10-Q 1 d744527d10q.htm FORM 10-Q Form 10-Q
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

 

 

Form 10-Q

 

 

(Mark One)

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

For the quarterly period ended June 30, 2014

Or

 

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

For the transition period from                      to                     

Commission file number: 001-34416

 

 

PennyMac Mortgage Investment Trust

(Exact name of registrant as specified in its charter)

 

 

 

Maryland   27-0186273

(State or other jurisdiction of

incorporation or organization)

 

(IRS Employer

Identification No.)

6101 Condor Drive, Moorpark, California   93021
(Address of principal executive offices)   (Zip Code)

(818) 224-7442

(Registrant’s telephone number, including area code)

 

 

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  x    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files).    Yes  x    No  ¨

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

 

Large accelerated filer   x    Accelerated filer   ¨
Non-accelerated filer   ¨  (Do not check if a smaller reporting company)    Smaller reporting company   ¨

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

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 August 7, 2014

Common Shares of Beneficial Interest, $0.01 par value    74,139,570

 

 

 


Table of Contents

PENNYMAC MORTGAGE INVESTMENT TRUST

FORM 10-Q

June 30, 2014

TABLE OF CONTENTS

 

         Page  

PART I. FINANCIAL INFORMATION

     1   
Item 1.  

Financial Statements (Unaudited):

     1   
 

Consolidated Balance Sheets

     1   
 

Consolidated Statements of Income

     3   
 

Consolidated Statements of Changes in Shareholders’ Equity

     4   
 

Consolidated Statements of Cash Flows

     5   
 

Notes to Consolidated Financial Statements

     7   
Item 2.  

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

     58   
 

Observations on Current Market Opportunities

     59   
 

Results of Operations

     61   
 

Net Investment Income

     62   
 

Expenses

     84   
 

Balance Sheet Analysis

     87   
 

Asset Acquisitions

     88   
 

Investment Portfolio Composition

     89   
 

Cash Flows

     94   
 

Liquidity and Capital Resources

     96   
 

Off-Balance Sheet Arrangements and Aggregate Contractual Obligations

     99   
 

Quantitative and Qualitative Disclosures About Market Risk

     105   
 

Factors That May Affect Our Future Results

     107   
Item 3.  

Quantitative and Qualitative Disclosures About Market Risk

     110   
Item 4.  

Controls and Procedures

     110   
PART II. OTHER INFORMATION      110   
Item 1.  

Legal Proceedings

     110   
Item 1A.  

Risk Factors

     110   
Item 2.  

Unregistered Sales of Equity Securities and Use of Proceeds

     110   
Item 3.  

Defaults Upon Senior Securities

     110   
Item 4.  

Mine Safety Disclosures

     111   
Item 5.  

Other Information

     111   
Item 6.  

Exhibits and Financial Statement Schedules

     112   


Table of Contents

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

PENNYMAC MORTGAGE INVESTMENT TRUST AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS (UNAUDITED)

 

     June 30,      December 31,  
     2014      2013  
    

(in thousands,

except share data)

 
ASSETS      

Cash

   $ 37,902       $ 27,411   

Short-term investments

     104,453         92,398   

Mortgage-backed securities at fair value pledged to secure assets sold under agreements to repurchase

     218,725         197,401   

Mortgage loans acquired for sale at fair value (includes $905,044 and $454,210 pledged to secure assets sold under agreements to repurchase)

     909,085         458,137   

Mortgage loans at fair value (includes $2,407,512 and $1,963,266 pledged to secure assets sold under agreements to repurchase)

     2,697,821         2,600,317   

Mortgage loans under forward purchase agreements at fair value pledged to secure borrowings under forward purchase agreements

     —           218,128   

Excess servicing spread purchased from PennyMac Financial Services, Inc. at fair value

     190,244         138,723   

Derivative assets

     14,594         7,976   

Real estate acquired in settlement of loans (includes $107,684 and $89,404 pledged to secure assets sold under agreements to repurchase)

     240,471         138,942   

Real estate acquired in settlement of loans under forward purchase agreements pledged to secure forward purchase agreements

     —           9,138   

Mortgage servicing rights (includes $46,802 and $26,452 carried at fair value)

     315,484         290,572   

Servicing advances

     63,993         59,573   

Due from PennyMac Financial Services, Inc.

