016~~

~~10.83~~	Amendment No. 11 to Mortgage Loan Participation Purchase and Sale Agreement, dated as of March 29, 2016, among Bank of America, N.A., PennyMac Corp., PennyMac Mortgage Investment Trust and PennyMac Operating Partnership, L.P.	~~10-Q~~	~~May 6, 2016~~

~~10.85~~	Amendment No. 12 to Mortgage Loan Participation Purchase and Sale Agreement, dated as of March 28, 2017, among Bank of America, N.A., PennyMac Corp., PennyMac Mortgage Investment Trust and PennyMac Operating Partnership, L.P.	~~10-Q~~	~~August 8, 2017~~

~~10.86~~	Amendment No. 14 to Mortgage Loan Participation Purchase and Sale Agreement, dated as of April 20, 2018, among Bank of America, N.A., PennyMac Corp., PennyMac Mortgage Investment Trust and PennyMac Operating Partnership, L.P	~~10-Q~~	~~May 7, 2018~~

~~10.87~~	Amendment No. 15 to Mortgage Loan Participation Purchase and Sale Agreement, dated as of June 29, 2018, among Bank of America, N.A., PennyMac Corp., PennyMac Mortgage Investment Trust and PennyMac Operating Partnership, L.P.	*

~~10.88~~	~~Guaranty, dated as of December 23, 2011, by PennyMac Mortgage Investment Trust and PennyMac Operating Partnership, L.P. in favor of Bank of America, N.A.~~	~~8-K~~	~~February 6, 2014~~

~~10.89~~	~~Master Repurchase Agreement, dated as of July 9, 2014, among Bank of America, N.A., PennyMac Operating Partnership, L.P. and PennyMac Mortgage Investment Trust.~~	~~8-K~~	~~July 14, 2014~~

~~10.90~~	~~Amendment No. 1 to Master Repurchase Agreement, dated as of January 30, 2015, among Bank of America, N.A., PennyMac Operating Partnership, L.P. and PennyMac Mortgage Investment Trust.~~	~~10-K~~	~~March 2, 2015~~

~~10.91~~	~~Amendment No. 2 to Master Repurchase Agreement, dated as of March 29, 2016, among Bank of America, N.A., PennyMac Operating Partnership, L.P. and PennyMac Mortgage Investment Trust.~~	~~10-Q~~	~~May 6, 2016~~

~~10.92~~	~~Amendment No. 3 to Master Repurchase Agreement, dated as of May 23, 2017, among Bank of America, N.A., PennyMac Operating Partnership, L.P. and PennyMac Mortgage Investment Trust.~~	~~8-K~~	~~May 30, 2017~~

~~10.93~~	~~Amendment No. 4 to Master Repurchase Agreement, dated as of April 20, 2018, among Bank of America, N.A., PennyMac Operating Partnership, L.P. and PennyMac Mortgage Investment Trust.~~	~~10-Q~~	~~May 7, 2018~~

~~10.94~~	~~Amendment No. 5 to Master Repurchase Agreement, dated as of June 29, 2018, among Bank of America, N.A., PennyMac Operating Partnership, L.P. and PennyMac Mortgage Investment Trust.~~	*

~~10.95~~	~~Amendment No. 6 to Master Repurchase Agreement, dated as of November 30, 2018, among Bank of America, N.A., PennyMac Operating Partnership, L.P. and PennyMac Mortgage Investment Trust.~~	*

~~10.71~~	~~Guaranty, dated as of July 9, 2014, by PennyMac Mortgage Investment Trust in favor of Bank of America, N.A.~~	~~8-K~~	~~July 14, 2014~~

~~10.97~~	Amended and Restated Master Repurchase Agreement, dated as of March 15, 2017, among JPMorgan Chase Bank, National Association, PennyMac Corp., PennyMac Operating Partnership, L.P., PennyMac Holdings, LLC, PMC REO Trust 2015-1 and PennyMac Mortgage Investment Trust.	~~8-K~~	~~March 21, 2017~~

~~107~~


~~10.98~~	Amendment No. 1 to Amended and Restated Master Repurchase Agreement, dated as of March 14, 2018, by and among JPMorgan Chase Bank, National Association, PennyMac Corp., PennyMac Operating Partnership, L.P., PennyMac Holdings, LLC, PMC REO Trust 2015-1 and PennyMac Mortgage Investment Trust.	~~8-K~~	~~March 16, 2018~~

~~10.99~~	~~Amended and Restated Guaranty, dated as of March 15, 2017, of PennyMac Mortgage Investment Trust in favor of JPMorgan Chase Bank, National Association.~~	~~8-K~~	~~March 21, 2017~~

~~10.100~~	~~Second Amended and Restated Loan and Security Agreement, dated as of March 24, 2017, by and among PennyMac Corp., PennyMac Holdings, LLC and Citibank, N.A.~~	~~8-K~~	~~March 30, 2017~~

~~10.102~~	~~Amendment Number Two to the Second Amended and Restated Loan and Security Agreement, dated as of May 1, 2018, by and among PennyMac Corp., PennyMac Holdings, LLC and Citibank, N.A.~~	~~10-Q~~	~~August 7, 2018~~

~~10.103~~	~~Amendment Number Three to the Second Amended and Restated Loan and Security Agreement, dated as of May 9, 2018, by and among PennyMac Corp., PennyMac Holdings, LLC and Citibank, N.A.~~	~~10-Q~~	~~August 7, 2018~~

~~10.104~~	~~Amendment Number Four to the Second Amended and Restated Loan and Security Agreement, dated as of May 14, 2018, by and among PennyMac Holdings, LLC, PennyMac Corp. and Citibank, N.A.~~	~~8-K~~	~~May 18, 2018~~

~~10.105~~	~~Amendment Number Five to the Second Amended and Restated Loan and Security Agreement, dated as of June 8, 2018, by and among PennyMac Corp., PennyMac Holdings, LLC and Citibank, N.A.~~	~~10-Q~~	~~August 7, 2018~~

~~10.106~~	~~Amendment Number Six to the Second Amended and Restated Loan and Security Agreement, dated as of June 22, 2018, by and among PennyMac Corp., PennyMac Holdings, LLC and Citibank, N.A~~.	~~10-Q~~	~~August 7, 2018~~

~~10.107~~	~~Amended and Restated Guaranty Agreement, dated as of September 15, 2016, by PennyMac Mortgage Investment Trust in favor of Citibank, N.A.~~	~~8-K~~	~~September 21, 2016~~

~~10.108~~	~~Master Repurchase Agreement, dated as of October 14, 2016, among PennyMac Corp., PennyMac Operating Partnership, L.P. and JPMorgan Chase Bank, N.A.~~	~~8-K~~	~~October 20, 2016~~

~~10.109~~	~~First Amendment to Master Repurchase Agreement, dated as of May 23, 2017, among PennyMac Corp., PennyMac Operating Partnership, L.P. and JPMorgan Chase Bank, N.A.~~	~~8-K~~	~~May 30, 2017~~

~~10.110~~	~~Second Amendment to Master Repurchase Agreement, dated as of July 31, 2017, among JPMorgan Chase Bank, N.A., PennyMac Corp. and PennyMac Operating Partnership, L.P.~~	~~10-Q~~	~~November 8, 2017~~

~~10.111~~	~~Third Amendment to Master Repurchase Agreement, dated as of October 13, 2017, among JPMorgan Chase Bank, N.A., PennyMac Corp. and PennyMac Operating Partnership, L.P.~~	~~10-Q~~	~~November 8, 2017~~

~~10.112~~	~~Fourth Amendment to Master Repurchase Agreement, dated as of July 26, 2018, among PennyMac Corp. and PennyMac Operating Partnership, L.P. and JPMorgan Chase Bank, N.A.~~	~~10-Q~~	~~November 7, 2018~~

~~10.113~~	~~Fifth Amendment to Master Repurchase Agreement, dated as of October 12, 2018, among PennyMac Corp. and PennyMac Operating Partnership, L.P. and JPMorgan Chase Bank, N.A.~~	~~10-Q~~	~~November 7, 2018~~

~~10.114~~	~~Guaranty, dated as of October 14, 2016, by PennyMac Mortgage Investment Trust in favor of JPMorgan Chase Bank, N.A.~~	~~8-K~~	~~October 20, 2016~~

~~108~~


~~10.115~~	~~Mortgage Loan Purchase Agreement, dated as of September 25, 2012, by and between PennyMac Loan Services, LLC and PennyMac Corp.~~	~~10-K~~	~~February 29, 2016~~

~~10.116~~	~~Flow Sale Agreement, dated as of June 16, 2015, by and between PennyMac Corp. and PennyMac Loan Services, LLC.~~	~~10-Q~~	~~August 10, 2015~~

~~10.117~~	~~Master Repurchase Agreement, dated as of September 14, 2015, among Barclays Bank PLC, PennyMac Corp., PennyMac Loan Services, LLC and PennyMac Mortgage Investment Trust.~~	~~8-K~~	~~September 18, 2015~~

~~10.118~~	~~Amendment Number One to Master Repurchase Agreement, dated as of August 31, 2016, among Barclays Bank PLC, PennyMac Corp., PennyMac Loan Services, LLC and PennyMac Mortgage Investment Trust.~~	~~10-Q~~	~~November 4, 2016~~

~~10.119~~	~~Amendment Number Two to Master Repurchase Agreement, dated as of September 29, 2016, among Barclays Bank PLC, PennyMac Corp., PennyMac Loan Services, LLC and PennyMac Mortgage Investment Trust.~~	~~10-Q~~	~~November 4, 2016~~

~~10.120~~	~~Amendment Number Three to Master Repurchase Agreement, dated as of December 2, 2016, among Barclays Bank PLC, PennyMac Corp., PennyMac Loan Services, LLC and PennyMac Mortgage Investment Trust.~~	~~10-K~~	~~February 28, 2017~~

~~10.121~~	~~Amendment Number Four to Master Repurchase Agreement, dated as of March 24, 2017, among Barclays Bank PLC, PennyMac Corp., PennyMac Loan Services, LLC and PennyMac Mortgage Investment Trust.~~	~~10-Q~~	~~May 9, 2017~~

~~10.122~~	~~Amendment Number Five to Master Repurchase Agreement, dated as of May 3, 2017, among Barclays Bank PLC, PennyMac Corp., PennyMac Loan Services, LLC and PennyMac Mortgage Investment Trust.~~	~~8-K~~	~~May 5, 2017~~

~~10.123~~	~~Amendment Number Six to Master Repurchase Agreement, dated as of June 16, 2017, among Barclays Bank PLC, PennyMac Corp., PennyMac Loan Services, LLC and PennyMac Mortgage Investment Trust.~~	~~8-K~~	~~June 21, 2017~~

~~10.124~~	~~Amendment Number Seven to Master Repurchase Agreement, dated as of December 1, 2017, among Barclays Bank PLC, PennyMac Corp., PennyMac Loan Services, LLC and PennyMac Mortgage Investment Trust.~~	~~10-K~~	~~March 1, 2018~~

~~10.125~~	~~Mortgage Loan Participation Purchase and Sale Agreement, dated as of September 14, 2015, among PennyMac Corp., PennyMac Loan Services, LLC and Barclays Bank PLC.~~	~~8-K~~	~~September 18, 2015~~

~~10.126~~	~~Amendment Number One to Mortgage Loan Participation Purchase and Sale Agreement, dated as of August 31, 2016, among PennyMac Corp., PennyMac Loan Services, LLC and Barclays Bank PLC~~.	~~10-Q~~	~~November 4, 2016~~

~~10.127~~	~~Amendment Number Two to Mortgage Loan Participation Purchase and Sale Agreement, dated as of December 2, 2016, among PennyMac Corp., PennyMac Loan Services, LLC and Barclays Bank PLC.~~	~~10-K~~	~~February 28, 2017~~

~~10.128~~	~~Amendment Number Three to Mortgage Loan Participation Purchase and Sale Agreement, dated as of May 3, 2017, among PennyMac Corp., PennyMac Loan Services, LLC and Barclays Bank PLC.~~	~~8-K~~	~~May 5, 2017~~

~~10.129~~	~~Amendment Number Four to Mortgage Loan Participation Purchase and Sale Agreement, dated as of June 16, 2017, among PennyMac Corp., PennyMac Loan Services, LLC and Barclays Bank PLC.~~	~~8-K~~	~~June 21, 2017~~

~~10.130~~	~~Amendment Number Five to Mortgage Loan Participation Purchase and Sale Agreement, dated as of December 1, 2017, among PennyMac Corp., PennyMac Loan Services, LLC and Barclays Bank PLC.~~	~~10-K~~	~~March 1, 2018~~

~~109~~



~~10.131~~	~~Amended and Restated Loan and Security Agreement, dated as of January 22, 2016, among PennyMac Corp., PennyMac Holdings, LLC, PennyMac Mortgage Investment Trust and Barclays Bank PLC.~~	~~8-K~~	~~January 28, 2016~~

~~10.132~~	Amendment Number One to Amended and Restated Loan and Security Agreement, dated as of August 31, 2016, among PennyMac Corp., PennyMac Holdings, LLC, PennyMac Mortgage Investment Trust and Barclays Bank PLC.	~~10-Q~~	~~November 4, 2016~~

~~10.133~~	Amendment Number Two to Amended and Restated Loan and Security Agreement, dated as of December 2, 2016, among PennyMac Corp., PennyMac Holdings, LLC, PennyMac Mortgage Investment Trust and Barclays Bank PLC.	~~10-K~~	~~February 28, 2017~~

~~10.134~~	Amendment Number Three to Amended and Restated Loan and Security Agreement, dated as of January 30, 2017, among PennyMac Corp., PennyMac Holdings, LLC, PennyMac Mortgage Investment Trust and Barclays Bank PLC.	~~10-K~~	~~February 28, 2017~~

~~10.135~~	Amendment Number Four to Amended and Restated Loan and Security Agreement, dated as of March 24, 2017, among PennyMac Corp., PennyMac Holdings, LLC, PennyMac Mortgage Investment Trust and Barclays Bank PLC.	~~10-Q~~	~~May 9, 2017~~

~~10.136~~	Amendment Number Five to Amended and Restated Loan and Security Agreement, dated as of June 16, 2017, among PennyMac Corp., PennyMac Holdings, LLC, PennyMac Mortgage Investment Trust and Barclays Bank PLC.	~~8-K~~	~~June 21, 2017~~

~~10.137~~	Amendment Number Six to Amended and Restated Loan and Security Agreement, dated as of December 1, 2017, among PennyMac Corp., PennyMac Holdings, LLC, PennyMac Mortgage Investment Trust and Barclays Bank PLC.	~~10-K~~	~~March 1, 2018~~

~~10.138~~	~~Loan and Security Agreement, dated as of March 24, 2017, by and among PennyMac Corp., PennyMac Holdings, LLC, PennyMac Mortgage Investment Trust and Barclays Bank PLC.~~	~~8-K~~	~~March 30, 2017~~

~~10.139~~	~~Amendment Number One to Loan and Security Agreement, dated June 16, 2017, by and among PennyMac Corp., PennyMac Holdings, LLC, PennyMac Mortgage Investment Trust and Barclays Bank PLC.~~	~~8-K~~	~~June 21, 2017~~

~~10.140~~	~~Amendment Number Two to Loan and Security Agreement, dated December 1, 2017, by and among PennyMac Corp., PennyMac Holdings, LLC, PennyMac Mortgage Investment Trust and Barclays Bank PLC.~~	~~10-K~~	~~March 1, 2018~~

~~10.141~~	~~Amended and Restated Flow Commercial Mortgage Loan Purchase Agreement, dated as of June 1, 2016, by and between PennyMac Loan Services, LLC and PennyMac Corp.~~	~~10-Q~~	~~August 5, 2016~~

~~10.142~~	~~Amendment No. 1 to Amended and Restated Flow Commercial Mortgage Loan Purchase Agreement, dated as of September 27, 2017, among PennyMac Corp. and PennyMac Loan Services, LLC.~~	~~10-Q~~	~~November 8, 2017~~

~~10.143~~	Servicing Agreement, dated as of July 13, 2015, between PennyMac Corp., PennyMac Holdings, LLC, any other parties signing this Agreement as an owner of Mortgage Loans as listed in Schedule I and any New Owners, PennyMac Loan Services, LLC, and Midland Loan Services, a division of PNC Bank, National Association.	~~10-K~~	~~February 29, 2016~~

~~10.144~~	~~Amended and Restated Commercial Mortgage Servicing Oversight Agreement, dated as of June 1, 2016, among PennyMac Corp., PennyMac Holdings, LLC, and PennyMac Loan Services, LLC.~~	~~10-Q~~	~~August 5, 2016~~

~~10.145~~	~~Amendment No. 1 to Amended and Restated Commercial Mortgage Servicing Oversight Agreement, dated as of September 27, 2017, among PennyMac Corp., PennyMac Holdings, LLC and PennyMac Loan Services, LLC.~~	~~10-Q~~	~~November 8, 2017~~

~~110~~



~~10.146~~	~~Master Repurchase Agreement, dated as of August 18, 2017, among PennyMac Corp. and Deutsche Bank AG, Cayman Islands Branch.~~	~~8-K~~	~~August 24, 2017~~

~~10.147~~	~~Amendment No. 1 to the Master Repurchase Agreement, dated as of April 17, 2018, by and between PennyMac Corp. and Deutsche Bank AG, Cayman Islands Branch.~~	~~8-K~~	~~April 23, 2018~~

~~10.148~~	~~Amendment No. 2 to the Master Repurchase Agreement, dated as of September 27, 2018, by and between PennyMac Corp. and Deutsche Bank AG, Cayman Islands Branch.~~	~~10-Q~~	~~November 7, 2018~~

~~10.149~~	~~Amendment No. 3 to the Master Repurchase Agreement, dated as of December 31, 2018, by and between PennyMac Corp. and Deutsche Bank AG, Cayman Islands Branch.~~	*

~~10.150~~	~~Amendment No. 4 to the Master Repurchase Agreement, dated as of January 29, 2019, by and between PennyMac Corp. and Deutsche Bank AG, Cayman Islands Branch.~~	*

~~10.151~~	~~Guaranty, dated as of August 18, 2017, by PennyMac Mortgage Investment Trust in favor of Deutsche Bank AG, Cayman Islands Branch.~~	~~8-K~~	~~August 24, 2017~~

~~10.152~~	Base Indenture, dated as of December 20, 2017, by and among PMT ISSUER TRUST-FMSR, Citibank, N.A., PennyMac Corp. and Credit Suisse First Boston Mortgage Capital LLC.	8-K	December 27, 2017

~~10.153~~10.33	Amendment No. 1, dated as of April 25, 2018, to the Base Indenture dated as of December ~~20.~~20, 2017, by and among PMT ISSUER TRUST - FMSR, Citibank, N.A., PennyMac Corp., and Credit Suisse First Boston Mortgage Capital ~~LLC.~~LLC	8-K	April 30, 2018

~~10.154~~10.34	Amendment No. 2, dated as of July 31, 2020 to the Base Indenture dated as of December 20, 2017, by and among PMT ISSUER TRUST - FMSR, Citibank, N.A., PennyMac Corp., and Credit Suisse First Boston Mortgage Capital LLC.	10-Q	August 7, 2020

10.35	Amendment No. 3, dated as of October 20, 2020 to the Base Indenture dated as of December 20, 2017, by and among PMT ISSUER TRUST – FMSR, Citibank, N.A., PennyMac Corp., and Credit Suisse First Boston Mortgage Capital LLC.	10-Q	November 6, 2020

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

10.37	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.~~LLC.	10-K	March 1, 2018

~~10.155~~10.38	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.	8-K	July 6, 2018

~~10.156~~10.39	Amendment No. 2 to the Series 2017-VF1 Indenture Supplement, dated as of August 4, 2020, among PMT ISSUER TRUST - FMSR, Citibank, N.A., PennyMac Corp. and Credit Suisse First Boston Mortgage Capital LLC.	8-K	August 10, 2020

10.40^	Amendment No. 3 to Series 2017-VF1 Indenture Supplement, dated as of August 9, 2021, by and among PMT ISSUER TRUST – FSMR, Citibank, N.A., PennyMac Corp. and Credit Suisse First Boston Mortgage Capital, LLC.	10-Q	November 5, 2021

10.41	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.	8-K	April 30, 2018

~~10.157~~10.42	Series 2021-FT1 Indenture Supplement, dated as of March 30, 2021, to Base Indenture dated as of December 20, 2017, by and among PMT ISSUER TRUST – FMSR, Citibank, N.A., PennyMac Corp. and Credit Suisse First Boston Mortgage Capital LLC.	8-K	March 31, 2021

10.43	Master Repurchase Agreement, dated as of December 20, 2017, by and among PennyMac Corp., PMT ISSUER TRUST-FMSR and PennyMac Mortgage Investment Trust.	8-K	December 27, 2017

~~10.158~~10.44	Guaranty, dated as of December 20, 2017, by PennyMac Mortgage Investment Trust in favor of PMT ISSUER TRUST – FMSR.	8-K	December 27, 2017

~~10.159~~10.45	Master Repurchase Agreement, dated as of December 20, 2017, by and among PennyMac Holdings, LLC, PennyMac Corp. and PennyMac Mortgage Investment Trust.	8-K	December 27, 2017

~~10.160~~10.46	Guaranty, dated as of December 20, 2017, by PennyMac Mortgage Investment Trust in favor of PennyMac Corp.	8-K	December 27, 2017


10.47	Subordination, Acknowledgement and Pledge Agreement, dated as of December 20, 2017, between PMT ISSUER TRUST – FMSR and PennyMac Holdings, LLC.	8-K	December 27, 2017

~~10.161~~10.48	~~Subordination, Acknowledgement and Pledge Agreement, dated as of December 20, 2017, between PMT ISSUER TRUST – FMSR and PennyMac Holdings, LLC.~~	~~8-K~~	~~December 27, 2017~~

~~10.162~~	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.	8-K	July 6, 2018

~~111~~

10.49	Joint Amendment No. 1 to the Series 2017-VF1 Repurchase Agreement and Amendment No. 2 to the Pricing Side Letter, dated as of August 4, 2020, among PennyMac Mortgage Investment Trust, PennyMac Corp., Credit Suisse First Boston Mortgage Capital LLC, and Credit Suisse AG, Cayman Islands Branch and Citibank, N.A.	8-K	August 10, 2020
~~10.163~~
10.50^˄	Joint Amendment No. 2 to the Series 2017-VF1 Repurchase Agreement and Amendment No. 5 to the Pricing Side Letter, dated as of August 9, 2021 by and among Credit Suisse First Boston Mortgage Capital, LLC, Credit Suisse AG, Cayman Islands Branch, Citibank, N.A., PennyMac Corp. and PennyMac Mortgage Investment Trust.	8-K	November 5, 2021

10.51^˄	Amendment No. 3 to the Series 2017-VF1 Repurchase Agreement, dated as of January 3, 2022, by and among Credit Suisse First Boston Mortgage Capital, LLC, Credit Suisse AG, Cayman Islands Branch, Citibank, N.A., PennyMac Corp. and PennyMac Mortgage Investment Trust.	*

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

~~10.164~~	~~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~~

~~10.165~~	~~Master Repurchase Agreement, dated as of April 17, 2018, by and among PennyMac Operating Partnership, L.P., PennyMac Corp. and PennyMac Mortgage Investment Trust and Royal Bank of Canada.~~	~~8-K~~	~~April 23, 2018~~

~~10.166~~	~~Amendment No. 1 to Master Repurchase Agreement, dated as of May 3, 2018, by and among PennyMac Operating Partnership, L.P., PennyMac Corp., PennyMac Mortgage Investment Trust and Royal Bank of Canada.~~	~~10-Q~~	~~August 7, 2018~~

~~10.167~~	~~Guaranty, dated as of April 17, 2018, by PennyMac Mortgage Investment Trust, in favor of Royal Bank of Canada.~~	~~8-K~~	~~April 23, 2018~~

~~10.168~~	~~Master Repurchase Agreement, dated as of August 3, 2018, by and among BNP Paribsas, PennyMac Operating Partnership, L.P., and PennyMac Mortgage Investment Trust.~~	~~8-K~~	~~August 8, 2018~~

~~10.169~~	~~Guaranty, dated as of August 3, 2018, by PennyMac Mortgage Investment Trust in favor of BNP Paribas.~~	~~8-K~~	~~August 8, 2018~~

21.1	Subsidiaries of PennyMac Mortgage Investment ~~Trust~~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~~Daniel S. ~~Chang~~Perotti pursuant to Rule 13a-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.	*

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

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

101	Interactive data files pursuant to Rule 405 of Regulation ~~S-T:~~S-T, formatted in Inline XBRL: (i) the Consolidated Balance Sheets as of December 31, ~~2018~~2021 and December 31, ~~2017~~2020 (ii) the Consolidated Statements of Income for the years ended December 31, ~~2018~~2021 and December 31, ~~2017,~~2020, (iii) the Consolidated Statements of Changes in Stockholders’ Equity for the years ended December 31, ~~2018~~2021 and December 31, ~~2017,~~2020, (iv) the Consolidated Statements of Cash Flows for the years ended December 31, ~~2018~~2021 and December 31, ~~2017~~2020 and (v) the Notes to the Consolidated Financial Statements.	*

101.INS	Inline XBRL Instance Document – the instance document does not appear in the Interactive Data File because XBRL tags are embedded within the Inline XBRL document.	*

101.SCH	Inline XBRL Taxonomy Extension Schema Document	*

101.CAL	Inline XBRL Taxonomy Extension Calculation Linkbase Document	*

101.DEF	Inline XBRL Taxonomy Extension Definition Linkbase Document	*

101.LAB	Inline XBRL Taxonomy Extension Label Linkbase Document	*

101.PRE	Inline XBRL Taxonomy Extension Presentation Linkbase Document	*

104	Cover Page Interactive Data File (embedded within the Inline XBRL document)

*	Filed herewith

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

†	Indicates management contract or compensatory plan or ~~arrangement.~~arrangement

It~~em 16.~~^˄

Portions of the exhibit have been redacted.

Item 16.

Form 10-K Summary

None.

~~112~~

PENNYMAC MORTGAGE INVESTMENT TRUST AND SUBSIDIARIES

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, ~~2018~~2021

		~~Page~~
Report of Independent Registered Public Accounting Firm (PCAOB ID No. 34)		F-2
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~~Income		~~F-5~~F-6
~~Notes to~~ Consolidated ~~Financial~~ Statements of Changes in Shareholders’ Equity		F-7
Consolidated Statements of Cash Flows		F-8
Notes to Consolidated Financial Statements		F-10

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Shareholders and the Board of Trustees ~~and Shareholders~~ 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, ~~2018~~2021 and ~~2017,~~2020, 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, ~~2018,~~2021, 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, ~~2018~~2021 and ~~2017,~~2020, and the results of its operations and its cash flows for each of the three years in the period ended December 31, ~~2018,~~2021, 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, ~~2018,~~2021, 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 ~~26, 2019,~~25, 2022, expressed an unqualified opinion on the Company’s internal control over financial reporting.

~~Change in Accounting Principle~~

As discussed in Note 3 to the consolidated financial statements, during 2018 the Company elected 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

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 (“MSRs”) - Refer to Notes 3, 7 and 12 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 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 preparing a value for comparison to the Company’s valuation

•

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 and Liabilities — 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 mortgage loans into Fannie Mae-guaranteed securitizations while retaining a portion of the credit risk underlying such mortgage loans. The Company retains an interest-only (“IO”) ownership interest in such mortgage loans and an obligation to absorb credit losses arising from such mortgage 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 and liabilities.

The Company accounts for CRT agreements and CRT strip assets and liabilities at fair value and categorizes them as “Level 3” fair value assets and liabilities. The Company determines the fair value of the CRT agreements and CRT strip assets and liabilities 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 liabilities and the related deposits. The Company applies adjustments to the indications of fair value of the CRT strip assets and liabilities due to contractual restrictions limiting the Company’s ability to sell them. The fair value of the CRT agreements and CRT strip assets and liabilities 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 and liabilities as a critical audit matter. Auditing the related fair values, particularly developing the discount rate 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 and liabilities 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 fair value estimates of the CRT agreements and CRT strip assets and liabilities, which included discount rate assumptions, and compared our estimates to the Company’s fair value.

/s/Deloitte & Touche LLP

Los Angeles, California

February ~~26, 2019~~25, 2022

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

PENNYMAC MORTGAGE INVESTMENT TRUST AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

	December 31,			December 31,			December 31,			December 31,
	2018			2017			2021			2020
	(in thousands, except share information)						(in thousands, except share information)
ASSETS
Cash	$	59,845		$	77,647		$	58,983		$	57,704
Short-term investments at fair value		74,850			18,398			167,999			127,295
Mortgage-backed securities at fair value pledged to creditors		2,610,422			989,461			2,666,768			2,213,922
Mortgage loans acquired for sale at fair value (includes $1,621,879 and $1,249,277 pledged to creditors, respectively)		1,643,957			1,269,515
Mortgage loans at fair value (includes $399,266 and $1,081,893 pledged to creditors, respectively)		408,305			1,089,473
Loans acquired for sale at fair value ($4,059,479 and $3,501,847 pledged to creditors, respectively)								4,171,025			3,551,890
Loans at fair value ($1,564,924 and $147,410 pledged to creditors, respectively)								1,568,726			151,734
Excess servicing spread purchased from PennyMac Financial Services, Inc. at fair value pledged to secure Assets sold to PennyMac Financial Services, Inc. under agreements to repurchase		216,110			236,534			0			131,750
Derivative assets (includes $87,976 and $26,058 pledged to creditors, respectively)		167,165			113,881
Firm commitment to purchase credit risk transfer securities at fair value		37,994			—
Real estate acquired in settlement of loans (includes $40,198 and $124,532 pledged to creditors, respectively)		85,681			162,865
Real estate held for investment (includes $23,262 and $31,128 pledged to creditors, respectively)		43,110			44,224
Deposits securing credit risk transfer agreements (includes $1,146,501 and $400,778 pledged to creditors, respectively)		1,146,501			588,867
Mortgage servicing rights (includes $1,162,369 and $91,459 at fair value; $1,139,582 and $831,892 pledged to creditors)		1,162,369			844,781
Servicing advances		67,666			77,158
Derivative assets ($19,627 and $58,699 pledged to creditors, respectively)								34,238			164,318
Deposits securing credit risk transfer arrangements pledged to creditors								1,704,911			2,799,263
Mortgage servicing rights at fair value ($2,863,544 and $1,742,905 pledged to creditors, respectively)								2,892,855			1,755,236
Servicing advances ($93,455 pledged to creditors at December 31, 2021)								204,951			121,820
Real estate acquired in settlement of loans ($7,293 and $15,365 pledged to creditors, respectively)								14,382			28,709
Due from PennyMac Financial Services, Inc.		4,077			4,154			15,953			8,152
Other		85,309			87,975			271,917			380,218
Total assets	$	7,813,361		$	5,604,933		$	13,772,708		$	11,492,011
LIABILITIES
Assets sold under agreements to repurchase	$	4,777,027		$	3,180,886		$	6,671,890		$	6,309,418
Mortgage loan participation purchase and sale agreements		178,639			44,488			49,988			16,851
Notes payable secured by credit risk transfer and mortgage servicing assets								2,471,961			1,924,999
Exchangeable senior notes		248,350			247,186			502,459			196,796
Notes payable		445,573			—
Asset-backed financing of a variable interest entity at fair value		276,499			307,419
Asset-backed financings at fair value								1,469,999			134,726
Interest-only security payable at fair value		36,011			7,070			10,593			10,757
Assets sold to PennyMac Financial Services, Inc. under agreements to repurchase		131,025			144,128			0			80,862
Derivative liabilities		5,914			1,306
Derivative and credit risk transfer strip liabilities at fair value								42,206			263,473
Accounts payable and accrued liabilities		70,687			64,751			96,156			124,809
Due to PennyMac Financial Services, Inc.		33,464			27,119			40,091			87,005
Income taxes payable		36,526			27,317			9,598			23,563
Liability for losses under representations and warranties		7,514			8,678			40,249			21,893
Total liabilities		6,247,229			4,060,348			11,405,190			9,195,152

Commitments and contingencies ─ Note 19
Commitments and contingencies ─ Note 16

SHAREHOLDERS’ EQUITY
Preferred shares of beneficial interest, $0.01 par value per share, authorized 100,000,000 shares, issued and outstanding 12,400,000 shares, liquidation preference $310,000,000		299,707			299,707
Common shares of beneficial interest—authorized, 500,000,000 common shares of $0.01 par value; issued and outstanding, 60,951,444 and 61,334,087 common shares, respectively		610			613
Preferred shares of beneficial interest, $0.01 par value per share, authorized 100,000,000 shares, issued and outstanding 22,400,000 and 12,400,000, shares respectively, liquidation preference ($560,000,000 and $310,000,000, respectively)								541,482			299,707
Common shares of beneficial interest—authorized, 500,000,000 common shares of $0.01 par value; issued and outstanding, 94,897,255 and 97,862,625 common shares, respectively								949			979
Additional paid-in capital		1,285,533			1,290,931			2,081,757			2,096,907
Accumulated deficit		(19,718	)		(46,666	)		(256,670	)		(100,734	)
Total shareholders’ equity		1,566,132			1,544,585			2,367,518			2,296,859
Total liabilities and shareholders’ equity	$	7,813,361		$	5,604,933		$	13,772,708		$	11,492,011

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

~~F-1~~

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):

	December 31,		December 31,		December 31,		December 31,
	2018		2017		2021		2020
	(in thousands)				(in thousands)
ASSETS
Mortgage loans at fair value	$	290,573	$	321,040
Derivative assets		123,987		98,640
Deposits securing credit risk transfer agreements		1,146,501		588,867
Loans at fair value					$	1,564,565	$	143,707
Derivative assets at fair value						19,627		58,699
Deposits securing credit risk transfer arrangements						1,704,911		2,799,263
Other—interest receivable		839		904		3,701		392
	$	1,561,900	$	1,009,451	$	3,292,804	$	3,002,061
LIABILITIES
Asset-backed financing at fair value	$	276,499	$	307,419
Asset-backed financings at fair value					$	1,469,999	$	134,726
Derivative and credit risk transfer liabilities at fair value						27,500		229,696
Interest-only security payable at fair value		36,011		7,070		10,593		10,757
Accounts payable and accrued liabilities—interest payable		839		904		3,701		392
	$	313,349	$	315,393	$	1,511,793	$	375,571

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

~~F-2~~

PENNYMAC MORTGAGE INVESTMENT TRUST AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

	Year ended December 31,									Year ended December 31,
	2018			2017			2016			2021			2020			2019
	(in thousands, except per share amounts)									(in thousands, except per common share amounts)
Net investment income
Net mortgage loan servicing fees:
Net gains (losses) on investments and financings:
From nonaffiliates	$	118,395		$	67,812		$	53,216		$	302,428		$	(148,156	)	$	270,848
From PennyMac Financial Services, Inc.		2,192			1,428			1,573			1,651			(22,729	)		(7,530	)
		120,587			69,240			54,789			304,079			(170,885	)		263,318
Net gain on mortgage loans acquired for sale:
Net gains on loans acquired for sale:
From nonaffiliates		48,260			62,432			97,218			80,801			368,885			155,783
From PennyMac Financial Services, Inc.		10,925			12,084			9,224			6,472			11,037			14,381
		59,185			74,516			106,442			87,273			379,922			170,164
Mortgage loan origination fees		43,321			40,184			41,993
Net gain (loss) on investments:
Loan origination fees											170,672			147,272			87,997
Net loan servicing fees:
From nonaffiliates		70,842			110,914			24,569
Contractually specified											526,245			406,060			295,390
Other											69,101			56,457			24,099
											595,346			462,517			319,489
Change in fair value of mortgage servicing rights											(337,186	)		(938,937	)		(464,353	)
Mortgage servicing rights hedging results											(345,041	)		601,743			80,622
											(86,881	)		125,323			(64,242	)
From PennyMac Financial Services, Inc.		11,084			(14,530	)		(17,394	)		50,859			28,373			5,324
		81,926			96,384			7,175			(36,022	)		153,696			(58,918	)
Interest income:
From nonaffiliates		207,634			178,225			199,521			193,959			213,717			307,594
From PennyMac Financial Services, Inc.		15,138			16,951			22,601			1,280			8,418			10,291
		222,772			195,176			222,122			195,239			222,135			317,885
Interest expense:
To nonaffiliates		167,709			143,333			141,938			304,350			267,445			291,144
To PennyMac Financial Services, Inc.		7,462			8,038			7,830			387			3,325			6,302
		175,171			151,371			149,768			304,737			270,770			297,446
Net interest income		47,601			43,805			72,354
Net interest (expense) income											(109,498	)		(48,635	)		20,439
Results of real estate acquired in settlement of loans		(8,786	)		(14,955	)		(19,118	)		3,075			5,465			771
Other		7,233			8,766			8,453			718			2,516			5,044
Net investment income		351,067			317,940			272,088			420,297			469,351			488,815
Expenses
Earned by PennyMac Financial Services, Inc.:
Mortgage loan fulfillment fees		81,350			80,359			86,465
Mortgage loan servicing fees		42,045			43,064			50,615
Loan fulfillment fees											178,927			222,200			160,610
Loan servicing fees											80,658			67,181			48,797
Management fees		24,465			22,584			20,657			37,801			34,538			36,492
Mortgage loan collection and liquidation		7,852			6,063			13,436
Loan origination											28,792			26,437			15,105
Loan collection and liquidation											11,279			10,363			4,600
Professional services											11,148			6,405			5,556
Safekeeping											9,087			7,090			5,097
Compensation		6,781			6,322			7,000			4,000			3,890			6,897
Mortgage loan origination		6,562			7,521			7,108
Professional services		6,380			6,905			6,819
Real estate held for investment		6,251			6,376			3,213
Other		11,393			14,200			15,012			13,944			11,517			15,020
Total expenses		193,079			193,394			210,325			375,636			389,621			298,174
Income before provision for (benefit from) income taxes		157,988			124,546			61,763
Provision for (benefit from) income taxes		5,190			6,797			(14,047	)
Income before (benefit from) provision for income taxes											44,661			79,730			190,641
(Benefit from) provision for income taxes											(12,193	)		27,357			(35,716	)
Net income		152,798			117,749			75,810			56,854			52,373			226,357
Dividends on preferred shares		24,938			15,267			—			30,891			24,938			24,938
Net income attributable to common shareholders	$	127,860		$	102,482		$	75,810		$	25,963		$	27,435		$	201,419
Earnings per common share
Basic	$	2.09		$	1.53		$	1.09		$	0.26		$	0.27		$	2.54
Diluted	$	1.99		$	1.48		$	1.08		$	0.26		$	0.27		$	2.42
Weighted average common shares outstanding
Basic		60,898			66,144			68,642			97,402			99,373			78,990
Diluted		69,365			74,611			77,109			97,402			99,373			87,711

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

~~F-3~~F-6

PENNYMAC MORTGAGE INVESTMENT TRUST AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

	Preferred shares					Common shares															Preferred shares					Common shares									(Accumulated
															Retained						Number					Number						Additional			deficit)
	Number					Number						Additional			earnings						of					of			Par			paid-in			retained
	of					of			Par			paid-in			(accumulated						shares		Amount			shares			value			capital			earnings			Total
	shares		Amount			shares			value			capital			deficit)			Total			(in thousands, except per share amounts)
	(in thousands, except per share amounts)
Balance at December 31, 2015		—	$	—			73,767		$	738		$	1,469,722		$	25,653		$	1,496,113
Balance at December 31, 2018																						12,400	$	299,707			60,951		$	610		$	1,285,533		$	(19,718	)	$	1,566,132
Net income		—		—			—			—			—			75,810			75,810			0		0			0			0			0			226,357			226,357
Share-based compensation		—		—			298			3			5,745			—			5,748			0		0			241			2			2,928			0			2,930
Common share dividends ($1.88 per share)		��		—			—			—			—			(128,187	)		(128,187	)
Repurchase of common shares		—		—			(7,368	)		(74	)		(98,296	)		—			(98,370	)
Balance at December 31, 2016		—		—			66,697			667			1,377,171			(26,724	)		1,351,114
Issuance of exchangeable notes with cash conversion option																						0		0			0			0			10,361			0			10,361
Issuance of common shares																						0		0			38,990			390			839,292			0			839,682
Issuance cost relating to common shares																						0		0			0			0			(10,225	)		0			(10,225	)
Dividends:
Preferred shares																						0		0			0			0			0			(24,944	)		(24,944	)
Common shares ($1.88 per share)																						0		0			0			0			0			(159,378	)		(159,378	)
Balance at December 31, 2019																						12,400	$	299,707			100,182		$	1,002		$	2,127,889		$	22,317		$	2,450,915
Net income		—		—			—			—			—			117,749			117,749			0		0			0			0			0			52,373			52,373
Share-based compensation		—		—			284			2			4,902			—			4,904			0		0			207			2			663			0			665
Dividends
Common shares ($1.88 per share)		—		—			—			—			—			(123,625	)		(123,625	)
Issuance of common shares																						0		0			241			2			5,652			0			5,654
Issuance costs relating to common shares																						0		0			0			0			(57	)		0			(57	)
Dividends:
Preferred shares		—		—			—			—			—			(14,066	)		(14,066	)		0		0			0			0			0			(24,945	)		(24,945	)
Issuance of preferred shares		12,400		310,000			—			—			—			—			310,000
Issuance cost relating to preferred shares		—		(10,293	)		—			—			—			—			(10,293	)
Common shares ($1.52 per share)																						0		0			0			0			0			(150,479	)		(150,479	)
Repurchase of common shares		—		—			(5,647	)		(56	)		(91,142	)		—			(91,198	)		0		0			(2,767	)		(27	)		(37,240	)		0			(37,267	)
Balance at December 31, 2017		12,400		299,707			61,334			613			1,290,931			(46,666	)		1,544,585
Cumulative effect of a change in accounting principle—Adoption of fair value accounting for mortgage servicing rights		—		—			—			—			—			14,361			14,361
Balance at January 1, 2018		12,400		299,707			61,334			613			1,290,931			(32,305	)		1,558,946
Balance at December 31, 2020																						12,400	$	299,707			97,863		$	979		$	2,096,907		$	(100,734	)	$	2,296,859
Net income		—		—			—			—			—			152,798			152,798			0		0			0			0			0			56,854			56,854
Share-based compensation		—		—			288			3			5,315			—			5,318			0		0			133			1			1,688			0			1,689
Dividends
Issuance of exchangeable notes with cash conversion option																						0		0			0			0			39,986			0			39,986
Issuance of preferred shares																						10,000		250,000			0			0			0			0			250,000
Issuance costs relating to preferred shares																						—		(8,225	)		0			0			0			0			(8,225	)
Dividends:
Preferred shares																						0		0			0			0			0			(30,146	)		(30,146	)
Common shares ($1.88 per share)		—		—			—			—			—			(115,267	)		(115,267	)		0		0			0			0			0			(182,644	)		(182,644	)
Preferred shares		—		—			—			—			—			(24,944	)		(24,944	)
Repurchase of common shares		—		—			(671	)		(6	)		(10,713	)		—			(10,719	)		0		0			(3,099	)		(31	)		(56,824	)		0			(56,855	)
Balance at December 31, 2018		12,400	$	299,707			60,951		$	610		$	1,285,533		$	(19,718	)	$	1,566,132
Balance at December 31, 2021																						22,400	$	541,482			94,897		$	949		$	2,081,757		$	(256,670	)	$	2,367,518

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

~~F-4~~

PENNYMAC MORTGAGE INVESTMENT TRUST AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

Year ended December 31,

2018

2017

2016

(in thousands)

Cash flows from operating activities

Net income

$
152,798

$
117,749

$
75,810

Adjustments to reconcile net income to net cash (used in) provided by operating
   activities:

Net change in fair value, amortization and impairment of mortgage servicing
   rights

94,330

103,487

78,628

Net gain on mortgage loans acquired for sale at fair value

(59,185
)

(74,516
)

(106,442
)
Net gain on investments

(81,926
)

(96,384
)

(7,175
)
Accrual of interest on excess servicing spread purchased from PennyMac
   Financial Services, Inc.

