PennyMac Financial Services 10Q 2021 Q3 Quarterly report

0001745916us-gaap:OperatingSegmentsMemberpfsi:MortgageBankingServicingSectorMember2021-01-012021-09-30

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

Form 10-Q

(Mark One)

☒

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

For the quarterly period ended September 30, 2021

☐

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

For the transition period from to

Commission File Number: 001-38727

PennyMac Financial Services, Inc.

(Exact name of registrant as specified in its charter)


Delaware		83-1098934
(State or other jurisdiction of		(IRS Employer
incorporation or organization)		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
Common Stock, $0.0001 par value		PFSI		New York Stock Exchange

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

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, 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 is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

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


Class		Outstanding at November 2, 2021
Common Stock, $0.0001 par value		59,029,210

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PENNYMAC FINANCIAL SERVICES, INC.

FORM 10-Q

September 30, 2021

TABLE OF CONTENTS


		Page
	Special Note Regarding Forward-Looking Statements	3

PART I. FINANCIAL INFORMATION		6

Item 1.	Financial Statements (Unaudited):	6
	Consolidated Balance Sheets	6
	Consolidated Statements of Income	7
	Consolidated Statements of Changes in Stockholders’ Equity	8
	Consolidated Statements of Cash Flows	9
	Notes to Consolidated Financial Statements	10
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	62
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	81
Item 4.	Controls and Procedures	83

PART II. OTHER INFORMATION		84

Item 1.	Legal Proceedings	84
Item 1A.	Risk Factors	85
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	85
Item 3.	Defaults Upon Senior Securities	85
Item 4.	Mine Safety Disclosures	85
Item 5.	Other Information	85
Item 6.	Exhibits	86

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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

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

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

●

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

●

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

●

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

●

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

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

You should not place undue reliance on any forward-looking statement and should consider the following uncertainties and risks, as well as the risks and uncertainties discussed elsewhere in this Report and the section entitled “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2020, filed with the Securities and Exchange Commission (“SEC”) on February 25, 2021.

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

●

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

●

failure to modify, resell or refinance early buyout loans and or defaults of early buyout loans beyond our expectations;

●

the continually changing federal, state and local laws and regulations applicable to the highly regulated industry in which we operate;

●

lawsuits or governmental actions if we do not comply with the laws and regulations applicable to our businesses;

●

the mortgage lending and servicing-related regulations promulgated by the Consumer Financial Protection Bureau (“CFPB”) and its enforcement of these regulations;

●

our dependence on U.S. government-sponsored entities and changes in their current roles or their guarantees or guidelines;

●

changes to government mortgage modification programs;

●

foreclosure delays and changes in foreclosure practices;

●

the licensing and operational requirements of states and other jurisdictions applicable to our businesses, to which our bank competitors are not subject;

●

our ability to manage third-party service providers and vendors and their compliance with laws, regulations and investor requirements;

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●

changes in macroeconomic and U.S. real estate market conditions;

●

difficulties inherent in growing loan production volume;

●

difficulties inherent in adjusting the size of our operations to reflect changes in business levels;

●

maintaining sufficient capital and liquidity to support business growth including compliance with financial covenants;

●

changes in prevailing interest rates;

●

our substantial amount of indebtedness;

●

increases in loan delinquencies and defaults;

●

our reliance on PennyMac Mortgage Investment Trust (“PMT”) as a significant source of financing for, and revenue related to, our mortgage banking business;

●

our obligation to indemnify third-party purchasers or repurchase loans if loans that we originate, acquire, service or assist in the fulfillment of, fail to meet certain criteria or characteristics or under other circumstances;

●

our exposure to counterparties that are unwilling or unable to honor contractual obligations, including their obligation to indemnify us or repurchase defective mortgage loans;

●

our ability to realize the anticipated benefit of potential future acquisitions of mortgage servicing rights;

●

our obligation to indemnify PMT if our services fail to meet certain criteria or characteristics or under other circumstances;

●

decreases in the returns on the assets that we select and manage for our clients, and our resulting management and incentive fees;

●

the extensive amount of regulation applicable to our investment management segment;

●

conflicts of interest in allocating our services and investment opportunities among ourselves and PMT;

●

the effect of public opinion on our reputation;

●

our recent growth;

●

our ability to effectively identify, manage, monitor and mitigate financial risks;

●

our initiation of new business activities or expansion of existing business activities;

●

our ability to detect misconduct and fraud;

●

our ability to effectively deploy new information technology applications and infrastructure;

●

our ability to mitigate cybersecurity risks and cyber incidents;

●

our ability to pay dividends to our stockholders; and

●

our organizational structure and certain requirements in our charter documents.

Other factors that could also cause results to differ from our expectations may not be described in this Report or any other document. Each of these factors could by itself, or together with one or more other factors, adversely affect our business, results of operations and/or financial condition.

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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.

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PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

PENNYMAC FINANCIAL SERVICES, INC.

CONSOLIDATED BALANCE SHEETS (UNAUDITED)


	September 30,		December 31,
	2021		2020

	(in thousands, except share amounts)
ASSETS
Cash	$	476,497	$	532,716
Short-term investments at fair value		5,046		15,217
Loans held for sale at fair value (includes $9,368,106 and $11,457,678 pledged to creditors)		9,659,695		11,616,400
Assets purchased from PennyMac Mortgage Investment Trust under agreements to resell pledged to creditors		—		80,862
Derivative assets		429,984		711,238
Servicing advances, net (includes valuation allowance of $127,453 and $181,433; $203,236 and $413,484 pledged to creditors)		522,906		579,528
Mortgage servicing rights at fair value (includes $3,600,978 and $2,577,964 pledged to creditors)		3,611,120		2,581,174
Operating lease right-of-use assets		85,266		74,934
Investment in PennyMac Mortgage Investment Trust at fair value		1,477		1,105
Receivable from PennyMac Mortgage Investment Trust		49,993		87,005
Loans eligible for repurchase		4,335,378		14,625,447
Other (includes $74,364 and $166,418 pledged to creditors)		567,776		692,169
Total assets	$	19,745,138	$	31,597,795
LIABILITIES
Assets sold under agreements to repurchase	$	6,897,157	$	9,654,797
Mortgage loan participation purchase and sale agreements		519,784		521,477
Obligations under capital lease		5,583		11,864
Notes payable secured by mortgage servicing assets		1,297,176		1,295,840
Unsecured senior notes		1,783,230		645,820
Excess servicing spread financing payable to PennyMac Mortgage Investment Trust at fair value		—		131,750
Derivative liabilities		14,204		42,638
Mortgage servicing liabilities at fair value		47,567		45,324
Accounts payable and accrued expenses		358,944		308,398
Operating lease liabilities		105,452		94,193
Payable to PennyMac Mortgage Investment Trust		138,972		140,306
Payable to exchanged Private National Mortgage Acceptance Company, LLC unitholders under tax receivable agreement		31,815		35,165
Income taxes payable		659,768		622,700
Liability for loans eligible for repurchase		4,335,378		14,625,447
Liability for losses under representations and warranties		45,806		32,688
Total liabilities		16,240,836		28,208,407

Commitments and contingencies – Note 16

STOCKHOLDERS’ EQUITY
Common stock—authorized 200,000,000 shares of $0.0001 par value; issued and outstanding, 60,419,578 and 70,905,532 shares, respectively		6		7
Additional paid-in capital		372,198		1,047,052
Retained earnings		3,132,098		2,342,329
Total stockholders' equity		3,504,302		3,389,388
Total liabilities and stockholders’ equity	$	19,745,138	$	31,597,795

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

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PENNYMAC FINANCIAL SERVICES, INC.

CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)


	Quarter ended September 30,				Nine months ended September 30,
	2021		2020		2021		2020

	(in thousands, except per share amounts)
Revenues
Net gains on loans held for sale at fair value:
From non-affiliates	$	639,730	$	865,044	$	2,002,515	$	1,819,175
From PennyMac Mortgage Investment Trust		(12,976)		(9,775)		(38,772)		62,549
		626,754		855,269		1,963,743		1,881,724
Loan origination fees:
From non-affiliates		88,040		69,496		274,048		177,747
From PennyMac Mortgage Investment Trust		6,541		6,076		21,861		14,344
		94,581		75,572		295,909		192,091
Fulfillment fees from PennyMac Mortgage Investment Trust		43,922		54,839		158,777		149,594
Net loan servicing fees:
Loan servicing fees:
From non-affiliates		216,592		203,696		635,620		601,527
From PennyMac Mortgage Investment Trust		20,703		18,752		59,811		48,806
Other		30,463		27,920		91,793		85,218
		267,758		250,368		787,224		735,551
Change in fair value of mortgage servicing rights and mortgage servicing liabilities		(147,669)		(127,217)		(260,474)		(1,368,219)
Change in fair value of excess servicing spread financing payable to PennyMac Mortgage Investment Trust		—		3,135		(1,037)		18,293
Mortgage servicing rights hedging results		(86,459)		6,521		(437,492)		1,027,327
		(234,128)		(117,561)		(699,003)		(322,599)
Net loan servicing fees		33,630		132,807		88,221		412,952
Net interest expense:
Interest income:
From non-affiliates		68,312		52,276		230,803		170,148
From PennyMac Mortgage Investment Trust		—		676		387		2,686
		68,312		52,952		231,190		172,834
Interest expense:
To non-affiliates		90,711		61,109		299,575		171,482
To PennyMac Mortgage Investment Trust		—		2,070		1,280		6,416
		90,711		63,179		300,855		177,898
Net interest expense		(22,399)		(10,227)		(69,665)		(5,064)
Management fees from PennyMac Mortgage Investment Trust		8,520		8,508		28,882		25,851
Change in fair value of investment in and dividends received from PennyMac Mortgage Investment Trust		(67)		(288)		478		(602)
Results of real estate acquired in settlement of loans		378		1,214		1,698		803
Other		1,293		2,298		5,507		6,102
Total net revenues		786,612		1,119,992		2,473,550		2,663,451
Expenses
Compensation		249,183		202,440		773,079		550,762
Loan origination		80,932		53,752		243,999		150,677
Technology		32,406		28,964		100,314		69,976
Servicing		27,892		71,110		78,365		169,779
Professional services		24,429		18,307		62,549		44,211
Occupancy and equipment		9,389		8,491		27,456		24,822
Other		22,832		8,637		62,716		29,841
Total expenses		447,063		391,701		1,348,478		1,040,068
Income before provision for income taxes		339,549		728,291		1,125,072		1,623,383
Provision for income taxes		90,239		193,131		294,665		429,303
Net income	$	249,310	$	535,160	$	830,407	$	1,194,080
Earnings per share
Basic	$	4.02	$	7.39	$	12.65	$	15.65
Diluted	$	3.80	$	7.03	$	11.98	$	15.00
Weighted average shares outstanding
Basic		62,085		72,439		65,671		76,292
Diluted		65,652		76,138		69,341		79,618

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

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PENNYMAC FINANCIAL SERVICES, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (UNAUDITED)


	Quarter ended September 30, 2021
				Additional				Total
	Number of	Par		paid-in		Retained		stockholders'
	shares	value		capital		earnings		equity

	(in thousands)
Balance, June 30, 2021	64,484	$	6	$	618,337	$	2,895,486	$	3,513,829
Net income	—		—		—		249,310		249,310
Stock-based compensation	130		—		11,165		—		11,165
Issuance of common stock in settlement of directors' fees	1		—		50		—		50
Repurchase of common stock	(4,195)		—		(257,354)		—		(257,354)
Common stock dividend ($0.20 per share)	—		—		—		(12,698)		(12,698)
Balance, September 30, 2021	60,420	$	6	$	372,198	$	3,132,098	$	3,504,302


	Quarter ended September 30, 2020
				Additional				Total
	Number of	Par		paid-in		Retained		stockholders'
	shares	value		capital		earnings		equity

	(in thousands)
Balance, June 30, 2020	72,358	$	7	$	1,113,412	$	1,365,774	$	2,479,193
Net income	—		—		—		535,160		535,160
Stock-based compensation	159		—		9,895		—		9,895
Issuance of common stock in settlement of directors' fees	1		—		48		—		48
Repurchase of common stock	(118)		—		(6,927)		—		(6,927)
Common stock dividend ($0.15 per share)	—		—		—		(292)		(292)
Balance, September 30, 2020	72,400	$	7	$	1,116,428	$	1,900,642	$	3,017,077


	Nine months ended September 30, 2021
				Additional				Total
	Number of	Par		paid-in		Retained		stockholders'
	shares	value		capital		earnings		equity

	(in thousands)
Balance, December 31, 2020	70,906	$	7	$	1,047,052	$	2,342,329	$	3,389,388
Net income	—		—		—		830,407		830,407
Stock-based compensation	933		—		25,787		—		25,787
Issuance of common stock in settlement of directors' fees	3		—		151		—		151
Repurchase of common stock	(11,422)		(1)		(700,792)		—		(700,793)
Common stock dividends ($0.60 per share)	—		—		—		(40,638)		(40,638)
Balance, September 30, 2021	60,420	$	6	$	372,198	$	3,132,098	$	3,504,302


	Nine months ended September 30, 2020
				Additional				Total
	Number of	Par		paid-in		Retained		stockholders'
	shares	value		capital		earnings		equity

	(in thousands)
Balance, December 31, 2019	78,515	$	8	$	1,335,107	$	726,392	$	2,061,507
Net income	—		—		—		1,194,080		1,194,080
Stock-based compensation	1,212		—		29,386		—		29,386
Issuance of common stock in settlement of directors' fees	4		—		144		—		144
Repurchase of common stock	(7,331)		(1)		(248,209)		—		(248,210)
Common stock dividends ($0.39 per share)	—		—		—		(19,830)		(19,830)
Balance, September 30, 2020	72,400	$	7	$	1,116,428	$	1,900,642	$	3,017,077

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

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PENNYMAC FINANCIAL SERVICES, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)


	Nine months ended September 30,
	2021		2020

	(in thousands)
Cash flow from operating activities
Net income	$	830,407	$	1,194,080
Adjustments to reconcile net income to net cash used in operating activities:
Net gains on loans held for sale at fair value		(1,963,743)		(1,881,724)
Change in fair value of mortgage servicing rights, mortgage servicing liabilities and excess servicing spread		261,511		1,349,926
Mortgage servicing rights hedging results		437,492		(1,027,327)
Capitalization of interest and advances on loans held for sale		(4,573)		(55,920)
Accrual of interest on excess servicing spread financing payable to PennyMac Mortgage Investment Trust		1,280		6,416
Amortization debt issuance costs		19,154		12,163
Change in fair value of investment in common shares of PennyMac Mortgage Investment Trust		(372)		681
Results of real estate acquired in settlement in loans		(1,698)		(803)
Stock-based compensation expense		28,595		26,220
(Reversal of) Provision for servicing advance losses		(44,535)		79,402
Impairment of capitalized software		728		—
Depreciation and amortization		21,729		17,126
Amortization of right-of-use assets		10,539		9,176
Purchase of loans held for sale from PennyMac Mortgage Investment Trust		(51,471,399)		(43,721,458)
Origination of loans held for sale		(41,634,531)		(20,580,388)
Purchase of loans held for sale from non-affiliates		(3,867,782)		(2,515,624)
Purchase of loans from Ginnie Mae securities and early buyout investors		(17,969,911)		(5,980,081)
Sale to non-affiliates and principal payments of loans held for sale		118,048,768		67,209,239
Sale to PennyMac Mortgage Investment Trust of loans held for sale		—		2,248,896
Repurchase of loans subject to representations and warranties		(75,023)		(43,664)
Settlement of repurchase agreement derivatives		—		8,270
Sale of real estate acquired in settlement of loans		11,712		27,842
Increase in servicing advances		(18,718)		(156,964)
Decrease (increase) in receivable from PennyMac Mortgage Investment Trust		27,404		(80,531)
Decrease (increase) in other assets		95,836		(305,100)
Increase in accounts payable and accrued expenses		45,707		102,789
Decrease in operating lease liabilities		(12,457)		(10,378)
Decrease in payable to PennyMac Mortgage Investment Trust		(39,755)		(14,001)
Payments to exchanged Private National Mortgage Acceptance Company, LLC unitholders under tax receivable agreement		(3,350)		(10,374)
Increase in income taxes payable		37,068		168,580
Net cash provided by (used in) operating activities		2,770,083		(3,923,531)
Cash flow from investing activities
Decrease (increase) in short-term investments		10,171		(27,525)
Net change in assets purchased from PMT under agreement to resell		80,862		20,554
Net settlement of derivative financial instruments used for hedging of mortgage servicing rights		(471,322)		1,000,865
Purchase of mortgage servicing rights		—		(25,473)
Purchase of furniture, fixtures, equipment and leasehold improvements		(5,999)		(5,584)
Acquisition of capitalized software		(32,276)		(38,443)
Decrease in margin deposits		117,106		205
Net cash (used in) provided by investing activities		(301,458)		924,599
Cash flow from financing activities
Sale of assets under agreements to repurchase		100,929,294		68,122,809
Repurchase of assets sold under agreements to repurchase		(103,689,987)		(64,997,443)
Issuance of mortgage loan participation purchase and sale certificates		17,990,980		17,814,845
Repayment of mortgage loan participation purchase and sale certificates		(17,992,673)		(17,777,414)
Repayment of obligations under capital lease		(6,281)		(6,853)
Issuance of unsecured senior notes		1,150,000		500,000
Repayment of excess servicing spread financing		(134,624)		(25,112)
Payment of debt issuance costs		(27,355)		(26,362)
Issuance of common stock pursuant to exercise of stock options		5,770		8,431
Payment of withholding taxes relating to stock-based compensation		(8,578)		(5,265)
Payment of dividend to holders of common stock		(40,638)		(19,830)
Repurchase of common stock		(700,793)		(248,210)
Net cash (used in) provided by financing activities		(2,524,885)		3,339,596
Net (decrease) increase in cash and restricted cash		(56,260)		340,664
Cash and restricted cash at beginning of period		532,781		188,578
Cash and restricted cash at end of period	$	476,521	$	529,242
Cash and restricted cash at end of period are comprised of the following:
Cash	$	476,497	$	529,166
Restricted cash included in Other assets		24		76
	$	476,521	$	529,242