     4,137         6,009   

Other assets

     72,836         66,192   
  

 

 

    

 

 

 

Total assets

   $ 4,869,745       $ 4,310,917   
  

 

 

    

 

 

 
LIABILITIES      

Assets sold under agreements to repurchase

   $ 2,701,755       $ 2,039,605   

Borrowings under forward purchase agreements

     —           226,580   

Asset-backed secured financing of the variable interest entity at fair value

     170,201         165,415   

Exchangeable senior notes

     250,000         250,000   

Derivative liabilities

     6,347         1,961   

Accounts payable and accrued liabilities

     69,552         71,561   

Due to PennyMac Financial Services, Inc.

     19,636         18,636   

Income taxes payable

     63,218         59,935   

Liability for losses under representations and warranties

     11,876         10,110   
  

 

 

    

 

 

 

Total liabilities

     3,292,585         2,843,803   
  

 

 

    

 

 

 

Commitments and contingencies

     
SHAREHOLDERS’ EQUITY      

Common shares of beneficial interest—authorized, 500,000,000 common shares of $0.01 par value; issued and outstanding, 74,139,070 and 70,458,082 common shares, respectively

     741         705   

Additional paid-in capital

     1,468,791         1,384,468   

Retained earnings

     107,628         81,941   
  

 

 

    

 

 

 

Total shareholders’ equity

     1,577,160         1,467,114   
  

 

 

    

 

 

 

Total liabilities and shareholders’ equity

   $ 4,869,745       $ 4,310,917   
  

 

 

    

 

 

 

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

 

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Table of Contents

PENNYMAC MORTGAGE INVESTMENT TRUST AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS (UNAUDITED)

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

 

     June 30,      December 31,  
     2014      2013  
     (in thousands)  
ASSETS   

Mortgage loans at fair value

   $ 541,320       $ 523,652   

Other assets - interest receivable

     1,702         1,584   
  

 

 

    

 

 

 
   $ 543,022       $ 525,236   
  

 

 

    

 

 

 
LIABILITIES      

Asset-backed secured financing at fair value

   $ 170,201       $ 165,415   

Accounts payable and accrued expenses - interest payable

     492         497   
  

 

 

    

 

 

 
   $ 170,693       $ 165,912   
  

 

 

    

 

 

 

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

 

2


Table of Contents

PENNYMAC MORTGAGE INVESTMENT TRUST AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)

 

     Quarter ended June 30,     Six months ended June 30,  
     2014     2013     2014     2013  
     (in thousands, except per share data)  

Net investment income

        

Net gain on mortgage loans acquired for sale

   $ 10,222      $ 44,438      $ 20,193      $ 73,717   

Loan origination fees

     4,485        4,752        6,841        10,225   

Net interest income:

        

Interest income

     48,518        26,797        87,864        43,672   

Interest expense

     21,865        14,144        41,640        25,380   
  

 

 

   

 

 

   

 

 

   

 

 

 
     26,653        12,653        46,224        18,292   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net gain on investments

     73,134        46,834        115,719        110,814   

Net loan servicing fees

     8,758        7,892        16,179        13,903   

Results of real estate acquired in settlement of loans

     (5,348     (1,929     (11,974     (5,182

Other

     2,652        913        3,969        1,600   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net investment income

     120,556        115,553        197,151        223,369   
  

 

 

   

 

 

   

 

 

   

 

 

 

Expenses

        

Expenses payable to PennyMac Financial Services, Inc.:

        