(15,138
)

(16,951
)

(22,601
)
Capitalization of interest and fees on mortgage loans at fair value

(7,439
)

(30,795
)

(84,820
)
Amortization of debt issuance (premiums) and costs, net

(9,323
)

13,769

13,152

Accrual of unearned discounts and amortization of premiums on mortgage-backed
   securities, mortgage loans at fair value, and asset-backed financing of a VIE

5,270

5,703

1,766

Results of real estate acquired in settlement of loans

8,786

14,955

19,118

Share-based compensation expense

5,318

4,904

5,748

Purchase of mortgage loans acquired for sale at fair value from nonaffiliates

(64,671,970
)

(65,830,095
)

(66,112,316
)
Purchase of mortgage loans acquired for sale at fair value from PennyMac Financial
   Services, Inc.

(3,343,028
)

(904,097
)

(21,541
)
Repurchase of mortgage loans subject to representation and warranties

(12,208
)

(11,412
)

(11,380
)
Sale to nonaffiliates and repayment of mortgage loans acquired for sale at fair value

29,369,656

24,314,165

23,525,952

Sale of mortgage loans acquired for sale to PennyMac Financial Services, Inc.

37,967,724

42,624,288

42,051,505

Settlement of repurchase agreement derivatives

8,964

—

—

Decrease (increase) in servicing advances

20,525

(2,353
)

4,672

(Increase) decrease in due from PennyMac Financial Services, Inc.

(26
)

2,514

1,640

(Increase) decrease in other assets

(23,482
)

8,822

(62,028
)
Increase (decrease) in accounts payable and accrued liabilities

6,400

(40,435
)

46,657

Increase (decrease) in due to PennyMac Financial Services, Inc.

6,345

10,656

(2,549
)
Increase (decrease) in income taxes payable

3,857

9,151

(15,339
)
Net cash (used in) provided by operating activities

(573,752
)

223,125

(621,543
)
Cash flows from investing activities

Net (increase) decrease in short-term investments

(56,452
)

103,690

(80,223
)
Purchase of mortgage-backed securities at fair value

(1,810,877
)

(251,872
)

(765,467
)
Sale and repayment of mortgage-backed securities at fair value

173,862

127,591

206,508

Sale to nonaffiliates and repayment of mortgage loans at fair value

622,705

582,207

712,975

Sale of mortgage loans at fair value to PennyMac Financial Services, Inc.

—

—

891

Repayment of excess servicing spread by PennyMac Financial Services, Inc.

46,750

54,980

69,992

Sale of excess servicing spread to PennyMac Financial Services, Inc.

—

—

59,045

Net settlement of derivative financial instruments

(4,863
)

(716
)

(7,216
)
Sale of real estate acquired in settlement of loans

99,194

166,921

234,684

Contribution to deposits securing credit risk transfer agreements

(596,626
)

(152,641
)

(306,507
)
Distribution from credit risk transfer agreements

125,920

65,564

24,746

Purchase of mortgage servicing rights

—

(79
)

(2,739
)
Sale of mortgage servicing rights

100

1,199

106

(Increase) decrease in margin deposits and restricted cash

(24,005
)

(15,163
)

40,062

Purchase of Federal Home Loan Bank capital stock

—

—

(225
)
Redemption of Federal Home Loan Bank capital stock

—

—

7,320

Net cash (used in) provided by investing activities

(1,424,292
)

681,681

193,952

	Year ended December 31,
	2021			2020			2019
	(in thousands)
Cash flows from operating activities
Net income	$	56,854		$	52,373		$	226,357
Adjustments to reconcile net income to net cash (used in) provided by operating activities:
Net (gains) losses on investments and financings		(304,079	)		170,885			(263,318	)
Net gains on loans acquired for sale at fair value		(87,273	)		(379,922	)		(170,164	)
Change in fair value of mortgage servicing rights		337,186			938,937			464,353
Mortgage servicing rights hedging results		345,041			(601,743	)		(80,622	)
Capitalization of interest and fees on loans at fair value		(251	)		0			(2,318	)
Accrual of interest on excess servicing spread purchased from PennyMac Financial Services, Inc.		(1,280	)		(8,418	)		(10,291	)
Accrual of unearned discounts and amortization of purchase premiums on mortgage-backed securities, loans at fair value, and asset-backed financings		9,803			24,712			13,574
Amortization of debt issuance costs		27,156			18,987			34
Results of real estate acquired in settlement of loans		(3,075	)		(5,465	)		(771	)
Gain on early extinguishment of debt		0			(1,738	)		0
Reversal of contingent underwriting fees		0			0			(1,134	)
Share-based compensation expense		2,419			2,294			5,530
Purchase of loans acquired for sale at fair value from nonaffiliates		(181,370,296	)		(167,768,999	)		(108,251,144	)
Purchase of loans acquired for sale at fair value from PennyMac Financial Services, Inc.		0			(2,248,896	)		(6,255,915	)
Sale to nonaffiliates and repayment of loans acquired for sale at fair value		110,919,477			106,306,805			61,128,081
Sale of loans acquired for sale to PennyMac Financial Services, Inc.		67,851,630			63,618,185			50,110,085
Repurchase of loans subject to representation and warranties		(105,627	)		(72,493	)		(22,478	)
Settlement of repurchase agreement derivatives		0			5,328			19,317
(Increase) decrease in servicing advances		(83,219	)		(73,129	)		18,772
(Increase) decrease in due from PennyMac Financial Services, Inc.		(7,744	)		(5,244	)		1,286
(Increase) decrease in other assets		(318,237	)		604,211			102,215
(Decrease) increase in accounts payable and accrued liabilities		(27,320	)		34,836			3,613
(Decrease) increase in due to PennyMac Financial Services, Inc.		(46,914	)		38,406			14,571
(Decrease) increase in income taxes payable		(13,965	)		21,744			(34,707	)
Net cash (used in) provided by operating activities		(2,819,714	)		671,656			(2,985,074	)
Cash flows from investing activities
Net increase in short-term investments		(40,704	)		(36,459	)		(15,986	)
Purchase of mortgage-backed securities at fair value		(2,232,923	)		(2,332,096	)		(1,250,289	)
Sale and repayment of mortgage-backed securities at fair value		1,696,400			3,022,336			1,085,508
Purchase of securities secured by loans held in consolidated variable interest entities		(28,815	)		0			0
Sale and repayment of loans at fair value		122,260			114,553			131,652
Repurchase of loans at fair value		0			(1,058	)		(1,077	)
Repayment of excess servicing spread receivable from PennyMac Financial Services, Inc.		134,624			32,377			40,316
Net settlement of derivative financial instruments		3,863			(8,029	)		(929	)
Settlement of firm commitment to purchase credit risk transfer securities		0			128,786			31,925
Deposit of cash securing credit risk transfer arrangements		0			(1,700,000	)		(933,370	)
Distribution from credit risk transfer arrangements		1,300,061			871,485			221,905
Sale of mortgage servicing rights		0			7			17
Sale of real estate acquired in settlement of loans		17,096			43,505			74,973
Decrease (increase) in margin deposits		121,151			(150,774	)		(89,322	)
Net cash provided by (used in) investing activities		1,093,013			(15,367	)		(704,677	)

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

Statements continued on the next page

~~F-5~~F-8

PENNYMAC MORTGAGE INVESTMENT TRUST AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)

Year ended December 31,

2018

2017

2016

(in thousands)

Cash flows from financing activities

Sale of assets under agreements to repurchase

85,574,226

77,985,354

70,684,674

Repurchase of assets sold under agreements to repurchase

(83,978,547
)

(78,587,535
)

(70,030,317
)
Issuance of mortgage loan participation certificates

7,559,680

6,960,713

6,579,706

Repayment of mortgage loan participation certificates

(7,425,503
)

(6,942,079
)

(6,553,789
)
Advance under notes payable

450,000

396,240

129,812

Repayment of notes payable

—

(671,346
)

(90,812
)
Issuance of asset-backed financing of a variable interest entity at fair value

—

—

182,400

Repayment of asset-backed financing of a variable interest entity at fair
   value

(21,886
)

(51,687
)

(73,624
)
Sale of assets to PennyMac Financial Services, Inc. under
   agreements to repurchase

2,293

—

—

Repurchase of assets sold to PennyMac Financial Services, Inc. under
   agreement to repurchase

(15,396
)

(5,872
)

—

Federal Home Loan Bank advances

—

—

28,000

Repayment of Federal Home Loan Bank advances

—

—

(211,000
)
Payment of debt issuance costs

(13,230
)

(13,670
)

(11,161
)
Issuance of preferred shares

—

310,000

—

Payment of issuance costs related to preferred shares

—

(10,293
)

—

Payment of dividends to preferred shareholders

(24,944
)

(14,066
)

—

Payment of dividends to common shareholders

(115,596
)

(126,135
)

(131,560
)
Repurchase of common shares

(10,719
)

(91,198
)

(98,370
)
Payment of contingent underwriting fees payable

(136
)

(61
)

—

Net cash provided by (used in) financing activities

1,980,242

(861,635
)

403,959

Net (decrease) increase in cash and restricted cash

(17,802
)

43,171

(23,632
)
Cash and restricted cash at beginning of year

77,647

34,476

58,108

Cash and restricted cash at end of year

$
59,845

$
77,647

$
34,476

Cash and restricted cash end of year are comprised of the following:

Cash

$
59,845

$
77,647

$
34,476

Restricted cash

—

—

—

$
59,845

$
77,647

$
34,476

	Year ended December 31,
	2021			2020			2019
	(in thousands)
Cash flows from financing activities
Sale of assets under agreements to repurchase		193,729,139			190,821,908			137,742,171
Repurchase of assets sold under agreements to repurchase		(193,372,527	)		(191,152,716	)		(135,870,355	)
Issuance of mortgage loan participation purchase and sale agreements		4,172,863			5,159,029			4,825,348
Repayment of mortgage loan participation purchase and sale agreements		(4,139,725	)		(5,142,178	)		(5,004,074	)
Issuance of notes payable secured by credit risk transfer and mortgage servicing assets		2,022,127			850,000			1,308,730
Repayment of notes payable secured by credit risk transfer and mortgage servicing assets		(1,472,508	)		(622,549	)		(56,468	)
Issuance of exchangeable senior notes		345,000			0			210,000
Repayment of exchangeable senior notes		0			(248,262	)		0
Issuance of asset-backed financings at fair value		690,550			0			0
Repayment of asset-backed financings at fair value		(115,137	)		(107,333	)		(42,753	)
Sale of assets sold to PennyMac Financial Services, Inc. under agreement to repurchase		0			0			26,503
Repurchase of assets sold to PennyMac Financial Services, Inc. under agreement to repurchase		(80,862	)		(26,650	)		(50,016	)
Payment of debt issuance costs		(21,007	)		(23,990	)		(15,642	)
Payment of dividends to preferred shareholders		(30,146	)		(24,945	)		(24,944	)
Payment of dividends to common shareholders		(183,973	)		(151,580	)		(141,001	)
Issuance of preferred shares		250,000			0			0
Payment of issuance costs related to preferred shares		(8,225	)		0			0
Issuance of common shares		0			5,654			839,682
Payment of issuance costs related to common shares		0			(57	)		(10,225	)
Payment of contingent underwriting fees payable related to common shares		(4	)		(76	)		(394	)
Payment of vested share-based compensation tax withholdings		(730	)		(1,629	)		(2,600	)
Repurchase of common shares		(56,855	)		(37,267	)		0
Net cash provided by (used in) financing activities		1,727,980			(702,641	)		3,733,962
Net increase (decrease) in cash		1,279			(46,352	)		44,211
Cash at beginning of year		57,704			104,056			59,845
Cash at end of year	$	58,983		$	57,704		$	104,056

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

~~F-6~~

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~~4 segments: ~~correspondent production,~~ credit sensitive strategies, interest rate sensitive strategies, correspondent production, and corporate:

•

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

•

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

•

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

The ~~correspondent production segment represents~~Company primarily sells 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 mortgage~~ loans either directly or in the form of mortgage-backed securities (“MBS”), using the services of PNMAC Capital Management, LLC (“PCM” or the “Manager”) and PennyMac Loan Services, LLC (“PLS”), both indirect controlled subsidiaries of PennyMac Financial Services, Inc. (“PFSI”).

~~Almost all of the mortgage loans the Company has acquired in~~it acquires through 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~~to PLS for sale into securitizations guaranteed by the Government National Mortgage Association (“Ginnie Mae”). Fannie Mae, Freddie Mac and Ginnie Mae are each referred to as an “Agency” and, collectively, as the “Agencies.”

The credit sensitive strategies segment represents the Company’s investments in credit risk transfer arrangements, including credit risk transfer agreements (“CRT Agreements”) and CRT securities, distressed mortgage loans, real estate acquired in settlement of mortgage loans (“REO”), real estate held for investment, non-Agency subordinated bonds and small balance commercial real estate mortgage loans.

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

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

•

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— 1 – Organizationabove, PMT’s operations and investing activities are centered in residential mortgage-related assets, including CRT ~~Agreements~~arrangements, subordinate Non-Agency MBS and ~~distressed mortgage loans. These investments include assets that~~MSRs. CRT arrangements are more sensitive to borrower credit ~~worthiness~~performance than other ~~mortgage~~mortgage-related investments such as traditional ~~mortgage~~ loans and ~~mortgage-backed securities.~~MBS. MSRs are sensitive to changes in prepayment rate activity and expectations.

~~CRT Arrangements~~Credit Risk

~~As detailed in~~ Note 56 – ~~Loan Sales and~~ Variable Interest Entities,details the ~~Company invests~~Company’s investments in CRT arrangements whereby itthe Company sells pools of recently-originated ~~mortgage~~ loans into Fannie Mae-guaranteed securitizations while either:

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

•

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

The Company also invests in subordinate Non-Agency MBS which are among the first beneficial interests in those securitizations to absorb credit losses ~~arising from such mortgage loans (“Recourse Obligations”); or~~

~~Beginning in June 2018, by entering into a firm commitment to purchase CRT securities that absorb losses from defaults of such~~on the underlying loans.

~~F-7~~F-10

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

CRT Agreements are structured such that ~~mortgage~~ loans that reach a specific number of days delinquent ~~will~~(including loans in forbearance which also includes those subject to the forbearance provided in the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”)) trigger losses chargeable to the CRT Agreements ~~in proportion to~~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 ~~mortgage~~ loans because the structure ~~of certain~~ of the CRT Agreements provides that the Company may be required to absorb losses in the event of delinquency or foreclosure even ~~where~~when there is ultimately no loss realized with respect to such loans (e.g., as a result of a borrower’s re-performance).

At In contrast, the ~~commencement~~structure of the aggregation period and before the settlement of the CRT securities, the Company makes a firm commitment to purchase the CRT securities. The Company has elected to account for these commitments at fair value. Accordingly, the Company recognizes the fair value of such commitment as it sells loans subject to the firm commitment, and also recognizes changes in fair value of the firm commitment during the time it is outstanding. Unlike the Company’s investment in CRT ~~Agreements before June 2018, the structure of its investment in CRT securities only~~strips requires ~~the Company~~PMT to absorb losses only when the reference ~~mortgage~~ loans realize actual losses.

InFair Value Risk

The Company is exposed to fair value risk in addition to the risks specific to credit ~~the Company is 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, the firm commitment to purchase CRT securities, and CRT securities.~~

~~Distressed Mortgage Loans~~

~~Due to the nature of the Company’s~~its investments in ~~distressed mortgage loans, the Company is exposed, to a greater extent than traditional mortgage investors, to certain risks associated with loan performance~~MSRs, CRT arrangements, and resolution, including the risk that borrowers may develop or be in economic distress and/or may have become unemployed, bankrupt or otherwise unable or unwilling to make payments when due, and that fluctuations in the residential real estate market may affect the performance of the Company’s investments.

~~Factors influencing these risks include, but are not limited to:~~MBS:

~~changes in the overall economy, unemployment rates and residential real estate fair values in the markets where the properties securing the Company’s distressed mortgage loans are located;~~

•

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

~~PCM’s ability to identify and PLS’ ability to execute optimal resolutions of distressed mortgage loans;~~

•

The fair value of CRT arrangements is sensitive to market perceptions of future credit performance of the underlying loans as well as the actual credit performance of such loans and to the returns required by market participants to hold such investments; and

~~the accuracy of valuation information obtained during the Company’s due diligence activities;~~
•
The fair value of MBS is sensitive to changes in market interest rates.

~~PCM’s ability to effectively model, and to develop appropriate model inputs that properly anticipate, future outcomes;~~

the level of government support for resolution of distressed mortgage loans and the effect of current and future proposed and enacted legislative and regulatory changes on the Company’s ability to effect cures or resolutions to distressed mortgage loans; and

regulatory, judicial and legislative support of the foreclosure process, and the resulting effect on the Company’s ability to acquire and liquidate the real estate securing its portfolio of distressed mortgage loans in a timely manner or at all.

Due to these uncertainties, there can be no assurance that risk management activities identified and executed on PMT’s behalf will prevent significant losses arising from the Company’s investments in distressed mortgage assets.

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”).

~~F-8~~

Use of Estimates

Preparation of financial statements in compliance with GAAP requires the ~~Manager~~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 ~~a securitization transaction, and, previously, CRT Agreements as~~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 ~~Variable Interest Entities (“VIEs”).~~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.

F-11

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 economic performance of 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 Mortgage 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 mortgage loans at a 3.9% weighted cost.

The asset-backed securities issued by the VIE are backed by the expected cash flows from the underlying fixed-rate prime jumbo mortgage loans. Cash inflows from these fixed-rate prime jumbo mortgage 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 settled, 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.Credit Risk Transfer Arrangements

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 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 the Company as the Manager determined that PMT is the primary beneficiary of the VIE. The Manager concluded that the Company is the primary beneficiary of the VIE as it has the power, through its affiliate, PLS, in its role as servicer of the mortgage 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 the Company to losses and returns that could potentially be significant to the VIE.

~~F-9~~

~~For financial reporting purposes, the mortgage loans owned by the consolidated VIE are included in~~ ~~Mortgage 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 mortgage loans at fair value included in the consolidated VIE and the Asset-backed financing of a variable interest entity at fair value are also included in a separate statement following the Company’s consolidated balance sheets.

The Company recognizes the interest income earned on the mortgage 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, through its wholly-owned subsidiary, PennyMac Corp. (“PMC”), entered into~~holds CRT ~~Agreements~~arrangements with Fannie Mae, pursuant to which ~~PMC,~~PennyMac Corp. (“PMC”), through subsidiary trust entities, sold pools of ~~mortgage~~ loans into Fannie Mae-guaranteed loan securitizations while retaining Recourse Obligations for credit losses in addition to IO ownership interests in such ~~mortgage~~ loans. The ~~mortgage~~ loans subject to the CRT ~~Agreements~~arrangements were transferred by PMC to subsidiary trust entities which sold the ~~mortgage~~ loans into Fannie Mae ~~mortgage~~ loan securitizations. Transfers of ~~mortgage~~ loans subject to CRT ~~Agreements~~arrangements received sale accounting treatment.

The ~~Manager~~Company has concluded that ~~the Company’s~~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 and liabilities, 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 isare the sole source of settlement of losses under the CRT ~~Agreements.~~arrangements. Gains and losses on the ~~derivatives~~derivative and interest-only strip assets and liabilities related to CRT ~~Agreements~~arrangements are included in Net ~~gain~~gains (losses) on investments and financings in the consolidated statements of income.

Investment in Securities Backed by Loans Secured by Investment Properties

Beginning in the quarter ended June 30, 2021, the Company retained or purchased subordinate mortgage pass-through securities backed by loans secured by investment properties in transactions sponsored by PMC or a nonaffiliate. The Company has retained or purchased securities relating to transactions with initial UPBs totaling approximately $1.5 billion through December 31, 2021.

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

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

The Company has concluded that the trusts holding the assets underlying these transactions are VIEs. The Company concluded that it is the primary beneficiary of the VIEs as it has the power, through PLS, in its role as the servicer or sub-servicer of the loans, to direct the activities of the trusts that most significantly impact the trusts’ economic performance and, as a holder of subordinate securities, that it is exposed to losses that could potentially be significant to the VIEs. Therefore, PMT consolidates the VIEs.

Jumbo Loan Securitization Transaction

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 subordinate 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 subordinate interests in the securitized assets, which are the first beneficial interests to absorb credit losses on those assets. The Company expects that any credit losses in the pools of securitized assets will likely be limited to the Company’s subordinate 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.

F-12

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

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

Fair Value

~~These~~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 ~~Manager~~Company has elected to carry ~~them~~the item at its fair ~~value. PMT~~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.

•

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

Fair Value Accounting Elections

The Company identified all of PMT’s non-cash financial assets, its Firm commitment to purchase CRT securities and MSRs to be accounted for at fair value. The Company has elected to account for these assets at fair value so such changes in fair value will be reflected in income as they occur and more timely reflect the results of the Company’s performance.

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

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.

~~F-10~~F-13

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 (loss)~~gains (losses) on ~~investments.~~ investments and financings. 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 ~~Manager~~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 ~~Manager~~Company updates its cash flow estimates monthly.

~~Mortgage~~ Loans

~~Mortgage loans~~Loans are carried at their fair values. Changes in the fair value of ~~mortgage~~ 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 (loss)~~gains (losses) on investments and financings for ~~mortgage~~ loans classified as ~~mortgage loans~~Loans at fair value and Net ~~gain~~gains on ~~mortgage~~ loans acquired for sale for ~~mortgage~~ loans classified as ~~mortgage loans~~Loans acquired for sale at fair ~~value.~~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 ~~mortgage~~ loans into the secondary mortgage market without recourse for credit losses. However, the Company maintains continuing involvement with the ~~mortgage~~ loans in the form of servicing arrangements and the liability under the representations and warranties it makes to purchasers and insurers of the ~~mortgage~~ loans.

The Company recognizes transfers of ~~mortgage~~ loans as sales based on whether the transfer is made to a VIE:

For mortgage loans that are not transferred to a VIE, the Company recognizes the transfer as a sale when it surrenders control over the mortgage loans. Control over transferred mortgage loans is deemed to be surrendered when (i) the mortgage 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 mortgage loans, and (iii) the Company does not maintain effective control over the transferred mortgage 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 mortgage 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.

For mortgage loans that are transferred to a VIE, the Company recognizes the transfer as a sale when the Manager determines that the Company is not the primary beneficiary of the VIE, as the Company would not both have the power to direct the activities that will have the most significant economic impact on the VIE and/or would not hold a variable interest that could potentially be significant to the 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 the loans before their maturity or (b) the ability to unilaterally cause the holder to return specific loans.

Interest Income Recognition

The Company has the ability but not the intent to hold ~~mortgage~~ loans acquired for sale and ~~mortgage~~ loans at fair value other than ~~mortgage~~ loans held in ~~a VIE~~VIEs for the foreseeable future. Therefore, interest income on ~~mortgage~~ loans acquired for sale and ~~mortgage~~ loans at fair value other than ~~mortgage~~ loans held in ~~a VIE~~VIEs is recognized over the life of the loans using their contractual interest rates.

The Company has both the ability and intent to hold ~~mortgage~~ loans held in ~~a VIE~~VIEs for the foreseeable future. Therefore, interest income on ~~mortgage~~ loans held in ~~a variable interest entity~~VIEs is recognized over the estimated remaining life of the ~~mortgage~~ 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 ~~mortgage~~ loans.

~~F-11~~

Income recognition is suspended and the accrued unpaid interest receivable is reversed against interest income when ~~mortgage loans become~~a loan becomes 90 days ~~delinquent, or when, in the Manager’s opinion, a full recovery of income and principal becomes doubtful.~~delinquent. 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. ~~Changes in fair value resulting from changes in market yield requirements are recognized in current period income in~~ ~~Net gain (loss) on investments~~. 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~~.

F-14

Derivative ~~Financial Instruments~~and Credit Risk Transfer Strip Assets and Liabilities

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

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

~~IRLCs that are created when the Company commits to purchase mortgage loans acquired for sale;~~

•

Interest rate lock commitments (“IRLCs”) that are created when the Company commits to purchase loans acquired for sale;

CRT Agreements that were created when the Company retained Recourse Obligations relating to certain mortgage loans it sold into Fannie Mae guaranteed securitizations, IO ownership interests in such mortgage loans and interest-only securities payable relating to the issuance of such instruments to nonaffiliates; and

•

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

Derivatives that are created when the Company finances mortgage loans approved as satisfying certain consumer credit relief characteristics under a master repurchase agreement that entitles the Company to receive interest expense offsets when it finances mortgage loans under the master repurchase agreement. The master repurchase agreement is subject to a rolling six-month term through August 21, 2019, unless terminated earlier at the option of the lender. The Company expects that it will cease to accrue the incentives under the repurchase agreement beginning in the second quarter of 2019.

•

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

The Company engages in interest rate risk management activities in an effort to reduce the variability of earnings caused by the effects of changes in interest rates on the fair value of certain of its assets and ~~liabilities:~~

~~The Company is exposed to price risk relative to the IRLCs it issues to correspondent sellers and to the mortgage loans it purchases as a result of issuing the IRLCs.~~liabilities. The Company bears price risk from the time an IRLC is issued to a correspondent seller until either the prospective purchase transaction is cancelled or the time the purchased mortgage loan is sold. The Company is exposed to loss if market mortgage interest rates increase, because such interest rate increases generally cause the fair value of the IRLC or mortgage loan acquired for sale to decrease.

~~The Company is exposed to losses~~ related to its ~~investment~~mortgage production, servicing and MBS financing activities due to changes in ~~MSRs and ESS if~~ market ~~mortgage~~ interest rates decrease, because such interest rate decreases generally encourage mortgage refinancing activity, which reduces the expected life of the mortgage loans underlying the MSRs and ESS, causing the fair value of MSRs and ESS to decrease.as discussed below:

•

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

•

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

To manage the price risk resulting from these interest rate ~~risk,~~risks, the Company uses derivative financial instruments with the intention of moderating the risk that changes in market ~~mortgage~~ interest rates will result in unfavorable changes in the fair value of the Company’s inventory of ~~mortgage~~ loans acquired for sale, ~~mortgage loans held in a VIE,~~ IRLCs, MSRs ~~ESS~~ and MBS financing.

~~F-12~~

The Company ~~accounts for its~~records all derivative ~~financial instruments as free-standing derivatives.~~and CRT strip assets and liabilities 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. All derivative financial instruments are recognized on the balance sheet at fair value with changes in fair value being reported in current period income. The fair value of the Company’s derivative financial instruments is included in ~~Derivative assets~~ ~~and~~ ~~Derivative liabilities~~ ~~and changes in fair value are included in~~ ~~Net mortgage loan servicing fees from nonaffiliates, in~~ ~~Net gain on mortgage loans acquired for sale, in~~ ~~Net gain (loss) on investments,~~ ~~or in~~ ~~Interest expense,~~ ~~as applicable, in the Company’s consolidated statements of income.~~

Cash flows from derivative financial instruments relating to hedging of IRLCs and loans acquired for sale are included in Cash flows from operating activities in Sale and repayment of loans acquired for sale at fair value to nonaffiliates. Cash flows from derivative financial instruments relating to hedging ofMSRs are included in Cash flows from investing activities, cash flows from derivative financial instruments relating to ~~IRLCs and mortgage loans acquired for sale are included in~~ ~~Cash flows from operating activities~~ in ~~Sale to nonaffiliates and repayment of mortgage loans acquired for sale at fair value~~;hedging and cash flows from repurchase agreement derivatives are included in Cash flows from operating activities.

When the Company has master netting agreements with its derivatives counterparties, the Company nets its counterparty positions along with any cash collateral received from or delivered to the counterparty.

Exchange-traded hedging derivatives are classified as “Level 1” fair value financial assets and liabilities. Hedging derivatives whose fair values are derived from observed MBS market interest rates and volatilities are classified as “Level 2” fair value assets and liabilities. IRLCs, CRT Agreements and derivatives embedded in a master repurchase agreement are classified as “Level 3” fair value assets and liabilities.

Firm Commitment to Purchase Credit Risk Transfer Securities

The Company ~~carries~~carried its firm commitment to purchase CRT securities at fair value. The firm commitment to purchase CRT securities iswas recognized initially as a component of Net gain on ~~mortgage~~ loans acquired for sale. Subsequent changes in fair value ~~are~~were recorded in Net ~~gain (loss)~~gains (losses) on investments and financings. The Company ~~categorizes~~categorized its firm commitment to purchase CRT securities as a “Level 3” fair value ~~asset.~~asset or liability.

Real Estate Acquired in Settlement of Loans

~~REO~~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 ~~mortgage~~ loan immediately before ~~REO~~ acquisition inof the ~~case of acquisition~~property in settlement of a ~~mortgage~~ 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 ~~mortgage~~ loans. Under these ~~contracts,~~agreements, the Company is obligated to provide ~~mortgage~~ loan servicing functions in exchange for fees and other remuneration. The servicing functions typically performed include, among other responsibilities, collecting and remitting ~~mortgage~~ 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 ~~mortgagors;~~mortgagors, administering loss mitigation activities, including modification and forbearance programs; and supervising ~~the acquisition~~foreclosures and ~~disposition of REO.~~property dispositions. The Company has engaged PFSI to provide these services on its behalf.

F-15

The Company recognizes MSRs initially at their fair values, either as proceeds from sales of ~~mortgage~~ loans where the Company assumes the obligation to service the ~~mortgage~~ loan in the sale transaction, or from the purchase of MSRs. The Company categorizes its ~~MSRs~~MSR as a “Level 3” fair value ~~assets.~~

The fair value of MSRs is derived from the net positive cash flows associated with the servicing contracts. The Company receives a servicing fee of generally 0.25% annually on the remaining outstanding principal balances of conventional mortgage 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 interest earned on funds held pending remittance of mortgagor principal, interest, tax and insurance payments.

~~F-13~~

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 mortgage loans with initial interest rates of less than or equal to 4.5%; and originated MSRs backed by mortgage loans with initial interest rates of more than 4.5%. Originated MSRs backed by mortgage 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 mortgage loan servicing fees-from nonaffiliates~~.

~~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 fell 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 mortgage loan type (fixed-rate or adjustable-rate) and note interest rate. Fixed-rate mortgage 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 mortgage 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 Manager 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 Manager 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 mortgage loan servicing fees-from nonaffiliates~~.asset.

Servicing Advances

Servicing advances represent advances made on behalf of borrowers and the ~~mortgage~~ loans’ investors to fund ~~delinquent balances for~~ property tax and insurance premiums for impounded loans with inadequate impound balances and for non-impounded loans with delinquent property tax insurance premiums and out of pocket collection costs for delinquent loans (e.g., preservation and restoration of mortgaged property, ~~REO,~~ 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~~financings 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 Notes~~ ~~and~~ ~~Notes payable~~ ~~are amortized~~ over ~~the respective~~non-revolving borrowings’ contractual lives using the interest method.

~~F-14~~

Asset-backed ~~financing of a VIE~~financings at Fair Value

The certificates issued to nonaffiliates by the Company relating to the asset-backed ~~financing~~financings are recorded as borrowings. Certificates issued to nonaffiliates have the right to receive principal and interest payments of the ~~mortgage~~ loans held by the consolidated ~~VIE.~~VIEs. Asset-backed financings of the ~~VIE~~VIEs are carried at fair value. Changes in fair value are recognized in current period income as a component of Net ~~gain (loss)~~gains (losses) on investments and financings. The Company categorizes asset-backed ~~financing~~financings of the ~~VIE~~consolidated VIEs at fair value as a “Level 2” fair value ~~liability.~~liabilities.

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 ~~mortgage~~ loans it has sold. The Company’s sales agreements ~~with the Agencies and other investors~~ include representations and warranties related to the ~~mortgage~~ 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 ~~mortgage~~ 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 ~~mortgage~~ loans with the identified defects or indemnify the investor or ~~insurer.~~insurer against credit losses arising from such loans. In ~~such cases,~~either case, the Company bears any subsequent credit loss on the ~~mortgage~~ loans. The Company’s credit loss may be reduced by any recourse it has to correspondent sellers that, in turn, had sold such ~~mortgage~~ 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 ~~mortgage~~ 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 ~~mortgage~~ loan defect rates, the estimated severity of loss in the event of default and the probability of reimbursement by the correspondent ~~mortgage~~ loan seller. The Company establishes a liability at the time ~~mortgage~~ loans are sold and periodically updates its liability estimate. The level of the liability for representations and warranties is reviewed and approved by the ~~Manager’s~~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 ~~mortgage~~ loan repurchase losses is dependent on economic factors, investor demand strategies, and other external conditions that may change over the lives of the underlying ~~mortgage~~ loans. The Company’s representations and warranties are generally not subject to stated limits of exposure. However, the ~~Manager~~Company believes that the current unpaid principal balance of ~~mortgage~~ loans sold by ~~the Company~~PMT to date represents the maximum exposure to repurchases related to representations and warranties.

~~Mortgage~~ Loan Servicing Fees

~~Mortgage loan~~Loan servicing fees and other remuneration are received by the Company for servicing residential ~~mortgage~~ loans. Loan servicing activities are described under Mortgage servicing rights above. The Company’s obligation under its loan servicing ~~includes loan administration, collection, and default management activities, including~~agreements is fulfilled as the ~~collection and remittance of loan payments; response to customer inquiries; accounting for principal and interest; holding custodial (impounded) funds for~~Company services the ~~payment of property taxes and insurance premiums; counseling delinquent mortgagors; and supervising foreclosures and property dispositions.~~loans.