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

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PENNYMAC FINANCIAL SERVICES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Note 1—Organization

PennyMac Financial Services, Inc. (“PFSI” or the “Company”) is a holding corporation and its primary assets are direct and indirect equity interests in Private National Mortgage Acceptance Company, LLC (“PennyMac”). The Company is the managing member of PennyMac, and it operates and controls all of the businesses and affairs of PennyMac, and consolidates the financial results of PennyMac and its subsidiaries.

PennyMac is a Delaware limited liability company which, through its subsidiaries, engages in mortgage banking and investment management activities. PennyMac’s mortgage banking activities consist of residential mortgage loan production and servicing. PennyMac’s investment management activities and a portion of its loan servicing activities are conducted on behalf of PennyMac Mortgage Investment Trust (“PMT”), a publicly-traded real estate mortgage investment trust that invests primarily in mortgage-related assets. PennyMac’s primary wholly owned subsidiaries are:

●

PennyMac Loan Services, LLC (“PLS”) — a Delaware limited liability company that services portfolios of residential mortgage loans on behalf of non-affiliates and PMT, purchases, originates and sells new prime credit quality residential mortgage loans and engages in other mortgage banking activities for its own account and the account of PMT.

PLS is approved as a seller/servicer of mortgage loans by the Federal National Mortgage Association (“Fannie Mae”) and the Federal Home Loan Mortgage Corporation (“Freddie Mac”) and as an issuer of securities guaranteed by the Government National Mortgage Association (“Ginnie Mae”). PLS is a licensed Federal Housing Administration (“FHA”) Nonsupervised Title II Lender with the U.S. Department of Housing and Urban Development (“HUD”) and a lender/servicer with the Veterans Administration (“VA”) and U.S. Department of Agriculture (“USDA”) (each of the above an “Agency” and collectively the “Agencies”).

●

PNMAC Capital Management, LLC (“PCM”)— a Delaware limited liability company registered with the Securities and Exchange Commission as an investment adviser under the Investment Advisers Act of 1940, as amended. PCM has an investment management agreement with PMT.

Note 2—Basis of Presentation and Recently Adopted Accounting Pronouncement

Basis of Presentation

The accompanying 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 Accounting Standards Codification for interim financial information and with the Securities and Exchange Commission’s instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, these financial statements and notes do not include all of the information required by GAAP for complete financial statements. This interim consolidated information should be read together with the Company’s Annual Report on Form 10-K for the year ended December 31, 2020.

The accompanying unaudited consolidated financial statements reflect all normal recurring adjustments necessary to present fairly the financial position, income, and cash flows for the interim periods presented, but are not necessarily indicative of income to be anticipated for the full year ending December 31, 2021. Intercompany accounts and transactions have been eliminated.

Preparation of financial statements in compliance with GAAP requires management to make judgments and estimates 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.

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Note 3—Concentration of Risk

A portion of the Company’s activities relate to PMT. Revenues generated from PMT (generally comprised of gains on loans held for sale, loan origination and fulfillment fees, loan servicing fees, change in fair value of excess servicing spread financing (“ESS”), net interest, management fees, and change in fair value of investment in and dividends received from PMT) totaled 9% and 7% of total net revenue for the quarters ended September 30, 2021 and 2020, respectively, and 9% and 12% for the nine months ended September 30, 2021 and 2020, respectively.

Note 4—Related Party Transactions

Transactions with PMT

Operating Activities

Mortgage Loan Production Activities and MSR Recapture

The Company sells newly originated loans to PMT under a mortgage loan purchase agreement. The Company has typically utilized the mortgage loan purchase agreement for the purpose of selling to PMT conforming balance non-government insured or guaranteed loans, as well as prime jumbo residential mortgage loans.

MSR Recapture

Through June 30, 2020, pursuant to the terms of an MSR recapture agreement by and between the Company and PMT, if the Company refinanced mortgage loans for which PMT previously held the MSRs, the Company was generally required to transfer and convey to PMT cash in an amount equal to 30% of the fair market value of the MSRs related to all such mortgage loans. On June 30, 2020, the MSR recapture agreement was amended and restated for a term of five years (the “2020 MSR Recapture Agreement”).

Effective July 1, 2020, the 2020 MSR Recapture Agreement changes the recapture fee payable by the Company 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 also agreed to allocate sufficient resources to target a recapture rate of 15%.

Fulfillment Services

The Company provides PMT with certain mortgage banking services, including fulfillment and disposition-related services, for which it receives a monthly fulfillment fee.

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Through June 30, 2020, pursuant to the terms of a mortgage banking services agreement, the monthly fulfillment fee was an amount equal to:

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

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 was due or payable to the Company with respect to any mortgage loans underwritten to the Ginnie Mae Mortgage-Backed Securities (“MBS”) Guide.

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

Fulfillment fees shall not exceed the following:

(a)

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

(b)

$315 multiplied by the number of purchased loans that are sold to Fannie Mae and Freddie Mac up to the and including 16,500 per quarter and $195 multiplied by the number of such purchased loans in excess of 16,500 per quarter, plus

(c)

$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

PMT does not hold the Ginnie Mae approval required to issue Ginnie Mae MBS and act as a servicer. Accordingly, under the agreement, the Company purchases mortgage loans underwritten in accordance with the Ginnie Mae MBS Guide “as is” and without recourse of any kind from PMT at PMT’s cost less an administrative fee plus accrued interest and, through June 30, 2020, a sourcing fee ranging from 2 to three and one-half basis points, generally based on the average number of calendar days mortgage loans are held by PMT before being purchased by the Company. Effective July 1, 2020, sourcing fee rates were revised to 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.

While the Company purchases these mortgage loans “as is” and without recourse of any kind from PMT, where the Company has a claim for repurchase, indemnity or otherwise against a correspondent seller, it is entitled, at its sole expense, to pursue any such claim through or in the name of PMT.