Loan servicing fees

     14,180        8,787        28,771        16,513   

Loan fulfillment fees

     12,433        22,054        21,335        50,298   

Management fees

     8,912        8,455        16,986        14,947   

Professional services

     2,690        1,339        4,421        3,723   

Compensation

     1,883        1,438        4,825        3,527   

Other

     7,154        5,571        11,221        10,517   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total expenses

     47,252        47,644        87,559        99,525   
  

 

 

   

 

 

   

 

 

   

 

 

 

Income before provision for income taxes

     73,304        67,909        109,592        123,844   

(Benefit from) provision for income taxes

     (1,907     13,412        (3,492     16,051   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income

   $ 75,211      $ 54,497      $ 113,084      $ 107,793   
  

 

 

   

 

 

   

 

 

   

 

 

 

Earnings per share

        

Basic

   $ 1.01      $ 0.92      $ 1.54      $ 1.81   

Diluted

   $ 0.93      $ 0.86      $ 1.44      $ 1.75   

Weighted-average shares outstanding

        

Basic

     74,065        59,035        72,803        58,981   

Diluted

     82,750        65,104        81,535        62,217   

Dividends declared per share

   $ 0.59      $ 0.57      $ 1.18      $ 1.14   

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

 

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PENNYMAC MORTGAGE INVESTMENT TRUST AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY (UNAUDITED)

 

     Number
of
shares
     Par
value
     Additional
paid-in
capital
    Retained
earnings
    Total  
     (in thousands)  

Balance at December 31, 2012

     58,904       $ 589       $ 1,129,858      $ 70,889      $ 1,201,336   

Net income

     —           —           —          107,793        107,793   

Share-based compensation

     173         2         2,468        —          2,470   

Dividends, $1.14 per share

     —           —           —          (67,249     (67,249

Underwriting and offering costs

     —           —           (169     —          (169
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Balance at June 30, 2013

     59,077       $ 591       $ 1,132,157      $ 111,433      $ 1,244,181   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Balance at December 31, 2013

     70,458       $ 705       $ 1,384,468      $ 81,941      $ 1,467,114   

Net income

     —           —           —          113,084        113,084   

Share-based compensation

     234         2         2,956        —          2,958   

Dividends, $1.18 per share

     —           —           —          (87,397     (87,397

Proceeds from offerings of common shares

     3,447         34         82,419        —          82,453   

Underwriting and offering costs

     —           —           (1,052     —          (1,052
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Balance at June 30, 2014

     74,139       $ 741       $ 1,468,791      $ 107,628      $ 1,577,160   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

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

 

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PENNYMAC MORTGAGE INVESTMENT TRUST AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

 

     Six months ended June 30,  
     2014     2013  
     (in thousands)  

Cash flows from operating activities

    

Net income

   $ 113,084      $ 107,793   

Adjustments to reconcile net income to net cash used by operating activities:

    

Net gain on mortgage loans acquired for sale at fair value

     (20,193     (73,717

Accrual of unearned discounts and amortization of premiums on mortgage-backed securities, mortgage loans at fair value, and asset-backed secured financing

     (537     —     

Capitalization of interest on mortgage loans at fair value

     (30,353     (11,814

Accrual of interest on excess servicing spread

     (6,001     —     

Amortization of credit facility commitment fees and debt issuance costs

     4,879        4,036   

(Reversal) accrual of costs related to forward purchase agreements

     (168     251   

Net gain on investments

     (115,719     (110,814

Change in fair value, amortization and impairment of mortgage servicing rights

     20,518        9,321   

Results of real estate acquired in settlement of loans

     11,974        5,182   

Share-based compensation expense

     2,958        2,471   

Purchases of mortgage loans acquired for sale at fair value

     (12,347,365     (17,759,140

Sales of mortgage loans acquired for sale at fair value to nonaffiliates

     4,789,444        9,044,480   

Sales of mortgage loans acquired for sale to PennyMac Financial Services, Inc.

     7,085,859        8,282,163   

(Increase) decrease in servicing advances

     (15,218     7,481   

Decrease in due from PennyMac Financial Services, Inc.