~~Mortgage loan~~Loan servicing fee amounts are based upon fee schedules established by the applicable investor and upon the unpaid principal balance of the ~~mortgage loans.~~

~~The Company’s obligation under its mortgage loan servicing agreements is fulfilled as the Company services the mortgage~~ loans. ~~Mortgage loan~~Loan servicing fees are recorded net of Agency guarantee fees paid by the ~~Company. Mortgage loan servicing fees~~Company and are ~~recorded when~~recognized in the ~~mortgage loan payments~~period which they are ~~collected from the borrowers.~~earned.

F-16

Share-Based Compensation

The Company amortizes the fair value of previously granted share-based awards to ~~compensation~~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.~~

~~F-15~~

The initial cost of ~~restricted share units awarded~~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 ~~compensation~~ awards ~~depending on whether~~for changes in estimates of the portion of the awards ~~are made~~it expects to ~~its trustees~~be forfeited by grantees and ~~certain named executive officers or other employees of our Manager or affiliates:~~

~~For awards to trustees and certain named executive officers of the Company, compensation cost relating to restricted share units is generally fixed at the fair value of the award on the grant date.~~

~~Compensation cost relating to performance share units is adjusted~~ 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.

Compensation cost for share-based compensation awarded to other executive officers of the Company or employees of the Manager or affiliates is adjusted to reflect changes in the fair value of awards, including changes in the Company’s share price for both restricted share units and performance share units and, in the case of performance share units, for changes in expected performance attainment in each subsequent reporting period until the award has vested or expired, the service being provided is subsequently completed, or, under certain circumstances, is likely to be completed, whichever occurs first.

~~The Manager’s estimates of compensation costs reflect the expected portion of share-based compensation awards that are expected to vest.~~

Income Taxes

The Company has elected to be taxed as a REIT and the ~~Manager~~Company believes ~~the Company~~PMT complies with the provisions of the Internal Revenue Code applicable to REITs. Accordingly, the ~~Manager~~Company believes ~~the Company~~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~~PMC, 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 ~~Manager~~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 ~~Manager’s~~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~~Pronouncements

~~On June 20, 2018,~~Pending Accounting Change

In August 2020, the FASB issued Accounting Standards Update ~~2018-07,~~ ~~Compensation—Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting~~ (“2020-06, Debt – Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging – Contracts in Entity’s Own Equity (Subtopic 815-40) (“ASU ~~2018-07”~~2020-06”). ASU ~~2018-07 expands the scope of the~~ ~~Compensation—Stock Compensation~~ topic of the ASC, which currently provides accounting guidance relating to share-based payments issued to employees, to include share-based payments issued to non-employees for goods or services. Consequently, under ASU 2018-07,2020-06 simplifies the accounting for ~~share-based payments to employees of~~convertible instruments by removing certain separation models in ASC subtopic 470-20, Debt – Debt with Conversion and Other Options for convertible instruments. Under the ~~Manager will be substantially aligned with the Company’s present accounting for share-based payments to its trustees and certain of its named executive officers.~~

~~The Company issues share-based compensation to certain employees of the Manager. Presently, the Company accounts for share-based payments to employees of the Manager under the guidance of~~ ~~Equity – Equity-Based Payments to Non-Employees~~ topic of the ASC. Under that topic, the measure of cost relating to such grants is generally established based on the fair value of the shares upon vesting of the share-based awards. Accordingly, the Manager’s estimate of compensation costs, and by extension periodic expense amounts, fluctuates with movements in the Company’s common share price during the period that expense relating to the grants is being recognized. This guidance is being replaced by ASU 2018-07. As a result of the adoption of ASU 2018-07, the cost of share-based grants made to employees of the Manager will be fixed at the date of the grant for restricted share units issued to those employees of the Manager and variable to the extent of changes in performance attainment expectations for performance share units issued to all grantees.

~~F-16~~

~~The~~ amendments in this update:

•

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

•

Diluted earnings per share guidance is changed to require that:

•

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

•

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

•

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

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

As detailed in Note 14 – Long-Term Debt, PMC has issued $555 million in unpaid principal balance of exchangeable senior notes that are exchangeable for PMT common shares of beneficial interest (“Common Shares”) (the “Exchangeable Notes”). The Exchangeable Notes will be subject to the ~~fiscal year ending December 31, 2019, including interim periods within that fiscal year. Upon adoption,~~guidance included in ASU 2020-06. Adoption of ASU 2020-06 will have the ~~Manager does not expect to record a cumulative effect adjustment to its accumulated deficit.~~following effects on PMT:

•

The exchange feature included in the Exchangeable Notes can be settled either in cash or Common Shares at the option of PMC. As a result of this feature and PMC’s intent to cash settle the Exchangeable Notes, the Company presently excludes the

F-17

effect of exchange of the Exchangeable Notes from diluted earnings per share as allowed under current accounting standards. Adoption of ASU 2020-06 will require the Company to include Common Shares issuable pursuant to exchange of the Exchangeable Notes in its determination of diluted earnings per share.

•

The Company recognized the fair value of the exchange feature as a component of Additional paid-in capital as of the date of issuance of the Exchangeable Notes as required by current guidance. The issuance discount charged to the Exchangeable Notes resulting from the allocation of the issuance discount to Additional paid-in capital is presently accrued to interest expense using the interest method. Upon adoption of ASU 2020-06, effective January 1, 2022, the Company will reclassify approximately $50.3 million from Additional paid-in capital to the carrying value of the Exchangeable Notes and will credit the accumulated accrual of the associated issuance discount, net of income taxes, of approximately $8.3 million to retained earnings as the cumulative effect of the adoption of ASU 2020-06.

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~~Through June 30, 2020, pursuant to the terms of the agreement, the monthly fulfillment fee iswas an amount ~~that shall~~ equal to (a) no greater than the product of (i) 0.35% and (ii) the aggregate initial unpaid principal balance (the “Initial UPB”) of all ~~mortgage~~ loans purchased in such month, plus (b) in the case of all ~~mortgage~~ loans other than ~~mortgage~~ 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 ~~mortgage~~ loans sold and securitized in such month; provided however, that no fulfillment fee shall be due or payable to PLS with respect to any ~~mortgage~~ loans underwritten toin 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~~which, through June 30, 2020, ranged from ~~two~~2 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~~Effective July 1, 2020, 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~~fulfillment 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.~~sourcing fees were revised as follows:

•

Fulfillment fees shall not exceed the following:

(i)

(ii)

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

(iii)

$750 multiplied by the number of all purchased loans that are sold or securitized to parties other than Fannie Mae and Freddie Mac; provided, however, that 0 fulfillment fee shall be due or payable to PLS with respect to any Ginnie Mae loans.

•

Sourcing fees charged to PLS range from 1 to 2 basis points, generally based on the average number of calendar days the loans are held by PMT before purchase by PLS.

The mortgage banking services agreement expires, unless terminated earlier in accordance with its terms, on ~~September 12, 2020,~~June 30, 2025, subject to automatic renewal for additional 18-month periods, unless terminated ~~earlier~~ in accordance with ~~the terms of the agreement.~~its terms.

The Company ~~purchases~~may purchase newly originated conforming balance non-government insured or guaranteed loans from PLS under a mortgage loan purchase and sale agreement.~~Historically, the Company has used the mortgage loan purchase and sale agreement for the purpose of purchasing from PLS prime jumbo residential mortgage loans.~~ Beginning in the quarter ended September 30, 2017, the Company also purchases conforming balance non-government insured or guaranteed mortgage loans from PLS under the mortgage loan purchase and sale agreement.

F-18

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

	Year ended December 31,
	2021		2020		2019
	(in thousands)
Loan fulfillment fees earned by PLS	$	178,927	$	222,200	$	160,610
UPB of loans fulfilled by PLS	$	110,003,574	$	100,389,252	$	56,033,704

Sourcing fees received from PLS included in Net gains on loans acquired for sale	$	6,472	$	11,037	$	14,381
UPB of loans sold to PLS	$	64,774,728	$	60,540,530	$	47,937,306

Purchases of loans acquired for sale from PLS	$	0	$	2,248,896	$	6,255,915

Tax service fees paid to PLS	$	26,126	$	23,408	$	14,697

Year ended December 31,

2018

2017

2016

(in thousands)

Mortgage loans fulfillment fees earned by PLS

$
81,350

$
80,359

$
86,465

UPB of mortgage loans fulfilled by PLS

$
26,194,303

$
22,971,119

$
23,188,386

Sourcing fees received from PLS included in
  Net gain on mortgage loans acquired for sale

$
10,925

$
12,084

$
11,976

UPB of mortgage loans sold to PLS

$
36,415,933

$
40,561,241

$
39,908,163

Early purchase program fees paid to PLS
   included in Mortgage loan servicing fees

$
—

$
7

$
30

Purchases of mortgage loans acquired for sale
   from PLS

$
3,343,028

$
904,097

$
21,541

Tax service fee paid to PLS included in Other
   expense

$
7,433

$
7,078

$
6,690

December 31, 2021

December 31, 2020

(in thousands)

Loans included in Loans acquired for sale at fair value

pending sale to PLS

314,995

460,414

~~F-17~~

December 31, 2018

December 31, 2017

(in thousands)

Mortgage loans included in Mortgage loans acquired
for sale at fair value pending sale to PLS

$
86,308

$
279,571

~~Mortgage~~ Loan Servicing

The Company, through its Operating Partnership, has ~~an amended and restated mortgage~~a loan servicing agreement with PLS ~~dated as~~(the “Servicing Agreement”) pursuant to which PLS provides subservicing for the Company's portfolio of ~~September 12, 2016.~~MSRs, loans held for sale and loans held in VIEs (prime servicing) and its portfolio of residential loans purchased with credit deterioration (distressed loans). The ~~servicing agreement~~Servicing Agreement provides for servicing fees earned by PLS that are ~~based on~~established at a ~~percentage of the mortgage loan’s unpaid principal balance or~~ fixed per loan monthly ~~amounts~~amount based on the delinquency, bankruptcy and/or foreclosure status of the serviced ~~mortgage~~ loan or ~~the~~ 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 ~~mortgage~~ loans it services for the ~~Company.~~

~~The base servicing fee rates~~Company, as well as certain fees for ~~distressed whole mortgage loans range from $30 per month~~the COVID-19 pandemic or related forbearance and modification activities provided 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 mortgage loan on behalf of the Company and not through a third-party lender and the resulting mortgage 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 limited employees and infrastructure. For these services, PLS received a supplemental 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 in the performance of its servicing obligations.

~~PLS, on behalf of the Company, is entitled to retain any incentive payments made to it and to which it is entitled~~ under the ~~U.S. Department of Treasury’s Home Affordable Modification Plan (“HAMP”); provided, however, that~~CARES Act. The Servicing Agreement expires on June 30, 2025, subject to automatic renewal for additional 18-month periods, unless terminated earlier in accordance with respect to any such incentive payments paid to PLS under HAMP in connection with a mortgage loan modification for which the Company previously paid PLS a modification fee, PLS shall reimburse the Company an amount equal to the incentive payments.its terms.

Prime Servicing

PLS is also entitled to certain activity-based fees for distressed whole mortgage 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 mortgage loan in any 18-month period.

The base servicing fees for ~~non-distressed mortgage~~prime 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 mortgage 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 ~~mortgage~~ loans.

To the extent that these non-distressed ~~mortgage~~ loans become delinquent, PLS is entitled to an additional servicing fee per ~~mortgage~~ loan ranging from $10 to $55 per month and based on the delinquency, bankruptcy and foreclosure status of the ~~mortgage~~ loan or $75 per month if the underlying mortgaged property becomes REO.

PLS is also entitled to customary ancillary income and certain market-based fees and charges, including boarding and deboarding fees, liquidation and disposition fees, assumption, modification and origination fees.

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

Special Servicing (Distressed Loans)

The ~~term of the~~base servicing fee rates for distressed loans range from $30 per month for current loans up to $95 per month for loans in foreclosure proceedings. The base servicing fee rate for REO is $75 per month.

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

MSR Recapture Agreement

The Company has an MSR recapture agreement ~~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.~~

~~F-18~~

PFSI. Pursuant to the terms of ~~an amended and restated~~the MSR recapture agreement, if ~~PLS~~PFSI refinances mortgage loans for which the Company previously held the MSRs, ~~PLS is~~through June 30, 2020, PFSI was generally required to transfer and convey to ~~one of~~ the ~~Company’s wholly-owned subsidiaries~~Company cash in an amount equal to 30% of the fair market value of the MSRs related to all ~~the~~such loans so originated.

Effective July 1, 2020, the 2020 MSR recapture agreement changed the recapture fee payable by PLS to a tiered amount equal to:

F-19

•

40% of the fair market value of the MSRs relating to the recaptured loans subject to the first 15% of the “recapture rate”;

•

35% of the fair market value of the MSRs relating to the recaptured loans subject to the “recapture rate” in excess of 15% and up to 30%; and

•

30% of the fair market value of the MSRs relating to the recaptured loans subject to the “recapture rate” in excess of 30%.

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

The MSR recapture agreement expires, unless terminated earlier in accordance with ~~the agreement,~~its terms, on ~~September 12, 2020,~~June 30, 2025, subject to automatic renewal for additional 18-month ~~periods.~~ periods, unless terminated in accordance with its terms.

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

Year ended December 31,

2018

2017

2016

(in thousands)

Mortgage loans servicing fees:

Mortgage loans acquired for sale at fair value:

Base

$
347

$
305

$
330

Activity-based

690

649

733

1,037

954

1,063

Mortgage loans at fair value:

Distressed mortgage loans:

Base

2,771

6,650

11,078

Activity-based

4,784

8,960

18,521

7,555

15,610

29,599

Mortgage loans held in VIE—Base

40

129

83

MSRs:

Base

32,814

25,862

19,378

Activity-based

599

509

492

33,413

26,371

19,870

$
42,045

$
43,064

$
50,615

Average investment in:

Mortgage loans acquired for sale at fair value

$
1,577,395

$
1,366,017

$
1,443,587

Mortgage loans at fair value:

Distressed mortgage loans

$
473,458

$
1,152,930

$
1,731,638

Mortgage loans held in a VIE

$
301,398

$
344,942

$
422,122

Average MSR portfolio UPB

$
80,500,212

$
63,836,843

$
49,626,758

MSR recapture income recognized included in
Net mortgage loan servicing fees—from PennyMac
Financial Services, Inc.

$
2,192

$
1,428

$
1,573

	Year ended December 31,
	2021		2020		2019
	(in thousands)
Loan servicing fees:
Loans acquired for sale at fair value	$	2,363	$	2,067	$	1,772
Loans at fair value		505		807		2,207
MSRs		77,790		64,307		44,818
	$	80,658	$	67,181	$	48,797
Average investment in:
Loans acquired for sale at fair value	$	4,135,140	$	3,469,392	$	2,754,955
Loans at fair value	$	481,433	$	223,628	$	356,700
Average MSR portfolio UPB	$	196,996,623	$	147,832,880	$	110,075,179

Management Fees

~~Under~~The Company has a management agreement ~~the Company~~with PCM pursuant to which PMT 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,~~“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~~“equity” plus the high watermark, up to (ii) a 16% return on ~~equity;~~“equity”; plus (c) 20% of the amount by which “net income” for the quarter exceeds a 16% return on ~~equity~~“equity” plus the ~~high watermark.~~“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~~Common Shares calculated in accordance with GAAP, and adjusted to exclude one-time events pursuant to changes in GAAP and certain other non-cash charges ~~determined~~ after ~~discussions~~discussion between ~~PCM~~the Manager and the Company’s independent trustees and after approval by a majority of the Company’s independent trustees.

~~F-19~~

“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~~Common Shares outstanding (including restricted share units) in the rolling four-quarter period.

~~The “high~~“High watermark” is the quarterly adjustment that reflects the amount by which the ~~“Net~~“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~~“net income” is lower than the target yield, the high watermark is increased by the difference. If the ~~“Net~~“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~~“net income” over (or under) the target yield, until the ~~“Net~~“net income” in excess of the target yield exceeds the then-current cumulative ~~high watermark~~“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~~Common Shares (subject to a limit of no more than 50% paid in ~~common shares)~~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.F-20

~~Following is a summary of the base management and performance incentive fees payable to PCM recorded by the Company:~~

Year ended December 31,

2018

2017

2016

(in thousands)

Base management

$
23,033

$
22,280

$
20,657

Performance incentive

1,432

304

—

$
24,465

$
22,584

$
20,657

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

Following is a summary of management fee expenses:

		Year ended December 31,
		2021		2020		2019
	(in thousands)
Base management		$	34,794	$	34,538	$	29,303
Performance incentive			3,007		0		7,189
		$	37,801	$	34,538	$	36,492
Average shareholders' equity amounts used to calculate base management fee expense		$	2,348,395	$	2,330,154	$	1,958,970

Expense Reimbursement and Amounts Payable to and Receivable from PCM

Under the management agreement, PCM is entitled to reimbursement of its organizational and operating expenses, including third-party expenses, incurred on the Company’s behalf, it being understood that PCM and its affiliates shall allocate a portion of their personnel’s time to provide certain legal, tax and investor relations services for the direct benefit of the Company. ~~With respect to the allocation~~PCM was reimbursed $120,000 per fiscal quarter through June 30, 2020. Effective July 1, 2020, PMT’s reimbursement of PCM’s and its affiliates’ compensation expenses was increased from ~~and after September 12, 2016, PCM shall be reimbursed~~ $120,000 to $165,000 per fiscal quarter, such amount to be reviewed annually and to not preclude reimbursement for any other services performed by PCM or its affiliates.

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

~~F-20~~

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

	Year ended December 31,							Year ended December 31,
	2018		2017		2016			2021		2020		2019
	(in thousands)							(in thousands)
Reimbursement of:
Expenses incurred on the Company’s behalf, net								$	18,812	$	22,583	$	4,362
Common overhead incurred by PCM and its affiliates	$	4,640	$	5,306	$	7,898			4,906		5,172		5,340
Compensation		480		—		—			660		570		480
Expenses incurred on the Company’s behalf, net		1,113		2,257		(163	)
	$	6,233	$	7,563	$	7,735		$	24,378	$	28,325	$	10,182
Payments and settlements during the year (1)	$	71,943	$	64,945	$	143,542		$	284,381	$	378,162	$	177,116

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

Investing Activities

Spread Acquisition and MSR Servicing Agreements

~~On December 19, 2016, the~~The Company, through a wholly-owned subsidiary, PennyMac Holdings, LLC (“PMH”), has an amended and restated a master spread acquisition and MSR servicing agreement with PLS (the “Spread Acquisition Agreement”), pursuant to which the Company may purchase from PLS, from time to time, ~~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 ~~mortgage~~ 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’~~its participation in the GNMA MSR Facility (as defined below).

To the extent PLS refinances any of the ~~mortgage~~ 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~~UPB of the newly originated ~~mortgage~~ loans. However, under the Spread Acquisition Agreement, in any month where the transferred ESS relating to newly originated Ginnie Mae ~~mortgage~~ loans is not ~~equivalent~~equal to at least 90% of the product of the excess servicing fee rate and the ~~unpaid principal balance~~UPB of the refinanced ~~mortgage~~ 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 ~~mortgage~~ loans is not ~~equivalent~~equal to at least 90% of the product of the excess servicing fee

F-21

rate and the ~~unpaid principal balance~~UPB of the modified ~~mortgage~~ loans, the Spread Acquisition Agreement contains provisions that require PLS to transfer additional ESS or cash in the amount of such shortfall. To the extent the fair market value of the aggregate ESS to be transferred for the applicable month is less than $200,000, PLS may, at its option, settle its recapture liability to the Company in cash in an amount equal to such fair market value in lieu of transferring such ESS. The remaining balance of the ESS was repaid during the quarter ended March 31, 2021.

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

	Year ended December 31,								Year ended December 31,
	2018		2017			2016			2021		2020			2019
	(in thousands)								(in thousands)
Sale of mortgage loans at fair value to PFSI	$	—	$	—		$	891
ESS:
Received pursuant to a recapture agreement	$	2,688	$	5,244		$	6,603		$	557	$	2,093		$	1,757
Repayments and sales	$	46,750	$	54,980		$	129,037
Repayments									$	134,624	$	32,377		$	40,316
Interest income	$	15,138	$	16,951		$	22,601		$	1,280	$	8,418		$	10,291
Net (loss) gain included in Net gain (loss) on investments:
Net gain (loss) included in Net gains (losses) on investments and financings:
Valuation changes	$	8,500	$	(19,350	)	$	(23,923	)	$	1,037	$	(24,970	)	$	(9,256	)
Recapture income		2,584		4,820			6,529			614		2,241			1,726
	$	11,084	$	(14,530	)	$	(17,394	)	$	1,651	$	(22,729	)	$	(7,530	)
At the end of the year:
Excess servicing spread purchased from PennyMac Financial Services, Inc. at fair value	$	216,110	$	236,534

~~F-21~~

Financing Activities

PFSI held 75,000 of the Company’s ~~common shares~~Common Shares at both December 31, ~~2018~~2021 and December 31, ~~2017.~~

2020.

Repurchase Agreement with PLS

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

In ~~connection with~~ the ~~GNMA MSR Facility,~~first quarter of 2021, PLS ~~pledges and/or sells~~repurchased the ESS from PMH at fair market value, effectively terminating the borrowing arrangements allowing PMH to ~~the Issuer Trust~~finance its participation certificates representing beneficial ~~interests~~ownership 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”). Also in connection with its IPO, the Company agreed to pay the IPO underwriters up to $5.9 million in contingent underwriting fees.

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

Year ended December 31,

2018

2017

2016

(in thousands)

Sale of assets under agreements to repurchase

$
2,293

$
—

$
—

Repurchase of assets sold under agreements to repurchase

$
15,396

$
5,872

$
—

Interest expense

$
7,462

$
8,038

$
7,830

Conditional Reimbursement paid to:

PCM

$
69

$
30

$
—

Underwriters

$
136

$
61

$
—

	Year ended December 31,
	2021		2020		2019
	(in thousands)
Net repayments of assets sold under agreements to repurchase	$	80,862	$	26,650	$	23,513
Interest expense	$	387	$	3,325	$	6,302

December 31, 2018

December 31, 2017

(in thousands)

Assets sold to PFSI under agreement to repurchase

$
131,025

$
144,128

Conditional Reimbursement payable to PCM included in Accounts
payable and accrued liabilities

$
801

$
870

	December 31, 2021		December 31, 2020
	(in thousands)
Assets sold to PFSI under agreement to repurchase	$	0	$	80,862

~~F-22~~

Amounts Receivable from and Payable to PFSI

Amounts receivable from and payable to PFSI are summarized below:

	December 31, 2021		December 31, 2020
	(in thousands)
Due from PFSI	$	15,953	$	8,152

Due to PFSI:
Allocated expenses and expenses and costs paid by PFSI on PMT’s behalf	$	15,431	$	38,142
Management fees		8,918		8,686
Correspondent production fees		8,894		13,065
Loan servicing fees		6,848		6,213
Fulfillment fees		0		20,873
Interest on Assets sold to PFSI under agreement to repurchase		0		26
	$	40,091	$	87,005

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

December 31, 2018

December 31, 2017

(in thousands)

Due from PFSI:

MSR recapture receivable

$
179

$
282

Other

3,898

3,872

$
4,077

$
4,154

Due to PFSI:

Fulfillment fees

$
10,006

$
346

Allocated expenses and expenses paid by PFSI on PMT’s behalf

9,066

11,542

Management fees

6,559

5,901

Mortgage loan servicing fees

4,841

6,583

Correspondent production fees

2,071

1,735

Conditional Reimbursement

801

870

Interest on Assets sold to PFSI under agreement to repurchase

120

142

$
33,464

$
27,119

Balance sheet line including advance amount	December 31, 2021		December 31, 2020
	(in thousands)
Loan servicing advances	$	204,951	$	121,820
Real estate acquired in settlement of loans		7,115		10,334
	$	212,066	$	132,154

Note 5—Loan Sales ~~and Variable Interest Entities~~

The Company is a variable interest holder in various special purpose entities that relate to its mortgage loan transfer and financing activities and credit risk transfer investments. These entities are classified as VIEs for accounting purposes. The Company has distinguished its involvement with VIEs between those VIEs which the Company does not consolidate and those VIEs which the Company consolidates.

~~Unconsolidated VIEs with Continuing Involvement~~

~~Sales of Mortgage Loans~~

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

	Year ended December 31,						Year ended December 31,
	2018		2017		2016		2021		2020		2019
	(in thousands)						(in thousands)
Cash flows:
Proceeds from sales	$	29,369,656	$	24,314,165	$	23,525,952	$	110,919,477	$	106,306,805	$	61,128,081
Mortgage loan servicing fees received (1)	$	204,663	$	164,776	$	125,961
Loan servicing fees received net of guarantee fees							$	526,245	$	406,060	$	295,390

~~(1)~~

~~Net of Agency guarantee fees.~~

~~F-23~~

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

	December 31,				December 31, 2021		December 31, 2020
	2018		2017		(in thousands)
	(in thousands)
UPB of mortgage loans outstanding	$	91,982,335	$	71,639,351
UPB of delinquent mortgage loans:
UPB of loans outstanding					$	215,927,495	$	170,502,361
Collection status (UPB) (1)
Delinquency:
30-89 days delinquent	$	614,668	$	532,673	$	1,148,542	$	1,235,981
90 or more days delinquent:
Not in foreclosure	$	142,871	$	280,786	$	1,726,488	$	4,428,915
In foreclosure	$	40,445	$	25,258	$	36,658	$	27,494
UPB of mortgage loans in bankruptcy	$	75,947	$	52,202
Bankruptcy					$	130,582	$	148,866
Custodial funds managed by the Company ~~(1)~~(2)	$	970,328	$	879,321	$	3,823,527	$	6,086,724
Delinquent loans in COVID-19 pandemic-related forbearance:
30-89 days					$	169,654	$	530,353
90 days or more					$	614,882	$	3,123,288

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

(2)

Custodial funds ~~include borrower and investor custodial~~are cash accounts holding funds on behalf of borrowers and investors relating to ~~mortgage~~ 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 ~~mortgage~~ loans’ borrowers and investors, which are included in Interest income in the Company’s consolidated statements of income.

Note 6—Variable Interest Entities

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

Credit Risk Transfer ~~Transactions~~Arrangements

The Company has entered into ~~mortgage~~certain loan sales arrangements pursuant to which it accepts credit risk relating to ~~certain~~the loans sold in exchange for a portion of ~~its mortgage loan sales.~~the interest earned on such loans. These arrangements absorb scheduled credit losses on such loans and include CRT Agreements, CRT strips and sales of ~~mortgage~~ loans that include firm commitments to purchase CRT ~~securities that absorb credit losses on such mortgage loans.~~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 ~~mortgage~~ loans into Fannie Mae-guaranteed securitizations while retaining Recourse Obligations ~~in addition to~~as part of the retention of IO ownership interests in such ~~mortgage~~ loans. ~~The transfers of mortgage loans subject to CRT Agreements were accounted for as sales.~~ The Company placed Deposits securing CRT ~~Agreements~~arrangements into the subsidiary trust entities to secure its Recourse Obligations. The Deposits securing CRT ~~Agreements~~arrangements represent the Company’s maximum contractual exposure to claims under its Recourse Obligations and isare the sole source of settlement of losses under the CRT Agreements. The Company recognizes its IO ownership interests and Recourse Obligations on the consolidated balance sheets as CRT Derivatives in Derivative assets and Derivative and credit risk transfer strip liabilities.

The Company’s exposure to losses under its Recourse ~~Obligation~~Obligations was ~~limited~~ initially established at rates ranging from 3.5% to ~~3.5%~~4.0% of the UPB of the ~~mortgage~~ loans sold under the CRT ~~Agreements.~~arrangements. As the UPB of the underlying ~~mortgage~~ loans subject to each CRT ~~Agreement~~arrangements is reduced through repayments, the percentage exposure of each CRT ~~Agreement~~arrangement will increase to ~~a maximum of~~maximums ranging from 4.5% to 5.0% of outstanding UPB, although the total dollar amount of exposure to losses does not increase. ~~Gains and losses on derivatives related to CRT Agreements are included in~~ ~~Net gain (loss) on investments~~ ~~in the consolidated statements of income.~~ The final sales of ~~mortgage~~ loans subject to the CRT Agreements were made during May 2018.

Effective in June 2018, the Company began entering into a different type of CRT arrangement. Under the new arrangement, the Company sold loans subject to agreements that required PMT to purchase securities that absorb incurred credit losses on such loans. The Company recognized these firm purchase commitments initially as a component of Net gains on loans acquired for sale; subsequent changes in fair value were recognized in Net gains (losses) on investments and financings. The final sales of loans subject to this type of CRT arrangement were made during September 2020.

F-24

The Company purchased the securities subject to the firm commitments. Similar to the CRT Agreements, the Company accounts for the deposits collateralizing these securities as Deposits securing CRT arrangements and recognizes its IO ownership interests and Recourse Obligations as CRT strips which are also included on the consolidated balance sheet in Derivative and credit risk transfer strip liabilities. Like CRT Agreements, the Deposits securing CRT arrangements relating to these arrangements represent the Company’s maximum contractual exposure to losses. Gains and losses on the derivatives and strips (including the IO ownership interest sold to nonaffiliates) included in the CRT arrangements are included in Net gains (losses) on investments and financings in the consolidated statements of income.

Following is a summary of the CRT ~~Agreements:~~arrangements:

Year ended December 31,

2018

2017

2016

(in thousands)

UPB of mortgage loans sold under CRT Agreements

$
5,546,977

$
14,529,548

$
11,190,933

Deposits securing CRT Agreements

$
596,626

$
152,641

$
306,507

(Decrease) increase in commitments to fund Deposits
   securing CRT Agreements resulting from sale of
   mortgage loans under CRT Agreements

(482,471
)

390,362

92,109

$
114,155

$
543,003

$
398,616

Interest earned on Deposits securing CRT Agreements

$
15,441

$
4,291

$
930

Gains recognized on CRT Agreements included in
   Net gain (loss) on investments

Realized

$
86,928

$
51,731

$
21,298

Resulting from valuation changes

25,347

83,030

15,316

112,275

134,761

36,614

Change in fair value of Interest-only security
    payable at fair value

(19,332
)

(11,033
)

(4,114
)

$
92,943

$
123,728

$
32,500

Payments made to settle losses

$
2,133

$
1,396

$
90

		Year ended December 31,
		2021			2020			2019
	(in thousands)
UPB of loans sold					$	18,277,263		$	47,748,300
Investments:
Deposits securing CRT arrangements					$	1,700,000		$	933,370
Change in expected face amount of firm commitment to purchase CRT securities						(1,502,203	)		897,151
					$	197,797		$	1,830,521
Investment income (loss):
Net gains on loans acquired for sale — Fair value of firm commitment to purchase CRT securities recognized upon sale of loans					$	(38,161	)	$	99,305
Net gains (losses) on investments and financings:
Derivative and CRT strips:
CRT derivatives
Realized		$	93,837			(53,965	)		79,619
Valuation changes			(12,829	)		(82,633	)		(9,571	)
			81,008			(136,598	)		70,048
CRT strips
Realized			111,872			54,929			32,200
Valuation changes			175,955			(79,221	)		(1,874	)
			287,827			(24,292	)		30,326
Interest-only security payable at fair value			164			14,952			10,302
			368,999			(145,938	)		110,676
Firm commitments to purchase CRT securities			0			(121,067	)		60,943
			368,999			(267,005	)		171,619
Interest income — Deposits securing CRT arrangements			559			7,012			34,229
		$	369,558		$	(298,154	)	$	305,153

Net (recoveries received) payments made to settle (recoveries) losses on CRT arrangements		$	(62,387	)	$	115,475		$	5,165

December 31, 2018

December 31, 2017

(in thousands)

UPB of mortgage loans subject to credit guarantee obligations

$
29,934,003

$
26,845,392

Collection status (in UPB):

Delinquency

Current

$
29,633,133

$
26,540,953

30—89 days delinquent

$
228,296

$
179,144

90—180 days delinquent

$
39,826

$
101,114

180 or more days delinquent

$
4,208

$
5,146

Foreclosure

$
5,180

$
5,463

Bankruptcy

$
23,360

$
13,572

Carrying value of CRT Agreements:

Derivative assets

$
123,987

$
98,640

Deposits securing CRT agreements

$
1,146,501

$
588,867

Interest-only security payable at fair value

$
36,011

$
7,070

CRT Agreement assets pledged to secure Assets sold under
agreements to repurchase:

Deposits securing CRT Agreements

$
1,146,501

$
400,778

Derivative assets

$
87,976

$
26,058

Commitments to fund Deposits securing credit risk
transfer agreements

$
—

$
482,471

	December 31, 2021			December 31, 2020
	(in thousands)
Carrying value of CRT arrangements:
Derivative and credit risk transfer strip assets (liabilities), net
CRT derivatives	$	18,964		$	31,795
CRT strips		(26,837	)		(202,792	)
	$	(7,873	)	$	(170,997	)

Deposits securing CRT arrangements	$	1,704,911		$	2,799,263
Interest-only security payable at fair value	$	10,593		$	10,757

CRT arrangement assets pledged to secure borrowings:
Derivative and credit risk transfer assets	$	19,627		$	58,699
Deposits securing CRT arrangements (1)	$	1,704,911		$	2,799,263

UPB of loans — underlying CRT arrangements	$	30,808,907		$	58,697,942
Collection status (UPB):
Delinquency (2)
Current	$	29,581,803		$	54,990,381
30-89 days delinquent	$	349,291		$	710,872
90-180 days delinquent	$	120,775		$	693,315
180 or more days delinquent	$	748,576		$	2,297,365
Foreclosure	$	8,462		$	6,009
Bankruptcy	$	64,694		$	75,700
Delinquent loans in COVID-19 pandemic-related forbearance plans:
30-89 days delinquent	$	44,015		$	383,028
90-180 days delinquent	$	57,815		$	546,344
180 or more days delinquent	$	174,041		$	1,944,663

~~F-25~~

(1)	Deposits securing credit risk transfer strip liabilities also secure $27.5 million and $229.7 million in CRT strip and CRT derivative liabilitiesat December 31, 2021 and 2020, respectively.

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

~~Effective~~Investments in June 2018, the Company began selling mortgage loans subject to agreements that require the Company to purchase securities that absorb credit losses on such mortgage loans. The Company has elected to account for the firm commitments to purchase such CRT securities at fair value. Subordinate Mortgage-Backed Securities

The Company recognizes ~~these purchase commitments initially as a component~~the interest income earned on the loans owned by the VIEs and the interest expense attributable to the asset-backed securities issued to nonaffiliates by the VIEs on its consolidated statements of ~~Gain on sale of mortgage loans; subsequent changes in fair value are recognized in~~ ~~Net gain (loss) on investments~~.income.

	Year ended December 31,
	2021		2020		2019
	(in thousands)
Interest income	$	17,014	$	10,609	$	11,734
Interest expense	$	15,076	$	10,971	$	11,324

Following is a summary of ~~activity under these purchase commitments:~~the Company’s investment in subordinate mortgage-backed securities:

Year ended December 31,

2018

(in thousands)

UPB of mortgage loans sold

$
16,392,300

Increase in expected face amount of firm commitment to purchase CRT
   securities backed by mortgage loans sold

$
605,052

Fair value of firm commitment recognized in Gain on sale of mortgage loans

$
30,595

Gains recognized on firm commitment included in Net gain (loss) on
   investments

$
7,399

December 31, 2018

(in thousands)

Firm commitment to purchase CRT securities

$
605,052

Fair value of firm commitment

$
37,994

UPB of mortgage loans sold subject to firm commitment to purchase CRT
   securities related to such loans

$
16,392,300

Collection status (in UPB):

Current

$
16,329,044

30—89 days delinquent

$
61,035

90—180 days delinquent

$
2,221

180 or more days delinquent

$
—

Foreclosure

$
—

Bankruptcy

$
1,258

	December 31, 2021		December 31, 2020
	(in thousands)
Loans at fair value	$	1,564,565	$	143,707
Asset-backed financings at fair value	$	1,469,999	$	134,726
Certificates retained at fair value pledged to secure Assets sold under agreements to repurchase	$	85,266	$	8,981

~~Jumbo Mortgage Loan Financing~~

On September 30, 2013, the Company completed a securitization transaction in which PMT Loan Trust 2013-J1, a VIE, issued $537.0 million in UPB of certificates backed by fixed-rate prime jumbo mortgage loans, at a 3.9% weighted yield. The fair value of the certificates retained by the Company was $14.1 million and $9.7 million as of December 31, 2018 and December 31, 2017, respectively. The Company includes the balance of certificates issued to nonaffiliates in ~~Asset backed financing of a variable interest entity at fair value.~~

Note 6—7—Fair Value

Fair Value Accounting Elections

~~The Manager~~We identified all of the Company’s non-cash financial assets, firm commitment to purchase CRT securities and MSRs to be accounted for at fair value. The ~~Manager~~Company has elected to account for these assets at fair value so such changes in fair value will be reflected in income as they occur and more timely reflect the results of the Company’s performance. Before January 1, 2018, originated MSRs backed by mortgage loans with initial interest rates of less than or equal to 4.5% were accounted for using the amortization method. Beginning January 1, 2018, the Company elected to account for all MSRs at fair value prospectively. The Manager determined that this change makes the accounting treatment for MSRs consistent with lender valuation under financing arrangements and simplifies hedging activities.