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Following is a summary of loan production activities, including MSR recapture between the Company and PMT:


	Quarter ended September 30,				Nine months ended September 30,
	2021		2020		2021		2020

	(in thousands)
Net gains on loans held for sale at fair value:
Net gains on loans held for sale to PMT (primarily cash)	$	—	$	1	$	—	$	81,295
Mortgage servicing rights and excess servicing spread recapture incurred		(12,976)		(9,776)		(38,772)		(18,746)
	$	(12,976)	$	(9,775)	$	(38,772)	$	62,549
Sale of loans held for sale to PMT	$	—	$	27	$	—	$	2,248,896

Tax service fees earned from PMT included in Loan origination fees	$	6,541	$	6,076	$	21,861	$	14,344

Fulfillment fee revenue	$	43,922	$	54,839	$	158,777	$	149,594
Unpaid principal balance ("UPB") of loans fulfilled for PMT subject to fulfillment fees	$	28,605,098	$	27,351,435	$	92,846,231	$	62,403,674

Sourcing fees included in cost of loans purchased from PMT	$	1,537	$	1,658	$	4,905	$	9,143
Unpaid principal balance of loans purchased from PMT	$	15,249,441	$	16,690,482	$	49,106,232	$	41,641,327

Loan Servicing

The Company and PMT have entered into a loan servicing agreement (the “Servicing Agreement”), pursuant to which the Company provides servicing for PMT’s portfolio of distressed loans and subservicing for its portfolio of MSRs (prime servicing). The Servicing Agreement provides for servicing fees of per-loan monthly amounts based on the delinquency, bankruptcy and/or foreclosure status of the serviced loan or the real estate acquired in settlement of loans (“REO”). The Company also remains entitled to customary ancillary income and market-based fees and charges relating to loans it services for PMT. These include boarding and deboarding fees, liquidation and disposition fees, assumption, modification and origination fees and a percentage of late charges.

Prime Servicing

●

The base servicing fees for prime loans are calculated through a monthly per-loan dollar amount, with the actual dollar amount for each loan based on whether the loan is a fixed-rate or adjustable-rate loan. The base servicing fee rates are $7.50 per month for fixed-rate loans and $8.50 per month for adjustable-rate loans.

●

To the extent that prime loans become delinquent, the Company is entitled to an additional servicing fee per loan ranging from $10 to $55 per month based on the delinquency, bankruptcy and foreclosure status of the loan or $75 per month if the underlying mortgaged property becomes REO. The Company 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, the Company also receives certain fees for COVID-19-related forbearance and modification activities provided for under the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”).

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Special Servicing (Distressed loans)

●

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

●

The Company 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. The Company 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 associated with its management of REO.

Following is a summary of loan servicing fees earned from PMT:


	Quarter ended September 30,				Nine months ended September 30,
	2021		2020		2021		2020

	(in thousands)
Loan type serviced:
Loans acquired for sale	$	698	$	452	$	1,871	$	1,595
Distressed loans		89		187		306		675
Mortgage servicing rights		19,916		18,113		57,634		46,536
	$	20,703	$	18,752	$	59,811	$	48,806

On June 30, 2020, the Servicing Agreement was amended and restated for a term of five years (the “2020 Servicing Agreement”). The terms of the 2020 Servicing Agreement are substantially similar to those in the prior servicing agreement except that they now include fees relating to COVID-19 related forbearance and modification activities provided for under the CARES Act.

Investment Management Activities

The Company has a management agreement with PMT ( the “Management Agreement”), pursuant to which the Company oversees PMT’s business affairs in conformity with the investment policies that are approved and monitored by its board of trustees, for which PFSI collects a base management fee and may collect a performance incentive fee. The Management Agreement provides that:

●

The base management fee is calculated quarterly and is equal to the sum of (i) 1.5% per year of PMT’s average shareholders’ equity up to $2 billion, (ii) 1.375% per year of PMT’s average shareholders’ equity in excess of $2 billion and up to $5 billion, and (iii) 1.25% per year of PMT’s average shareholders’ equity in excess of $5 billion.

●

The performance incentive fee is calculated quarterly at a defined annualized percentage of the amount by which PMT’s “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 PMT’s “net income” for the quarter exceeds (i) an 8% return on “equity” plus the “high watermark,” up to (ii) a 12% return on PMT’s “equity”; plus (b) 15% of the amount by which PMT’s “net income” for the quarter exceeds (i) a 12% return on PMT’s “equity” plus the “high watermark,” up to (ii) a 16% return on PMT’s “equity”; plus (c) 20% of the amount by which PMT’s “net income” for the quarter exceeds a 16% return on “equity” plus the “high watermark.”

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For the purpose of determining the amount of the performance incentive fee:

“Net income” is defined as net income or loss attributable to PMT’s common shares of beneficial interest computed in accordance with GAAP adjusted for certain other non-cash charges determined after discussions between the Company and PMT’s independent trustees and approval by a majority of PMT’s independent trustees.

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

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 average Fannie Mae 30-year MBS yield (the “Target Yield”) for the four quarters then ended. 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 0. As a result, the threshold amounts required for the Company to earn a performance incentive fee are adjusted cumulatively based on the performance of PMT’s “net income” over (or under) the Target Yield, until the “net income” in excess of the Target Yield exceeds the then-current cumulative high watermark amount, and a performance incentive fee is earned.

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

In the event of termination of the Management Agreement between PMT and the Company, the Company 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 the Company, in each case during the 24-month period immediately preceding the date of termination.

Following is a summary of the base management and performance incentive fees earned from PMT:


	Quarter ended September 30,				Nine months ended September 30,
	2021		2020		2021		2020

	(in thousands)
Base management	$	8,778	$	8,508	$	25,875	$	25,851
Performance incentive (adjustment)		(258)		—		3,007		—
	$	8,520	$	8,508	$	28,882	$	25,851

Expense Reimbursement

Under the Management Agreement, PMT reimburses the Company for its organizational and operating expenses, including third-party expenses, incurred on PMT’s behalf, it being understood that the Company 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 PMT. With respect to the allocation of the Company’s and its affiliates’ personnel compensation, the Company was reimbursed $120,000 per fiscal quarter through June 30, 2020.

PMT is also required to pay its pro rata portion of rent, telephone, utilities, office furniture, equipment, machinery and other office, internal and overhead expenses of the Company and its affiliates required for PMT’s and its subsidiaries’ operations. These expenses are allocated based on the ratio of PMT’s proportion of gross assets compared to all remaining gross assets managed by the Company as calculated at each fiscal quarter end.

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On June 30, 2020, the Management Agreement was amended and restated for a term of five years (the “2020 Management Agreement”). The terms of the 2020 Management Agreement are materially consistent with those of the prior management agreement, except that, effective July 1, 2020, PMT’s reimbursement of PCM’s and its affiliates’ compensation expenses was increased from $120,000 to $165,000 per fiscal quarter, such amount to be reviewed annually and not preclude reimbursement for any other services performed by the Company or its affiliates.

The Company received reimbursements from PMT for expenses as follows:


	Quarter ended September 30,				Nine months ended September 30,
	2021		2020		2021		2020

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

(1)	Payments and settlements include payments for management fees and correspondent production activities itemized in the preceding tables and netting settlements made pursuant to master netting agreements between the Company and PMT.

Investing Activities

Master Repurchase Agreement

On December 19, 2016, the Company, through PLS, entered into a master repurchase agreement with one of PMT’s wholly-owned subsidiaries, PennyMac Holdings, LLC (“PMH”) (the “PMH Repurchase Agreement”), pursuant to which PMH may borrow from the Company for the purpose of financing PMH’s participation certificates representing beneficial ownership in ESS. 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 PennyMac, as guarantor (the “PC Repurchase Agreement”). The Issuer Trust was formed for the purpose of allowing PLS to finance MSRs and ESS relating to such MSRs (the “GNMA MSR Facility”).

In the first quarter of 2021, PLS repurchased the ESS from PMH at fair market value, effectively terminating the borrowing arrangements allowing PMH to finance its participation certificates representing beneficial ownership in ESS. Such ESS is now included in PLS's participation certificates representing beneficial ownership in ESS and MSRs, which PLS pledges in connection with the GNMA MSR Facility.

The Company holds an investment in PMT in the form of 75,000 common shares of beneficial interest.

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


	Quarter ended September 30,				Nine months ended September 30,
	2021		2020		2021		2020

	(in thousands)
Interest income relating to Assets purchased from PennyMac Mortgage Investment Trust under agreements to resell	$	—	$	676	$	387	$	2,686
Change in fair value of investment in and dividends received from PennyMac Mortgage Investment Trust	$	(67)	$	(288)	$	478	$	(602)

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	September 30,		December 31,
	2021		2020

	(in thousands)
Assets purchased from PennyMac Mortgage Investment Trust under agreements to resell	$	—	$	80,862
Common shares of beneficial interest of PennyMac Mortgage Investment Trust:
Fair value	$	1,477	$	1,105
Number of shares		75		75

Financing Activities

Spread Acquisition and MSR Servicing Agreements

The Company has a master spread acquisition and MSR servicing agreement with PMT (the “Spread Acquisition Agreement”) which was amended and restated effective December 19, 2016, pursuant to which the Company may sell to PMT, from time to time, the right to receive participation certificates representing beneficial ownership in ESS arising from Ginnie Mae MSRs acquired by the Company, in which case the Company 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 PMT in connection with the parties’ participation in the GNMA MSR Facility.