     2,812        1,766   

(Increase) decrease in other assets

     (25,427     41,379   

Decrease in accounts payable and accrued liabilities

     (45,366     (11,016

Increase in payable to PennyMac Financial Services, Inc.

     1,036        4,509   

Increase in income taxes payable

     3,283        15,088   
  

 

 

   

 

 

 

Net cash used by operating activities

     (570,500     (440,581

Cash flows from investing activities

    

Net increase in short-term investments

     (12,055     (34,219

Purchases of mortgage-backed securities at fair value

     (19,638     —     

Repayments of mortgage-backed securities at fair value

     5,419        —     

Purchases of mortgage loans at fair value

     (283,017     (200,486

Repayments and sales of mortgage loans at fair value

     397,643        135,242   

Repayments of mortgage loans under forward purchase agreements at fair value

     6,413        —     

Purchase of excess servicing spread from PennyMac Financial Services, Inc.

     (73,393     —     

Repayment of excess spread investment

     16,494        —     

Settlements of derivative financial instruments used for hedging

     (9,785     —     

Purchase of real estate acquired in settlement of loans

     (3,049     —     

Sales of real estate acquired in settlement of loans

     76,903        63,017   

Sales of real estate acquired in settlement of loans under forward purchase agreements

     5,365        —     

Purchase of mortgage servicing rights

     —          (185

Decrease (increase) in margin deposits and restricted cash

     5,454        (13,426
  

 

 

   

 

 

 

Net cash provided (used) by investing activities

     112,754        (50,057
  

 

 

   

 

 

 

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

 

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Table of Contents

PENNYMAC MORTGAGE INVESTMENT TRUST AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

 

     Six months ended June 30,  
     2014     2013  
     (in thousands)  

Cash flows from financing activities

    

Sales of assets under agreement to repurchase

     15,938,914        16,841,470   

Repurchases of assets sold under agreements to repurchase

     (15,276,762     (16,516,020

Repurchases of real estate acquired in settlement of loans financed under agreement to repurchase

     —          (15,656

Repayments of borrowings under forward purchase agreements

     (227,866     —     

Repayments of asset-backed secured financing at fair value

     (3,372     —     

Issuance of exchangeable senior notes

     —          250,000   

Payment of exchangeable senior notes issuance costs

     —          (7,425

Proceeds from issuance of common shares

     82,453        —     

Payment of common share underwriting and offering costs

     (1,052     (169

Payment of contingent underwriting fees payable

     (424     (427

Payment of dividends

     (43,654     (67,249
  

 

 

   

 

 

 

Net cash provided by financing activities

     468,237        484,524   
  

 

 

   

 

 

 

Net increase (decrease) in cash

     10,491        (6,114

Cash at beginning of period

     27,411        33,756   
  

 

 

   

 

 

 

Cash at end of period

   $ 37,902      $ 27,642   
  

 

 

   

 

 

 

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

 

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Table of Contents

PENNYMAC MORTGAGE INVESTMENT TRUST AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Note 1—Organization and Basis of Presentation

PennyMac Mortgage Investment Trust (“PMT” or the “Company”) was organized in Maryland on May 18, 2009, and commenced operations on August 4, 2009, when it completed its initial offerings of common shares of beneficial interest (“common shares”). The Company is a specialty finance company, which, through its subsidiaries (all of which are wholly-owned), invests primarily in residential mortgage loans and mortgage-related assets.

The Company operates in two segments: correspondent production and investment activities:

 

    The correspondent production segment represents the Company’s operations aimed at serving as an intermediary between mortgage lenders and the capital markets by purchasing, pooling and reselling newly originated prime credit quality mortgage loans either directly or in the form of mortgage-backed securities (“MBS”), using the services of PNMAC Capital Management, LLC (“PCM” or the “Manager”) and PennyMac Loan Services, LLC (“PLS” or the “Servicer”), both subsidiaries of PennyMac Financial Services, Inc. (“PFSI”).