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

~~F-26~~

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:

	December 31, 2018									December 31, 2021
	Level 1		Level 2		Level 3		Total			Level 1		Level 2		Level 3		Total
	(in thousands)									(in thousands)
Assets:
Short-term investments	$	74,850	$	—	$	—	$	74,850		$	167,999	$	0	$	0	$	167,999
Mortgage-backed securities at fair value		—		2,610,422		—		2,610,422			0		2,666,768		0		2,666,768
Mortgage loans acquired for sale at fair value		—		1,626,483		17,474		1,643,957
Mortgage loans at fair value		—		290,573		117,732		408,305
Excess servicing spread purchased from PFSI		—		—		216,110		216,110
Loans acquired for sale at fair value											0		4,140,896		30,129		4,171,025
Loans at fair value											0		1,564,565		4,161		1,568,726
Derivative assets:
Interest rate lock commitments		—		—		12,162		12,162
CRT Agreements		—		—		123,987		123,987
Repurchase agreement derivatives		—		—		14,511		14,511
Call options on interest rate futures purchase contracts											2,828		0		0		2,828
Put options on interest rate futures purchase contracts											3,180		0		0		3,180
Forward purchase contracts		—		14,845		—		14,845			0		5,806		0		5,806
Forward sale contracts		—		13		—		13			0		6,307		0		6,307
MBS put options		—		218		—		218			0		3,662		0		3,662
MBS call options		—		945		—		945
Call options on interest rate futures		5,137		—		—		5,137
Put options on interest rate futures		178		—		—		178
Swaption purchase contracts											0		39		0		39
CRT derivatives											0		0		19,627		19,627
Interest rate lock commitments											0		0		3,897		3,897
Total derivative assets before netting		5,315		16,021		150,660		171,996			6,008		15,814		23,524		45,346
Netting		—		—		—		(4,831	)		0		0		0		(11,108	)
Total derivative assets after netting		5,315		16,021		150,660		167,165			6,008		15,814		23,524		34,238
Firm commitment to purchase credit risk transfer securities at fair value		—		—		37,994		37,994
Mortgage servicing rights at fair value		—		—		1,162,369		1,162,369			0		0		2,892,855		2,892,855
	$	80,165	$	4,543,499	$	1,702,339	$	6,321,172		$	174,007	$	8,388,043	$	2,950,669	$	11,501,611
Liabilities:
Asset-backed financing of a VIE at fair value	$	—	$	276,499	$	—	$	276,499
Asset-backed financings at fair value										$	0	$	1,469,999	$	0	$	1,469,999
Interest-only security payable at fair value		—		—		36,011		36,011			0		0		10,593		10,593
Derivative liabilities:
Interest rate lock commitments		—		—		174		174
Derivative and credit risk transfer strip liabilities:
Forward purchase contracts		—		43		—		43			0		3,620		0		3,620
Forward sales contracts		—		29,273		—		29,273			0		13,782		0		13,782
CRT derivatives											0		0		663		663
Interest rate lock commitments											0		0		1,446		1,446
Total derivative liabilities before netting		—		29,316		174		29,490			0		17,402		2,109		19,511
Netting		—		—		—		(23,576	)		0		0		0		(4,142	)
Total derivative liabilities after netting		—		29,316		174		5,914			0		17,402		2,109		15,369
Credit risk transfer strips											0		0		26,837		26,837
Total derivative and credit risk transfer strip liabilities											0		17,402		28,946		42,206
	$	—	$	305,815	$	36,185	$	318,424		$	0	$	1,487,401	$	39,539	$	1,522,798

December 31, 2017

Level 1

Level 2

Level 3

Total

(in thousands)

Assets:

Short-term investments

$
18,398

$
—

$
—

$
18,398

Mortgage-backed securities at fair value

—

989,461

—

989,461

Mortgage loans acquired for sale at fair value

—

1,261,380

8,135

1,269,515

Mortgage loans at fair value

—

321,040

768,433

1,089,473

Excess servicing spread purchased from PFSI

—

—

236,534

236,534

Derivative assets:

Interest rate lock commitments

—

—

4,859

4,859

CRT Agreements

—

—

98,640

98,640

Repurchase agreement derivatives

—

—

3,748

3,748

Forward purchase contracts

—

4,343

—

4,343

Forward sale contracts

—

387

—

387

MBS put options

—

3,170

—

3,170

Put options on interest rate futures

656

—

—

656

Total derivative assets before netting

656

7,900

107,247

115,803

Netting

—

—

—

(1,922
)
Total derivative assets after netting

656

7,900

107,247

113,881

Mortgage servicing rights at fair value

—

—

91,459

91,459

$
19,054

$
2,579,781

$
1,211,808

$
3,808,721

Liabilities:

Asset-backed financing of a VIE at fair value

$
—

$
307,419

$
—

$
307,419

Interest-only security payable at fair value

—

—

7,070

7,070

Derivative liabilities:

Interest rate lock commitments

—

—

227

227

Forward purchase contracts

—

248

—

248

Forward sales contracts

—

2,830

—

2,830

Total derivative liabilities before netting

—

3,078

227

3,305

Netting

—

—

—

(1,999
)
Total derivative liabilities after netting

—

3,078

227

1,306

$
—

$
310,497

$
7,297

$
315,795

	December 31, 2020
	Level 1		Level 2		Level 3		Total
	(in thousands)
Assets:
Short-term investments	$	127,295	$	0	$	0	$	127,295
Mortgage-backed securities at fair value		0		2,213,922		0		2,213,922
Loans acquired for sale at fair value		0		3,518,015		33,875		3,551,890
Loans at fair value		0		143,707		8,027		151,734
Excess servicing spread purchased from PFSI		0		0		131,750		131,750
Derivative assets:
Call options on interest rate futures		3,070		0		0		3,070
Put options on interest rate futures		4,742		0		0		4,742
Forward purchase contracts		0		72,526		0		72,526
Forward sale contracts		0		92		0		92
MBS put options		0		3,220		0		3,220
Swaption purchase contracts		0		8,505		0		8,505
CRT derivatives		0		0		58,699		58,699
Interest rate lock commitments		0		0		72,794		72,794
Total derivative assets before netting		7,812		84,343		131,493		223,648
Netting		0		0		0		(59,330	)
Total derivative assets after netting		7,812		84,343		131,493		164,318
Mortgage servicing rights at fair value		0		0		1,755,236		1,755,236
	$	135,107	$	5,959,987	$	2,060,381	$	8,096,145
Liabilities:
Asset-backed financings at fair value	$	0	$	134,726	$	0	$	134,726
Interest-only security payable at fair value		0		0		10,757		10,757
Derivative liabilities and credit risk transfer strips:
Forward purchase contracts		0		17		0		17
Forward sales contracts		0		122,884		0		122,884
CRT derivatives		0		0		26,904		26,904
Interest rate lock commitments		0		0		408		408
Total derivative liabilities before netting		0		122,901		27,312		150,213
Netting		0		0		0		(89,532	)
Total derivative liabilities after netting		0		122,901		27,312		60,681
Credit risk transfer strips		0		0		202,792		202,792
Total derivative and credit risk transfer strip liabilities		0		122,901		230,104		263,473
	$	0	$	257,627	$	240,861	$	408,956

The following is a summary of changes in items measured at fair value on a recurring basis using ~~Level 3~~“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, 2018

Mortgage
loans
acquired for
sale at fair
value

Mortgage
loans at
fair value

Excess
servicing
spread

Interest rate
lock commitments
(1)

CRT
Agreement
derivatives

Repurchase
agreement
derivatives

Firm
commitment
to purchase
CRT securities

Mortgage
servicing
rights

Total

(in thousands)

Assets

Balance, December 31, 2017

$
8,135

$
768,433

$
236,534

$
4,632

$
98,640

$
3,748

$
—

$
91,459

$
1,211,581

Cumulative effect of a change in accounting
   principle — Adoption of fair value
   accounting for mortgage servicing rights

—

—

—

—

—

—

—

773,035

773,035

Balance, January 1, 2018

8,135

768,433

236,534

4,632

98,640

3,748

—

864,494

1,984,616

Purchases and issuances

12,208

—

—

4,655

—

19,918

—

—

36,781

Repayments and sales

(12,934
)

(600,638
)

(46,750
)

—

(86,928
)

(8,964
)

—

(100
)

(756,314
)
Capitalization of interest

—

7,439

15,138

—

—

—

—

—

22,577

Capitalization of advances

—

5,481

—

—

—

—

—

—

5,481

ESS received pursuant to a recapture
   agreement with PFSI

—

—

2,688

—

—

—

—

—

2,688

Amounts received as proceeds from sales
   of mortgage loans

—

—

—

—

—

—

30,595

356,755

387,350

Changes in fair value included in
   income arising from:

Changes in instrument-specific credit
   risk

—

2,907

—

—

—

—

—

—

2,907

Other factors

(16
)

(18,104
)

8,500

(14,016
)

112,275

(191
)

7,399

(58,780
)

37,067

(16
)

(15,197
)

8,500

(14,016
)

112,275

(191
)

7,399

(58,780
)

39,974

Transfers of mortgage loans to REO

—

(47,786
)

—

—

—

—

—

—

(47,786
)
Transfers of mortgage loans acquired for
   sale at fair value from "Level 2" to
   "Level 3" (2)

10,081

—

—

—

—

—

—

—

10,081

Transfers of interest rate lock commitments
   to mortgage loans acquired for sale

—

—

—

16,717

—

—

—

—

16,717

Balance, December 31, 2018

$
17,474

$
117,732

$
216,110

$
11,988

$
123,987

$
14,511

$
37,994

$
1,162,369

$
1,702,165

Changes in fair value recognized during the
   year relating to assets still held at
   December 31, 2018

$
(158
)

$
(18,428
)

$
8,500

$
11,988

$
25,347

$
77

$
37,994

$
(58,780
)

$
6,540

	Year ended December 31, 2021
Assets (1)	Loans acquired for sale			Loans at fair value			Excess servicing spread			CRT derivatives			Interest rate lock commitments			CRT strips			Mortgage servicing rights			Total
	(in thousands)
Balance, December 31, 2020	$	33,875		$	8,027		$	131,750		$	31,795		$	72,386		$	(202,792	)	$	1,755,236		$	1,830,277
Purchases and issuances		86,285			0			0			0			76,934			0			0			163,219
Repayments and sales		(90,603	)		(5,121	)		(134,624	)		(93,839	)		0			(111,872	)		0			(436,059	)
Capitalization of interest and fees		0			251			1,280			0			0			0			0			1,531
ESS received pursuant to a recapture agreement with PFSI		0			0			557			0			0			0			0			557
Amounts received pursuant to sales of loans		0			0			0			0			0			0			1,484,629			1,484,629
Changes in fair value included in income arising from:
Changes in instrument - specific credit risk		0			0			0			0			0			0			0			0
Other factors		572			610			1,037			81,008			(156,840	)		287,827			(337,186	)		(122,972	)
		572			610			1,037			81,008			(156,840	)		287,827			(337,186	)		(122,972	)
Transfers:
Loans from REO		0			394			0			0			0			0			0			394
Interest rate lock commitments to loans acquired for sale (2)		0			0			0			0			9,971			0			0			9,971
Recombination of MSRs with loans at fair value resulting from consolidation of a VIE		0			0			0			0			0			0			(9,824	)		(9,824	)
Balance, December 31, 2021	$	30,129		$	4,161		$	0		$	18,964		$	2,451		$	(26,837	)	$	2,892,855		$	2,921,723
Changes in fair value recognized during the year relating to assets still held at December 31, 2021	$	(157	)	$	(371	)	$	0		$	(12,829	)	$	2,451		$	175,955		$	(337,186	)	$	(172,137	)

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

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

Liabilities	Year ended December 31, 2021
	(in thousands)
Interest-only security payable:
Balance, December 31, 2020	$	10,757
Changes in fair value included in results of operations arising from:
Changes in instrument - specific credit risk		0
Other factors		(164	)
		(164	)
Balance, December 31, 2021	$	10,593
Changes in fair value recognized during the year relating to liability outstanding at December 31, 2021	$	(164	)

	Year ended December 31, 2020
Assets (1)	Loans acquired for sale			Loans at fair value			Excess servicing spread			CRT derivatives			Interest rate lock commitments			CRT strips			Repurchase agreement derivatives			Firm commitment to purchase CRT securities			Mortgage servicing rights			Total
	(in thousands)
Balance, December 31, 2019	$	18,567		$	14,426		$	178,586		$	115,863		$	11,154		$	54,930		$	5,275		$	109,513		$	1,535,705		$	2,044,019
Purchases and issuances		74,339			1,058			0			0			369,802			0			0			0			0			445,199
Repayments and sales		(58,290	)		(5,734	)		(32,377	)		52,530			0			(54,929	)		(5,328	)		(128,786	)		(7	)		(232,921	)
Capitalization of interest		0			0			8,418			0			0			0			0			0			0			8,418
ESS received pursuant to a recapture agreement with PFSI		0			0			2,093			0			0			0			0			0			0			2,093
Amounts (incurred) received pursuant to sales of loans		0			0			0			0			0			0			0			(38,161	)		1,158,475			1,120,314
Changes in fair value included in results of operations arising from:
Changes in instrument - specific credit risk		0			0			0			0			0			0			0			0			0			0
Other factors		(741	)		(837	)		(24,970	)		(136,598	)		536,943			(24,292	)		53			(121,067	)		(938,937	)		(710,446	)
		(741	)		(837	)		(24,970	)		(136,598	)		536,943			(24,292	)		53			(121,067	)		(938,937	)		(710,446	)
Transfers:
Loans to REO		0			(886	)		0			0			0			0			0			0			0			(886	)
Firm commitment to purchase CRT securities to CRT strips		0			0			0			0			0			(178,501	)		0			178,501			0			0
Interest rate lock commitments to loans acquired for sale (2)		0			0			0			0			(845,513	)		0			0			0			0			(845,513	)
Balance, December 31, 2020	$	33,875		$	8,027		$	131,750		$	31,795		$	72,386		$	(202,792	)	$	0		$	0		$	1,755,236		$	1,830,277
Changes in fair value recognized during the year relating to assets still held at December 31, 2020	$	(899	)	$	(1,033	)	$	(24,970	)	$	(82,633	)	$	72,386		$	(79,221	)	$	0		$	0		$	(938,937	)	$	(1,055,307	)

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

(2)	~~During~~The Company had transfers among the ~~year ended December 31, 2018,~~fair value levels arising from transfers of IRLCs to loans acquired for sale at fair value upon purchase of the ~~Manager~~respective loans.

Liabilities	Year ended December 31, 2020
	(in thousands)
Interest-only security payable:
Balance, December 31, 2019	$	25,709
Changes in fair value included in income arising from:
Changes in instrument - specific credit risk		0
Other factors		(14,952	)
		(14,952	)
Balance, December 31, 2020	$	10,757
Changes in fair value recognized during the year relating to liability outstanding at December 31, 2020	$	(14,952	)

	Year ended December 31, 2019
Assets (1)	Loans acquired for sale			Loans at fair value			Excess servicing spread			CRT derivatives			Interest rate lock commitments			CRT strips			Repurchase agreement derivatives			Firm commitments to purchase CRT securities			Mortgage servicing rights			Total
	(in thousands)
Balance, December 31, 2018	$	17,474		$	117,732		$	216,110		$	123,987		$	11,988		$	0		$	14,511		$	37,994		$	1,162,369		$	1,702,165
Purchases and issuances		26,823			1,077			0			0			65,051			0			10,057			0			0			103,008
Repayments and sales		(27,609	)		(88,460	)		(40,316	)		(78,172	)		0			(32,200	)		(19,317	)		(31,925	)		(17	)		(318,016	)
Capitalization of interest		0			2,318			10,291			0			0			0			0			0			0			12,609
Capitalization of advances		0			1,340			0			0			0			0			0			0			0			1,340
ESS received pursuant to a recapture agreement with PFSI		0			0			1,757			0			0			0			0			0			0			1,757
Amounts received pursuant to sales of loans		0			0			0			0			0			0			0			99,305			837,706			937,011
Changes in fair value included in results of operations arising from:
Changes in instrument - specific credit risk		0			3,737			0			0			0			0			0			0			0			3,737
Other factors		1,070			(10,906	)		(9,256	)		70,048			80,133			30,326			24			60,943			(464,353	)		(241,971	)
		1,070			(7,169	)		(9,256	)		70,048			80,133			30,326			24			60,943			(464,353	)		(238,234	)
Transfers:
Loans to REO		0			(12,412	)		0			0			0			0			0			0			0			(12,412	)
Loans acquired for sale at fair value from "Level 2" to "Level 3" (2)		809			0			0			0			0			0			0			0			0			809
Firm commitment to purchase CRT securities to CRT strips		0			0			0			0			0			56,804			0			(56,804	)		0			0
Interest rate lock commitments to loans acquired for sale (3)		0			0			0			0			(146,018	)		0			0			0			0			(146,018	)
Balance, December 31, 2019	$	18,567		$	14,426		$	178,586		$	115,863		$	11,154		$	54,930		$	5,275		$	109,513		$	1,535,705		$	2,044,019
Changes in fair value recognized during the year relating to assets still held at December 31, 2019	$	121		$	(8,255	)	$	(9,256	)	$	(9,571	)	$	11,154		$	(1,874	)	$	107		$	29,808		$	(464,353	)	$	(452,119	)

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

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

Year ended December 31, 2018

Interest-only

security payable

(in thousands)

Liabilities:

Balance, December 31, 2017

$
7,070

Changes in fair value included in income arising from:

Changes in instrument-specific credit risk

—

Other factors

28,941

28,941

Balance, December 31, 2018

$
36,011

Changes in fair value recognized during the year relating to liability
outstanding at December 31, 2018

$
28,941

Year ended December 31, 2017

Mortgage
loans
acquired for
sale at fair
value

Mortgage
loans at fair
value

Excess
servicing
spread

Interest rate
lock commitments
(1)

CRT
Agreement
derivatives

Repurchase
agreement
derivatives

Mortgage
servicing
rights

Total

(in thousands)

Assets:

Balance, December 31, 2016

$
5,682

$
1,354,572

$
288,669

$
3,777

$
15,610

$
—

$
64,136

$
1,732,446

Purchases and issuances

11,415

—

—

36,005

—

3,864

79

51,363

Repayments and sales

(12,513
)

(530,367
)

(54,980
)

—

(51,731
)

—

—

(649,591
)
Capitalization of interest

—

30,795

16,951

—

—

—

—

47,746

Capitalization of advances

—

18,923

—

—

—

—

—

18,923

ESS received pursuant to a recapture
   agreement with PFSI

—

—

5,244

—

—

—

—

5,244

Amounts received as proceeds from
   sales of mortgage loans

—

—

—

—

—

—

41,379

41,379

Changes in fair value included in
   income arising from:

Changes in instrument- specific
   credit risk

—

24,685

—

—

—

—

—

24,685

Other factors

1,045

(25,369
)

(19,350
)

45,304

134,761

(116
)

(14,135
)

122,140

1,045

(684
)

(19,350
)

45,304

134,761

(116
)

(14,135
)

146,825

Transfers of mortgage loans to REO

—

(104,806
)

—

—

—

—

—

(104,806
)
Transfers of mortgage loans acquired
   for sale at fair value from "Level 2"
   to "Level 3" (2)

2,506

—

—

—

—

—

—

2,506

Transfers of interest rate lock
   commitments to mortgage loans
   acquired for sale

—

—

—

(80,454
)

—

—

—

(80,454
)
Balance, December 31, 2017

$
8,135

$
768,433

$
236,534

$
4,632

$
98,640

$
3,748

$
91,459

$
1,211,581

Changes in fair value recognized during
   the year relating to assets still held at
   December 31, 2017

$
98

$
(10,594
)

$
(19,350
)

$
4,632

$
83,030

$
(116
)

$
(14,135
)

$
43,565

~~(1)~~

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

~~(2)~~(3)

~~During~~The Company had transfers among the ~~year ended December 31, 2017, the Manager identified certain “Level 2”~~ fair value ~~mortgage~~levels arising from transfers of IRLCs to loans acquired for sale ~~that were not saleable into~~at fair value upon purchase of the ~~prime mortgage market and therefore transferred them to “Level 3”.~~

Year ended December 31, 2017

Interest-only

security payable

(in thousands)

Liabilities:

Balance, December 31, 2016

$
4,114

Changes in fair value included in income arising from:

Changes in instrument-specific credit risk

—

Other factors

2,956

2,956

Balance, December 31, 2017

7,070

Changes in fair value recognized during the year relating to liability
outstanding at December 31, 2017

$
2,956

Year ended December 31, 2016

Mortgage
loans at
fair value

Excess servicing
spread

Interest rate
lock
commitments
(1)

CRT Agreement
derivatives

Mortgage servicing
rights

Total

(in thousands)

Assets:

Balance, December 31, 2015

$
2,100,394

$
412,425

$
4,646

$
593

$
66,584

$
2,584,642

Purchases and issuances

—

—

71,892

—

2,739

74,631

Repayments and sales

(626,095
)

(129,037
)

—

(21,298
)

—

(776,430
)
Capitalization of interest

84,820

22,601

—

—

—

107,421

ESS received pursuant to a recapture
   agreement with PFSI

—

6,603

—

—

—

6,603

Amounts received as proceeds from sales of
   mortgage loans

—

—

—

—

7,337

7,337

Changes in fair value included in income
   arising from:

Changes in instrument-specific credit risk

26,910

—

—

—

—

26,910

Other factors

(30,414
)

(23,923
)

15,944

36,315

(12,524
)

(14,602
)

(3,504
)

(23,923
)

15,944

36,315

(12,524
)

12,308

Transfers of mortgage loans to REO

(201,043
)

—

—

—

—

(201,043
)
Transfers of interest rate lock commitments to
   mortgage loans acquired for sale

—

—

(88,705
)

—

—

(88,705
)
Balance, December 31, 2016

$
1,354,572

$
288,669

$
3,777

$
15,610

$
64,136

$
1,726,764

Changes in fair value recognized during the year
   relating to assets still held at December 31, 2016

$
(15,877
)

$
(16,713
)

$
3,777

$
15,610

$
(12,524
)

$
(25,727
)

~~(1)~~

~~For the purpose of this table, the IRLC asset and liability positions are shown net.~~respective loans.

Year ended December 31, 2016

Interest-only

security payable

(in thousands)

Liabilities:

Balance, December 31, 2015

$
—

Changes in fair value included in income arising from:

Changes in instrument- specific credit risk

—

Other factors

4,114

4,114

Balance, December 31, 2016

4,114

Changes in fair value recognized during the year relating to liability
outstanding at December 31, 2016

$
4,114

Liabilities	Year ended December 31, 2019
	(in thousands)
Interest-only security payable:
Balance, December 31, 2018	$	36,011
Changes in fair value included in income arising from:
Changes in instrument - specific credit risk		0
Other factors		(10,302	)
		(10,302	)
Balance, December 31, 2019	$	25,709
Changes in fair value recognized during the year relating to liability outstanding at December 31, 2019	$	(10,302	)

~~F-31~~

~~The Company had transfers among~~Financial Statement Items Measured at Fair Value under the fair value levels arising from transfers of IRLCs to mortgage loans held for sale at fair value upon purchase of the respective mortgage loans and identification of certain mortgage loans acquired for sale are not saleable into the prime mortgage market.

Fair Value Option

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

	December 31, 2018							December 31, 2017							December 31, 2021							December 31, 2020
	Fair value		Principal amount due upon maturity		Difference			Fair value		Principal amount due upon maturity		Difference			Fair value		Principal amount due upon maturity		Difference			Fair value		Principal amount due upon maturity		Difference
	(in thousands)														(in thousands)
Mortgage loans acquired for sale at fair value:
Current through 89 days delinquent:	$	1,643,465	$	1,580,504	$	62,961		$	1,268,121	$	1,221,125	$	46,996
90 or more days delinquent:
Not in foreclosure		492		492		—			950		1,120		(170	)
In foreclosure		—		—		—			444		496		(52	)
		492		492		—			1,394		1,616		(222	)
	$	1,643,957	$	1,580,996	$	62,961		$	1,269,515	$	1,222,741	$	46,774
Mortgage loans at fair value:
Mortgage loans held in a consolidated VIE:
Loans acquired for sale at fair value:
Current through 89 days delinquent	$	290,573	$	294,617	$	(4,044	)	$	321,040	$	316,684	$	4,356		$	4,166,177	$	4,048,967	$	117,210		$	3,545,100	$	3,377,970	$	167,130
90 or more days delinquent:
Not in foreclosure		—		—		—			—		—		—			4,848		5,801		(953	)		6,591		8,006		(1,415	)
In foreclosure		—		—		—			—		—		—			0		0		0			199		235		(36	)
		—		—		—			—		—		—			4,848		5,801		(953	)		6,790		8,241		(1,451	)
		290,573		294,617		(4,044	)		321,040		316,684		4,356		$	4,171,025	$	4,054,768	$	116,257		$	3,551,890	$	3,386,211	$	165,679
Distressed mortgage loans at fair value:
Loans at fair value:
Loans held in consolidated VIEs:
Current through 89 days delinquent															$	1,561,794	$	1,514,575	$	47,219		$	140,052	$	128,787	$	11,265
90 or more days delinquent:
Not in foreclosure																2,141		2,722		(581	)		3,655		4,240		(585	)
In foreclosure																630		809		(179	)		0		0		0
																2,771		3,531		(760	)		3,655		4,240		(585	)
																1,564,565		1,518,106		46,459			143,707		133,027		10,680
Distressed loans:
Current through 89 days delinquent		28,806		43,043		(14,237	)		414,785		519,009		(104,224	)		782		1,455		(673	)		2,071		4,099		(2,028	)
90 or more days delinquent:
Not in foreclosure		37,288		71,732		(34,444	)		166,749		257,038		(90,289	)		1,181		3,824		(2,643	)		3,714		12,357		(8,643	)
In foreclosure		51,638		86,259		(34,621	)		186,899		267,911		(81,012	)		2,198		5,490		(3,292	)		2,242		4,641		(2,399	)
		88,926		157,991		(69,065	)		353,648		524,949		(171,301	)		3,379		9,314		(5,935	)		5,956		16,998		(11,042	)
		117,732		201,034		(83,302	)		768,433		1,043,958		(275,525	)		4,161		10,769		(6,608	)		8,027		21,097		(13,070	)
	$	408,305	$	495,651	$	(87,346	)	$	1,089,473	$	1,360,642	$	(271,169	)	$	1,568,726	$	1,528,875	$	39,851		$	151,734	$	154,124	$	(2,390	)

~~F-32~~

Following are the changes in fair value included in current period income by consolidated statement of income line item for ~~assets and liabilities~~financial statement items accounted for under the fair value option:

	Year ended December 31, 2018															Year ended December 31, 2021
	Net mortgage loan servicing fees			Net gain on mortgage loans acquired for sale			Net gain (loss) on investments			Net interest income			Total				Net gains on loans acquired for sale		Net gains on investments and financings			Net loan servicing fees			Net interest expense			Total
	(in thousands)															(in thousands)
Assets:
Short-term investments at fair value	$	—		$	—		$	—		$	—		$	—
Mortgage-backed securities at fair value		—			—			(11,262	)		(4,793	)		(16,055	)		$	0	$	(74,354	)	$	0		$	(9,323	)	$	(83,677	)
Mortgage loans acquired for sale at fair value		—			(5,298	)		—			—			(5,298	)
Mortgage loans at fair value		—			—			(23,696	)		7,539			(16,157	)
Loans acquired for sale at fair value																		3,960		0			0			0			3,960
Loans at fair value																		0		(11,925	)		0			(1,624	)		(13,549	)
ESS at fair value		—			—			8,500			15,138			23,638				0		1,037			0			1,280			2,317
Firm commitment to purchase credit risk transfer securities at fair value		—			30,595			7,399			—			37,994
Credit risk transfer strips																		0		287,827			0			0			287,827
MSRs at fair value		(58,780	)		—			—			—			(58,780	)			0		0			(337,186	)		0			(337,186	)
	$	(58,780	)	$	25,297		$	(19,059	)	$	17,884		$	(34,658	)		$	3,960	$	202,585		$	(337,186	)	$	(9,667	)	$	(140,308	)
Liabilities:
Interest-only security payable at fair value	$	—		$	—		$	(28,941	)	$	—		$	(28,941	)		$	0	$	164		$	0		$	0		$	164
Asset-backed financing of a VIE at fair value		—			—			9,610			(577	)		9,033
Asset-backed financings at fair value																		0		19,708			0			(1,144	)		18,564
	$	—		$	—		$	(19,331	)	$	(577	)	$	(19,908	)		$	0	$	19,872		$	0		$	(1,144	)	$	18,728

	Year ended December 31, 2017														Year ended December 31, 2020
	Net mortgage loan servicing fees			Net gain on mortgage loans acquired for sale		Net gain (loss) on investments			Net interest income			Total				Net gains on loans acquired for sale			Net gains on investments and financings			Net loan servicing fees			Net interest expense			Total
	(in thousands)														(in thousands)
Assets:
Short-term investments at fair value	$	—		$	—	$	—		$	—		$	—
Mortgage-backed securities at fair value		—			—		5,498			5,367			10,865			$	0		$	87,852		$	0		$	(23,323	)	$	64,529
Mortgage loans acquired for sale at fair value		—			97,940		—			—			97,940
Mortgage loans at fair value		—			—		3,582			32,239			35,821
Loans acquired for sale at fair value																	817,158			0			0			0			817,158
Loans at fair value																	0			(7,454	)		0			2,776			(4,678	)
ESS at fair value		—			—		(19,350	)		16,951			(2,399	)			0			(24,970	)		0			8,418			(16,552	)
Credit risk transfer strips																	0			(24,292	)		0			0			(24,292	)
Firm commitment to purchase CRT securities at fair value																	(38,161	)		(121,067	)		0			0			(159,228	)
MSRs at fair value		(14,135	)		—		—			—			(14,135	)			0			0			(938,937	)		0			(938,937	)
	$	(14,135	)	$	97,940	$	(10,270	)	$	54,557		$	128,092			$	778,997		$	(89,931	)	$	(938,937	)	$	(12,129	)	$	(262,000	)
Liabilities:
Interest-only security payable at fair value	$	—		$	—	$	2,956		$	—		$	2,956			$	0		$	14,952		$	0		$	0		$	14,952
Asset-backed financing of a VIE at fair value		—			—		(3,426	)		(1,781	)		(5,207	)
Asset-backed financings at fair value																	0			5,519			0			(4,218	)		1,301
	$	—		$	—	$	(470	)	$	(1,781	)	$	(2,251	)		$	0		$	20,471		$	0		$	(4,218	)	$	16,253

	Year ended December 31, 2016														Year ended December 31, 2019
	Net mortgage loan servicing fees			Net gain on mortgage loans acquired for sale		Net gain (loss) on investments			Net interest income			Total				Net gains on loans acquired for sale		Net gains on investments and financings			Net loan servicing fees			Net interest expense			Total
	(in thousands)														(in thousands)
Assets:
Short-term investments at fair value	$	—		$	—	$	—		$	—		$	—
Mortgage-backed securities at fair value		—			—		(13,168	)		(2,391	)		(15,559	)		$	0	$	77,283		$	0		$	(12,853	)	$	64,430
Mortgage loans acquired for sale at fair value		—			55,350		—			—			55,350
Mortgage loans at fair value		—			—		(5,252	)		86,114			80,862
Loans acquired for sale at fair value																	163,244		0			0			0			163,244
Loans at fair value																	0		714			0			3,420			4,134
ESS at fair value		—			—		(23,923	)		22,601			(1,322	)			0		(9,256	)		0			10,291			1,035
Credit risk transfer strips																	0		30,326			0			0			30,326
Firm commitment to purchase CRT securities at fair value																	99,305		60,943			0			0			160,248
MSRs at fair value		(12,524	)		—		—			—			(12,524	)			0		0			(464,353	)		0			(464,353	)
	$	(12,524	)	$	55,350	$	(42,343	)	$	106,324		$	106,807			$	262,549	$	160,010		$	(464,353	)	$	858		$	(40,936	)
Liabilities:
Asset-backed financing of a VIE at fair value	$	—		$	—	$	3,238		$	(669	)	$	2,569
Interest-only security payable																$	0	$	10,302		$	0		$	0		$	10,302
Asset-backed financings at fair value																	0		(7,553	)		0			(2,061	)		(9,614	)
	$	—		$	—	$	3,238		$	(669	)	$	2,569			$	0	$	2,749		$	0		$	(2,061	)	$	688

Financial Statement ~~Items~~Item Measured at Fair Value on a Nonrecurring Basis

Following is a summary of the carrying value ~~at year end for financial statement items~~of assets that were re-measured atduring the year based on fair value on a nonrecurring ~~basis during the years presented:~~

basis:

December 31, 2018

Level 1

Level 2

Level 3

Total

(in thousands)

Real estate acquired in settlement of loans

$
—

$
—

$
24,515

$
24,515

$
—

$
—

$
24,515

$
24,515

Real estate acquired in settlement of loans									Level 1		Level 2		Level 3		Total
	December 31, 2017								(in thousands)
	Level 1		Level 2		Level 3		Total
	(in thousands)
Real estate acquired in settlement of loans	$	—	$	—	$	71,380	$	71,380
MSRs at lower of amortized cost or fair value		—		—		312,995		312,995
	$	—	$	—	$	384,375	$	384,375
December 31, 2021									$	0	$	0	$	5,147	$	5,147
December 31, 2020									$	0	$	0	$	12,656	$	12,656

The following table summarizes the fair value changes recognized during the ~~years presented~~year on assets held at year end that were remeasured atbased on fair value on a nonrecurring basis:

Year ended December 31,

2018

2017

2016

(in thousands)

Real estate asset acquired in settlement of loans

$
(4,434
)

$
(11,882
)

$
(17,561
)
MSRs at lower of amortized cost or fair value

—

(5,876
)

(2,728
)

$
(4,434
)

$
(17,758
)

$
(20,289
)

	Year ended December 31,
	2021		2020			2019
	(in thousands)
Real estate asset acquired in settlement of loans	$	279	$	(1,638	)	$	(2,155	)

~~Real Estate Acquired in Settlement of Loans~~

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. The initial carrying value of the REO is measured at cost as indicated by the purchase price in the case of purchased REO or as measured by the fair value of the mortgage loan immediately before REO acquisition in the case of acquisition in settlement of a mortgage loan. REO may be ~~subsequently~~ 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 loansin the Company’s consolidated statements of income.

~~F-34~~

~~Mortgage Servicing Rights at Lower of Amortized Cost or Fair Value~~

Before the Company adopted fair value accounting for all of its existing classes of MSRs on January 1, 2018, the Manager evaluated the Company’s MSRs at lower of amortized cost or fair value for impairment with reference to the asset’s fair value. For purposes of performing its MSR impairment evaluation, the Company stratified its MSRs at lower of amortized cost or fair value based on the interest rates borne by the mortgage loans underlying the MSRs. Mortgage loans were grouped into pools with 50 basis point interest rate ranges for fixed-rate mortgage loans with interest rates between 3.0% and 4.5% and a single pool for mortgage loans with interest rates below 3.0%. MSRs relating to adjustable rate mortgage 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 interest rate pools was below the amortized cost of the MSRs, those MSRs were impaired.

When MSRs were impaired, the change in impairment was recognized in current-period income and the carrying value of the MSRs was adjusted using a valuation allowance. If the fair value of the MSRs subsequently increased, the increase in fair value was recognized in current period income only to the extent of the valuation allowance for the respective impairment stratum.

The Manager periodically reviewed the various impairment strata to determine whether the fair value of the impaired MSRs in a given stratum was likely to recover. When the Manager deemed recovery of 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.

Fair Value of Financial Instruments Carried at Amortized Cost

Most of the Company’s borrowings are carried at amortized cost. The Company’s Assets sold under agreements to repurchase, Mortgage loan participation purchase and sale agreements, Notes payable secured by credit risk transfer and mortgage servicing assets, Exchangeable senior notes, ~~Notes payable~~ 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 ~~Manager~~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 ~~and Notes payable~~approximate the agreements’ carrying values due to the borrowing agreements’ variable interest rates and short maturities.

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

	December 31, 2021				December 31, 2020
Instrument	Carrying value		Fair value		Carrying value		Fair value
	(in thousands)
Notes payable secured by credit risk transfer and mortgage servicing assets	$	2,471,961	$	2,480,842	$	1,924,999	$	1,871,276
Exchangeable senior notes	$	502,459	$	536,460	$	196,796	$	207,428

The Company estimates the fair value of the Notes payable secured by credit risk transfer and mortgage servicing assets and Exchangeable senior notes ~~at December 31, 2018 and December 31, 2017 was $247.2 million and $244.9 million, respectively. The~~ using indications of fair value ~~of the~~ ~~Exchangeable senior notes~~ ~~is estimated using a broker indication of fair value. The fair value of~~ ~~Notes payable~~ ~~was $444.4 million at December 31, 2018. The fair value of the~~ ~~Notes payable~~ ~~is estimated using a discounted cash flow approach using broker-provided indications of market pricing spreads to develop an appropriate discount rate.~~provided by nonaffiliate brokers.

Valuation Governance

Most of the Company’s assets, its Asset-backed ~~financing of a VIE,~~financings at fair value, Interest-only security payable at fair value and Derivative and credit risk transfer strip liabilities at fair value 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 ~~Manager’s~~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 ~~Manager~~Company has assigned responsibility for estimating the fair value of these assets and liabilities to specialized staff and subjects the valuation process to significant senior management oversight. PFSI’s Financial Analysis and Valuation group (the “FAV group”) is responsible for estimating the fair values of “Level 3” fair value assets and liabilities other than IRLCs and maintaining its valuation policies and procedures. The fair value of the Company’s IRLCs is developed by ~~the Manager’s~~PFSI’s Capital Markets Risk Management staff and is reviewed by the ~~Manager’s~~PFSI’s Capital Markets Operations group.

With respect to the non-IRLC “Level 3” valuations, the FAV group reports to PFSI’s senior management valuation committee, which oversees the valuations. The FAV group monitors the models used for valuation of the Company’s “Level 3” fair value assets and liabilities other than IRLCs, including the models’ performance versus actual results, and reports those results to PFSI’s senior management valuation committee. PFSI’s senior management valuation committee includes the Company’s ~~executive chairman, chief executive,~~ chief financial, ~~chief~~investment, and credit risk officers as well as other senior members of the Company’s finance, capital markets and ~~deputy chief financial officers.~~risk management staffs.

The FAV group is responsible for reporting to PFSI’s senior management valuation committee on the changes in the valuation of the non-IRLC “Level 3” fair value assets and liabilities, including major factors affecting the valuation and any changes in model methods and inputs. To assess the reasonableness of its valuations, the FAV group presents an analysis of the effect on the valuation of changes to the significant inputs to the models.

~~F-35~~F-34

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 (loss)~~gains (losses) on investments and financings in the consolidated statements of income.

~~Mortgage~~ Loans

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

Mortgage loans that are saleable into active markets, comprised of most of the Company’s mortgage loans acquired for sale at fair value and all of the mortgage loans at fair value held in a VIE, are categorized as “Level 2” fair value assets. For mortgage loans acquired for sale, the fair values of mortgage loans acquired for sale at fair value are established using their quoted market or contracted price or market price equivalent. For the mortgage 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 mortgage 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 Manager believes are similar to the models and inputs used by other market participants.

Mortgage loans that are not saleable into active markets, comprised primarily of distressed mortgage loans, are categorized as “Level 3” fair value assets and their fair values are estimated using a discounted cash flow approach. Inputs to the discounted cash flow model include current interest rates, loan amount, payment status, property type, discount rates and forecasts of future interest rates, home prices, prepayment speeds, default speeds, loss severities or contracted selling price when applicable.

Changes in fair value attributable to changes in instrument-specific credit risk are measured by the effect on fair value of the change in the respective mortgage loan’s delinquency status and performance history at period-end from the later of the beginning of the period or acquisition date.