To the extent the Company refinances any of the mortgage loans relating to the ESS it has issued, the Spread Acquisition Agreement also contains recapture provisions requiring that the Company transfer to PMT, at no cost, the ESS relating to a certain percentage of the unpaid principal balance 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 equal to at least 90% of the product of the excess servicing fee rate and the unpaid principal balance of the refinanced mortgage loans, the Company 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 equal to at least 90% of the product of the excess servicing fee rate and the unpaid principal balance of the modified mortgage loans, the Spread Acquisition Agreement contains provisions that require the Company 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, the Company may, at its option, settle its obligation to PMT in cash in an amount equal to such fair market value in lieu of transferring such ESS.

During the quarter ended March 31, 2021, the Company repaid its outstanding ESS financing through the repurchase of the ESS from PMT.

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


	Quarter ended		Nine months ended September 30,
	September 30, 2020		2021		2020

	(in thousands)
Excess servicing spread financing:
Balance at beginning of period	$	151,206	$	131,750	$	178,586
Issuance pursuant to recapture agreement		531		557		1,393
Accrual of interest		2,070		1,280		6,416
Repayment		(7,682)		(134,624)		(25,112)
Change in fair value		(3,135)		1,037		(18,293)
Balance at end of period	$	142,990	$	—	$	142,990
Recapture incurred pursuant to refinancings by the Company of mortgage loans subject to excess servicing spread financing included in Net gains on loans held for sale at fair value	$	525	$	614	$	1,441

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Receivable from and Payable to PMT

Amounts receivable from and payable to PMT are summarized below:


	September 30,		December 31,
	2021		2020

	(in thousands)
Receivable from PMT:
Allocated expenses and expenses incurred on PMT's behalf	$	12,493	$	38,142
Correspondent production fees		10,867		13,065
Fulfillment fees		10,709		20,873
Management fees		8,778		8,686
Servicing fees		7,146		6,213
Interest on assets purchased under agreements to resell		—		26
	$	49,993	$	87,005
Payable to PMT:
Amounts advanced by PMT to fund its servicing advances	$	119,810	$	132,154
Other		19,162		8,152
	$	138,972	$	140,306

Exchanged Private National Mortgage Acceptance Company, LLC Unitholders

On May 8, 2013, the Company entered into a tax receivable agreement with certain former owners of PennyMac that provides for the payment from time to time by the Company to PennyMac’s exchanged unitholders of an amount equal to 85% of the amount of the net tax benefits, if any, that the Company is deemed to realize as a result of (i) increases in tax basis of PennyMac’s assets resulting from exchanges of ownership interests in PennyMac and (ii) certain other tax benefits related to entering into the tax receivable agreement, including tax benefits attributable to payments under the tax receivable agreement.

Although a reorganization in November 2018 eliminated the potential for unitholders to exchange any additional units subject to this tax receivable agreement, the Company continues to be subject to the agreement and will be required to make payments, to the extent any of the tax benefits specified above are deemed to be realized, under the tax receivable agreement to those certain prior owners of PennyMac who effected exchanges of ownership interests in PennyMac for the Company’s common stock before the closing of the reorganization.

The Company has recorded $31.8 million and $35.2 million, Payable to exchanged Private National Mortgage Acceptance Company, LLC unitholders under tax receivable agreement as of September 30, 2021 and December 31, 2020, respectively. The Company made $3.4 million of payments under the tax receivable agreement during the nine months ended September 30, 2021 and $10.4 million during the nine months ended September 30, 2020.

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Note 5—Loan Sales and Servicing Activities

The Company, through PLS, originates or purchases and sells loans in the secondary mortgage market without recourse for credit losses. However, the Company maintains continuing involvement with the loans in the form of servicing arrangements and the liability under representations and warranties it makes to purchasers and insurers of the loans.

The following table summarizes cash flows between the Company and transferees as a result of the sale of loans in transactions where the Company maintains continuing involvement with the loans as servicer:


	Quarter ended September 30,				Nine months ended September 30,
	2021		2020		2021		2020

	(in thousands)
Cash flows:
Sales proceeds	$	39,040,868	$	26,683,234	$	118,048,768	$	67,209,239
Servicing fees received (1)	$	178,684	$	166,316	$	576,332	$	491,743

(1)	Net of guarantee fees paid to the Agencies.

The following table summarizes the UPB of the loans sold by the Company in which it maintains continuing involvement in the form of owned servicing obligations:


	September 30,		December 31,
	2021		2020

	(in thousands)
UPB of loans outstanding	$	241,193,601	$	199,655,361
Delinquencies (1):
30-89 days	$	5,630,358	$	6,041,366
90 days or more:
Not in foreclosure	$	11,538,275	$	17,799,621
In foreclosure	$	453,155	$	581,683
Foreclosed	$	5,949	$	10,893
Bankruptcy	$	1,183,564	$	1,230,696
Delinquent loans in COVID-19 pandemic-related forbearance:
30-89 days	$	1,464,126	$	2,626,617
90 days or more		5,441,170		12,181,174
	$	6,905,296	$	14,807,791

(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.

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The following tables summarize the UPB of the Company’s loan servicing portfolio:


	September 30, 2021
			Contract
	Servicing		servicing and		Total
	rights owned		subservicing		loans serviced

	(in thousands)
Investor:
Non-affiliated entities:
Originated	$	241,193,601	$	—	$	241,193,601
Purchased		26,913,132		—		26,913,132
		268,106,733		—		268,106,733
PennyMac Mortgage Investment Trust		—		218,013,788		218,013,788
Loans held for sale		9,295,126		—		9,295,126
	$	277,401,859	$	218,013,788	$	495,415,647
Delinquent loans (1):
30 days	$	4,979,570	$	894,634	$	5,874,204
60 days		1,622,154		203,932		1,826,086
90 days or more:
Not in foreclosure		12,728,881		2,228,664		14,957,545
In foreclosure		586,596		29,219		615,815
Foreclosed		6,978		17,483		24,461
	$	19,924,179	$	3,373,932	$	23,298,111
Bankruptcy	$	1,474,614	$	150,716	$	1,625,330
Delinquent loans in COVID-19 pandemic-related forbearance:
30 days	$	852,327	$	134,253	$	986,580
60 days		790,683		123,813		914,496
90 days or more		5,922,433		1,408,078		7,330,511
	$	7,565,443	$	1,666,144	$	9,231,587
Custodial funds managed by the Company (2)	$	9,930,772	$	5,373,992	$	15,304,764

(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 cash accounts holding funds on behalf of borrowers and investors relating to loans serviced under servicing agreements and are not recorded 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.

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	December 31, 2020
			Contract
	Servicing		servicing and		Total
	rights owned		subservicing		loans serviced

	(in thousands)
Investor:
Non-affiliated entities:
Originated	$	199,655,361	$	—	$	199,655,361
Purchased		41,612,940		—		41,612,940
		241,268,301		—		241,268,301
PennyMac Mortgage Investment Trust		—		174,418,591		174,418,591
Loans held for sale		11,063,938		—		11,063,938
	$	252,332,239	$	174,418,591	$	426,750,830
Delinquent loans (1):
30 days	$	5,217,949	$	901,965	$	6,119,914
60 days		2,393,267		348,416		2,741,683
90 days or more:
Not in foreclosure		21,781,226		4,473,217		26,254,443
In foreclosure		751,586		33,312		784,898
Foreclosed		12,938		37,131		50,069
	$	30,156,966	$	5,794,041	$	35,951,007
Bankruptcy	$	1,698,418	$	153,179	$	1,851,597
Delinquent loans in COVID-19 pandemic-related forbearance:
30 days	$	1,745,257	$	334,498	$	2,079,755
60 days		1,479,753		259,019		1,738,772
90 days or more		14,904,052		3,690,505		18,594,557
	$	18,129,062	$	4,284,022	$	22,413,084
Custodial funds managed by the Company (2)	$	10,660,517	$	6,086,725	$	16,747,242

(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)

Following is a summary of the geographical distribution of loans included in the Company’s loan servicing portfolio for the top five and all other states as measured by UPB:


	September 30,		December 31,
State	2021		2020

	(in thousands)
California	$	66,810,277	$	60,591,363
Florida		42,858,332		35,360,190
Texas		40,794,499		34,591,419
Virginia		30,720,994		26,209,701
Maryland		23,338,554		19,974,809
All other states		290,892,991		250,023,348
	$	495,415,647	$	426,750,830

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Note 6—Fair Value

Most of the Company’s assets and certain of its liabilities are measured at or based on their fair values. The Company groups its assets and liabilities at fair value in three levels, based on the markets in which the assets and liabilities are traded and the observability of the significant inputs used to determine fair value. These levels are:

●

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 observable inputs are unavailable, unobservable inputs may be used. Unobservable inputs reflect the Company’s own judgments about the factors that market participants use in pricing an asset or liability, and are based on the best information available in the circumstances.

As a result of the difficulty in observing certain significant valuation inputs affecting “Level 3” fair value assets and liabilities, the Company is required to make judgments regarding these items’ fair values. Different persons in possession of the same facts may reasonably arrive at different conclusions as to the inputs to be applied in valuing these assets and liabilities and their fair values. Such differences may result in significantly different fair value measurements. Likewise, due to the general illiquidity of some of these assets and liabilities, subsequent transactions may be at values significantly different from those reported.

Fair Value Accounting Elections

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

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Assets and Liabilities Measured at Fair Value on a Recurring Basis

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


	September 30, 2021
	Level 1		Level 2		Level 3		Total

	(in thousands)
Assets:
Short-term investments	$	5,046	$	—	$	—	$	5,046
Loans held for sale at fair value		—		7,544,350		2,115,345		9,659,695
Derivative assets:
Interest rate lock commitments		—		—		367,851		367,851
Forward purchase contracts		—		6,730		—		6,730
Forward sales contracts		—		97,720		—		97,720
MBS put options		—		42,067		—		42,067
MBS call options		—		263		—		263
Swaption purchase contracts		—		42,069		—		42,069
Put options on interest rate futures purchase contracts		8,664		—		—		8,664
Call options on interest rate futures purchase contracts		328		—		—		328
Total derivative assets before netting		8,992		188,849		367,851		565,692
Netting		—		—		—		(135,708)
Total derivative assets		8,992		188,849		367,851		429,984
Mortgage servicing rights at fair value		—		—		3,611,120		3,611,120
Investment in PennyMac Mortgage Investment Trust		1,477		—		—		1,477
	$	15,515	$	7,733,199	$	6,094,316	$	13,707,322
Liabilities:
Derivative liabilities:
Interest rate lock commitments	$	—	$	—	$	6,928	$	6,928
Forward purchase contracts		—		86,766		—		86,766
Forward sales contracts		—		22,648		—		22,648
Total derivative liabilities before netting		—		109,414		6,928		116,342
Netting		—		—		—		(102,138)
Total derivative liabilities		—		109,414		6,928		14,204
Mortgage servicing liabilities at fair value		—		—		47,567		47,567
	$	—	$	109,414	$	54,495	$	61,771

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	December 31, 2020
	Level 1		Level 2		Level 3		Total

	(in thousands)
Assets:
Short-term investments	$	15,217	$	—	$	—	$	15,217
Loans held for sale at fair value		—		6,941,231		4,675,169		11,616,400
Derivative assets:
Interest rate lock commitments		—		—		679,961		679,961
Forward purchase contracts		—		133,267		—		133,267
Forward sales contracts		—		1,451		—		1,451
MBS put options		—		14,302		—		14,302
Swaption purchase contracts		—		11,939		—		11,939
Put options on interest rate futures purchase contracts		5,520		—		—		5,520
Call options on interest rate futures purchase contracts		1,391		—		—		1,391
Total derivative assets before netting		6,911		160,959		679,961		847,831
Netting		—		—		—		(136,593)
Total derivative assets		6,911		160,959		679,961		711,238
Mortgage servicing rights at fair value		—		—		2,581,174		2,581,174
Investment in PennyMac Mortgage Investment Trust		1,105		—		—		1,105
	$	23,233	$	7,102,190	$	7,936,304	$	14,925,134
Liabilities:
Excess servicing spread financing payable to PennyMac Mortgage Investment Trust at fair value	$	—	$	—	$	131,750	$	131,750
Derivative liabilities:
Interest rate lock commitments		—		—		2,935		2,935
Forward purchase contracts		—		1,276		—		1,276
Forward sales contracts		—		251,149		—		251,149
Total derivative liabilities before netting		—		252,425		2,935		255,360
Netting		—		—		—		(212,722)
Total derivative liabilities		—		252,425		2,935		42,638
Mortgage servicing liabilities at fair value		—		—		45,324		45,324
	$	—	$	252,425	$	180,009	$	219,712

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


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

	(in thousands)
Balance, June 30, 2021	$	3,818,261	$	343,610	$	3,412,648	$	7,574,519
Purchases and issuances, net		5,573,766		449,834		—		6,023,600
Capitalization of interest and advances		40,035		—		—		40,035
Sales and repayments		(4,286,574)		—		—		(4,286,574)
Mortgage servicing rights resulting from loan sales		—		—		432,429		432,429
Changes in fair value included in income arising from:
Changes in instrument-specific credit risk		38,698		—		—		38,698
Other factors		—		236,316		(233,957)		2,359
		38,698		236,316		(233,957)		41,057
Transfers from Level 3 to Level 2		(3,068,841)		—		—		(3,068,841)
Transfers to loans held for sale		—		(668,837)		—		(668,837)
Balance, September 30, 2021	$	2,115,345	$	360,923	$	3,611,120	$	6,087,388
Changes in fair value recognized during the quarter relating to assets still held at September 30, 2021	$	16,415	$	360,923	$	(233,957)	$	143,381

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


	Quarter ended
Liabilities	September 30, 2021
	(in thousands)
Mortgage servicing liabilities:
Balance, June 30, 2021	$	100,091
Mortgage servicing liabilities resulting from loan sales		33,764
Changes in fair value included in income		(86,288)
Balance, September 30, 2021	$	47,567
Changes in fair value recognized during the quarter relating to liabilities still outstanding at September 30, 2021	$	(86,288)

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

	(in thousands)
Balance, June 30, 2020	$	661,719	$	368,064	$	8,187	$	2,213,539	$	3,251,509
Purchases (purchase adjustment) and issuances, net		2,734,321		593,065		—		(287)		3,327,099
Capitalization of interest and advances		22,262		—		—		—		22,262
Sales and repayments		(88,955)		—		(8,270)		—		(97,225)
Mortgage servicing rights resulting from loan sales		—		—		—		245,946		245,946
Changes in fair value included in income arising from:
Changes in instrument-specific credit risk		42,029		—		—		—		42,029
Other factors		—		311,790		83		(125,377)		186,496
		42,029		311,790		83		(125,377)		228,525
Transfers from Level 3 to Level 2		(597,134)		—		—		—		(597,134)
Reinstatement from real estate acquired in settlement of loans		755		—		—		—		755
Transfers to loans held for sale		—		(731,474)		—		—		(731,474)
Balance, September 30, 2020	$	2,774,997	$	541,445	$	—	$	2,333,821	$	5,650,263
Changes in fair value recognized during the quarter relating to assets still held at September 30, 2020	$	38,217	$	541,445	$	—	$	(125,377)	$	454,285

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


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

	(in thousands)
Balance, June 30, 2020	$	151,206	$	29,858	$	181,064
Issuance of excess servicing spread financing pursuant to a recapture agreement with PennyMac Mortgage Investment Trust		531		—		531
Accrual of interest		2,070		—		2,070
Repayments		(7,682)		—		(7,682)
Changes in fair value included in income		(3,135)		1,840		(1,295)
Balance, September 30, 2020	$	142,990	$	31,698	$	174,688
Changes in fair value recognized during the quarter relating to liabilities still outstanding at September 30, 2020	$	(3,135)	$	1,840	$	(1,295)