The significant unobservable inputs used in the fair value measurement of the Company’s mortgage loans at fair value are 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 mortgage 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 mortgage loans at fair value are included in ~~Net gain (loss) 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” mortgage loans at fair value:~~

Key inputs (1)

December 31, 2018

December 31, 2017

Discount rate

Range

2.8% – 19.6%

2.9% – 15.0%

Weighted average

12.0%

6.9%

Twelve-month projected housing price index change

Range

3.1% – 3.7%

3.6% – 4.6%

Weighted average

3.4%

4.4%

Voluntary prepayment speed (2)

Range

0.9% – 8.3%

3.2% – 11.0%

Weighted average

3.2%

4.2%

Total prepayment speed (3)

Range

8.3% – 22.0%

10.8% – 23.8%

Weighted average

18.3%

16.5%

~~(1)~~

~~Weighted average inputs~~•

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

~~(2)~~

~~Prepayment speed is measured~~•

For loans acquired for sale, the fair values are established using ~~Life Voluntary Conditional Prepayment Rate (“CPR”).~~the loans’ contracted selling price or quoted market price or market price equivalent.

~~(3)~~

~~Total~~•

For loans at fair value held in VIEs, the quoted indications of fair value of all of the individual securities issued by the securitization trusts are used to derive fair values for the loans. The Company obtains indications of fair value from nonaffiliated brokers based on comparable securities and validates the brokers’ indications of fair value using pricing models and inputs the Company believes are similar to the models and inputs used by other market participants. The Company adjusts the fair values received from brokers to include the fair value of MSRs attributable to loans held by the Company included in the VIEs.

•

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

•

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

•

Distressed loans’ fair values are estimated based on the expected resolution to be realized from the individual asset’s disposition strategy. When a cash flow projection is ~~measured using Life Total CPR.~~used to estimate the fair value of the resolution, those cash flows are discounted at annual rates up to 20%.

~~F-36~~

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)~~discount rate (pricing spread) and prepayment ~~speed.~~rate (prepayment speed). Significant changes to those inputs in isolation may result in a significant change in the ESS fair value measurement. Changes in these key inputs are not ~~necessarily~~ directly related. Changes in the fair value of ESS are included in Net ~~gain~~ ~~(loss)~~ gains (losses) on investments and financings in the consolidated statements of income. The remaining balance of the ESS was repaid during the quarter ended March 31, 2021.

F-35

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

Key inputs (1)	December 31, 2018		December 31, 2017
UPB of underlying mortgage loans (in thousands)	$	23,196,033	$	27,217,199
					December 31, 2020
Fair value (in thousands)					$	131,750
UPB of underlying loans (in thousands)					$	15,833,050
Average servicing fee rate (in basis points)		34		34		34
Average ESS rate (in basis points)		19		19		19
Key inputs (1)
Pricing spread (2)
Range	2.8% - 3.2%		3.8% - 4.3%		4.9% – 5.3%
Weighted average	3.1%		4.1%		5.1%
Annual total prepayment speed (3)
Range	8.2% - 29.5%		8.4% - 41.4%		9.6% – 18.3%
Weighted average	9.7%		10.8%		11.7%
Life (in years)
Equivalent life (in years)
Range	1.6 - 7.6		1.4 - 7.7		2.3 – 6.6
Weighted average	6.8		6.5		5.8

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

(2)

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

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

Derivative and Credit Risk Transfer Strip Assets and Liabilities

CRT Derivatives

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

The Company assesses the fair values it receives from nonaffiliated brokers using the discounted cash flow approach. The significant unobservable inputs used by the Company in its review and approval of the valuation of CRT derivatives are the discount rate, voluntary and involuntary prepayment speeds and the remaining loss expectations of the reference loans. Changes in fair value of CRT derivatives are included in Net gains (losses) on investments and financings in the consolidated statements of income.

F-36

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:

	December 31, 2021		December 31, 2020
	(dollars in thousands)
Fair value
CRT derivatives:
Assets	$	19,627	$	58,699
Liabilities	$	663	$	26,904
UPB of loans in reference pools	$	7,426,288	$	13,854,426
Key inputs (1)
Discount rate
Range	3.3% – 5.9%		6.7% – 9.0%
Weighted average	5.7%		7.3%
Voluntary prepayment speed (2)
Range	12.6% – 13.1%		20.8% – 23.5%
Weighted average	12.7%		21.9%
Involuntary prepayment speed (3)
Range	(0.1)% – 0.8%		(0.8)% – 1.1%
Weighted average	0.1%		(0.2)%
Remaining loss (recovery) expectation (4)
Range	(0.1)% – 0.6%		(0.6)% – 0.6%
Weighted average	0.1%		(0.3)%

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

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

~~Derivative Financial Instruments~~

(3)

Involuntary prepayment speed is measured using Life Involuntary CPR. Negative involuntary prepayment speeds reflect the expectation for reinstatement to the reference pool of a portion of the loans that previously triggered contractual losses due to delinquency while under CARES Act forbearance upon their expected re-performance, as contractually provided for in certain CRT Agreements.

(4)

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

Interest Rate Lock Commitments

The Company categorizes IRLCs as “Level 3” fair value assets and liabilities. The Company estimates the fair value of IRLCs based on quoted Agency MBS prices, ~~its~~the probability that the loans 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 ~~in the~~upon sale of the ~~mortgage loan and the probability that the mortgage loan will be purchased under the commitment (the “pull-through rate”).~~loan.

The significant unobservable inputs used in the fair value measurement of the Company’s IRLCs are the pull-through rate and the estimated MSR ~~component of the Company’s estimate of the fair value of~~attributed to the mortgage loans it has committed to purchase. Significant changes in the pull-through rate or the MSR component of the IRLCs, in isolation, may result in a significant change in the IRLCs’ fair value. The financial effects of changes in these inputs are generally inversely correlated as increasing interest rates have a positive effect on the fair value of the MSR component of IRLC fair value, but also increase the pull-through rate for the ~~mortgage~~ 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~~gains on ~~mortgage~~ loans acquired for sale ~~and may also be included in~~ ~~Net mortgage loan servicing fees – from nonaffiliates~~ ~~when the Manager includes IRLCs in its MSR hedging activities~~ in the consolidated statements of income.

F-37

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

Key inputs (1)	December 31, 2018		December 31, 2017
					December 31, 2021		December 31, 2020
Fair value (in thousands) (1)					$	2,451	$	72,386
Committed amount (in thousands)					$	2,092,129	$	10,588,208
Key inputs (2)
Pull-through rate
Range	45.4% - 100%		58.0% - 100%		64.3% – 100%		44.6% – 100%
Weighted average	91.8%		90.3%		91.4%		86.3%
MSR value expressed as
MSR fair value expressed as
Servicing fee multiple
Range	2.4 - 5.6		2.1 - 5.8		0.5 – 6.3		2.0 – 5.3
Weighted average		4.3		4.9	4.5		4.4
Percentage of UPB
Range	0.6% - 3.6%		0.0% - 2.4%		0.3% – 2.7%		0.5% – 1.9%
Weighted average	2.2%		1.3%		1.5%		1.2%

(1)	~~Weighted average inputs~~For purposes of this table, IRLC asset and liability positions are ~~based on committed amounts.~~

~~CRT Agreements~~

The Company categorizes CRT Agreement derivatives as “Level 3” fair value assets. The fair value of CRT Agreements is established based on whether the aggregation period has been completed and the CRT Agreements have been securitized:

For securitized CRT Agreements, fair value is based on indications of fair value provided to the Company by nonaffiliated brokers for the certificates representing the beneficial interest in CRT Agreements which include the deposits securing the CRT Agreements, the Recourse Obligations and the IO ownership interest. Together, the Recourse Obligations and the IO ownership comprise the CRT Agreement derivative. Fair value of the CRT Agreement derivative is derived by deducting the balance of the ~~Deposits securing CRT Agreements~~ ~~from the indication of fair value of the certificates provided by the nonaffiliated brokers.~~

~~For CRT Agreements that have not been securitized, fair value is estimated using a discounted cash flow analysis.~~

The significant unobservable inputs into the valuation of CRT Agreement derivatives are the discount rate and voluntary involuntary prepayment speeds of the reference mortgage loans. Changes in fair value of CRT Agreements are included in ~~Net gain (loss) on investments~~.

Following is a quantitative summary of key unobservable inputs used in the valuation of non-securitized CRT Agreements and the review and approval of broker-provided fair values for securitized CRT Agreements. At December 31, 2018, all CRT Agreements held by the Company were securitized:

Key inputs (1)

December 31, 2018

December 31, 2017

Discount rate

Range

6.6% – 7.5%

5.1% – 6.2%

Weighted average

7.3%

5.6%

Voluntary prepayment speed (2)

Range

9.0% – 10.6%

12.1% – 15.0%

Weighted average

9.9%

13.0%

Involuntary prepayment speed (3)

Range

0.2% – 0.2%

0.3% – 0.3%

Weighted average

0.2%

0.3%

Remaining loss expectation (4)

Range

0.1% – 0.2%

0.1% – 0.3%

Weighted average

0.2%

0.2%

~~(1)~~

~~Weighted average inputs are based on fair value amounts of the CRT Agreements.~~shown net.

(2)	~~Voluntary prepayment speed is measured using Life Voluntary CPR.~~Weighted-average inputs are based on the committed amounts.

~~(3)~~

~~Involuntary prepayment speed is measured using Life Involuntary CPR.~~

~~(4)~~

~~Remaining loss expectation is measured as expected future contractual losses divided by UPB of reference mortgage loans.~~

~~F-38~~

~~Repurchase Agreement Derivatives~~

The Company has a master repurchase agreement that includes incentives for financing mortgage loans approved for satisfying certain consumer relief characteristics. These incentives are classified as embedded derivatives for accounting purposes and are accounted for separate from the repurchase agreements. The significant unobservable inputs into the valuation of these derivative assets are the discount rate and the expected approval rate of the mortgage loans financed under the master repurchase agreement. The resulting ratio included in the Company’s fair value estimate was 97% at both December 31, 2018 and December 31, 2017. Changes in fair value of repurchase agreement derivatives are included in ~~Interest expense~~ ~~in the consolidated statements of income. The Company classifies repurchase agreement derivatives as “Level 3” fair value assets.~~

Hedging Derivatives

Fair ~~values~~value of derivative financial instruments ~~based~~actively traded on ~~exchange traded market prices~~exchanges are categorized by the Company as “Level 1” fair value assets and ~~liabilities; fair~~liabilities. Fair values of derivative financial instruments based on observable interest rates, volatilities and prices in the MBS ~~market~~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~~gains on ~~mortgage~~ loans acquired for sale,Net ~~gain (loss)~~gains (losses) on investments and financings, or Net ~~mortgage~~ loan servicing fees – from nonaffiliates – Mortgage servicing rights hedging results, as applicable, in the consolidated statements of income.

~~Firm commitment to purchase CRT securities~~Credit Risk Transfer Strips

The Company categorizes ~~its firm commitment to purchase~~ CRT ~~securities~~strips as a “Level 3” fair value ~~asset.~~assets or liabilities. The fair value of CRT strips is based on indications of fair value provided to the ~~firm commitment~~Company by nonaffiliated brokers for the certificates representing the beneficial interests in the trust holding the Deposits securing CRT arrangements, the IO ownership interest and Recourse Obligation. Together, the IO ownership interest and the Recourse Obligation comprise the CRT strips. Fair value of the CRT strips is ~~estimated using a discounted cash flow approach to estimate~~derived by deducting the balance of the Deposits securing CRT arrangements from the fair value of the ~~CRT securities~~certificates derived from indications provided by the nonaffiliated brokers. The Company applies adjustments to ~~be purchased less~~ the fair value derived from these indications to account for contractual ~~purchase price. Key inputs used in~~restrictions limiting PMT’s ability to sell certain of the ~~estimation~~certificates.

The Company assesses the indications of fair value 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 ~~firm commitment~~valuation of the CRT strips are the discount rate, ~~and the~~ voluntary and involuntary prepayment speeds and the remaining loss expectations of the reference ~~mortgage~~ loans. ~~The firm commitment to purchase CRT securities is recognized initially as a component of~~ ~~Gain on sale of mortgage loans acquired for sale. Subsequent changes~~Changes in fair value of CRT strips are ~~recorded~~included in Net ~~gain (loss)~~gains (losses) on investments. and financings.

F-38

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

strip liabilities:

~~Key inputs (1)~~		~~December 31, 2018~~
~~Discount rate~~		~~7.9%~~
~~Voluntary prepayment speed (2)~~		~~12.4%~~
~~Involuntary prepayment speed (3)~~		~~0.1%~~
~~Remaining loss expectation (4)~~		~~0.1%~~

	December 31, 2021		December 31, 2020
	(dollars in thousands)
Carrying value
CRT strips	$	26,837	$	202,792
UPB of loans in the reference pools	$	23,382,619	$	44,843,516
Key inputs (1)
Discount rate
Range	3.8% – 6.4%		6.0% – 8.4%
Weighted average	6.0%		8.0%
Voluntary prepayment speed (2)
Range	14.9% – 17.6%		25.0% – 30.2%
Weighted average	17.2%		26.2%
Involuntary prepayment speed (3)
Range	0.5% – 1.4%		0.8% – 1.7%
Weighted average	0.6%		1.0%
Remaining loss expectation (4)
Range	0.3% – 1.1%		0.3% – 0.6%
Weighted average	0.5%		0.4%

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

Mortgage Servicing Rights

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

The key inputs used in the estimation of the fair value of MSRs include the applicable pricing spread, the prepayment speeds of the underlying loans and the annual per-loan cost to service the loans, all of which are unobservable. Significant changes to any of those inputs in isolation could result in a significant change in the MSR fair value measurement. Changes in these key inputs are not directly related. Changes in the fair value of MSRs are included in Net loan servicing fees – from nonaffiliates – Change in fair value of mortgage servicing rights in the consolidated statements of income.

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

F-39

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

	Year ended December 31,
	2021		2020		2019
	(MSR recognized and UPB of underlying loans amounts in thousands)
MSR recognized	$	1,484,629	$	1,158,475	$	837,706
UPB of underlying loans	$	108,424,795	$	103,136,121	$	59,951,884
Weighted average annual servicing fee rate (in basis points)	28		28		31
Key inputs (1)
Pricing spread (2)
Range	6.0% – 8.0%		6.7% – 11.3%		5.6% – 9.9%
Weighted average	7.2%		7.8%		6.1%
Prepayment speed (3)
Range	5.5% – 12.5%		7.0% – 20.9%		8.5% – 26.1%
Weighted average	8.2%		10.0%		11.7%
Equivalent average life (in years)
Range	3.5 – 9.1		3.5 – 9.2		3.1 – 7.7
Weighted average	8.1		7.4		6.8
Annual per-loan cost of servicing
Range	$80 – $81		$78 – $81		$78 – $78
Weighted average	$80		$80		$78

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

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

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

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:

	December 31, 2021		December 31, 2020
	(Fair value, UPB of underlying loans and effect on fair value amounts in thousands)
Fair value	$	2,892,855	$	1,755,236
UPB of underlying loans	$	216,065,626	$	170,728,322
Weighted average annual servicing fee rate (in basis points)	28		28
Weighted average note interest rate	3.0%		3.6%
Key inputs (1)
Pricing spread (2)
Range	6.0% – 8.0%		8.0% – 11.1%
Weighted average	7.2%		8.0%
Effect on fair value of:
5% adverse change	$(39,826)		$(31,400)
10% adverse change	$(78,613)		$(61,718)
20% adverse change	$(153,220)		$(119,305)
Prepayment speed (3)
Range	5.5% – 12.5%		12.4% – 28.8%
Weighted average	8.2%		12.8%
Equivalent average life (in years)
Range	3.5 – 9.1		2.9 – 6.8
Weighted average	8.1		6.5
Effect on fair value of:
5% adverse change	$(59,726)		$(48,136)
10% adverse change	$(117,162)		$(94,244)
20% adverse change	$(225,672)		$(180,820)
Annual per-loan cost of servicing
Range	$80 – $81		$78 – $121
Weighted average	$80		$81
Effect on fair value of:
5% adverse change	$(17,585)		$(11,846)
10% adverse change	$(35,169)		$(23,692)
20% adverse change	$(70,338)		$(47,385)

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

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

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

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

Real Estate Acquired in Settlement of Loans

REO is measured based on its fair value on a nonrecurring basis and is categorized as a “Level 3” fair value asset. Fair value of REO is established by using a current estimate of fair value from either a broker’s price opinion, or a full appraisal, or the price given in a pending contract of sale.

REO fair values are reviewed by ~~PFSI’s~~PLS staff appraisers when the Company obtains multiple indications of fair value and there is a significant difference between the indications of fair ~~values received. PFSI’s~~value. PLS staff appraisers will attempt to resolve the difference between the indications of fair value. In circumstances where the staff appraisers are not able to generate adequate data to support a fair value conclusion, the staff appraisers ~~will order~~obtain an additional appraisal to determine fair value. Recognized changes in the fair value of REO are included in Results of real estate acquired in settlement of loans in the consolidated statements of income.

~~F-39~~

~~Mortgage Servicing Rights~~

MSRs are categorized as “Level 3” fair value assets. The Company uses a discounted cash flow approach to estimate the fair value of MSRs. The key inputs used in the estimation of the fair value of MSRs include the applicable pricing spread, the prepayment and default rates of the underlying mortgage loans, and annual per-loan cost to service mortgage 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. Recognized changes in the fair value of MSRs are included in ~~Net mortgage loan servicing fees~~ ~~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 mortgage loans, thereby reducing the cash flows expected to accrue to the MSRs. Reductions in the fair value of MSRs affect income primarily through change in fair value and change in impairment. Through December 31, 2017, the Company accounted for certain of its MSRs using the amortization method. Beginning January 1, 2018 and prospectively, the Company accounts for all existing classes of MSRs at fair value.

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

Year ended December 31,

2018

2017

2016

Fair
value

Fair
value

Amortized
cost

Fair
value

Amortized
cost

(MSR recognized and UPB of underlying mortgage loan amounts in thousands)

MSR recognized

$
356,755

$
41,379

$
248,930

$
7,337

$
267,755

Key inputs (1)

UPB of underlying mortgage loans

$
28,923,523

$
3,724,642

$
19,982,686

$
752,850

$
22,068,577

Weighted average annual servicing
fee rate (in basis points)

26

25

25

26

25

Pricing spread (2)

Range

5.8% – 12.9%

7.6% – 7.6%

7.6% – 12.6%

7.2% – 7.6%

7.2% – 12.6%

Weighted average

6.9%

7.6%

7.6%

7.3%

7.5%

Annual total prepayment speed (3)

Range

3.2% – 35.3%

7.9% – 29.5%

3.2% – 31.1%

7.2% – 38.0%

3.3% – 49.2%

Weighted average

9.9%

10.7%

8.0%

14.5%

8.3%

Life (in years)

Range

2.3 – 11.9

2.8 – 8.5

2.6 – 11.9

2.0 – 9.4

1.4 – 12.3

Weighted average

7.6

7.3

8.3

5.9

8.0

Annual per-loan cost of servicing

Range

$77 – $79

$79 – $79

$79 – $79

$68 – $82

$68 – $79

Weighted average

$79

$79

$79

$73

$77

~~(1)~~

~~Weighted average inputs are based on UPB of the underlying mortgage loans.~~

~~(2)~~

~~The Company applies a pricing spread to the United States Dollar LIBOR curve for purposes of discounting cash flows relating to MSRs.~~

~~(3)~~

~~Prepayment speed is measured using Life Total CPR.~~

~~F-40~~

~~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:~~

December 31, 2018

December 31, 2017

Fair
value

Fair
value

Amortized
cost

(Carrying value, UPB of underlying mortgage loans and effect on fair
value amounts in thousands)

Carrying value

$
1,162,369

$
91,459

$
753,322

Key inputs (1):

UPB of underlying mortgage loans

$
92,410,226

$
8,273,696

$
63,853,606

Weighted average annual servicing
fee rate (in basis points)

25

25

25

Weighted average note interest rate

4.2%

4.7%

3.9%

Pricing spread (2)

Range

5.7% – 10.7%

7.6% – 12.6%

7.6% – 13.1%

Weighted average

5.8%

7.6%

7.6%

Effect on fair value of (3):

5% adverse change

$(13,872)

$(1,347)

$(11,848)

10% adverse change

$(27,428)

$(2,655)

$(23,352)

20% adverse change

$(53,626)

$(5,162)

$(45,379)

Prepayment speed (4)

Range

8.1% – 27.1%

7.3% – 20.9%

7.1% – 27.1%

Weighted average

9.8%

11.1%

8.4%

Life (in years)

Range

2.7 - 7.3

3.1 - 6.8

2.9 - 8.0

Weighted average

7.1

6.8

7.6

Effect on fair value of (3):

5% adverse change

$(21,661)

$(1,954)

$(12,267)

10% adverse change

$(42,458)

$(3,827)

$(24,120)

20% adverse change

$(81,660)

$(7,352)

$(46,668)

Annual per-loan cost of servicing

Range

$77 – $78

$77 – $79

$78 – $79

Weighted average

$78

$79

$79

Effect on fair value of (3):

5% adverse change

$(8,298)

$(744)

$(5,721)

10% adverse change

$(16,597)

$(1,488)

$(11,441)

20% adverse change

$(33,194)

$(2,976)

$(22,883)

~~(1)~~

~~Weighted average inputs are based on the UPB of underlying mortgage loans.~~

~~(2)~~

~~The Company applies a pricing spread to the United States Dollar LIBOR curve for purposes of discounting cash flows relating to MSRs.~~

~~(3)~~

For MSRs carried at fair value, an adverse change in one of the above-mentioned key inputs is expected to result in a recognized reduction in fair value which would be recorded in income. For MSRs carried at lower of amortized cost or fair value, an adverse change in one of the above-mentioned key inputs may have resulted in recognition of MSR impairment. The extent of the recognized MSR impairment depended on the relationship of fair value to the carrying value of such MSRs immediately before the adverse change took place.

~~(4)~~

~~Prepayment speed is measured using Life Total CPR.~~

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 the 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 Manager to account for changing circumstances. For these reasons, the preceding estimates should not be viewed as earnings forecasts.

Note 8—Mortgage-Backed Securities

F-41

~~Note 7—Mortgage Backed Securities~~

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

	Year ended December 31,
	2021			2020			2019
	(in thousands)
Balance at beginning of year	$	2,213,922		$	2,839,633		$	2,610,422
Purchases		2,232,923			2,332,096			1,250,289
Sales		(1,300,653	)		(1,979,789	)		(704,178	)
Repayments		(395,747	)		(1,042,547	)		(381,330	)
Changes in fair value included in income arising from:
Amortization of net purchase premiums		(9,323	)		(23,323	)		(12,853	)
Valuation adjustments		(74,354	)		87,852			77,283
		(83,677	)		64,529			64,430
Balance at end of year	$	2,666,768		$	2,213,922		$	2,839,633

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

	December 31, 2021
										Coupon
Agency: (1)	Principal balance		Unamortized net purchase premiums		Accumulated valuation changes			Fair value		Minimum		Maximum		Weighted average
	(dollars in thousands)
Freddie Mac	$	826,859	$	28,037	$	(23,479	)	$	831,417		2.0		2.5		2.1
Fannie Mae		1,822,379		54,901		(41,929	)		1,835,351		2.0		2.5		2.2
	$	2,649,238	$	82,938	$	(65,408	)	$	2,666,768

	December 31, 2018									December 31, 2017
	Principal balance		Unamortized purchase premiums		Accumulated valuation changes			Fair value		Principal balance		Unamortized purchase premiums		Accumulated valuation changes			Fair value		December 31, 2020
	(in thousands)																										Coupon
Agency: (1)																			Principal balance		Unamortized net purchase premiums		Accumulated valuation changes		Fair value		Minimum		Maximum		Weighted average
																			(dollars in thousands)
Freddie Mac																			$	1,253,755	$	32,414	$	24,867	$	1,311,036		2.0		3.0		2.7
Fannie Mae	$	2,050,769	$	39,488	$	(14,920	)	$	2,075,337	$	774,473	$	30,355	$	(7,975	)	$	796,853		863,758		23,692		15,436		902,886		2.0		3.0		2.5
Freddie Mac		530,734		6,702		(2,351	)		535,085		187,127		3,518		1,963			192,608
	$	2,581,503	$	46,190	$	(17,271	)	$	2,610,422	$	961,600	$	33,873	$	(6,012	)	$	989,461	$	2,117,513	$	56,106	$	40,303	$	2,213,922

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

~~All MBS are pledged to secure~~ ~~Assets sold under agreements to repurchase~~ ~~at both December 31, 2018 and December 31, 2017.~~F-42

Note ~~8—Mortgage~~ 9—Loans Acquired for Sale at Fair Value

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

Loan type

December 31, 2018

December 31, 2017

(in thousands)

Agency-eligible

$
1,495,954

$
971,910

Held for sale to PLS — Government insured or guaranteed

86,308

279,571

Jumbo

44,221

—

Commercial real estate

8,559

9,898

Repurchased pursuant to representations and warranties

8,915

8,136

$
1,643,957

$
1,269,515

Mortgage loans pledged to secure:

Assets sold under agreements to repurchase

$
1,436,437

$
1,201,992

Mortgage loan participation purchase and sale agreements

185,442

47,285

$
1,621,879

$
1,249,277

The Company is not approved by Ginnie Mae as an issuer of Ginnie Mae-guaranteed securities which are backed by government-insured or guaranteed mortgage loans. The Company transfers government-insured or guaranteed mortgage 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 mortgage loans are held prior to purchase by PLS~~.

~~F-42~~

~~Note 9—Mortgage Loans at Fair Value~~

Mortgage loans at fair value are comprised of mortgage 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 Manager’s determination that such a sale represents the most advantageous disposition strategy for the identified mortgage loan.

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

Loan type	December 31, 2021		December 31, 2020
	(in thousands)
Agency-eligible (1)	$	3,825,901	$	3,057,601
Held for sale to PLS — Government insured or guaranteed (2)		314,995		460,414
Home equity lines of credit		3,265		5,566
Commercial real estate		964		1,010
Repurchased pursuant to representations and warranties		25,900		27,299
	$	4,171,025	$	3,551,890
Loans pledged to secure:
Assets sold under agreements to repurchase	$	4,007,377	$	3,484,202
Mortgage loan participation purchase and sale agreements		52,102		17,645
	$	4,059,479	$	3,501,847

December 31, 2018

December 31, 2017

Loan type

Fair
value

Unpaid
principal
balance

Fair
value

Unpaid
principal
balance

(in thousands)

Distressed mortgage loans:

Nonperforming

$
88,926

$
157,991

$
353,648

$
524,949

Performing

28,806

43,043

414,785

519,009

117,732

201,034

768,433

1,043,958

Fixed interest rate jumbo mortgage loans held in a VIE

290,573

294,617

321,040

316,684

$
408,305

$
495,651

$
1,089,473

$
1,360,642

Mortgage loans at fair value pledged to secure:

Assets sold under agreements to repurchase

$
108,693

$
760,853

Asset-backed financing of a VIE at fair value

290,573

321,040

$
399,266

$
1,081,893

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

(2)

The Company is not approved by Ginnie Mae as an issuer of Ginnie Mae-guaranteed securities which are backed by government-insured or guaranteed loans. The Company sells government-insured or guaranteed loans that it purchases from correspondent sellers to PLS, which is a Ginnie Mae-approved issuer, and earns a sourcing fee as described in Note 4 – Transactions with Related Parties – Correspondent Production Activities.

Note 10—Loans at Fair Value

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

Following is a summary of ~~certain concentrations by state~~the distribution of ~~credit risk in~~ the ~~portfolio of distressed mortgage~~Company’s loans at fair value:

Loan type	December 31, 2021		December 31, 2020
	(in thousands)
Loans in VIEs:
Secured by investment properties	$	1,495,914	$	0
Fixed interest rate jumbo loans		68,651		143,707
		1,564,565		143,707
Distressed loans		4,161		8,027
	$	1,568,726	$	151,734
Loans at fair value pledged to secure:
Asset-backed financings at fair value (1)	$	1,564,565	$	143,707
Assets sold under agreements to repurchase		359		3,703
	$	1,564,924	$	147,410

~~Concentration by State~~(1)

As discussed in Note 6 ‒ Variable Interest Entities-Investment in Subordinate Mortgage BackedSecurities, the Company holds a portion of the securities issued by the VIEs. At December 31, ~~2018~~

~~December 31, 2017~~

~~(percentages are~~2021 and 2020, $85.3 million and $9.0 million, respectively, of ~~fair value)~~

~~States contributing 5% or more of mortgage loans~~

~~New York~~

~~Florida~~

~~California~~

~~New Jersey~~

~~Hawaii~~

~~Massachusetts~~

~~New York~~

~~California~~

~~New Jersey~~

~~Florida~~

~~Massachusetts~~such retained certificates were pledged to secure Assets sold under agreements to repurchase.

~~F-43~~

Note ~~10—~~11— Derivative and Credit Risk Transfer Strip Assets and Liabilities

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

	December 31, 2021		December 31, 2020
	(in thousands)
Derivative assets	$	34,238	$	164,318
	$	34,238	$	164,318

Derivative liabilities	$	15,369	$	60,681
Credit risk transfer strip liabilities		26,837		202,792
	$	42,206	$	263,473

The Company records all derivatives and CRT strip liabilities at fair value and records changes in fair value in current period income.

Derivative Activities

Derivative Notional Amounts and Fair Value of Derivatives

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

December 31, 2018

December 31, 2017

Fair value

Fair value

Notional

Derivative

Derivative

Notional

Derivative

Derivative

Instrument

amount

assets

liabilities

amount

assets

liabilities

(in thousands)

Derivatives not designated as hedging instruments:

Not subject to master netting arrangements:

CRT Agreements

29,934,003

$
123,987

$
—

26,845,392

$
98,640

$
—

Interest rate lock commitments

1,688,516

12,162

174

1,250,803

4,859

227

Repurchase agreement derivatives

14,511

—

3,748

—

Subject to master netting agreements─used
    for hedging purposes:

Forward purchase contracts

3,072,223

14,845

43

1,996,235

4,343

248

Forward sale contracts

4,595,241

13

29,273

2,565,271

387

2,830

MBS put options

2,550,000

218

—

2,375,000

3,170

—

MBS call options

500,000

945

—

—

—

—

Call options on interest rate futures

512,500

5,137

—

—

—

—

Put options on interest rate futures

1,102,500

178

—

550,000

656

—

Swap futures

—

—

—

275,000

—

—

Bond futures

815,000

—

—

—

—

—

Eurodollar future sale contracts

—

—

—

937,000

—

—

Total derivative instruments before netting

171,996

29,490

115,803

3,305

Netting

(4,831
)

(23,576
)

(1,922
)

(1,999
)

$
167,165

$
5,914

$
113,881

$
1,306

Margin deposits placed with derivatives
   counterparties included in Other assets, net

$
18,744

$
76

Derivative assets pledged to secure Assets sold
    under agreements to repurchase

$
87,976

$
26,058

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

Year ended December 31, 2018

Amount,

Amount,

beginning

Dispositions/

end

Instrument

of year

Additions

expirations

of year

(in thousands)

Forward purchase contracts

1,996,235

97,737,906

(96,661,918
)

3,072,223

Forward sales contracts

2,565,271

129,544,573

(127,514,603
)

4,595,241

MBS put options

2,375,000

9,575,000

(9,400,000
)

2,550,000

MBS call options

—

2,000,000

(1,500,000
)

500,000

Call options on interest rate futures

—

3,487,500

(2,975,000
)

512,500

Put options on interest rate futures

550,000

13,302,500

(12,750,000
)

1,102,500

Swap futures

275,000

—

(275,000
)

—

Bond futures

—

5,274,400

(4,459,400
)

815,000

Eurodollar future sale contracts

937,000

149,597

(1,086,597
)

—

Year ended December 31, 2017

Amount,

Amount,

beginning

Dispositions/

end

Instrument

of year

Additions

expirations

of year

(in thousands)

Forward purchase contracts

4,840,707

71,768,061

(74,612,533
)

1,996,235

Forward sales contracts

6,148,242

95,889,432

(99,472,403
)

2,565,271

MBS put options

925,000

9,225,000

(7,775,000
)

2,375,000

MBS call options

750,000

550,000

(1,300,000
)

—

Call options on interest rate futures

200,000

825,000

(1,025,000
)

—

Put options on interest rate futures

550,000

7,150,000

(7,150,000
)

550,000

Swap futures

150,000

1,650,000

(1,525,000
)

275,000

Eurodollar future sale contracts

1,351,000

404,000

(818,000
)

937,000

Treasury future buy contracts

—

110,700

(110,700
)

—

Treasury future sale contracts

—

110,700

(110,700
)

—

	December 31, 2021								December 31, 2020
			Fair value								Fair value
	Notional		Derivative			Derivative			Notional		Derivative			Derivative
Instrument	amount (1)		assets			liabilities			amount (1)		assets			liabilities
	(in thousands)
Hedging derivatives subject to master netting arrangements (2):
Call options on interest rate futures purchase contracts		1,450,000	$	2,828		$	0			1,450,000	$	3,070		$	0
Put options on interest rate futures purchase contracts		1,775,000		3,180			0			2,800,000		4,742			0
Forward purchase contracts		6,945,340		5,806			3,620			17,563,549		72,526			17
Forward sale contracts		10,466,182		6,307			13,782			26,615,716		92			122,884
MBS put options		3,400,000		3,662			0			3,625,000		3,220			0
Swaption purchase contracts		2,200,000		39			0			3,655,000		8,505			0
Swap futures		1,425,100		0			0			1,950,000		0			0
Bond futures		181,800		0			0			66,500		0			0
Other derivatives not subject to master netting arrangements:
CRT derivatives		7,426,288		19,627			663			13,854,426		58,699			26,904
Interest rate lock commitments		2,092,129		3,897			1,446			10,588,208		72,794			408
Total derivative instruments before netting				45,346			19,511					223,648			150,213
Netting				(11,108	)		(4,142	)				(59,330	)		(89,532	)
			$	34,238		$	15,369				$	164,318		$	60,681
Margin deposits (received from) placed with derivative counterparties, net			$	(6,965	)						$	30,197
Derivative assets pledged to secure:
Notes payable secured by credit risk transfer and mortgage servicing assets			$	19,627							$	58,699

Year ended December 31, 2016

Amount,

Amount,

beginning

Dispositions/

end

Instrument

of year

Additions

expirations

of year

(in thousands)

Forward purchase contracts

2,469,550

73,269,440

(70,898,283
)

4,840,707

Forward sales contracts

2,450,642

99,737,855

(96,040,255
)

6,148,242

MBS put options

375,000

12,400,000

(11,850,000
)

925,000

MBS call options

—

750,000

—

750,000

Call options on interest rate futures

50,000

4,425,000

(4,275,000
)

200,000

Put options on interest rate futures

1,600,000

7,445,000

(8,495,000
)

550,000

Swap futures

—

175,000

(25,000
)

150,000

Eurodollar future sale contracts

1,755,000

282,000

(686,000
)

1,351,000

Treasury future buy contracts

—

558,700

(558,700
)

—

Treasury future sale contracts

—

558,700

(558,700
)

—

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

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

Netting of Financial Instruments

The Company has elected to net derivative asset and liability positions, and cash collateral placed with or received from its counterparties when subject to a legally enforceable master netting arrangement. The derivative financial instruments that are not subject to master netting arrangements are ~~IRLCs,~~ CRT ~~Agreement~~ derivatives and ~~repurchase agreement derivatives.~~IRLCs. As of December 31, ~~2018~~2021 and December 31, ~~2017,~~2020, the Company ~~did~~was not ~~enter into~~a party to any reverse repurchase agreements or securities lending transactions that are required to be disclosed in the following tables.

~~F-45~~

Offsetting of Derivative Assets

Following is a summary of net derivative assets.

	December 31, 2018								December 31, 2017								December 31, 2021								December 31, 2020
	Gross amounts of recognized assets		Gross amounts offset in the consolidated balance sheet			Net amounts of assets presented in the consolidated balance sheet			Gross amounts of recognized assets		Gross amounts offset in the consolidated balance sheet			Net amounts of assets presented in the consolidated balance sheet			Gross amounts of recognized assets		Gross amounts offset in the consolidated balance sheet			Net amounts of assets presented in the consolidated balance sheet			Gross amounts of recognized assets		Gross amounts offset in the consolidated balance sheet			Net amounts of assets presented in the consolidated balance sheet
	(in thousands)																(in thousands)
Derivative assets
Not subject to master netting arrangements:
CRT Agreement derivatives	$	123,987	$	—		$	123,987		$	98,640	$	—		$	98,640
Interest rate lock commitments		12,162		—			12,162			4,859		—			4,859
Repurchase agreement derivatives		14,511		—			14,511			3,748		—			3,748
		150,660		—			150,660			107,247		—			107,247
Subject to master netting arrangements:
Call options on interest rate futures purchase contracts																	$	2,828	$	0		$	2,828		$	3,070	$	0		$	3,070
Put options on interest rate futures purchase contracts																		3,180		0			3,180			4,742		0			4,742
Forward purchase contracts		14,845		—			14,845			4,343		—			4,343			5,806		0			5,806			72,526		0			72,526
Forward sale contracts		13		—			13			387		—			387			6,307		0			6,307			92		0			92
MBS put options		218		—			218			3,170		—			3,170			3,662		0			3,662			3,220		0			3,220
MBS call options		945		—			945			—		—			—
Call options on interest rate futures		5,137		—			5,137			—		—			—
Put options on interest rate futures		178		—			178			656		—			656
Swaption purchase contracts																		39		0			39			8,505		0			8,505
Netting		—		(4,831	)		(4,831	)		—		(1,922	)		(1,922	)		0		(11,108	)		(11,108	)		0		(59,330	)		(59,330	)
		21,336		(4,831	)		16,505			8,556		(1,922	)		6,634			21,822		(11,108	)		10,714			92,155		(59,330	)		32,825
Not subject to master netting arrangements:
CRT derivatives																		19,627		0			19,627			58,699		0			58,699
Interest rate lock commitments																		3,897		0			3,897			72,794		0			72,794
	$	171,996	$	(4,831	)	$	167,165		$	115,803	$	(1,922	)	$	113,881			23,524		0			23,524			131,493		0			131,493
																	$	45,346	$	(11,108	)	$	34,238		$	223,648	$	(59,330	)	$	164,318

Derivative Assets, Financial Instruments and Collateral Held by Counterparty

The following table summarizes by significant counterparty the amount of derivative asset positions after considering master netting arrangements and financial instruments or cash pledged that do not meet the accounting guidance qualifying for setoff accounting.