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

	(in thousands)
Balance, December 31, 2020	$	4,675,169	$	677,026	$	2,581,174	$	7,933,369
Purchases and issuances, net		16,630,301		1,279,701		—		17,910,002
Capitalization of interest and advances		118,879		—		—		118,879
Sales and repayments		(9,081,815)		—		—		(9,081,815)
Mortgage servicing rights resulting from loan sales		—		—		1,386,324		1,386,324
Changes in fair value included in income arising from:
Changes in instrument-specific credit risk		266,644		—		—		266,644
Other factors		—		389,138		(356,378)		32,760
		266,644		389,138		(356,378)		299,404
Transfers from Level 3 to Level 2		(10,493,751)		—		—		(10,493,751)
Transfers to real estate acquired in settlement of loans		(82)		—		—		(82)
Transfers to loans held for sale		—		(1,984,942)		—		(1,984,942)
Balance, September 30, 2021	$	2,115,345	$	360,923	$	3,611,120	$	6,087,388
Changes in fair value recognized during the period relating to assets still held at September 30, 2021	$	79,529	$	360,923	$	(356,378)	$	84,074

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


	Nine months ended September 30, 2021
	Excess
	servicing		Mortgage
	spread		servicing
Liabilities	financing		liabilities		Total

	(in thousands)
Balance, December 31, 2020	$	131,750	$	45,324	$	177,074
Issuance of excess servicing spread financing pursuant to a recapture agreement with PennyMac Mortgage Investment Trust		557		—		557
Accrual of interest		1,280		—		1,280
Repayments		(134,624)		—		(134,624)
Mortgage servicing liabilities resulting from loan sales		—		98,147		98,147
Changes in fair value included in income		1,037		(95,904)		(94,867)
Balance, September 30, 2021	$	—	$	47,567	$	47,567
Changes in fair value recognized during the period relating to liabilities still outstanding at September 30, 2021	$	—	$	(95,904)	$	(95,904)

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

	(in thousands)
Balance, December 31, 2019	$	383,878	$	136,650	$	8,187	$	2,926,790	$	3,455,505
Purchases and issuances, net		4,664,408		1,431,194		—		25,473		6,121,075
Capitalization of interest and advances		55,283		—		—		—		55,283
Sales and repayments		(888,247)		—		(8,270)		—		(896,517)
Mortgage servicing rights resulting from loan sales		—		—		—		753,795		753,795
Changes in fair value included in income arising from:
Changes in instrument-specific credit risk		35,638		—		—		—		35,638
Other factors		—		808,906		83		(1,372,237)		(563,248)
		35,638		808,906		83		(1,372,237)		(527,610)
Transfers from Level 3 to Level 2		(1,476,027)		—		—		—		(1,476,027)
Transfers to real estate acquired in settlement of loans		(691)		—		—		—		(691)
Reinstatement from real estate acquired in settlement of loans		755		—		—		—		755
Transfers of interest rate lock commitments to loans held for sale		—		(1,835,305)		—		—		(1,835,305)
Balance, September 30, 2020	$	2,774,997	$	541,445	$	—	$	2,333,821	$	5,650,263
Changes in fair value recognized during the period relating to assets still held at September 30, 2020	$	31,389	$	541,445	$	—	$	(1,372,237)	$	(799,403)

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


	Nine months ended September 30, 2020
	Excess
	servicing		Mortgage
	spread		servicing
Liabilities	financing		liabilities		Total

	(in thousands)
Balance, December 31, 2019	$	178,586	$	29,140	$	207,726
Issuance of excess servicing spread financing pursuant to a recapture agreement with PennyMac Mortgage Investment Trust		1,393		—		1,393
Accrual of interest		6,416		—		6,416
Repayments		(25,112)		—		(25,112)
Mortgage servicing liabilities resulting from loan sales		—		6,576		6,576
Changes in fair value included in income		(18,293)		(4,018)		(22,311)
Balance, September 30, 2020	$	142,990	$	31,698	$	174,688
Changes in fair value recognized during the period relating to liabilities still outstanding at September 30, 2020	$	(18,293)	$	(4,018)	$	(22,311)

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

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

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


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

	(in thousands)
Assets:
Loans held for sale	$	645,536	$	—	$	645,536	$	773,313	$	—	$	773,313
Mortgage servicing rights		—		(233,957)		(233,957)		—		(125,377)		(125,377)
	$	645,536	$	(233,957)	$	411,579	$	773,313	$	(125,377)	$	647,936
Liabilities:
Excess servicing spread financing payable to PennyMac Mortgage Investment Trust	$	—	$	—	$	—	$	—	$	3,135	$	3,135
Mortgage servicing liabilities		—		86,288		86,288		—		(1,840)		(1,840)
	$	—	$	86,288	$	86,288	$	—	$	1,295	$	1,295


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

	(in thousands)
Assets:
Loans held for sale	$	2,057,496	$	—	$	2,057,496	$	1,911,828	$	—	$	1,911,828
Mortgage servicing rights		—		(356,378)		(356,378)		—		(1,372,237)		(1,372,237)
	$	2,057,496	$	(356,378)	$	1,701,118	$	1,911,828	$	(1,372,237)	$	539,591
Liabilities:
Excess servicing spread financing payable to PennyMac Mortgage Investment Trust	$	—	$	(1,037)	$	(1,037)	$	—	$	18,293	$	18,293
Mortgage servicing liabilities		—		95,904		95,904		—		4,018		4,018
	$	—	$	94,867	$	94,867	$	—	$	22,311	$	22,311

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


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

	(in thousands)
Current through 89 days delinquent	$	9,418,521	$	9,054,408	$	364,113	$	11,304,308	$	10,743,814	$	560,494
90 days or more delinquent:
Not in foreclosure		220,072		218,659		1,413		275,419		280,595		(5,176)
In foreclosure		21,102		22,059		(957)		36,673		39,529		(2,856)
	$	9,659,695	$	9,295,126	$	364,569	$	11,616,400	$	11,063,938	$	552,462

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Assets Measured at Fair Value on a Nonrecurring Basis

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


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

	(in thousands)
September 30, 2021	$	—	$	—	$	2,948	$	2,948
December 31, 2020	$	—	$	—	$	1,450	$	1,450

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


	Quarter ended September 30,				Nine months ended September 30,
	2021		2020		2021		2020

	(in thousands)
Real estate acquired in settlement of loans	$	(284)	$	(825)	$	(912)	$	(2,059)

Fair Value of Financial Instruments Carried at Amortized Cost

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

These assets and liabilities are classified as “Level 3” fair value items due to the Company’s reliance on unobservable inputs to estimate their fair values. The Company has concluded that the fair values of these assets and liabilities other than the GMSR 2018-GT1 Term Notes and GMSR 2018-GT2 Term Notes included in Notes payable secured by mortgage servicing assets and the Unsecured senior notes approximate their carrying values due to their short terms and/or variable interest rates.

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


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

	(in thousands)
Notes payable secured by mortgage servicing assets	$	1,302,642	$	1,297,176	$	1,268,304	$	1,295,840
Unsecured senior notes	$	1,781,250	$	1,783,230	$	685,750	$	645,820

Valuation Governance

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

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

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With respect to the non-IRLC “Level 3” valuations, the FAV group reports to the Company’s senior management valuation committee, which oversees the valuations. The FAV group monitors the models used for valuation of the Company’s “Level 3” fair value assets and liabilities, including the models’ performance versus actual results, and reports those results to the Company’s senior management valuation committee. The Company’s senior management valuation committee includes the Company’s chief operating, financial, investment and risk officers as well as other senior members of the Company’s finance, capital markets and risk management staffs.

The FAV group is responsible for reporting to the Company’s senior management valuation committee on the changes in the valuation of the non-IRLC “Level 3” fair value assets and liabilities, including major factors affecting the valuation and any changes in model methods and inputs. To assess the reasonableness of its valuations, the FAV group presents an analysis of the effect on the valuation of changes to the significant inputs to the models.