	December 31, 2018								December 31, 2017								December 31, 2021								December 31, 2020
	Net amount		Gross amounts						Net amount		Gross amounts						Net amount		Gross amounts						Net amount		Gross amounts
	of assets		not offset in the						of assets		not offset in the						of assets		not offset in the						of assets		not offset in the
	presented		consolidated						presented		consolidated						presented		consolidated						presented		consolidated
	in the		balance sheet						in the		balance sheet						in the		balance sheet						in the		balance sheet
	consolidated				Cash				consolidated				Cash				consolidated				Cash				consolidated				Cash
	balance		Financial		collateral		Net		balance		Financial		collateral		Net		balance		Financial		collateral		Net		balance		Financial		collateral		Net
	sheet		instruments		received		amount		sheet		instruments		received		amount		sheet		instruments		received		amount		sheet		instruments		received		amount
	(in thousands)																(in thousands)
CRT Agreement derivatives	$	123,987	$	—	$	—	$	123,987	$	98,640	$	—	$	—	$	98,640
CRT derivatives																	$	19,627	$	0	$	0	$	19,627	$	58,699	$	0	$	0	$	58,699
Interest rate lock commitments		12,162		—		—		12,162		4,859		—		—		4,859		3,897		0		0		3,897		72,794		0		0		72,794
RJ O’Brien & Associates, LLC																		6,008		0		0		6,008		7,813		0		0		7,813
J.P. Morgan Securities LLC																		2,085		0		0		2,085		0		0		0		0
Bank of America, N.A.																		1,958		0		0		1,958		15,406		0		0		15,406
PNC Capital Markets LLC																		0		0		0		0		3,138		0		0		3,138
Citigroup Global Markets Inc.																		0		0		0		0		2,416		0		0		2,416
Deutsche Bank Securities LLC		14,511		—		—		14,511		3,748		—		—		3,748		0		0		0		0		1,602		0		0		1,602
Federal National Mortgage Association		5,619		—		—		5,619		1,606		—		—		1,606
RJ O’Brien & Associates, LLC		5,315		—		—		5,315		656		—		—		656
Wells Fargo Securities, LLC		2,800		—		—		2,800		146		—		—		146
Citigroup Global Markets Inc.		971		—		—		971		429		—		—		429
Credit Suisse Securities (USA) LLC		579		—		—		579		809		—		—		809
Mitsubishi UFJ Sec		257		—		—		257		193		—		—		193		0		0		0		0		1,070		0		0		1,070
Morgan Stanley & Co. LLC		243		—		—		243		457		—		—		457
J.P. Morgan Securities LLC		107		—		—		107		2,020		—		—		2,020
Other		614		—		—		614		318		—		—		318		663		0		0		663		1,380		0		0		1,380
	$	167,165	$	—	$	—	$	167,165	$	113,881	$	—	$	—	$	113,881	$	34,238	$	0	$	0	$	34,238	$	164,318	$	0	$	0	$	164,318

~~F-46~~

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.

	December 31, 2018									December 31, 2017									December 31, 2021									December 31, 2020
	Gross amounts of recognized liabilities			Gross amounts offset in the consolidated balance sheet			Net amounts of liabilities presented in the consolidated balance sheet			Gross amounts of recognized liabilities			Gross amounts offset in the consolidated balance sheet			Net amounts of liabilities presented in the consolidated balance sheet			Gross amounts of recognized liabilities			Gross amounts offset in the consolidated balance sheet			Net amounts of liabilities presented in the consolidated balance sheet			Gross amounts of recognized liabilities			Gross amounts offset in the consolidated balance sheet			Net amounts of liabilities presented in the consolidated balance sheet
	(in thousands)																		(in thousands)
Derivative liabilities:
Not subject to master netting arrangements — Interest rate lock commitments	$	174		$	—		$	174		$	227		$	—		$	227
Subject to master netting arrangements:
Forward purchase contracts		43			—			43			248			—			248		$	3,620		$	0		$	3,620		$	17		$	0		$	17
Forward sales contracts		29,273			—			29,273			2,830			—			2,830			13,782			0			13,782			122,884			0			122,884
Netting		—			(23,576	)		(23,576	)		—			(1,999	)		(1,999	)		0			(4,142	)		(4,142	)		0			(89,532	)		(89,532	)
		29,316			(23,576	)		5,740			3,078			(1,999	)		1,079			17,402			(4,142	)		13,260			122,901			(89,532	)		33,369
Not subject to master netting arrangements
CRT derivatives																				663			0			663			26,904			0			26,904
Interest rate lock commitments																				1,446			0			1,446			408			0			408
		29,490			(23,576	)		5,914			3,305			(1,999	)		1,306			19,511			(4,142	)		15,369			150,213			(89,532	)		60,681
Assets sold under agreements to repurchase:
UPB		4,777,486			—			4,777,486			3,182,504			—			3,182,504			6,674,541			0			6,674,541			6,317,928			0			6,317,928
Unamortized debt issuance costs		(459	)		—			(459	)		(1,618	)		—			(1,618	)		(2,651	)		0			(2,651	)		(8,510	)		0			(8,510	)
		4,777,027			—			4,777,027			3,180,886			—			3,180,886			6,671,890			0			6,671,890			6,309,418			0			6,309,418
	$	4,806,517		$	(23,576	)	$	4,782,941		$	3,184,191		$	(1,999	)	$	3,182,192		$	6,691,401		$	(4,142	)	$	6,687,259		$	6,459,631		$	(89,532	)	$	6,370,099

Derivative Liabilities, Financial Liabilities and Collateral Pledged by Counterparty

The following table summarizes by significant counterparty the amount of derivative liabilities and assets sold under agreements to repurchase after considering master netting arrangements and financial instruments or cash pledged that do not ~~meet the accounting guidance qualifying~~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.

	December 31, 2018									December 31, 2017									December 31, 2021									December 31, 2020
	Net amount		Gross amounts							Net amount		Gross amounts							Net amount		Gross amounts							Net amount		Gross amounts
	of liabilities		not offset in the							of liabilities		not offset in the							of liabilities		not offset in the							of liabilities		not offset in the
	presented		consolidated							presented		consolidated							presented		consolidated							presented		consolidated
	in the		balance sheet							in the		balance sheet							in the		balance sheet							in the		balance sheet
	consolidated					Cash				consolidated					Cash				consolidated					Cash				consolidated					Cash
	balance		Financial			collateral		Net		balance		Financial			collateral		Net		balance		Financial			collateral		Net		balance		Financial			collateral		Net
	sheet		instruments			pledged		amount		sheet		instruments			pledged		amount		sheet		instruments			pledged		amount		sheet		instruments			pledged		amount
	(in thousands)																		(in thousands)
Interest rate lock commitments	$	174	$	—		$	—	$	174	$	227	$	—		$	—	$	227	$	1,446	$	0		$	0	$	1,446	$	408	$	0		$	0	$	408
CRT derivatives																				663		0			0		663		26,904		0			0		26,904
RBC Capital Markets, L.P.																				1,293,754		(1,293,754	)		0		0		765,892		(765,892	)		0		0
Bank of America, N.A.																				1,088,417		(1,088,417	)		0		0		414,044		(414,044	)		0		0
Barclays Capital Inc.																				1,086,104		(1,085,723	)		0		381		922,959		(922,035	)		0		924
Credit Suisse Securities (USA) LLC																				832,610		(830,954	)		0		1,656		1,059,547		(1,054,636	)		0		4,911
J.P. Morgan Securities LLC		1,441,934		(1,441,934	)		—		—		373,186		(373,186	)		—		—		726,762		(726,762	)		0		0		359,573		(357,211	)		0		2,362
Bank of America, N.A.		1,307,923		(1,307,584	)		—		339		839,057		(838,771	)		—		286
Credit Suisse Securities (USA) LLC		512,662		(512,662	)		—		—		845,567		(845,567	)		—		—
Deutsche Bank Securities LLC		495,974		(495,974	)		—		—		374,526		(374,526	)		—		—
Daiwa Capital Markets																				495,973		(495,973	)		0		0		728,207		(727,562	)		0		645
Morgan Stanley & Co. LLC																				412,321		(410,413	)		0		1,908		367,493		(366,415	)		0		1,078
Goldman Sachs & Co. LLC																				217,459		(212,580	)		0		4,879		149,272		(144,883	)		0		4,389
BNP Paribas																				171,185		(171,185	)		0		0		164,414		(163,548	)		0		866
Citigroup Global Markets Inc.																				131,312		(129,016	)		0		2,296		830,161		(830,161	)		0		0
Amherst Pierpont Securities LLC																				125,090		(125,090	)		0		0		153,224		(153,224	)		0		0
Wells Fargo Securities, LLC																				106,088		(104,674	)		0		1,414		148,854		(140,796	)		0		8,058
Mizuho Securities		270,708		(270,708	)		—		—		3		—			—		3		0		0			0		0		279,321		(277,521	)		0		1,800
Daiwa Capital Markets		254,332		(254,332	)		—		—		153,833		(153,730	)		—		103
BNP Paribas		162,636		(162,357	)		—		279		45,411		(45,411	)		—		—
Morgan Stanley & Co. LLC		105,366		(105,366	)		—		—		164,530		(164,530	)		—		—
Citigroup Global Markets Inc.		99,626		(98,644	)		—		982		235,541		(235,319	)		—		222
Wells Fargo Securities, LLC		70,130		(70,130	)		—		—		50,360		(50,360	)		—		—
RBC Capital Markets, L.P.		57,795		(57,795	)		—		—		92,014		(91,805	)		—		209
Barclays Capital Inc.		325		—			—		325		9,374		(9,299	)		—		75
Federal Home Loan Mortgage Corporation																				0		0			0		0		5,883		0			0		5,883
Other		3,815		—			—		3,815		181		—			—		181		726		0			0		726		2,453		0			0		2,453
	$	4,783,400	$	(4,777,486	)	$	—	$	5,914	$	3,183,810	$	(3,182,504	)	$	—	$	1,306	$	6,689,910	$	(6,674,541	)	$	0	$	15,369	$	6,378,609	$	(6,317,928	)	$	0	$	60,681

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:

		Year ended December 31,									Year ended December 31,
Derivative activity	Income statement line	2018			2017			2016		Consolidated statement of income line	2021			2020			2019
		(in thousands)									(in thousands)
Interest rate lock commitments	Net gain on mortgage loans acquired for sale	$	7,356		$	81,309		$	87,836	Net gains on loans acquired for sale (1)	$	(69,935	)	$	61,232		$	(834	)
CRT agreements	Net gain (loss) on investments	$	112,275		$	134,761		$	32,500
CRT derivatives										Net gains (losses) on investments and financings	$	81,008		$	(136,598	)	$	70,048
Repurchase agreement derivatives	Interest expense	$	191		$	116		$	—	Interest expense	$	0		$	53		$	24
Hedged item:
Interest rate lock commitments and mortgage loans acquired for sale	Net gain on mortgage loans acquired for sale	$	25,334		$	(31,245	)	$	50,274
Interest rate lock commitments and loans acquired for sale										Net gains on loans acquired for sale	$	141,901		$	(459,309	)	$	(91,084	)
Mortgage servicing rights	Net mortgage loan servicing fees	$	(35,550	)	$	(2,512	)	$	2,271	Net loan servicing fees	$	(345,041	)	$	601,743		$	80,622
Fixed-rate assets and LIBOR- indexed repurchase agreements	Net gain (loss) on investments	$	(4,152	)	$	(18,468	)	$	7,251
Fixed-rate and prepayment sensitive assets and LIBOR-indexed repurchase agreements										Net gains (losses) on investments and financings	$	0		$	32,932		$	28,785

(1)

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

~~F-48~~F-47

~~Note 11—Real Estate Acquired in Settlement of Loans~~Credit Risk Transfer Strips

Following is a summary of ~~financial information relating to REO:~~the Company’s investment in CRT strips:

Credit risk transfer strips contractually restricted from sale (1)	December 31, 2021			December 31, 2020
	(in thousands)
Currently unrestricted	$	5,978		$	0
Through December 4, 2021		0			(168,539	)
To maturity		(32,815	)		(34,253	)
	$	(26,837	)	$	(202,792	)

Year ended December 31,

2018

2017

2016

(in thousands)

Balance at beginning of year

$
162,865

$
274,069

$
341,846

Transfers:

From mortgage loans at fair value and
   advances

32,578

87,202

207,431

To real estate held for investment

(5,183
)

(16,530
)

(21,406
)
From real estate held for investment

3,401

—

—

Results of REO:

Valuation adjustments, net

(17,323
)

(27,505
)

(36,193
)
Gain on sale, net

8,537

12,550

17,075

(8,786
)

(14,955
)

(19,118
)
Sales

(99,194
)

(166,921
)

(234,684
)
Balance at end of year

$
85,681

$
162,865

$
274,069

At the end of year:

REO pledged to secure assets sold under
   agreements to repurchase

$
1,939

$
76,037

REO held in a consolidated subsidiary whose
   stock is pledged to secure financings of such
   properties

38,259

48,495

$
40,198

$
124,532

(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.

~~F-49~~

Note 12—Mortgage Servicing Rights

~~Carried at Fair Value:~~

Following is a summary of ~~MSRs carried at fair value:~~MSRs:

	Year ended December 31,
	2021			2020			2019
	(in thousands)
Balance at beginning of year	$	1,755,236		$	1,535,705		$	1,162,369
Sales		0			(7	)		(17	)
MSRs resulting from loan sales		1,484,629			1,158,475			837,706
Changes in fair value:
Due to changes in inputs used in valuation model (1)		(39,056	)		(706,107	)		(262,031	)
Other changes in fair value (2)		(298,130	)		(232,830	)		(202,322	)
		(337,186	)		(938,937	)		(464,353	)
Recombination with loans at fair value resulting from consolidation of VIEs (3)		(9,824	)		0			0
Balance at end of year	$	2,892,855		$	1,755,236		$	1,535,705

Year ended December 31,

2018

2017

2016

(in thousands)

Balance at beginning of year

$
91,459

$
64,136

$
66,584

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

773,035

—

—

Balance after reclassification

864,494

64,136

66,584

Purchases

—

79

2,739

Sales

(100
)

—

—

MSRs resulting from mortgage loan sales

356,755

41,379

7,337

Changes in fair value:

Due to changes in valuation inputs used in
   valuation model (1)

60,772

(9,762
)

(3,210
)
Other changes in fair value (2)

(119,552
)

(4,373
)

(9,314
)

(58,780
)

(14,135
)

(12,524
)
Balance at end of year

$
1,162,369

$
91,459

$
64,136

At the end of year:

Fair value of mortgage servicing rights pledged to
   secure Assets sold under agreements to
   repurchase and Notes payable (3)

$
1,139,582

$
90,284

December 31, 2021

December 31, 2020

(in thousands)

Fair value of mortgage servicing rights

pledged to secure Assets sold under

agreements to repurchase and Notes

payable secured by credit risk transfer

and mortgage servicing assets

2,863,544

1,742,905

(1)	~~Principally~~Primarily reflects changes in pricing spread, ~~(discount rate) and~~ prepayment speed, ~~inputs, primarily due to changes in market interest rates.~~servicing cost, and UPB of underlying loan inputs.

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

(3)

~~During 2018, beneficial interest in Fannie Mae MSRs are pledged as collateral for both~~ ~~Assets sold under agreements to repurchase~~ ~~and~~ ~~Notes payable~~ asAs discussed in Note 163 ‒ Variable Interest Entities – ~~Notes Payable~~Investment in Subordinate Mortgage-Backed Securities, the Company consolidated VIEs holding certain loans for which it had previously recognized MSRs. Upon initial consolidation of the VIEs, the Company recombined the MSRs with the loans in the consolidated VIEs to Loans at fair value.

~~F-50~~

~~Carried at Lower of Amortized Cost or Fair Value:~~

~~Following is a summary of MSRs carried at lower of amortized cost or fair value:~~

Year ended December 31,

2018

2017

2016

(in thousands)

Amortized cost:

Balance at beginning of year

$
772,870

$
606,103

$
404,101

Transfer of mortgage servicing right to mortgage
   servicing rights carried at fair value pursuant to
   a change in accounting principle

(772,870
)

—

—

Balance after reclassification

—

606,103

404,101

MSRs resulting from mortgage loan sales

—

248,930

267,755

Amortization

—

(81,624
)

(65,647
)
Sales

—

(539
)

(106
)
Balance at end of year

—

772,870

606,103

Valuation allowance:

Balance at beginning of year

(19,548
)

(13,672
)

(10,944
)
Reduction pursuant to a change in accounting
   principle

19,548

—

—

Balance after reclassification

—

(13,672
)

(10,944
)
Additions to valuation allowance

—

(5,876
)

(2,728
)
Balance at end of year

—

(19,548
)

(13,672
)
MSRs, net

$
—

$
753,322

$
592,431

Fair value at beginning of year

$
772,940

$
626,334

$
424,154

Fair value at end of year

$
772,940

$
626,334

At the end of year:

MSRs carried at lower of cost or fair value pledged to
   secure:

Assets sold under agreements to repurchase

$
584,762

Notes payable

156,846

$
741,608

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

		Year ended December 31,
		2021		2020		2019
	(in thousands)
Contractually-specified servicing fees		$	526,245	$	406,060	$	295,390
Ancillary and other fees:
Late charges			1,701		1,498		1,658
Other			67,400		54,959		22,441
			69,101		56,457		24,099
		$	595,346	$	462,517	$	319,489
Average MSR servicing portfolio		$	196,996,623	$	147,832,880	$	110,075,179

Year ended December 31,

2018

2017

2016

(in thousands)

Contractually-specified servicing fees

$
204,663

$
164,776

$
125,961

Ancillary and other fees:

Late charges

974

718

570

Other

7,088

5,805

5,302

$
212,725

$
171,299

$
131,833

Note 13—Short-term Debt

The borrowing facilities described throughout these Notes 13 and 14 contain various covenants, including financial covenants governing the Company and its subsidiaries’ net worth, debt-to-equity ratio, profitability and liquidity. Management believes that the Company was in compliance with these covenants as of December 31, 2021.

Assets Sold Under Agreements to Repurchase

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

	Year ended December 31,									Year ended December 31,
	2018			2017			2016			2021			2020			2019
	(dollars in thousands)									(dollars in thousands)
Weighted average interest rate (1)		3.25	%		2.49	%		2.44	%		1.36	%		1.62	%		3.25	%
Average balance	$	3,901,772		$	3,332,084		$	3,382,528		$	6,161,755		$	5,508,147		$	5,600,469
Total interest expense ~~(2)~~	$	115,383		$	93,580		$	92,838		$	97,078		$	102,131		$	178,211
Maximum daily amount outstanding	$	6,665,118		$	4,242,600		$	5,573,021		$	8,882,538		$	10,433,609		$	8,577,065

(1)

Excludes the effect of ~~net~~ amortization of net debt issuance costs of $13.2 million and $12.9 million for the years ended December 31, 2021 and 2020, respectively, and net issuance premiums of ~~$11.7~~$4.0 million for the year ended December 31, ~~2018 and net debt issuance costs of $8.3 million for the year ended December 31, 2017 and $8.8 million for the year ended December 31, 2016.~~

~~(2)~~

The Company’s interest expense relating to assets sold under agreements to repurchase for the years ended December 31, 2018 and 2017 includes recognition of incentives it received for financing certain of its mortgage loans acquired for sale satisfying certain consumer debt relief characteristics under a master repurchase agreement. During the years ended December 31, 2018 and 2017, the Company recognized $19.7 million and $3.1 million, respectively, in such incentives as a reduction of interest expense. The master repurchase agreement is subject to a rolling six-month term through August 21, 2019, unless terminated earlier at the option of the lender. The Company expects that it will cease to accrue the incentives under the repurchase agreement in the second quarter of 2019.

	December 31,
	2018			2017			December 31, 2021			December 31, 2020
	(dollars in thousands)						(dollars in thousands)
Carrying value:
Unpaid principal balance	$	4,777,486		$	3,182,504		$	6,674,541		$	6,317,928
Unamortized debt issuance premiums and (costs), net		(459	)		(1,618	)
Unamortized debt issuance costs								(2,651	)		(8,510	)
	$	4,777,027		$	3,180,886		$	6,671,890		$	6,309,418
Weighted average interest rate		3.38	%		2.77	%		1.08	%		1.36	%
Available borrowing capacity (1):
Committed	$	783,415		$	749,650		$	289,436		$	483,767
Uncommitted		2,325,246			2,030,607			4,875,433			4,151,905
	$	3,108,661		$	2,780,257		$	5,164,869		$	4,635,672
Margin deposits placed with counterparties included in Other assets	$	43,676		$	28,154		$	67,997		$	141,808
Assets securing agreements to repurchase:
Mortgage-backed securities	$	2,610,422		$	989,461		$	2,666,768		$	2,213,922
Mortgage loans acquired for sale at fair value	$	1,436,437		$	1,201,992
Mortgage loans at fair value	$	108,693		$	760,853
CRT Agreements:
Deposits securing CRT agreements	$	1,146,501		$	400,778
Derivative assets	$	87,976		$	26,058
Loans acquired for sale at fair value							$	4,007,377		$	3,484,202
Loans at fair value:
Certificates retained in asset-backed financings							$	85,266		$	8,981
Distressed							$	359		$	3,703
MSRs (2)							$	1,598,090		$	1,166,090
Servicing advances							$	93,455		$	0
Real estate acquired in settlement of loans	$	40,198		$	124,532		$	7,293		$	15,365
Real estate held for investment	$	23,262		$	31,128
MSRs (2)	$	1,139,582		$	651,575
Deposits securing CRT arrangements							$	0		$	2,799,263

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

(2)	~~During 2018, beneficial~~Beneficial interests in Fannie Mae MSRs are pledged as collateral ~~for~~under both Assets sold under agreements to repurchase andNotes payable ~~as discussed in Note 16 –~~ ~~Notes Payable~~. secured by credit risk transfer and mortgage servicing assets.

F-49

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

Remaining maturity at December 31, 2018	Contractual balance
Remaining maturity at December 31, 2021			Unpaid principal balance
	(in thousands)		(in thousands)
Within 30 days	$	2,532,214	$	2,905,581
Over 30 to 90 days		882,985		3,568,960
Over 90 days to 180 days		430,114		0
Over 180 days to 1 year		927,173		0
Over one year to two years		5,000
Over 1 year to 2 years				200,000
	$	4,777,486	$	6,674,541
Weighted average maturity (in months)		2.2		2.1

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.

~~F-52~~

The ~~amount~~amounts 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 isare summarized by pledged asset and counterparty below as of December 31, ~~2018:~~2021:

~~Mortgage loans,~~Loans, REO and MSRs ~~sold under agreements to repurchase~~

Weighted average

Weighted-average maturity

Counterparty

Amount at risk

maturity

Facility maturity

Amount at risk

Advances

Facility

(in thousands)

Credit Suisse First Boston Mortgage Capital LLC

369,773

December 20, 2020

RBC Capital Markets, L.P.

69,095

March 27, 2022

August 10, 2022

Barclays Capital Inc.

50,917

March 14, 2022

November 3, 2022

Bank of America, N.A.

22,680

January 22, 2022

June 7, 2023

Credit Suisse First Boston Mortgage Capital LLC

49,454

March 23, 2019

April 26, 2019

46,355

March 21, 2022

March 31, 2023

JPMorgan Chase & Co.

36,481

February 16, 2019

October 11, 2019

8,000

February 14, 2022

June 6, 2023

Bank of America, N.A.

13,975

January 12, 2019

July 1, 2019

Deutsche Bank

29,797

March 22, 2019

June 30, 2019

Morgan Stanley & Co. LLC

24,216

March 14, 2022

November 2, 2022

Citibank, N.A.

16,902

February 6, 2022

August 10, 2023

Goldman Sachs & Co. LLC

13,340

March 6, 2022

December 23, 2022

BNP Paribas Corporate & Institutional Banking

6,991

March 18, 2019

August 2, 2019

8,513

February 23, 2022

July 31, 2023

Citibank, N.A.

50,845

March 22, 2019

June 7, 2019

Morgan Stanley

5,925

March 11, 2019

August 23, 2019

Royal Bank of Canada

3,423

February 28, 2019

Wells Fargo Securities, LLC

6,183

January 31, 2022

October 6, 2022

Securities ~~sold under agreements to repurchase~~

Counterparty

Amount at risk

Weighted average maturity

(in thousands)

JPMorgan Chase & Co.

$
45,359

February 13, 2019
Bank of America, N.A.

$
59,343

January 22, 2019
Daiwa Capital Markets America Inc.

$
19,831

January 14, 2019
Mizuho Securities

$
12,312

January 14, 2019
Wells Fargo, N.A.

$
4,760

January 13, 2019

~~CRT Agreements sold under agreements to repurchase~~

Counterparty	Amount at risk		Weighted average maturity	Amount at risk		Weighted average maturity
	(in thousands)			(in thousands)
Credit Suisse First Boston Mortgage Capital LLC	$	53,785	January 17, 2019
Barclays Capital Inc.				$	14,988	January 19, 2022
Bank of America, N.A.				$	28,056	January 29, 2022
JPMorgan Chase & Co.	$	202,469	January 7, 2019	$	21,294	January 19, 2022
Bank of America, N.A.	$	25,582	January 21, 2019
BNP Paribas Corporate & Institutional Banking	$	16,575	January 22, 2019
Daiwa Capital Markets America Inc.				$	13,771	January 20, 2022
Amherst Pierpont Securities LLC				$	3,848	January 17, 2022

~~Note 14—~~Mortgage Loan Participation Purchase and Sale Agreements

Certain borrowing facilities secured by ~~mortgage~~ 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 ~~mortgage~~ loans that have been pooled with Fannie Mae or Freddie Mac, are sold to a lender pending the securitization of such ~~mortgage~~ 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 ~~the~~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.

~~F-53~~

Mortgage loan participation purchase and sale agreements are summarized below:

	Year ended December 31,										Year ended December 31,
	2018			2017			2016				2021			2020			2019
	(dollars in thousands)									(dollars in thousands)
Weighted average interest rate (1)		3.42	%		2.34	%		1.74	%			1.42	%		1.63	%		3.53	%
Average balance	$	64,512		$	61,807		$	70,391			$	33,827		$	44,432		$	40,036
Total interest expense	$	2,422		$	1,593		$	1,376			$	606		$	902		$	1,570
Maximum daily amount outstanding	$	287,862		$	136,854		$	99,469			$	89,879		$	96,570		$	207,065

(1)	Excludes the effect of amortization of debt issuance costs of ~~$217,000~~$125,000, $176,000 and $158,000 for the ~~year~~years ended December 31, ~~2018, $125,000 for the year ended December 31, 2017,~~2021, 2020 and ~~$130,000 for the year ended December 31, 2016.~~2019, respectively.

	December 31,
	2018			2017			December 31, 2021			December 31, 2020
	(dollars in thousands)						(dollars in thousands)
Carrying value:
Amount outstanding	$	178,726		$	44,550		$	49,988		$	16,851
Unamortized debt issuance costs		(87	)		(62	)		0			0
	$	178,639		$	44,488		$	49,988		$	16,851
Weighted average interest rate		3.77	%		2.82	%		1.48	%		1.39	%
Mortgage loans acquired for sale pledged to secure mortgage loan participation purchase and sale agreements	$	185,442		$	47,285
Loans acquired for sale pledged to secure mortgage loan participation purchase and sale agreements							$	52,102		$	17,645

Note ~~15—Exchangeable Senior~~ 14—Long-Term Debt

Notes Payable Secured By Credit Risk Transfer and Mortgage Servicing Assets

The Company, through its indirect PMT CREDIT RISK TRANSFER TRUST subsidiaries issued CRT term notes to qualified institutional buyers under Rule 144A of the Securities Act of 1933, as amended (the “Securities Act”). All of the CRT term notes rank pari passu with each other.

Following is a summary of the CRT term notes issued:

				Unpaid		Annual			Maturity date
Term notes	Issuance date	Issuance amount		principal balance		interest rate spread (1)			Stated	Optional extension (2)
		(in thousands)
2021 1R	March 04, 2021	$	659,156	$	398,288		2.90	%	February 28, 2024	February 27, 2026
2020 2R	December 22, 2020	$	500,000		300,523		3.81	%	December 28, 2022		—
2020 1R	February 14, 2020	$	350,000		86,918		2.35	%	March 1, 2023	February 27, 2025
2019 3R	October 16, 2019	$	375,000		84,131		2.70	%	October 27, 2022	October 29, 2024
2019 2R	June 11, 2019	$	638,000		243,309		2.75	%	May 29, 2023	May 29, 2025
2019 1R	March 29, 2019	$	295,700		91,467		2.00	%	March 29, 2022	March 27, 2024
				$	1,204,636

(1)	Spread over one-month LIBOR.

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

F-51

PMC finances mortgage servicing rights through the issuance of a Series 2017-VF1 Note dated December 20, 2017 (the "FMSR VFN") issued inby another one of the Company’s indirect subsidiaries and sold to institutional buyers under an agreement to repurchase. The FMSR VFN has a ~~private offering $250~~committed borrowing capacity of $700 million and matures on March 31, 2023.

On March 30, 2021, the Company, through its indirect subsidiary, PMT ISSUER TRUST—FMSR, issued an aggregate principal amount of ~~exchangeable senior~~$350 million in secured term notes ~~(“Exchangeable~~(the “2021-FT1 Notes”) ~~due May 1, 2020.~~to qualified institutional buyers under Rule 144A of the Securities Act. The ~~Exchangeable~~2021-FT1 Notes are secured by certain participation certificates relating to Fannie Mae MSRs and excess servicing spread relating to such MSRs that are financed pursuant to a structured finance transaction. The 2021-FT1 Notes bear interest at a rate ~~of 5.375%~~equal to one-month LIBOR plus 3.00% per year ~~payable semiannually. The Exchangeable Notes are exchangeable into common shares~~and will mature on March 25, 2026 or, if extended pursuant to the terms of the 2021-FT1 Notes indenture supplement, on March 27, 2028. The 2021-FT1 Notes rank pari passu with the 2018-FT1 Notes described below and the FMSR VFN.

During March 2021, the Company, through PMC and PMH, terminated a loan and security agreement entered into on February 1, 2018, pursuant to which PMC and PMH could finance certain mortgage servicing rights (inclusive of any related excess servicing spread arising therefrom and transferred from PMC to PMH from time to time) relating to loans pooled into Freddie Mac securities, and entered into a similar borrowing arrangement with Citibank, N.A. The aggregate loan amount available under the loan and security agreement with Citibank, N.A. increased to $1 billion from $700 million, bears interest at a rate ~~of 33.8667 common shares~~equal to LIBOR plus 3.25% per ~~$1,000 principal amount of~~year with index replacement provisions related to the ~~Exchangeable Notes as of December 31, 2018, which is an increase over~~transition from LIBOR, and will mature on January 3, 2022. Advances under 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 in prior reporting periods, as provided in the related indenture.

~~Following is financial information~~loan and security agreement are secured by MSRs relating to ~~the Exchangeable Notes:~~

Year ended December 31,

2018

2017

2016

(in thousands)

Average balance

$
250,000

$
250,000

$
250,000

Total interest expense

$
14,601

$
14,535

$
14,473

December 31,

2018

2017

(in thousands)

Carrying value:

UPB

$
250,000

$
250,000

Unamortized debt issuance costs

(1,650
)

(2,814
)

$
248,350

$
247,186

~~Note 16—Notes Payable~~loans serviced for Freddie Mac guaranteed securities.

On April 25, 2018, the Company, through its indirect subsidiary, PMT ISSUER TRUST-FMSR, ~~(“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.~~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.~~

year. 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”)~~FMSR VFN pledged to Credit Suisse under an agreement to repurchase. The

~~F-54~~

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 (“Credit Suisse”), 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 matures on February 1, 2020.

On March 24, 2017, the Company, through PMC and PMH, entered into a second Amended and Restated Loan and Security Agreement with Citibank, N.A., pursuant to which PMC and PMH finance certain MSRs (inclusive of any related excess servicing spread and/or junior excess strips arising therefrom and that may be transferred from PMC to PMH from time to time) relating to mortgage loans pooled into Fannie Mae securities (collectively, the “Fannie MSRs”) in an aggregate loan amount not to exceed $400 million, all of which is committed. The note was repaid and terminated in December 2017.

On March 24, 2017, the Company, through PMC and PMH, entered into a Loan and Security Agreement with Barclays Bank PLC (“Barclays”), 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 $170 million, all of which is committed. The note matured and was repaid on February 1, 2018.

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

payable secured by credit risk transfer and mortgage servicing assets:

		Year ended December 31,										Year ended December 31,
		2018			2017			2016				2021			2020			2019
	(dollars in thousands)										(dollars in thousands)
Weighted average interest rate (1)			4.68	%		5.71	%		4.73	%			3.08	%		3.19	%		4.70	%
Average balance		$	300,035		$	145,638		$	202,293			$	2,635,601		$	1,771,370		$	1,101,501
Total interest expense		$	14,623		$	12,634		$	12,892			$	86,753		$	59,261		$	53,968
Maximum daily amount outstanding		$	450,000		$	275,106		$	275,106			$	3,336,480		$	2,032,665		$	1,742,227

(1)

Excludes the effect of amortization of debt issuance costs of ~~$681,000~~$5.5 million, $2.7 million and $2.2 million for the ~~year~~years ended December 31, ~~2018, $4.2 million for the year ended December 31, 2017~~2021, 2020 and ~~$3.2 million for the year ended December 31, 2016.~~2019, respectively.

	December 31,
	2018			2017		December 31, 2021			December 31, 2020
	(dollars in thousands)					(dollars in thousands)
Carrying value:
Amount outstanding	$	450,000		$	—	$	2,479,636		$	1,930,018
Unamortized debt issuance costs		(4,427	)		—		(7,675	)		(5,019	)
	$	445,573		$	—	$	2,471,961		$	1,924,999
Weighted average interest rate		4.86	%		—		3.02	%		2.99	%
MSRs pledged to secure notes payable (1)	$	1,139,582		$	180,317
Assets securing notes payable:
MSRs (1)						$	2,863,544		$	1,742,905
CRT Agreements:
Deposits securing CRT arrangements						$	1,704,911		$	2,799,263
Derivative assets						$	19,627		$	58,699

(1)	~~During 2018, beneficial interests~~Beneficial interest in Fannie Mae MSRs ~~are~~is pledged as collateral for both Assets sold under agreements to repurchase and Notes payable ~~as discussed above.~~ secured by credit risk transfer and mortgage servicing assets.

Exchangeable Notes

On March 5 and March 9, 2021, PMC issued $345 million aggregate principal amount of exchangeable senior notes (the “2026 Exchangeable Notes”) in a private offering. The 2026 Exchangeable Notes will mature on March 15, 2026 unless repurchased

~~Note 17—~~F-52

or exchanged in accordance with their terms before such date. The 2026 Exchangeable Notes bear interest at a rate of 5.50% per year, payable semiannually.

On November 4 and November 19, 2019, PMC issued $210 million in principal amount of exchangeable senior notes due 2024 (the “2024 Exchangeable Notes”) in a private offering. The 2024 Exchangeable Notes will mature on November 1, 2024 unless repurchased or exchanged in accordance with their terms before such date. The 2024 Exchangeable Notes bear interest at 5.50% per year, payable semiannually.

The 2026 Exchangeable Notes and the 2024 Exchangeable Notes are fully and unconditionally guaranteed by the Company and are exchangeable for Common Shares, cash, or a combination thereof, at PMC’s election, at any time until the close of business on the second scheduled trading day immediately preceding the maturity date, subject to the satisfaction of certain conditions if the exchange occurs before December 15, 2025 and August 1, 2024, respectively. The exchange rates are equal to 46.1063 and 40.101 Common Shares per $1,000 principal amount of the 2026 Exchangeable Notes and 2024 Exchangeable Notes, respectively, and are subject to adjustment upon the occurrence of certain events, but will not be adjusted for any accrued and unpaid interest.

Following is financial information relating to the Exchangeable Notes:

		Year ended December 31,
		2021			2020			2019
	(in thousands)
Average balance		$	445,064		$	269,247		$	279,207
Weighted average interest rate (1)			7.74	%		6.43	%		5.60	%
Interest expense:
Coupon		$	27,152		$	15,556		$	15,344
Amortization of:
Conversion option (2)			7,306			1,801			287
Issuance cost			2,289			1,490			1,406
		$	36,747		$	18,847		$	17,037

		December 31, 2021			December 31, 2020
		(in thousands)
Carrying value:
UPB		$	555,000		$	210,000
Conversion option allocated to Additional paid-in capital (2)			(40,952	)		(8,273	)
Unamortized debt issuance costs			(11,589	)		(4,931	)
			(52,541	)		(13,204	)
		$	502,459		$	196,796

(1)	Excludes the effect of amortization of debt issuance and conversion option costs.

(2)

As discussed in Note 3 ‒ Significant Accounting Policies ‒ Recently Issued Pronouncements, the Company will adopt ASU 2020-06 effective January 1, 2022. As a result of the adoption of ASU 2020-06, the Company expects to reclassify approximately $50.3 million from Additional paid-in capital to the carrying value of the Exchangeable Notes. As a result of this reclassification, the unamortized conversion option cost will no longer remain outstanding and amortization of such costs will no longer be included in Interest expense.

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

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

		Year ended December 31,
		2021			2020			2019
	(dollars in thousands)
Average balance		$	447,247		$	203,795		$	267,539
Total interest expense		$	15,076		$	10,971		$	11,324
Weighted average interest rate			3.63	%		3.30	%		3.46	%

Year ended December 31,

2018

2017

2016

(dollars in thousands)

Average balance

$
288,244

$
331,409

$
338,582

Total interest expense

$
10,821

$
13,184

$
12,091

Weighted average interest rate (1)

3.55
%

3.39
%

3.32
%

(1)

Excludes the effect of ~~amortization of~~net debt issuance (premium) costs of ~~$577,000~~$(1.1) million, $4.2 million and $2.1 million, for the ~~year~~years ended December 31, ~~2018, $1.8 million for the year ended December 31, 2017,~~2021, 2020 and ~~$669,000 for the year ended December 31, 2016.~~2019, respectively.

	December 31,
	2018			2017			December 31, 2021			December 31, 2020
	(dollars in thousands)						(dollars in thousands)
Fair value	$	276,499		$	307,419		$	1,469,999		$	134,726
UPB	$	281,922		$	316,684		$	1,442,379		$	131,835
Weighted average interest rate		3.51	%		3.51	%		3.18	%		3.56	%

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

Maturities of Long-Term Debt

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

			Year ended December 31,
	Total		2022		2023		2024		2025		2026		Thereafter
	(in thousands)
Notes payable secured by credit risk transfer and mortgage servicing assets (1)	$	2,479,636	$	951,122	$	780,227	$	398,287	$	0	$	350,000	$	0
Exchangeable senior notes		555,000		0		0		210,000		0		345,000		0
Asset-backed financings at fair value (2)		1,442,379		0		0		0		0		0		1,442,379
Interest-only security payable at fair value (2)		10,593		0		0		0		0		0		10,593
Total	$	4,487,608	$	951,122	$	780,227	$	608,287	$	0	$	695,000	$	1,452,972

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

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

Note ~~18—~~15—Liability for Losses Under Representations and Warranties

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

	Year ended December 31,										Year ended December 31,
	2018			2017			2016				2021			2020			2019
	(in thousands)									(in thousands)
Balance, beginning of year	$	8,678		$	15,350		$	20,171			$	21,893		$	7,614		$	7,514
Provision for losses:
Pursuant to mortgage loan sales		2,531			3,147			3,254
Pursuant to loan sales												25,029			19,316			3,778
Reduction in liability due to change in estimate		(3,707	)		(9,679	)		(7,564	)			(5,812	)		(4,457	)		(3,550	)
Recoveries (losses incurred), net		12			(140	)		(511	)
Losses incurred, net												(861	)		(580	)		(128	)
Balance, end of year	$	7,514		$	8,678		$	15,350			$	40,249		$	21,893		$	7,614
UPB of mortgage loans subject to representations and warranties at end of year	$	90,427,100		$	71,416,333		$	56,114,162
UPB of loans subject to representations and warranties at end of year											$	213,944,023		$	163,592,788		$	122,163,186

Note ~~19—~~16—Commitments and Contingencies

Cessation of the LIBOR Index

The Company is involved in both lending and financing transactions that use the LIBOR index to establish the applicable interest or dividend rates. It has been announced that this index will no longer be published. The Company services LIBOR-based adjustable rate mortgages for which the underlying mortgage notes incorporate fallback provisions. The Company also has debt agreements and preferred shares of beneficial interest that have not yet transitioned from LIBOR to a replacement index but contain replacement provisions related to the transition from LIBOR. The Company cannot anticipate whether the response of borrowers, note holders or preferred shareholders to the adoption of the replacement indices adopted by the Company will result in future losses to PMT.

Litigation

From time to time, the Company may be involved in various proceedings, claims and legal actions arising in the ordinary course of business. AsThe amount, if any, of ~~December 31, 2018,~~ultimate liability with respect to such matters cannot be determined, but despite the ~~Company was not involved in~~inherent uncertainties of litigation, management believes that the ultimate disposition of any such proceedings ~~claims~~and exposure will not have, individually or ~~legal actions that in the Manager’s view would reasonably be likely to have~~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:

December 31, 2018

(in thousands)

Commitments to purchase mortgage loans acquired for sale

$
1,688,516

Firm commitment to purchase credit risk transfer securities

$
605,052

	December 31, 2021
	(in thousands)
Commitments to purchase loans acquired for sale	$	2,092,129

~~F-56~~

Note ~~20—~~17—Shareholders’ Equity

Preferred Shares of Beneficial Interest

Preferred shares of beneficial interest are summarized below:

											Dividends per share, year ended
Series		Description (1)	Number of shares		Liquidation preference		Issuance discount		Carrying value		December 31, 2018		December 31, 2017
Preferred																									Dividends per share, year ended December 31,
Share series																Description (1)	Number of shares		Liquidation preference		Issuance discount		Carrying value		2021		2020		2019
Fixed-to-floating rate cumulative redeemable preferred	Fixed-to-floating rate cumulative redeemable preferred		(in thousands, except dividends per share)												Fixed-to-floating rate cumulative redeemable preferred		(in thousands, except dividends per share)
A		8.125% Issued March 2017		4,600	$	115,000	$	3,828	$	111,172	$	2.03	$	1.59		8.125% Issued March 2017		4,600	$	115,000	$	3,828	$	111,172	$	2.03	$	2.03	$	2.03
B		8.00% Issued July 2017		7,800		195,000		6,465		188,535	$	2.00	$	0.89		8.00% Issued July 2017		7,800		195,000		6,465		188,535	$	2.00	$	2.00	$	2.00
C																6.75% Issued August 2021		10,000		250,000		8,225		241,775	$	0.52		—		—
				12,400	$	310,000	$	10,293	$	299,707								22,400	$	560,000	$	18,518	$	541,482

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

~~During March 2017, the Company issued 4.6 million of its 8.125%~~The Company’s 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~~ pay cumulative dividends ~~on the Series A Preferred Shares~~ at a fixed rate of 8.125% per ~~annum~~year based on the $25.00 per share liquidation ~~preference.~~preference to, but not including, March 15, 2024. From, and including, March 15, 2024 and thereafter, the Company will pay cumulative dividends on the Series A Preferred Shares at a floating rate equal to three-month LIBOR as calculated on each applicable dividend determination date plus a spread of 5.831% per ~~annum~~year based on the $25.00 per share liquidation preference.

~~During July 2017, the Company issued 7.8 million of its 8.00%~~The Company’s 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~~ pay cumulative dividends ~~on the Series B Preferred Shares~~ at a fixed rate of 8.00% per ~~annum~~year based on the $25.00 per share liquidation ~~preference.~~preference to, but not including, June 15, 2024. From, and including, June 15, 2024 and thereafter, the Company will pay cumulative dividends on the Series B Preferred Shares at a floating rate equal to three-month LIBOR as calculated on each applicable dividend determination date plus a spread of 5.99% per ~~annum~~year based on the $25.00 per share liquidation preference.

The ~~Company pays quarterly~~Company’s Series C Fixed Rate Cumulative Redeemable Preferred Shares of Beneficial Interest (the “Series C Preferred Shares” together with the Series A Preferred Shares and Series B Preferred Shares, the “Preferred Shares”) pay cumulative dividends at a fixed rate of 6.75% per year based on the $25.00 per share liquidation preference to, but not including, August 24, 2026. The first dividend on the Series C Preferred Shares 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 bewas paid on December 15, 2021 in the ~~following business day.~~amount of $0.52031 per share, and represented accrual for more than the full quarterly period, covering the period from, and including August 24, 2021 to, but not including, December 15, 2021.

~~F-57~~F-55

The Series A Preferred Shares, the Series B Preferred Shares and Series BC Preferred Shares will not be redeemable before March 15, 2024, ~~and~~ June 15, 2024 and August 24, 2026, respectively, except in connection with the Company’s qualification as a REIT for U.S. federal income tax purposes or upon the occurrence of a change of control. On or after the date the Preferred Shares become redeemable, or 120 days after the first date on which such change of control occurred, the Company may, at its option, redeem any or all of the Preferred Shares at $25.00 per share plus any accumulated and unpaid dividends ~~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~~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:

	Year ended December 31, 2019
	(in thousands)
Number of Common Shares issued		33,527
Gross proceeds	$	719,777
Net proceeds	$	710,752

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

The Company periodically enters into ATM equity offering programs allowing it to offer and sell securities on an as-and-when-needed basis through designated broker-dealers. On June 15, 2021, the Company entered into a new ATM equity offering program allowing it to offer up to $200 million in Common Shares.

Following is a summary of the activities under the ATM equity offering program:

	Year ended December 31,
	2020		2019
	(in thousands)
Number of Common Shares issued		241		5,463
Gross proceeds	$	5,654	$	119,905
Net proceeds	$	5,597	$	118,705

At December 31, 2021, the Company had $200 million of Common Shares available for issuance under its ATM equity-offering program.

Common Share ~~Repurchases~~Repurchase Program

~~During August 2015,~~The Company has a Common Share repurchase program. On June 11, 2021, the Company’s board of trustees ~~authorized a common share~~approved an increase to the Company’s Common Share repurchase ~~program. Under the program, as amended, the Company may repurchase up to~~authorization from $300 million ~~of its outstanding common shares.~~to $400 million.

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

Year ended December 31,

Cumulative

2018

2017

2016

total (1)

(in thousands)

Common shares repurchased

671

5,647

7,368

14,731

Cost of common shares repurchased

$
10,719

$
91,198

$
98,370

$
216,625

		Year ended December 31,						Cumulative
		2021		2020		2019		total (1)
	(in thousands)
Common Shares repurchased			3,099		2,767		0		20,597
Cost of Common Shares repurchased		$	56,855		37,267	$	0	$	310,747

(1)	Amounts represent the share repurchase program total from its inception in August 2015 through December 31, ~~2018.~~2021.

~~The repurchased common shares were canceled upon settlement of the repurchase transactions~~Note 18—Net Gains (Losses) on Investments 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 $68,000, $30,000 and $0 during the years ended December 31, 2018, 2017 and 2016, 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 of time. 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 Company made payments under the Reimbursement Agreement totaling $137,000, $61,000, and $0 during the years ended December 31, 2018, 2017 and 2016, respectively. The Reimbursement Agreement as amended expires on February 1, 2023.

~~F-58~~

~~Note 21—Net Mortgage Loan Servicing Fees~~Financings

Net ~~mortgage loan servicing fees~~gains (losses) on investments and financings are summarized below:

Year ended December 31,

2018

2017

2016

(in thousands)

From non-affiliates:

Servicing fees (1)

$
204,663

$
164,776

$
125,961

Ancillary and other fees

8,062

6,523

5,872

Effect of MSRs:

Carried at fair value - changes in fair value:

Realization of cashflows

(119,552
)

(9,762
)

(9,314
)
Other

60,772

(4,373
)

(3,210
)

(58,780
)

(14,135
)

(12,524
)
Carried at lower of amortized cost or fair value:

Amortization

—

(81,624
)

(65,647
)
Increase in impairment valuation allowance

—

(5,876
)

(2,728
)
Gain on sale

—

660

11

(Losses) gains on hedging derivatives, net

(35,550
)

(2,512
)

2,271

(94,330
)

(103,487
)

(78,617
)

118,395

67,812

53,216

From PFSI—MSR recapture income

2,192

1,428

1,573

Net mortgage loan servicing fees

$
120,587

$
69,240

$
54,789

Average servicing portfolio

$
80,500,212

$
63,836,843

$
49,626,758

~~(1)~~

~~Includes contractually specified servicing fees, net of Agency guarantee fees.~~

		Year ended December 31,
		2021			2020			2019
	(in thousands)
From nonaffiliates:
Mortgage-backed securities		$	(74,354	)	$	87,852		$	77,283
Loans at fair value:
Held in VIEs			(12,536	)		(6,617	)		7,883
Distressed			611			(837	)		(7,169	)
CRT arrangements			368,999			(145,938	)		110,676
Firm commitment to purchase CRT securities			0			(121,067	)		60,943
Asset-backed financings at fair value			19,708			5,519			(7,553	)
Hedging derivatives			0			32,932			28,785
			302,428			(148,156	)		270,848
From PFSI ‒ ESS			1,651			(22,729	)		(7,530	)
		$	304,079		$	(170,885	)	$	263,318

Note ~~22—~~19—Net ~~Gain~~Gains on ~~Mortgage~~ Loans Acquired for Sale

Net ~~gain~~gains on ~~mortgage~~ loans acquired for sale isare summarized below:

		Year ended December 31,
		2021			2020			2019
	(in thousands)
From nonaffiliates:
Cash loss:
Loans		$	(1,487,649	)	$	(326,214	)	$	(687,317	)
Hedging activities			188,733			(504,506	)		(88,633	)
			(1,298,916	)		(830,720	)		(775,950	)
Non-cash gain:
Recognition of fair value of firm commitment to purchase CRT securities			0			(38,161	)		99,305
Receipt of MSRs in mortgage loan sale transactions			1,484,629			1,158,475			837,706
Provision for losses relating to representations and warranties provided in loan sales:
Pursuant to loans sales			(25,029	)		(19,316	)		(3,778	)
Reduction of liability due to change in estimate			5,812			4,457			3,550
			(19,217	)		(14,859	)		(228	)
Change in fair value of loans and derivatives
IRLCs			(69,935	)		61,232			(834	)
Loans			31,072			(12,279	)		(1,765	)
Hedging derivatives			(46,832	)		45,197			(2,451	)
			(85,695	)		94,150			(5,050	)
			1,379,717			1,199,605			931,733
Total from nonaffiliates			80,801			368,885			155,783
From PFSI ‒ cash gain			6,472			11,037			14,381
		$	87,273		$	379,922		$	170,164

Year ended December 31,

2018

2017

2016

(in thousands)

From non-affiliates:

Cash loss:

Mortgage loans

$
(363,271
)

$
(209,898
)

$
(229,743
)
Hedging activities

9,172

(15,288
)

30,927

(354,099
)

(225,186
)

(198,816
)
Non cash gain:

Recognition of fair value of firm commitment to purchase credit
risk transfer security

30,595

—

—

Receipt of MSRs in mortgage loan sale transactions

356,755

290,309

275,092

Provision for losses relating to representations and warranties
provided in mortgage loan sales:

Pursuant to mortgage loans sales

(2,531
)

(3,147
)

(3,254
)
Reduction in liability due to change in estimate

3,707

9,679

7,564

1,176

6,532

4,310

Change in fair value of financial instruments held at year end:

IRLCs

7,356

855

(869
)
Mortgage loans

(9,685
)

5,879

(1,846
)
Hedging derivatives

16,162

(15,957
)

19,347

13,833

(9,223
)

16,632

Total from non-affiliates-sourcing fees

48,260

62,432

97,218

From PFSI—cash gain

10,925

12,084

9,224

$
59,185

$
74,516

$
106,442

~~F-59~~

Note ~~23—Net Gain (Loss) on Investments~~

~~Net gain (loss) on investments is summarized below:~~

Year ended December 31,

2018

2017

2016

(in thousands)

From non-affiliates:

Mortgage-backed securities at fair value

$
(11,262
)

$
5,498

$
(13,168
)
Mortgage loans at fair value:

Distressed

(15,197
)

(684
)

(3,504
)
Held in a VIE

(8,499
)

4,266

(1,748
)
CRT Agreements

92,943

123,728

32,500

Firm commitment to purchase CRT securities

7,399

—

—

Asset-backed financing of a VIE at fair value

9,610

(3,426
)

3,238

Hedging derivatives

(4,152
)

(18,468
)

7,251

70,842

110,914

24,569

From PFSI—ESS

11,084

(14,530
)

(17,394
)

$
81,926

$
96,384

$
7,175

~~F-60~~

~~Note 24—~~20—Net Interest (Expense) Income

Net interest (expense) income is summarized below:

Year ended December 31,

2018

2017

2016

(in thousands)

Interest income:

From nonaffiliates:

Short-term investments

$
852

$
576

$
923

Mortgage-backed securities

55,487

29,438

14,663

Mortgage loans acquired for sale at fair value

75,610

53,164

54,750

Mortgage loans at fair value:

Distressed

21,666

63,613

107,044

Held in a VIE

11,813

14,425

17,042

Deposits securing CRT Agreements

15,441

4,291

930

Placement fees relating to custodial funds

26,065

12,517

4,058

Other

700

201

111

207,634

178,225

199,521

From PFSI—ESS

15,138

16,951

22,601

222,772

195,176

222,122

Interest expense:

To nonaffiliates:

Assets sold under agreements to repurchase (1)

115,383

93,580

92,838

Mortgage loan participation purchase and sale agreements

2,422

1,593

1,376

Exchangeable Notes

14,601

14,535

14,473

Notes payable

14,623

12,634

12,892

Asset-backed financings of a VIE at fair value

10,821

13,184

12,091

FHLB advances

—

—

122

Interest shortfall on repayments of mortgage loans
serviced for Agency securitizations

7,324

5,928

6,812

Interest on mortgage loan impound deposits

2,535

1,879

1,334

167,709

143,333

141,938

To PFSI—Assets sold under agreement to repurchase

7,462

8,038

7,830

175,171

151,371

149,768

Net interest income

$
47,601

$
43,805

$
72,354

~~(1)~~

In 2017, the Company entered into a master repurchase agreement that provides the Company with incentives to finance mortgage loans approved for satisfying certain consumer relief characteristics as provided in the agreement. During the years ended December 31, 2018 and 2017, the Company included $19.7 million and $3.1 million, respectively, of such incentives as a reduction of ~~Interest expense~~. The master repurchase agreement is subject to a rolling six-month term through August 21, 2019, unless terminated earlier at the option of the lender. The Company expects that it will cease to accrue the incentives under the repurchase agreement in the second quarter of 2019.

		Year ended December 31,
		2021			2020			2019
	(in thousands)
Interest income:
From nonaffiliates:
Cash and short-term investments		$	938		$	3,804		$	4,559
Mortgage-backed securities			36,180			59,461			78,450
Loans acquired for sale at fair value			125,438			103,221			121,387
Loans at fair value:
Held in VIEs			17,014			10,609			11,734
Distressed			369			493			3,848
Deposits securing CRT arrangements			559			7,012			34,229
Placement fees relating to custodial funds			13,366			28,804			52,587
Other			95			313			800
			193,959			213,717			307,594
From PFSI ‒ ESS			1,280			8,418			10,291
			195,239			222,135			317,885
Interest expense:
To nonaffiliates:
Assets sold under agreements to repurchase			97,078			102,131			178,211
Mortgage loan participation purchase and sale agreements			606			902			1,570
Notes payable secured by credit risk transfer and mortgage servicing assets			86,753			59,261			53,968
Exchangeable Notes			36,747			18,847			17,037
Asset-backed financings at fair value			15,076			10,971			11,324
Interest shortfall on repayments of loans serviced for Agency securitizations			64,519			71,516			25,776
Interest on loan impound deposits			3,571			3,817			3,258
			304,350			267,445			291,144
To PFSI ‒ Assets sold under agreement to repurchase			387			3,325			6,302
			304,737			270,770			297,446
Net interest (expense) income		$	(109,498	)	$	(48,635	)	$	20,439

Note ~~25—~~21—Share-Based Compensation ~~Plans~~

The Company has adopted an equity incentive plan which 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 the Operating Partnership) and other awards based on PMT’s ~~common shares~~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~~PMT’s board of trustees, which has the authority to make awards to the eligible participants referenced above, and to determine what form the awards will take, and the terms and conditions of the awards.

~~F-61~~F-58

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

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

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

•

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~~

•

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.~~

•

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:

	Year ended December 31,
	2021		2020		2019
	(in thousands)
Grants:
Restricted share units		105		92		96
Performance share units		126		112		116
		231		204		212
Grant date fair value:
Restricted share units	$	1,992	$	1,978	$	1,978
Performance share units		2,399		2,425		2,380
	$	4,391	$	4,403	$	4,358
Vestings:
Restricted share units		123		129		227
Performance share units (1)		48		143		118
		171		272		345
Forfeitures:
Restricted share units		0		4		0
Performance share units		0		0		1
		0		4		1
Compensation expense relating to share-based grants	$	2,419	$	2,294	$	5,530

Year ended December 31,

2018

2017

2016

(in thousands)

Grants:

Restricted share units

129

136

218

Performance share units

116

126

112

Total share units granted

245

262

330

Grant date fair value:

Restricted share units granted

$
2,281

$
2,316

$
2,690

Performance share units granted

1,542

1,675

1,351

Total fair value of share units granted

$
3,823

$
3,991

$
4,041

Vestings:

Restricted share units

261

284

299

Performance share units

27

—

—

Total share units vested

288

284

299

Forfeitures:

Restricted share units

2

13

—

Performance share units

—

—

—

Total share units forfeited

2

13

—

Compensation expense relating to share-based grants

$
5,318

$
4,904

$
5,748

(1)	The actual number of performance-based RSUs vested during the year ended December 31, 2021 was 48,381 Common Shares, which is approximately 100% of the originally granted performance-based RSUs.

	December 31, 2018				December 31, 2021
	Restricted share units		Performance share units		Restricted share units		Performance share units
Shares expected to vest:
Number of units (in thousands)		360		237		170		202
Grant date fair value per unit	$	17.69	$	11.21
Average remaining vesting period (months)		8		9
Grant date average fair value per unit					$	19.89	$	19.88

~~F-62~~

~~Note 26—Other Expenses~~

~~Other expenses are summarized below:~~

Note ~~27—~~22—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 ~~mortgage loans~~REMIC and excess servicing interests 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.

F-59

The approximate tax characterization of the Company’s distributions is as follows:

Year ended December 31,

Ordinary
income

Long term
capital gain

Return of
capital

2018

49
%

0
%

51
%
2017

71
%

29
%

0
%
2016

60
%

40
%

0
%

Year ended December 31,	Ordinary income			Long term capital gain			Return of capital
2021		100	%		0	%		0	%
2020		75	%		25	%		0	%
2019		66	%		0	%		34	%

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~~The TRS made a $20 million distribution in 2017 that resulted in dividend income to the ~~Company.~~Company but has made0 other distributions in the preceding or subsequent years. 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 ~~(benefit from)~~ income taxes which relates primarily to the TRS for the years presented:

	Year ended December 31,
	2021			2020		2019
	(in thousands)
Current expense (benefit):
Federal	$	0		$	0	$	(120	)
State		11			12		12
Total current expense (benefit)		11			12		(108	)
Deferred (benefit) expense:
Federal		(14,692	)		20,440		(39,592	)
State		2,488			6,905		3,984
Total deferred (benefit) expense		(12,204	)		27,345		(35,608	)
Total (benefit from) provision for income taxes	$	(12,193	)	$	27,357	$	(35,716	)

Year ended December 31,

2018

2017

2016

(in thousands)

Current expense:

Federal

$
19

$
251

$
361

State

6

57

81

Total current expense

25

308

442

Deferred expense (benefit):

Federal

7,587

3,824

(8,790
)
State

(2,422
)

2,665

(5,699
)
Total deferred expense (benefit)

5,165

6,489

(14,489
)
Total provision for (benefit from) income taxes

$
5,190

$
6,797

$
(14,047
)

The following table is a reconciliation of the Company’s (benefit from) provision for ~~(benefit from)~~ income taxes at statutory rates to the (benefit from) provision for ~~(benefit from)~~ income taxes at the Company’s effective rate for the years presented:

		Year ended December 31,																			Year ended December 31,
		2018						2017						2016							2021						2020						2019
		Amount			Rate			Amount			Rate			Amount			Rate				Amount			Rate			Amount			Rate			Amount			Rate
	(dollars in thousands)																			(dollars in thousands)
Federal income tax expense at statutory tax rate		$	33,177			21.0	%	$	43,591			35.0	%	$	21,617			35.0	%		$	9,379			21.0	%	$	16,743			21.0	%	$	40,035			21.0	%
Effect of non-taxable REIT income			(26,647	)		(16.9	)%		(25,754	)		(20.7	)%		(32,501	)		(52.6	)%			(46,193	)		(103.4	)%		15,076			18.9	%		(79,467	)		(41.7	)%
State income taxes, net of federal benefit			(2,044	)		(1.3	)%		1,687			1.4	%		(3,652	)		(5.9	)%			(7,175	)		(16.1	)%		5,370			6.7	%		(7,417	)		(3.9	)%
Effect of federal statutory rate change			—			0	%		(12,992	)		(10.4	)%		—			0	%
Convertible debt permanent adjustment																						(2,215	)		(5.0	)%		3,446			4.3	%	0				(—	)%
Valuation allowance																						34,011			76.2	%		(13,502	)		(16.9	)%		13,612			7	%
Other			704			0.4	%		265			0.2	%		489			0.8	%			0			(—	)%		224			0.3	%		(2,479	)		(1.2	)%
Valuation allowance			—			0	%		—			0	%		—			0	%
Provision for (benefit from) income taxes		$	5,190			3.3	%	$	6,797			5.5	%	$	(14,047	)		(22.7	)%
(Benefit from) provision for income taxes																					$	(12,193	)		(27.3	)%	$	27,357			34.3	%	$	(35,716	)		(18.8	)%

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 ~~(benefit from)~~ deferred income taxes are as follows:

		Year ended December 31,										Year ended December 31,
		2018			2017			2016				2021			2020			2019
	(in thousands)										(in thousands)
Real estate valuation loss		$	1,565		$	3,476		$	2,732			$	758		$	437		$	1,140
Mortgage servicing rights			4,797			15,516			10,597				52,818			27,179			(212	)
Net operating loss carryforward			(1,109	)		4,333			(19,863	)			(60,314	)		31,622			(56,339	)
Liability for losses under representations and warranties			405			2,652			2,222				(4,435	)		(3,486	)		111
Excess interest expense disallowance			234			(7,304	)		(8,721	)			(35,769	)		(15,749	)		4,667
Effect of federal statutory rate change			—			(12,992	)		—
Other			(727	)		808			(1,456	)			727			844			1,413
Valuation allowance			—			—			—				34,011			(13,502	)		13,612
Total provision for (benefit from) deferred income taxes		$	5,165		$	6,489		$	(14,489	)
Total (benefit from) provision for deferred income taxes												$	(12,204	)	$	27,345		$	(35,608	)

The components of income taxes payable are as follows:

	December 31, 2021			December 31, 2020
	(in thousands)
Taxes currently payable (receivable)	$	(7,620	)	$	(5,859	)
Deferred income taxes payable		17,218			29,422
Income taxes payable	$	9,598		$	23,563

December 31, 2018

December 31, 2017

(in thousands)

Taxes currently (receivable) payable

$
(1,160
)

$
148

Deferred income taxes payable

37,686

27,169

Income taxes payable

$
36,526

$
27,317

The tax effects of temporary differences that gave rise to deferred income tax assets and liabilities are presented below:

	December 31, 2018		December 31, 2017		December 31, 2021			December 31, 2020
	(in thousands)				(in thousands)
Deferred income tax assets:
Net operating loss carryforward	$	40,896	$	39,788	$	125,929		$	65,615
Excess interest expense disallowance		19,901		20,135		66,752			30,983
REO valuation loss		2,578		4,143		244			1,001
Liability for losses under representations and warranties		2,011		2,416		9,821			5,386
Other		1,576		848		0			(682	)
Gross deferred tax assets		66,962		67,330		202,746			102,303
Valuation allowance						(34,121	)		(110	)
Deferred tax assets after valuation allowance						168,625			102,193
Deferred income tax liabilities:
Mortgage servicing rights		104,648		94,499		184,433			131,615
Other		—		—		1,410			0
Gross deferred tax liabilities		104,648		94,499		185,843			131,615
Net deferred income tax liability	$	37,686	$	27,169		17,218		$	29,422

The net deferred income tax liability is included in Income taxes payable in the consolidated balance sheets.

The Company has federal net operating loss carryforwards of ~~$136.8~~$466.5 million and ~~$131.5~~$237.5 million at December 31, ~~2018~~2021 and December 31, ~~2017,~~2020, respectively. Losses that occurred prior to 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~~their use is limited to 80% of taxable ~~income.~~income for tax years beginning after December 31, 2020.

We evaluated the deferred tax assets of our TRS and established a deferred tax valuation allowance in the amount of $34.1 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, ~~2018~~2021 and December 31, ~~2017,~~2020, the Company had no0 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, ~~2018~~2021 and December 31, ~~2017.~~2020.

The Company files U.S. federal and state income tax returns for both the REIT and the TRS. These federal income tax returns for ~~2015~~2018 and forward are subject to examination. The Company’s state income tax returns are generally subject to examination for ~~2014~~2017 and forward. ~~The TRS’s New York state income tax returns for tax years 2013 through 2015 were examined and accepted as filed with no changes.~~

Note ~~28—~~23—Earnings Per Share

The Company grants restricted share units which entitle the recipients to receive dividend equivalents during the vesting period on a basis equivalent to the dividends paid to holders of common ~~shares.~~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~~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,~~securities) by the weighted average ~~common shares~~Common Shares outstanding during the period.

F-61

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,~~5.375% exchangeable notes due May 1, 2020 (the “2020 Notes”), by the weighted average ~~common shares~~Common Shares outstanding, assuming all dilutive securities were issued.

~~F-65~~As discussed in Note 3 ‒ Significant Accounting Policies ‒ Pending Accounting Change, PMC issued the Exchangeable Notes. The Exchangeable Notes include cash conversion options. The Company intends to cash settle the Exchangeable Notes. Therefore, the effect of conversion of the Exchangeable Notes presently is excluded from diluted earnings (losses) per share. As further discussed in Note 3, effective for the quarter ending March 31, 2022, the Company will adopt ASU 2020-06, which will require inclusion of the Common Shares issuable pursuant to conversion of the Exchangeable Notes in the Company’s diluted earnings per share calculation.

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

	Year ended December 31,										Year ended December 31,
	2018			2017			2016				2021			2020			2019
	(in thousands except per share amounts)									(in thousands except per share amounts)
Net income	$	152,798		$	117,749		$	75,810			$	56,854		$	52,373		$	226,357
Dividends on preferred shares		(24,938	)		(15,267	)		—				(30,891	)		(24,938	)		(24,938	)
Effect of participating securities—share-based compensation awards		(750	)		(991	)		(1,333	)			(318	)		(287	)		(566	)
Net income attributable to common shareholders	$	127,110		$	101,491		$	74,477				25,645			27,148			200,853

Net income attributable to common shareholders	$	127,110		$	101,491		$	74,477
Interest on Exchangeable Notes, net of income taxes		10,637			8,757			8,719
Interest on 2020 Notes, net of income taxes												0			0			11,827
Diluted net income attributable to common shareholders	$	137,747		$	110,248		$	83,196			$	25,645		$	27,148		$	212,680
Weighted average basic shares outstanding		60,898			66,144			68,642				97,402			99,373			78,990
Dilutive securities:
Shares issuable pursuant to exchange of the Exchangeable Notes		8,467			8,467			8,467
Diluted weighted average number of shares outstanding		69,365			74,611			77,109
Shares issuable under share-based compensation plan												0			0			254
Shares issuable pursuant to exchange of the 2020 Notes												0			0			8,467
Diluted weighted average shares outstanding												97,402			99,373			87,711
Basic earnings per share	$	2.09		$	1.53		$	1.09			$	0.26		$	0.27		$	2.54
Diluted earnings per share	$	1.99		$	1.48		$	1.08			$	0.26		$	0.27		$	2.42

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.~~anti-dilutive. The following table summarizes the potentially dilutive shares excluded from the diluted earnings per share calculation as inclusion of such shares would have been ~~antidilutive:~~anti-dilutive:

Year ended December 31,

2018

2017

2016

(in thousands)

Shares issuable under share-based compensation plan

252

157

701

		Year ended December 31,
		2021		2020		2019
	(in thousands)
Shares issuable under share-based compensation plan			162		172		152
Shares issuable pursuant to exchange of the Exchangeable Notes			0		2,529		0

Note ~~29—~~24—Segments

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

~~The correspondent production segment represents the Company’s operations aimed at serving~~4 segments as ~~an intermediary between mortgage lenders and the capital markets by purchasing, pooling and reselling newly originated prime credit quality mortgage loans either directly or~~described in ~~the form of MBS, using the services of the Manager and PLS.~~

The credit sensitive strategies segment represents the Company’s investments in CRT Agreements, firm commitment to purchase CRT securities, distressed mortgage loans, REO, real estate held for investment 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 corporate segment includes certain interest income, management fee and corporate expense amounts.~~

~~Segment results for the year ended December 31, 2016 have been restated to conform prior year presentation to the new segment composition.~~Note 1 ‒ Organization.

~~F-66~~

Financial highlights by operating segment are summarized below:

	Credit			Interest rate
	sensitive			sensitive			Correspondent
Year ended December 31, 2021	strategies			strategies			production		Corporate			Total
	(in thousands)
Net investment income:
Net gains (losses) on investments and financings	$	376,725		$	(72,646	)	$	—	$	—		$	304,079
Net gains on loans acquired for sale		(2	)		—			87,275		—			87,273
Net loan servicing fees		0			(36,022	)		0		0			(36,022	)
Net interest (expense) income:
Interest income		2,739			64,528			125,056		2,916			195,239
Interest expense		59,545			160,525			84,667		0			304,737
		(56,806	)		(95,997	)		40,389		2,916			(109,498	)
Other		3,204			0			171,261		—			174,465
		323,121			(204,665	)		298,925		2,916			420,297
Expenses:
Loan fulfillment and servicing fees payable to PFSI		363			80,295			178,927		0			259,585
Management fees		0			0			0		37,801			37,801
Other		16,115			5,105			33,062		23,968			78,250
		16,478			85,400			211,989		61,769			375,636
Pretax income (loss)	$	306,643		$	(290,065	)	$	86,936	$	(58,853	)	$	44,661
Total assets at end of year	$	1,848,294		$	7,363,878		$	4,325,750	$	234,786		$	13,772,708

	Credit			Interest rate
	sensitive			sensitive			Correspondent
Year ended December 31, 2020	strategies			strategies			production		Corporate			Total
	(in thousands)
Net investment income:
Net gains (losses) on investments and financings	$	(237,049	)	$	66,164		$	—	$	—		$	(170,885	)
Net gains on loans acquired for sale		(43,813	)		—			423,735		—			379,922
Net loan servicing fees		0			153,696			0		0			153,696
Net interest (expense) income:
Interest income		8,902			108,036			102,779		2,418			222,135
Interest expense		39,237			153,338			76,892		1,303			270,770
		(30,335	)		(45,302	)		25,887		1,115			(48,635	)
Other		5,857			0			147,600		1,796			155,253
		(305,340	)		174,558			597,222		2,911			469,351
Expenses:
Loan fulfillment and servicing fees payable to PFSI		807			66,374			222,200		0			289,381
Management fees		0			0			0		34,538			34,538
Other		10,996			2,487			30,383		21,836			65,702
		11,803			68,861			252,583		56,374			389,621
Pretax (loss) income	$	(317,143	)	$	105,697		$	344,639	$	(53,463	)	$	79,730
Total assets at end of year	$	2,920,558		$	4,593,127		$	3,781,010	$	197,316		$	11,492,011

Credit

Interest rate

Correspondent

sensitive

sensitive

Year ended December 31, 2018

production

strategies

strategies

Corporate

Total

(in thousands)

Net investment income:

Net mortgage loan servicing fees

$
—

$
29

$
120,558

$
—

$
120,587

Net gain on mortgage loans acquired for sale

28,445

30,740

—

—

59,185

Net gain (loss) on investments

—

84,943

(3,017
)

—

81,926

Net interest income (expense):

Interest income

75,068

37,786

108,366

1,552

222,772

Interest expense

(41,354
)

(41,523
)

(92,294
)

—

(175,171
)

33,714

(3,737
)

16,072

1,552

47,601

Other income (loss)

43,447

(1,704
)

—

25

41,768

105,606

110,271

133,613

1,577

351,067

Expenses:

Mortgage loan fulfillment and servicing fees
payable to PFSI

81,350

7,561

34,484

—

123,395

Management fees

—

—

—

24,465

24,465

Other

7,784

15,459

697

21,279

45,219

89,134

23,020

35,181

45,744

193,079

Pre-tax income (loss)

$
16,472

$
87,251

$
98,432

$
(44,167
)

$
157,988

Total assets at year end

$
1,698,656

$
1,602,776

$
4,373,488

$
138,441

$
7,813,361

	Credit			Interest rate
	sensitive			sensitive			Correspondent
Year ended December 31, 2019	strategies			strategies			production		Corporate			Total
	(in thousands)
Net investment income:
Net gains (losses) on investments and financings	$	164,413		$	98,905		$	—	$	—		$	263,318
Net gains on loans acquired for sale		51,014			—			119,150		—			170,164
Net loan servicing fees		—			(58,918	)		—		—			(58,918	)
Net interest (expense) income:
Interest income		39,343			155,176			120,974		2,392			317,885
Interest expense		67,412			144,513			85,521		—			297,446
		(28,069	)		10,663			35,453		2,392			20,439
Other		4,507			—			88,159		1,146			93,812
		191,865			50,650			242,762		3,538			488,815
Expenses:
Loan fulfillment and servicing fees payable to PFSI		2,213			46,584			160,610		—			209,407
Management fees		—			—			—		36,492			36,492
Other		7,476			2,918			17,559		24,322			52,275
		9,689			49,502			178,169		60,814			298,174
Pretax income (loss)	$	182,176		$	1,148		$	64,593	$	(57,276	)	$	190,641
Total assets at end of year	$	2,364,749		$	4,993,840		$	4,216,806	$	195,956		$	11,771,351

Credit

Interest rate

Correspondent

sensitive

sensitive

Year ended December 31, 2017

production

strategies

strategies

Corporate

Total

(in thousands)

Net investment income:

Net mortgage loan servicing fees

$
—

$
134

$
69,106

$
—

$
69,240

Net gain on mortgage loans acquired for sale

74,308

208

—

—

74,516

Net gain (loss) on investments

—

123,774

(27,390
)

—

96,384

Net interest income:

Interest income

52,522

69,008

72,870

776

195,176

Interest expense

(35,128
)

(53,434
)

(62,809
)

—

(151,371
)

17,394

15,574

10,061

776

43,805

Other income (loss)

40,279

(6,290
)

—

6

33,995

131,981

133,400

51,777

782

317,940

Expenses:

Mortgage loan fulfillment and servicing fees
payable to PFSI

80,366

15,611

27,446

—

123,423

Management fees

—

—

—

22,584

22,584

Other

8,677

15,575

1,648

21,487

47,387

89,043

31,186

29,094

44,071

193,394

Pre-tax income (loss)

$
42,938

$
102,214

$
22,683

$
(43,289
)

$
124,546

Total assets at year end

$
1,302,245

$
1,791,447

$
2,414,423

$
96,818

$
5,604,933

~~F-67~~

Credit

Interest rate

Correspondent

sensitive

sensitive

Year ended December 31, 2016

production

strategies

strategies

Corporate

Total

(in thousands)

Net investment income:

Net mortgage loan servicing fees

$
—

$
6

$
54,783

—

$
54,789

Net gain (loss) on mortgage loans acquired for
sale

107,126

(684
)

—

—

106,442

Net gain (loss) on investments

—

30,418

(23,243
)

—

7,175

Net interest income:

Interest income

53,943

109,986

57,542

651

222,122

Interest expense

(34,630
)

(62,707
)

(52,431
)

—

(149,768
)

19,313

47,279

5,111

651

72,354

Other income (loss)

42,091

(10,763
)

—

—

31,328

168,530

66,256

36,651

651

272,088

Expenses:

Mortgage loan fulfillment and servicing fees
payable to PFSI

86,488

29,601

20,991

—

137,080

Management fees

—

—

—

20,657

20,657

Other

8,200

19,367

1,619

23,402

52,588

94,688

48,968

22,610

44,059

210,325

Pre-tax income (loss)

$
73,842

$
17,288

$
14,041

$
(43,408
)

$
61,763

Total assets at year end

$
1,734,290

$
2,288,886

$
2,177,024

$
157,302

$
6,357,502

~~F-68~~

Note ~~30—Selected Quarterly Results (Unaudited)~~

~~Following is a presentation of selected quarterly financial data:~~

Quarter ended

2018

2017

Dec. 31

Sept. 30

June 30

Mar. 31

Dec. 31

Sept. 30

June 30

Mar. 31

(dollars in thousands, except per share data)

Net investment income

$
83,902

$
108,501

$
82,991

$
75,673

$
93,703

$
75,804

$
83,959

$
64,474

Net income

$
41,625

$
46,562

$
36,425

$
28,186

$
40,838

$
19,395

$
28,780

$
28,737

Earnings per share:

Basic

$
0.58

$
0.66

$
0.49

$
0.36

$
0.53

$
0.20

$
0.39

$
0.42

Diluted

$
0.55

$
0.62

$
0.47

$
0.35

$
0.50

$
0.20

$
0.38

$
0.40

Cash dividends declared per share

$
0.47

$
0.47

$
0.47

$
0.47

$
0.47

$
0.47

$
0.47

$
0.47

At quarter end:

Mortgage-backed securities

$
2,610,422

$
2,126,507

$
1,698,322

$
1,436,456

$
989,461

$
1,036,669

$
1,065,540

$
1,089,610

Mortgage loans (1)

2,052,262

2,582,600

2,539,963

1,895,023

2,358,988

2,618,283

2,846,415

2,861,797

Excess servicing spread

216,110

223,275

229,470

236,002

236,534

248,763

261,796

277,484

Derivative assets

167,165

143,577

133,239

122,518

113,881

67,288

73,875

41,213

Real estate (2)

128,791

141,576

155,702

187,296

207,089

227,580

247,350

260,368

Deposits securing credit risk transfer agreements

1,146,501

662,624

651,204

622,330

588,867

545,694

503,108

463,836

Mortgage servicing rights

1,162,369

1,109,741

1,010,507

957,013

844,781

790,335

734,800

696,970

Other assets

329,741

277,678

258,442

333,848

265,332

250,431

277,360

311,668

Total assets

$
7,813,361

$
7,267,578

$
6,676,849

$
5,790,486

$
5,604,933

$
5,785,043

$
6,010,244

$
6,002,946

Short-term debt

$
5,081,691

$
4,452,670

$
3,630,843

$
3,366,181

$
3,269,462

$
3,475,552

$
3,846,324

$
3,634,396

Long-term debt

1,011,433

1,086,841

1,363,886

737,289

661,715

571,696

582,665

780,180

Other liabilities

154,105

169,504

136,633

144,758

129,171

127,230

126,423

129,780

Total liabilities

6,247,229

5,709,015

5,131,362

4,248,228

4,060,348

4,174,478

4,555,412

4,544,356

Shareholders’ equity

1,566,132

1,558,563

1,545,487

1,542,258

1,544,585

1,610,565

1,454,832

1,458,590

Total liabilities and
shareholders’ equity

$
7,813,361

$
7,267,578

$
6,676,849

$
5,790,486

$
5,604,933

$
5,785,043

$
6,010,244

$
6,002,946

~~(1)~~

~~Includes mortgage loans acquired for sale at fair value and mortgage loans at fair value.~~

~~(2)~~

~~Includes REO and real estate held for investment.~~

~~F-69~~

~~Note 31—~~25—Supplemental Cash Flow Information

Year ended December 31,

2018

2017

2016

(in thousands)

Payments:

Income tax (refunds), net

$
1,333

$
(2,354
)

$
1,294

Interest

$
170,435

$
152,441

$
157,686

Cumulative effect on accumulated deficit of conversion to fair value
   accounting for mortgage servicing rights

$
(14,361
)

$
—

$
—

Non-cash investing activities:

Transfer of mortgage loans and advances to real estate
   acquired in settlement of loans

$
32,578

$
87,202

$
207,431

Transfer of real estate acquired in settlement of mortgage
   loans to real estate held for investment

$
5,183

$
16,530

$
21,406

Transfer of real estate acquired in settlement of mortgage
   loans from real estate held for investment

$
3,401

$
—

$
—

Receipt of mortgage servicing rights as proceeds from sales of
   mortgage loans

$
356,755

$
290,309

$
275,092

Receipt of excess servicing spread pursuant to recapture agreement
   with PennyMac Financial Services, Inc.