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

Valuation Techniques and Inputs

Following is a description of the techniques and inputs used in estimating the fair values of “Level 2” and “Level 3” fair value assets and liabilities:

Loans Held for Sale

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

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

●

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

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

●

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

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

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



	September 30, 2021		December 31, 2020
Fair value (in thousands)	$	2,115,345	$	4,675,169
Key inputs (1):
Discount rate:
Range		2.1% – 9.2%		2.8% – 9.2%
Weighted average		2.2%		2.8%
Twelve-month projected housing price index change:
Range		5.9% – 6.8%		2.7% – 3.5%
Weighted average		6.4%		3.0%
Voluntary prepayment/resale speed (2):
Range		0.4% – 33.9%		0.4% – 31.3%
Weighted average		22.7%		21.9%
Total prepayment speed (3):
Range		0.4% – 42.9%		0.5% – 42.9%
Weighted average		28.5%		29.2%

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

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

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

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

Derivative Financial Instruments

Interest Rate Lock Commitments

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

The significant unobservable inputs used in the fair value measurement of the Company’s IRLCs are the estimated fair value of MSRs attributable to the mortgage loans it has committed to purchase and the pull-through rate. Significant changes in the pull-through rate or the MSR component of the IRLCs, in isolation, could result in significant changes in the IRLCs’ fair value measurement. The financial effects of changes in these inputs are generally inversely correlated as increasing interest rates have a positive effect on the fair value of the MSR component of IRLC fair value, but increase the pull-through rate for the loan principal and interest payment cash flow component, which has decreased in fair value. Changes in fair value of IRLCs are included in Net gains on loans held for sale at fair value in the consolidated statements of income.

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



	September 30, 2021		December 31, 2020
Fair value (in thousands) (1)	$	360,923	$	677,026
Key inputs (2):
Pull-through rate:
Range		8.0% – 100%		10.1% – 100%
Weighted average		80.3%		82.7%
Mortgage servicing rights value expressed as:
Servicing fee multiple:
Range		(9.7) – 6.5		0.7 – 5.3
Weighted average		4.1		3.6
Percentage of loan commitment amount
Range		(2.1)% – 3.0%		0.1% – 2.6%
Weighted average		1.4%		1.2%

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

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

Hedging Derivatives

Fair values of derivative financial instruments actively traded on exchanges are categorized by the Company as “Level 1” fair value assets and liabilities; fair values of derivative financial instruments based on observable interest rates, volatilities and prices in the MBS or other markets are categorized by the Company as “Level 2” fair value assets and liabilities.

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

Mortgage Servicing Rights

MSRs are categorized as “Level 3” fair value assets. The Company uses a discounted cash flow approach to estimate the fair value of MSRs. The key inputs used in the estimation of the fair value of MSRs include the applicable pricing spread (discount rate), prepayment rate (prepayment speed), and annual per-loan cost to service the underlying loans, all of which are unobservable. Significant changes to any of those inputs in isolation could result in a significant change in the MSR fair value measurement. Changes in these key inputs are not directly related. Changes in the fair value of MSRs are included in Net loan servicing fees—Change in fair value of mortgage servicing rights and mortgage servicing liabilities in the consolidated statements of income.

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


	Quarter ended September 30,				Nine months ended September 30,
	2021		2020		2021		2020

	(Amount recognized and unpaid principal balance of underlying loans in thousands)
MSR and pool characteristics:
Amount recognized	$	432,429	$	245,946	$	1,386,324	$	753,795
Unpaid principal balance of underlying loans	$	33,697,228	$	25,369,941	$	105,470,580	$	63,766,627
Weighted average servicing fee rate (in basis points)		34		32		33		36
Key inputs (1):
Pricing spread (2):
Range		6.0% – 16.9%		8.0% – 17.6%		6.0% – 16.9%		6.8% – 18.1%
Weighted average		8.5%		9.6%		9.0%		9.3%
Annual total prepayment speed (3):
Range		7.2% – 31.0%		7.2% – 41.0%		6.2% – 31.0%		7.2% – 49.8%
Weighted average		9.2%		10.4%		8.5%		12.4%
Equivalent average life (in years):
Range		3.0 – 8.4		2.3 – 9.1		3.0 – 9.0		1.5 – 9.1
Weighted average		7.7		7.3		8.1		6.6
Per-loan annual cost of servicing:
Range		$80 – $117		$80 – $110		$80 – $117		$77 – $110
Weighted average		$102		$102		$104		$100

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

(2)

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

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

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


	September 30, 2021	December 31, 2020

	(Fair value, unpaid principal balance of underlying
	loans and effect on fair value amounts in thousands)
Fair value	$ 3,611,120	$ 2,581,174
Pool characteristics:
Unpaid principal balance of underlying loans	$ 259,220,948	$ 238,410,809
Weighted average note interest rate	3.2%	3.6%
Weighted average servicing fee rate (in basis points)	34	35
Key inputs (1):
Pricing spread (2):
Range	5.3% – 16.0%	8.0% – 17.6%
Weighted average	8.1%	10.1%
Effect on fair value of:
5% adverse change	($59,086)	($46,356)
10% adverse change	($116,282)	($90,936)
20% adverse change	($225,331)	($175,137)
Annual total prepayment speed (3):
Range	7.9% – 28.2%	10.1% – 32.9%
Weighted average	10.3%	13.7%
Equivalent average life (in years):
Range	3.0 – 7.8	2.3 – 7.7
Weighted average	6.9	6.0
Effect on fair value of:
5% adverse change	($76,847)	($66,536)
10% adverse change	($150,928)	($130,253)
20% adverse change	($291,339)	($249,843)
Per-loan annual cost of servicing:
Range	$79 – $117	$79 – $117
Weighted average	$106	$107
Effect on fair value of:
5% adverse change	($31,700)	($25,482)
10% adverse change	($63,399)	($50,964)
20% adverse change	($126,799)	($101,929)

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

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

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

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

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Excess Servicing Spread Financing at Fair Value

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

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

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

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


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

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

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

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

Mortgage Servicing Liabilities

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

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


		September 30,		December 31,
		2021		2020
Fair value (in thousands)	$	47,567	$	45,324
Pool characteristics:
Unpaid principal balance of underlying loans (in thousands)	$	8,885,785	$	2,857,492
Servicing fee rate (in basis points)		24		25
Key inputs (1):
Pricing spread (2)		8.3%		7.6%
Annual total prepayment speed (3)		29.1%		33.3%
Equivalent average life (in years)		4.0		3.2
Per-loan annual cost of servicing	$	258	$	305

(1)

During the quarter ended September 30, 2021, significant changes were made to valuation inputs used to estimate the fair value of MSLs in recognition of the observed increase in the proportion of performing government loans and reduced expected costs and losses from defaulted government insured or guaranteed loans underlying the Company’s MSLs.

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

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

Note 7—Loans Held for Sale at Fair Value

Loans held for sale at fair value include the following:


	September 30,		December 31,
Loan type	2021		2020

	(in thousands)
Government-insured or guaranteed	$	5,588,553	$	5,683,786
Conventional conforming		1,955,797		1,257,445
Purchased from Ginnie Mae pools serviced by the Company		2,069,120		4,661,378
Repurchased pursuant to representations and warranties		46,225		13,791
	$	9,659,695	$	11,616,400
Fair value of loans pledged to secure:
Assets sold under agreements to repurchase	$	8,826,793	$	10,912,178
Mortgage loan participation purchase and sale agreements		541,313		545,500
	$	9,368,106	$	11,457,678

Note 8—Derivative Financial Instruments

The Company holds and issues derivative financial instruments in connection with its operating activities. Derivative financial instruments are created as a result of the Company’s loan production activities and when the Company enters into derivative transactions as part of its interest rate risk management activities. Derivative financial instruments created as a result of the Company’s loan production activities are IRLCs that are created when the Company commits to purchase or originate a loan for sale.

The Company engages in interest rate risk management activities in an effort to moderate the effect of changes in market interest rates on the fair value of certain of the its assets. To manage this fair value risk resulting from interest rate risk, the Company uses derivative financial instruments acquired with the intention of reducing the risk that changes in market interest rates will result in unfavorable changes in the fair value of the Company’s IRLCs, inventory of loans held for sale and its MSRs.

The Company does not designate and qualify any of its derivatives for hedge accounting. The Company records all derivative financial instruments at fair value and records changes in fair value in current period income.

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Derivative Notional Amounts and Fair Value of Derivatives

The Company had the following derivative financial instruments recorded on its consolidated balance sheets:

September 30, 2021

December 31, 2020

Fair value

Notional

Derivative

Notional

Derivative

Instrument

amount (1)

assets

liabilities

amount (1)

assets

liabilities

(in thousands)

Not subject to master netting arrangements:

Interest rate lock commitments

15,804,462

367,851

6,928

20,624,535

679,961

2,935

Used for hedging purposes (2):

Forward purchase contracts

23,912,210

Positive
Negative
Uncertain
Constraining
Legalese
Litigous
Readability	H.S. junior Avg

PennyMac Financial Services (PFSI) 10-Q2021 Q3 Quarterly report

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