$
2,688

$
5,244

$
6,603

Capitalization of servicing advances pursuant to mortgage loan
   modifications

$
5,481

$
18,923

$
—

Non-cash financing activities:

Dividends declared, not paid

$
28,816

$
29,145

$
31,655

	Year ended December 31,
	2021		2020		2019
	(in thousands)
Payments (Refunds), net:
Income taxes	$	1,771	$	5,613	$	(1,009	)
Interest	$	298,862	$	290,225	$	298,591
Non-cash investing activities:
Transfer of loans and advances to real estate acquired in settlement of loans	$	0	$	1,166	$	23,672
Transfer of real estate held for investment to real estate acquired in settlement of loans	$	0	$	0	$	30,432
Receipt of mortgage servicing rights as proceeds from sales of loans at fair value	$	1,484,629	$	1,158,475	$	837,706
Receipt of excess servicing spread pursuant to recapture agreement with PennyMac Financial Services, Inc.	$	557	$	2,093	$	1,757
Capitalization of servicing advances pursuant to mortgage loan modifications	$	0	$	0	$	1,340
Transfer of firm commitment to purchase CRT securities to investment securities	$	0	$	178,501	$	56,804
Recognition of loans at fair value resulting from initial consolidation of variable interest entities	$	1,542,333	$	0	$	0
Recombination of MSRs to loans at fair value resulting from initial consolidation of VIEs	$	9,824	$	0	$	0
Retention of subordinate mortgage-backed securities in loan securitizations	$	42,256	$	0	$	0
Non-cash financing activities:
Recognition of asset-backed financings resulting from initial consolidation of VIEs	$	1,471,262	$	0	$	0
Dividends declared, not paid	$	44,764	$	46,093	$	47,193

Note ~~32—~~26—Regulatory Capital and Liquidity Requirements

~~PMC~~The Company is ~~a seller/servicer~~subject to financial eligibility requirements established by the Federal Housing Finance Agency (“FHFA”) for sellers/servicers eligible to sell or service mortgage loans with Fannie Mae and Freddie Mac. The ~~Company is required to comply with the following minimum capital and liquidity~~ eligibility requirements ~~to remain in good standing with each Agency:~~include:

~~A minimum net worth of $2.5 million plus 25 basis points of UPB for all mortgage loans serviced;~~

•

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

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

•

A 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.

•

A liquidity requirement equal to 3.5 basis points of the aggregate UPB serviced for the Agencies plus 200 basis points of total nonperforming Agency servicing UPB less 70% of such nonperforming Agency servicing UPB in excess of 600 basis points where the underlying loans are in COVID-19 forbearance but were current at the time they entered forbearance.

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

Net Worth (1)

Tangible Net Worth /
Total Assets Ratio (1)

Liquidity (1)

Fannie Mae and Freddie Mac

Actual

Required

Actual

Required

Actual

Required

(dollars in thousands)

December 31, 2018

$
528,506

$
238,915

11
%

6
%

$
58,144

$
31,678

December 31, 2017

$
487,535

$
182,818

12
%

6
%

$
73,252

$
25,245

	Net worth (1)				Tangible net worth / total assets ratio (1)						Liquidity (1)
Fannie Mae and Freddie Mac	Actual		Required		Actual			Required			Actual		Required
	(dollars in thousands)
December 31, 2021	$	938,218	$	557,229		12	%		6	%	$	108,536	$	74,771
December 31, 2020	$	1,101,318	$	438,530		16	%		6	%	$	101,116	$	59,158

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

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

~~F-70~~F-65

Note ~~33—~~27—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:

December 31, 2018

Company consolidated

Debt covenant
requirement

Calculated
balance⁽¹⁾

(in thousands)

PennyMac Mortgage Investment Trust

$
860,000

$
1,566,132

Operating Partnership

$
860,000

$
1,598,784

PennyMac Holdings

$
250,000

$
598,826

PennyMac Corp

$
150,000

$
526,935

	December 31, 2021
Company consolidated	Debt covenant requirement		Calculated balance⁽¹⁾
	(in thousands)
PennyMac Mortgage Investment Trust	$	1,250,000	$	2,367,518
PennyMac Operating Partnership, L.P.	$	1,250,000	$	2,367,683
PennyMac Holdings, LLC	$	250,000	$	583,298
PennyMac Corp.	$	300,000	$	938,066

(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.

~~F-71~~

PENNYMAC MORTGAGE INVESTMENT TRUST

CONDENSED BALANCE SHEETS

Following are condensed parent-only financial statements for the Company:

	December 31,
	2021		2020
	(in thousands)
Assets
Short-term investment	$	3,542	$	6,482
Investments in subsidiaries		2,518,953		2,368,592
Due from subsidiaries		89		463
Other assets		0		571
Total assets	$	2,522,584	$	2,376,108

Liabilities
Dividends payable	$	44,764	$	46,093
Capital notes due to subsidiaries		100,679		44,380
Accounts payable and accrued liabilities		1,233		298
Due to affiliates		421		373
Due to subsidiaries		244		27
Total liabilities		147,341		91,171
Shareholders' Equity		2,375,243		2,284,937
Total liabilities and shareholders' equity	$	2,522,584	$	2,376,108

December 31,

2018

2017

(in thousands)

Assets

Short-term investment

$
714

$
1,873

Investments in subsidiaries

1,599,298

1,651,419

Due from subsidiaries

86

2

Other assets

647

589

Total assets

$
1,600,745

$
1,653,883

Liabilities

Dividends payable

$
28,680

$
28,949

Accounts payable and accrued liabilities

2,338

5,657

Capital notes due to subsidiaries

—

69,200

Due to affiliates

888

1,073

Due to subsidiaries

27

3

Total liabilities

31,933

104,882

Shareholders' equity

1,568,812

1,549,001

Total liabilities and shareholders' equity

$
1,600,745

$
1,653,883

~~F-72~~

PENNYMAC MORTGAGE INVESTMENT TRUST

CONDENSED STATEMENTS OF INCOME

	Year ended December 31,									Year ended December 31,
	2018			2017			2016			2021			2020			2019
	(in thousands)									(in thousands)
Income
Dividends from subsidiaries	$	221,469		$	177,571		$	230,091		$	213,794		$	176,216		$	165,451
Intercompany interest		8			7			6			42			140			34
Other		1,250			1,256			1,250			0			475			2,389
Total income		222,727			178,834			231,347			213,836			176,831			167,874
Expenses
Intercompany interest		414			378			1,382			3,663			1,509			27
Other		—			—			(114	)		85			62			3
Total expenses		414			378			1,268			3,748			1,571			30
Income before provision for income taxes and equity in undistributed earnings in subsidiaries		222,313			178,456			230,079
Provision for income taxes		24			308			442
Income before provision for (benefit from) income taxes and (distribution in excess of earnings) undistributed earnings in subsidiaries											210,088			175,260			167,844
Provision for (benefit from) income taxes											11			13			(109	)
Income before equity in undistributed earnings of subsidiaries		222,289			178,148			229,637			210,077			175,247			167,953
Equity in distributions in excess of earnings of subsidiaries		(71,180	)		(60,655	)		(155,093	)
(Distributions in excess of earnings of subsidiaries) undistributed earnings of subsidiaries											(133,576	)		(139,620	)		60,937
Net income	$	151,109		$	117,493		$	74,544		$	76,501		$	35,627		$	228,890

~~F-73~~

PENNYMAC MORTGAGE INVESTMENT TRUST

CONDENSED STATEMENTS OF CASH FLOWS

Year ended December 31,

2018

2017

2016

(in thousands)

Cash flows from operating activities:

Net income

$
151,109

$
117,493

$
74,544

Equity in distributions in excess of earnings of subsidiaries

71,180

60,655

155,093

Decrease in due from affiliates

490

620

693

(Increase) decrease in other assets

(58
)

21

196

(Decrease) increase in accounts payable and accrued liabilities

(3,320
)

2,892

93

Increase in due from affiliates

(185
)

(58
)

(116
)
Increase (decrease) due to affiliates

84

35

(174
)
Net cash provided by operating activities

219,300

181,658

230,329

Cash flows from investing activities:

Increase in investment in subsidiaries

—

(299,919
)

—

Net decrease (increase) in short-term investments

1,159

(838
)

1,571

Net cash provided by (used in) investing activities

1,159

(300,757
)

1,571

Cash flows from financing activities:

Net (decrease) increase in intercompany unsecured note payable

(69,200
)

50,791

(1,970
)
Issuance of preferred shares

—

310,000

—

Payment of issuance costs related to preferred shares

—

(10,293
)

—

Payment of dividends to preferred shareholders

(24,944
)

(14,066
)

—

Payment of dividends to common shareholders

(115,596
)

(126,135
)

(131,560
)
Repurchases of common shares

(10,719
)

(91,198
)

(98,370
)
Net cash (used in) provided by financing activities

(220,459
)

119,099

(231,900
)
Net change in cash

—

—

—

Cash and restricted cash at beginning of year

—

—

—

Cash and restricted cash at end of year

$
—

$
—

$
—

Non-cash financing activity — dividends payable

$
28,816

$
29,145

$
31,655

	Year ended December 31,
	2021			2020			2019
	(in thousands)
Cash flows from operating activities:
Net income	$	76,501		$	35,627		$	228,890
Distributions in excess of earnings of subsidiaries (undistributed earnings of subsidiaries)		133,576			139,620			(60,937	)
Decrease in due from subsidiaries		967			697			261
Decrease in other assets		571			24			52
Increase (decrease) in accounts payable and accrued liabilities		854			(1,266	)		(697	)
Decrease (increase) in due from affiliates		48			(26	)		(489	)
Increase in due to affiliates		297			27			33
Net cash provided by operating activities		212,814			174,703			167,113
Cash flows from investing activities:
Increase in investment in subsidiaries		(242,125	)		(5,596	)		(825,920	)
Net decrease (increase) in short-term investments		2,940			(3,663	)		(2,105	)
Net cash used in investing activities		(239,185	)		(9,259	)		(828,025	)
Cash flows from financing activities:
Net increase in intercompany unsecured note payable		56,300			44,380			0
Issuance of preferred shares		250,000			0			0
Payment of issuance costs related to preferred shares		(8,225	)		0			0
Issuance of Common Shares		0			5,654			839,682
Payment of issuance costs related to Common Shares		0			(57	)		(10,225	)
Payment of withholding taxes related to share-based compensation		(730	)		(1,629	)		(2,600	)
Payment of dividends to preferred shareholders		(30,146	)		(24,945	)		(24,944	)
Payment of dividends to common shareholders		(183,973	)		(151,580	)		(141,001	)
Repurchase of Common Shares		(56,855	)		(37,267	)		0
Net cash provided (used in) by financing activities		26,371			(165,444	)		660,912
Net change in cash		0			0			0
Cash at beginning of year		0			0			0
Cash at end of year	$	0		$	0		$	0

Non-cash investing activities:
Investment in subsidiary pursuant to share based compensation plan	$	2,418		$	2,289		$	5,529
Non-cash financing activities:
Contribution of equity to subsidiary pursuant to share based compensation plan	$	2,418		$	2,289		$	5,529
Dividends payable	$	44,764		$	46,093		$	47,193

Note ~~34—~~28—Subsequent Events

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

On February 11, 2019, the Company, the Operating Partnership, and the Manager entered into a Purchase Agreement (the “Purchase Agreement”) with Credit Suisse Securities (USA) LLC, Deutsche Bank Securities Inc., Merrill Lynch, Pierce, Fenner & Smith Incorporated, Morgan Stanley & Co. LLC and Goldman Sachs & Co. LLC (each, an “Underwriter” and collectively, the “Underwriters”), relating to the issuance and sale by the Company, and the purchase by the Underwriters, severally, of 7,000,000 common shares of beneficial interest, par value $0.01 per share at a purchase price of $20.41 per share (before expenses).

•

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

~~F-74~~

~~SIGNATURES~~

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~~	Chairman and Chief Executive Officer
		(Principal Executive Officer)

Dated: February ~~26, 2019~~25, 2022

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.

Signatures	Title	Date

/s/ David A. Spector
David A. Spector	~~President~~Chairman and Chief Executive Officer (Principal Executive Officer)	February ~~26, 2019~~25, 2022

/s/ ~~Andrew~~Daniel S. ~~Chang~~Perotti
~~Andrew~~Daniel S. ~~Chang~~Perotti	Senior Managing Director and Chief Financial Officer (Principal Financial Officer)	February ~~26, 2019~~25, 2022

/s/ Gregory L. Hendry
Gregory L. Hendry	Chief Accounting Officer (Principal Accounting Officer)	February ~~26, 2019~~25, 2022

/s/ ~~Stanford L. Kurland~~
~~Stanford L. Kurland~~	~~Executive Chairman~~	~~February 26, 2019~~

~~/s/~~ ScottW. Carnahan
ScottW. Carnahan	Trustee	February ~~26, 2019~~25, 2022

/s/ Preston DuFauchard
Preston DuFauchard	Trustee	February ~~26, 2019~~25, 2022

/s/ Randall D. Hadley
Randall D. Hadley	Trustee	February ~~26, 2019~~25, 2022

/s/ Nancy McAllister
Nancy McAllister	Trustee	February 25, 2022

/s/ Renee R Schultz
Renee R Schultz	Trustee	February ~~26, 2019~~25, 2022

/s/ Marianne Sullivan
Marianne Sullivan	Trustee	February ~~26, 2019~~25, 2022

/s/ Stacey D. Stewart
Stacey D. Stewart	Trustee	February ~~26, 2019~~

~~/s/ Frank P. Willey~~
~~Frank P. Willey~~	~~Trustee~~	~~February 26, 2019~~25, 2022

		At December 31, 2018
Level	Description	Carrying value of assets measured (1)		% total assets			% shareholders' equity
		(in thousands)
Level 1:	Prices determined using quoted prices in active markets for identical assets or liabilities.	$	80,165		1	%		5	%
Level 2:	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 Manager.		4,543,499		58	%		290	%
Level 3:	Prices determined using significant unobservable inputs. Unobservable inputs reflect our Manager’s 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.		1,788,020		23	%		114	%
	Total assets measured at or based on fair value	$	6,411,684		82	%		409	%
	Total assets	$	7,813,361				��
	Total shareholders’ equity	$	1,566,132

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

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

	For the year ended December 31, 2016
	Interest income/expense
			Discount/					Average		Interest
	Coupon		fees (1)			Total		balance		yield/cost %
	(dollars in thousands)
Assets:
Short-term investments	$	923	$	—		$	923	$	35,194		2.62	%
Mortgage-backed securities		17,054		(2,391	)		14,663		514,847		2.85	%
Mortgage loans acquired for sale at fair value		54,750		—			54,750		1,443,587		3.79	%
Mortgage loans:
Distressed		53,916		53,128			107,044		1,731,638		6.18	%
Held by variable interest entity		15,748		1,294			17,042		422,122		4.04	%
		69,664		54,422			124,086		2,153,760		5.76	%
ESS from PFSI		22,601		—			22,601		317,945		7.11	%
Deposits securing CRT Agreements		930		—			930		311,351		0.30	%
		165,922		52,031			217,953		4,776,684		4.55	%
Placement fees relating to custodial funds		4,058		—			4,058
Other		111		—			111
		170,091		52,031			222,122	$	4,776,684		4.65	%
Liabilities:
Assets sold under agreements to repurchase		84,009		8,829			92,838	$	3,382,528		2.74	%
Mortgage loan participation purchase and sale agreements		1,246		130			1,376		70,391		1.95	%
Federal Home Loan Bank advances		122		—			122		24,376		0.50	%
Exchangeable Notes		13,438		1,035			14,473		250,000		5.79	%
Notes payable		9,726		3,166			12,892		202,293		6.37	%
Asset-backed financings of a VIE at fair value		11,422		669			12,091		338,582		3.57	%
Borrowing from PFSI		6,509		1,321			7,830		150,000		5.22	%
		126,472		15,150			141,622		4,418,170		3.21	%
Interest shortfall on repayments of mortgage loans serviced for Agency securitizations		6,812		—			6,812
Interest on mortgage loan impound deposits		1,334		—			1,334
		134,618		15,150			149,768	$	4,418,170		3.39	%
Net interest income	$	35,473	$	36,881		$	72,354
Net interest margin											1.51	%
Net interest spread											1.26	%

	December 31, 2018																December 31, 2017
	Performing loans								Nonperforming loans								Performing loans								Nonperforming loans
						Average								Average								Average								Average
Current loan-to	Fair		%			note			Fair		%			note			Fair		%			note			Fair		%			note
-value (1)	value		total			rate			value		total			rate			value		total			rate			value		total			rate
	(dollars in thousands)
Less than 80%	$	8,851		31	%		3.37	%	$	36,472		41	%		5.06	%	$	139,408		33	%		3.80	%	$	136,994		39	%		5.08	%
80% - 99.99%		7,026		24	%		2.63	%		21,630		24	%		5.41	%		107,121		26	%		3.12	%		94,538		27	%		4.90	%
100% - 119.99%		4,464		16	%		2.40	%		16,781		19	%		4.69	%		74,182		18	%		2.86	%		58,330		16	%		4.45	%
120% or greater		8,465		29	%		2.13	%		14,043		16	%		3.29	%		94,074		23	%		2.35	%		63,786		18	%		4.01	%
	$	28,806		100	%		2.58	%	$	88,926		100	%		4.54	%	$	414,785		100	%		3.04	%	$	353,648		100	%		4.62	%

	Year of origination
Origination FICO score	2018		2017		2016		2015		Total
	(in millions)
600 - 649	$	58	$	106	$	72	$	42	$	278
650 - 699		719		1,854		1,084		521		4,178
700 - 749		1,344		4,613		2,978		984		9,919
750 or greater		1,817		7,203		5,049		1,462		15,531
N/A		7		19		1		1		28
	$	3,945	$	13,795	$	9,184	$	3,010	$	29,934
Weighted average		740		747		750		743		746

	Year of origination
Origination LTV	2018			2017			2016			2015			Total
	(in millions)
<80 %	$	1,357		$	4,194		$	3,599		$	1,093		$	10,243
80-85 %		1,047			3,805			2,359			761			7,972
85-90 %		216			752			541			163			1,672
90-95 %		441			1,777			1,057			391			3,666
95-100 %		884			3,267			1,628			602			6,381
	$	3,945		$	13,795		$	9,184		$	3,010		$	29,934
Weighted average		82.5	%		83.1	%		81.3	%		82.1	%		82.4	%

	Year of origination
Current LTV (1)	2018			2017			2016			2015			Total
	(in millions)
<80 %	$	2,383		$	9,126		$	7,948		$	2,766		$	22,223
80-85 %		419			2,012			866			169			3,466
85-90 %		605			1,918			297			60			2,880
90-95 %		467			656			61			11			1,195
95-100 %		65			72			9			3			149
>100%		6			11			3			1			21
	$	3,945		$	13,795		$	9,184		$	3,010		$	29,934
Weighted average		78.0	%		75.2	%		68.4	%		65.4	%		72.5	%

	Year of origination
Regional geographic concentration (1)	2018		2017		2016		2015		Total
	(in millions)
Midwest	$	306	$	1,266	$	769	$	228	$	2,569
Northeast		332		1,503		983		386		3,204
Southeast		1,254		4,421		2,668		913		9,256
Southwest		839		2,778		1,675		633		5,925
West		1,214		3,827		3,089		850		8,980
	$	3,945	$	13,795	$	9,184	$	3,010	$	29,934

	Year ended
	December 31, 2018
	(in thousands)
UPB of mortgage loans sold	$	16,392,300
Increase in expected face amount of firm commitment to purchase CRT securities backed by mortgage loans sold	$	605,052
Fair value of firm commitment recognized in Gain on sale of mortgage loans	$	30,595
Gains recognized on firm commitment included in Net gain (loss) on investments	$	7,399

	December 31, 2018
	(in thousands)
Firm commitment to purchase CRT securities	$	605,052
Fair value of firm commitment	$	37,994
UPB of mortgage loans sold subject to firm commitment to purchase CRT securities related to such loans	$	16,392,300
Collection status (in UPB):
Current	$	16,329,044
30—89 days delinquent	$	61,035
90—180 days delinquent	$	2,221
180 or more days delinquent	$	—
Foreclosure	$	—
Bankruptcy	$	1,258

	December 31, 2018					December 31, 2017
Property type	Carrying value		% total			Carrying value		% total
	(dollars in thousands)
1 - 4 dwelling units	$	71,318		83	%	$	131,576		81	%
Condominium/Townhome/Co-op		9,060		11	%		16,771		10	%
Planned unit development		5,303		6	%		14,311		9	%
5+ dwelling units		—		0	%		207		0	%
	$	85,681		100	%	$	162,865		100	%

.	Payments due by period
Contractual obligations	Total		Less than 1 year		1 - 3 years		3 - 5 years		More than 5 years
	(in thousands)
Commitments to purchase mortgage loans from correspondent sellers	$	1,688,516	$	1,688,516	$	—	$	—	$	—
Firm commitment to purchase CRT securities		605,052		605,052		—		—		—
Short‒term debt		5,082,237		5,082,237		—		—		—
Long‒term debt		1,014,318		—		255,000		450,000		309,318
Interest expense on long term debt (1)		259,218		45,632		70,375		47,655		95,556
Total	$	8,649,341	$	7,421,437	$	325,375	$	497,655	$	404,874

Interest rate shift in basis points	-200			-75			-50			50			75			200
	(dollar in thousands)
Fair value	$	2,750,928		$	2,691,168		$	2,667,584		$	2,543,571		$	2,507,793		$	2,316,845
Change in fair value:
$	$	140,506		$	80,746		$	57,162		$	(66,851	)	$	(102,629	)	$	(293,577	)
%		5.4	%		3.1	%		2.2	%		(2.6	)%		(3.9	)%		(11.2	)%

Pricing spread shift in %		-20%			-10%			-5%			+5%			+10%			+20%
	(dollars in thousands)
Fair value	$	1,221,241		$	1,191,106		$	1,176,568		$	1,148,496		$	1,134,941		$	1,108,742
Change in fair value:
$	$	58,872		$	28,738		$	14,200		$	(13,872	)	$	(27,428	)	$	(53,626	)
%		5.1	%		2.5	%		1.2	%		(1.2	)%		(2.4	)%		(4.6	)%

Prepayment speed shift in %		-20%			-10%			-5%			+5%			+10%			+20%
	(dollars in thousands)
Fair value	$	1,258,838		$	1,208,508		$	1,184,949		$	1,140,708		$	1,119,911		$	1,080,709
Change in fair value:
$	$	96,469		$	46,140		$	22,580		$	(21,661	)	$	(42,458	)	$	(81,660	)
%		8.3	%		4.0	%		1.9	%		(1.9	)%		(3.7	)%		(7.0	)%

Per-loan servicing cost shift in %		-20%			-10%			-5%			+5%			+10%			+20%
	(dollars in thousands)
Fair value	$	1,195,562		$	1,178,966		$	1,170,667		$	1,154,070		$	1,145,772		$	1,129,175
Change in fair value:
$	$	33,194		$	16,597		$	8,298		$	(8,298	)	$	(16,597	)	$	(33,194	)
%		2.9	%		1.4	%		0.7	%		(0.7	)%		(1.4	)%		(2.9	)%

	Year ended December 31, 2018
	Mortgage loans acquired for sale at fair value			Mortgage loans at fair value			Excess servicing spread			Interest rate lock commitments (1)			CRT Agreement derivatives			Repurchase agreement derivatives			Firm commitment to purchase CRT securities		Mortgage servicing rights			Total
	(in thousands)
Assets
Balance, December 31, 2017	$	8,135		$	768,433		$	236,534		$	4,632		$	98,640		$	3,748		$	—	$	91,459		$	1,211,581
Cumulative effect of a change in accounting principle — Adoption of fair value accounting for mortgage servicing rights		—			—			—			—			—			—			—		773,035			773,035
Balance, January 1, 2018		8,135			768,433			236,534			4,632			98,640			3,748			—		864,494			1,984,616
Purchases and issuances		12,208			—			—			4,655			—			19,918			—		—			36,781
Repayments and sales		(12,934	)		(600,638	)		(46,750	)		—			(86,928	)		(8,964	)		—		(100	)		(756,314	)
Capitalization of interest		—			7,439			15,138			—			—			—			—		—			22,577
Capitalization of advances		—			5,481			—			—			—			—			—		—			5,481
ESS received pursuant to a recapture agreement with PFSI		—			—			2,688			—			—			—			—		—			2,688
Amounts received as proceeds from sales of mortgage loans		—			—			—			—			—			—			30,595		356,755			387,350
Changes in fair value included in income arising from:
Changes in instrument-specific credit risk		—			2,907			—			—			—			—			—		—			2,907
Other factors		(16	)		(18,104	)		8,500			(14,016	)		112,275			(191	)		7,399		(58,780	)		37,067
		(16	)		(15,197	)		8,500			(14,016	)		112,275			(191	)		7,399		(58,780	)		39,974
Transfers of mortgage loans to REO		—			(47,786	)		—			—			—			—			—		—			(47,786	)
Transfers of mortgage loans acquired for sale at fair value from "Level 2" to "Level 3" (2)		10,081			—			—			—			—			—			—		—			10,081
Transfers of interest rate lock commitments to mortgage loans acquired for sale		—			—			—			16,717			—			—			—		—			16,717
Balance, December 31, 2018	$	17,474		$	117,732		$	216,110		$	11,988		$	123,987		$	14,511		$	37,994	$	1,162,369		$	1,702,165
Changes in fair value recognized during the year relating to assets still held at December 31, 2018	$	(158	)	$	(18,428	)	$	8,500		$	11,988		$	25,347		$	77		$	37,994	$	(58,780	)	$	6,540

	Year ended December 31, 2018
	Interest-only
	security payable
	(in thousands)
Liabilities:
Balance, December 31, 2017	$	7,070
Changes in fair value included in income arising from:
Changes in instrument-specific credit risk		—
Other factors		28,941
		28,941
Balance, December 31, 2018	$	36,011
Changes in fair value recognized during the year relating to liability outstanding at December 31, 2018	$	28,941

	Year ended December 31, 2017
	Mortgage loans acquired for sale at fair value			Mortgage loans at fair value			Excess servicing spread			Interest rate lock commitments (1)			CRT Agreement derivatives			Repurchase agreement derivatives			Mortgage servicing rights			Total
	(in thousands)
Assets:
Balance, December 31, 2016	$	5,682		$	1,354,572		$	288,669		$	3,777		$	15,610		$	—		$	64,136		$	1,732,446
Purchases and issuances		11,415			—			—			36,005			—			3,864			79			51,363
Repayments and sales		(12,513	)		(530,367	)		(54,980	)		—			(51,731	)		—			—			(649,591	)
Capitalization of interest		—			30,795			16,951			—			—			—			—			47,746
Capitalization of advances		—			18,923			—			—			—			—			—			18,923
ESS received pursuant to a recapture agreement with PFSI		—			—			5,244			—			—			—			—			5,244
Amounts received as proceeds from sales of mortgage loans		—			—			—			—			—			—			41,379			41,379
Changes in fair value included in income arising from:
Changes in instrument- specific credit risk		—			24,685			—			—			—			—			—			24,685
Other factors		1,045			(25,369	)		(19,350	)		45,304			134,761			(116	)		(14,135	)		122,140
		1,045			(684	)		(19,350	)		45,304			134,761			(116	)		(14,135	)		146,825
Transfers of mortgage loans to REO		—			(104,806	)		—			—			—			—			—			(104,806	)
Transfers of mortgage loans acquired for sale at fair value from "Level 2" to "Level 3" (2)		2,506			—			—			—			—			—			—			2,506
Transfers of interest rate lock commitments to mortgage loans acquired for sale		—			—			—			(80,454	)		—			—			—			(80,454	)
Balance, December 31, 2017	$	8,135		$	768,433		$	236,534		$	4,632		$	98,640		$	3,748		$	91,459		$	1,211,581
Changes in fair value recognized during the year relating to assets still held at December 31, 2017	$	98		$	(10,594	)	$	(19,350	)	$	4,632		$	83,030		$	(116	)	$	(14,135	)	$	43,565

	Year ended December 31, 2016
	Mortgage loans at fair value			Excess servicing spread			Interest rate lock commitments (1)			CRT Agreement derivatives			Mortgage servicing rights			Total
	(in thousands)
Assets:
Balance, December 31, 2015	$	2,100,394		$	412,425		$	4,646		$	593		$	66,584		$	2,584,642
Purchases and issuances		—			—			71,892			—			2,739			74,631
Repayments and sales		(626,095	)		(129,037	)		—			(21,298	)		—			(776,430	)
Capitalization of interest		84,820			22,601			—			—			—			107,421
ESS received pursuant to a recapture agreement with PFSI		—			6,603			—			—			—			6,603
Amounts received as proceeds from sales of mortgage loans		—			—			—			—			7,337			7,337
Changes in fair value included in income arising from:
Changes in instrument-specific credit risk		26,910			—			—			—			—			26,910
Other factors		(30,414	)		(23,923	)		15,944			36,315			(12,524	)		(14,602	)
		(3,504	)		(23,923	)		15,944			36,315			(12,524	)		12,308
Transfers of mortgage loans to REO		(201,043	)		—			—			—			—			(201,043	)
Transfers of interest rate lock commitments to mortgage loans acquired for sale		—			—			(88,705	)		—			—			(88,705	)
Balance, December 31, 2016	$	1,354,572		$	288,669		$	3,777		$	15,610		$	64,136		$	1,726,764
Changes in fair value recognized during the year relating to assets still held at December 31, 2016	$	(15,877	)	$	(16,713	)	$	3,777		$	15,610		$	(12,524	)	$	(25,727	)

	December 31, 2018		December 31, 2017
	Fair value		Fair value		Amortized cost
	(Carrying value, UPB of underlying mortgage loans and effect on fair value amounts in thousands)
Carrying value	$	1,162,369	$	91,459	$	753,322
Key inputs (1):
UPB of underlying mortgage loans	$	92,410,226	$	8,273,696	$	63,853,606
Weighted average annual servicing fee rate (in basis points)		25		25		25
Weighted average note interest rate	4.2%		4.7%		3.9%
Pricing spread (2)
Range	5.7% – 10.7%		7.6% – 12.6%		7.6% – 13.1%
Weighted average	5.8%		7.6%		7.6%
Effect on fair value of (3):
5% adverse change	$(13,872)		$(1,347)		$(11,848)
10% adverse change	$(27,428)		$(2,655)		$(23,352)
20% adverse change	$(53,626)		$(5,162)		$(45,379)
Prepayment speed (4)
Range	8.1% – 27.1%		7.3% – 20.9%		7.1% – 27.1%
Weighted average	9.8%		11.1%		8.4%
Life (in years)
Range	2.7 - 7.3		3.1 - 6.8		2.9 - 8.0
Weighted average		7.1		6.8		7.6
Effect on fair value of (3):
5% adverse change	$(21,661)		$(1,954)		$(12,267)
10% adverse change	$(42,458)		$(3,827)		$(24,120)
20% adverse change	$(81,660)		$(7,352)		$(46,668)
Annual per-loan cost of servicing
Range	$77 – $78		$77 – $79		$78 – $79
Weighted average	$78		$79		$79
Effect on fair value of (3):
5% adverse change	$(8,298)		$(744)		$(5,721)
10% adverse change	$(16,597)		$(1,488)		$(11,441)
20% adverse change	$(33,194)		$(2,976)		$(22,883)

		Year ended December 31, 2018
		Amount,							Amount,
		beginning				Dispositions/			end
Instrument		of year		Additions		expirations			of year
	(in thousands)
Forward purchase contracts			1,996,235		97,737,906		(96,661,918	)		3,072,223
Forward sales contracts			2,565,271		129,544,573		(127,514,603	)		4,595,241
MBS put options			2,375,000		9,575,000		(9,400,000	)		2,550,000
MBS call options			—		2,000,000		(1,500,000	)		500,000
Call options on interest rate futures			—		3,487,500		(2,975,000	)		512,500
Put options on interest rate futures			550,000		13,302,500		(12,750,000	)		1,102,500
Swap futures			275,000		—		(275,000	)		—
Bond futures			—		5,274,400		(4,459,400	)		815,000
Eurodollar future sale contracts			937,000		149,597		(1,086,597	)		—

	December 31, 2018
	(in thousands)
Commitments to purchase mortgage loans acquired for sale	$	1,688,516
Firm commitment to purchase credit risk transfer securities	$	605,052

	Quarter ended
	2018								2017
	Dec. 31		Sept. 30		June 30		Mar. 31		Dec. 31		Sept. 30		June 30		Mar. 31
	(dollars in thousands, except per share data)
Net investment income	$	83,902	$	108,501	$	82,991	$	75,673	$	93,703	$	75,804	$	83,959	$	64,474
Net income	$	41,625	$	46,562	$	36,425	$	28,186	$	40,838	$	19,395	$	28,780	$	28,737
Earnings per share:
Basic	$	0.58	$	0.66	$	0.49	$	0.36	$	0.53	$	0.20	$	0.39	$	0.42
Diluted	$	0.55	$	0.62	$	0.47	$	0.35	$	0.50	$	0.20	$	0.38	$	0.40
Cash dividends declared per share	$	0.47	$	0.47	$	0.47	$	0.47	$	0.47	$	0.47	$	0.47	$	0.47
At quarter end:
Mortgage-backed securities	$	2,610,422	$	2,126,507	$	1,698,322	$	1,436,456	$	989,461	$	1,036,669	$	1,065,540	$	1,089,610
Mortgage loans (1)		2,052,262		2,582,600		2,539,963		1,895,023		2,358,988		2,618,283		2,846,415		2,861,797
Excess servicing spread		216,110		223,275		229,470		236,002		236,534		248,763		261,796		277,484
Derivative assets		167,165		143,577		133,239		122,518		113,881		67,288		73,875		41,213
Real estate (2)		128,791		141,576		155,702		187,296		207,089		227,580		247,350		260,368
Deposits securing credit risk transfer agreements		1,146,501		662,624		651,204		622,330		588,867		545,694		503,108		463,836
Mortgage servicing rights		1,162,369		1,109,741		1,010,507		957,013		844,781		790,335		734,800		696,970
Other assets		329,741		277,678		258,442		333,848		265,332		250,431		277,360		311,668
Total assets	$	7,813,361	$	7,267,578	$	6,676,849	$	5,790,486	$	5,604,933	$	5,785,043	$	6,010,244	$	6,002,946
Short-term debt	$	5,081,691	$	4,452,670	$	3,630,843	$	3,366,181	$	3,269,462	$	3,475,552	$	3,846,324	$	3,634,396
Long-term debt		1,011,433		1,086,841		1,363,886		737,289		661,715		571,696		582,665		780,180
Other liabilities		154,105		169,504		136,633		144,758		129,171		127,230		126,423		129,780
Total liabilities		6,247,229		5,709,015		5,131,362		4,248,228		4,060,348		4,174,478		4,555,412		4,544,356
Shareholders’ equity		1,566,132		1,558,563		1,545,487		1,542,258		1,544,585		1,610,565		1,454,832		1,458,590
Total liabilities and shareholders’ equity	$	7,813,361	$	7,267,578	$	6,676,849	$	5,790,486	$	5,604,933	$	5,785,043	$	6,010,244	$	6,002,946