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

 

    The investment activities segment represents the Company’s investments in mortgage-related assets, which include distressed mortgage loans, real estate acquired in settlement of loans (“REO”), MBS, mortgage servicing rights (“MSRs”) and excess servicing spread (“ESS”). The Company seeks to maximize the value of the distressed mortgage loans that it acquires through proprietary loan modification programs, special servicing or other initiatives focused on keeping borrowers in their homes. Where this is not possible, such as in the case of many nonperforming mortgage loans, the Company seeks to effect property resolution in a timely, orderly and economically efficient manner, including through the use of resolution alternatives to foreclosure.

The Company is externally managed by PCM, an investment adviser registered with the Securities and Exchange Commission (the “SEC”) that specializes in and focuses on residential mortgage loans. Under the terms of a management agreement, the Company pays PCM a management fee with a base component and a performance incentive component.

The Company believes that it qualifies, and has elected to be taxed, as a real estate investment trust (“REIT”) under the Internal Revenue Code of 1986, as amended (the “Internal Revenue Code”), beginning with its taxable period ended on December 31, 2009. To maintain its tax status as a REIT, the Company has to distribute at least 90% of its taxable income in the form of qualifying distributions to shareholders.

The Company conducts substantially all of its operations and makes substantially all of its investments through its subsidiary, PennyMac Operating Partnership, L.P. (the “Operating Partnership”), and the Operating Partnership’s subsidiaries. A wholly-owned subsidiary of the Company is the sole general partner, and the Company is the sole limited partner, of the Operating Partnership.

The accompanying consolidated financial statements have been prepared in compliance with accounting principles generally accepted in the United States (“U.S. GAAP”) as codified in the Financial Accounting Standards Board’s (“FASB”) Accounting Standards Codification and with the SEC’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 U.S. GAAP for complete financial statements. The interim consolidated information should be read together with the Company’s Annual Report on Form 10-K for the year ended December 31, 2013 (the “Annual Report”). Intercompany accounts and transactions have been eliminated.

 

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Preparation of financial statements in compliance with U.S. GAAP requires management to make estimates and assumptions 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.

Reclassification of previously presented balances

Certain prior period amounts have been reclassified to conform to the current presentation. Specifically:

 

    Interest expense is included with Interest income under a new caption, Net interest income, to better reflect the Company’s results due to growth in its portfolio of interest-earning assets. This reclassification results in the presentation of Net interest income in Net investment income and a decrease in Expenses.

 

    Loan servicing fees payable to PennyMac Financial Services, Inc. is presented without the inclusion of other servicing expenses payable to nonaffiliates. Previously, Loan servicing expense included amounts payable to PFSI and to nonaffiliates. Amounts payable to nonaffiliates have been reclassified to Other expenses.

Following is a summary of the reclassifications:

 

    As reported     As previously reported     Reclassification  
    Quarter ended
June 30, 2013
    Six months ended
June 30, 2013
    Quarter ended
June 30, 2013
    Six months ended
June 30, 2013
    Quarter ended
June 30, 2013
    Six months ended
June 30, 2013
 
    (in thousands)  

Net interest income (new caption):

           

Interest income

  $ 26,797      $ 43,672      $ 26,797      $ 43,672      $ —        $ —     

Interest expense

    14,144        25,380        —          —          14,144        25,380   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
    12,653        18,292        26,797        43,672        (14,144     (25,380
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net investment income

  $ 115,553      $ 223,369      $ 129,697      $ 248,749      $ (14,144   $ (25,380

Expenses:

           

Interest expense

  $ —        $ —        $ 14,144      $ 25,380      $ (14,144   $ (25,380

Total expenses

  $ 47,644      $ 99,525      $ 61,788      $ 124,905      $ (14,144   $ (25,380

These reclassifications did not change previously reported income before provision for (benefit from) income taxes, provision for (benefit from) income taxes, net income, reported consolidated balance sheet amounts, including shareholders’ equity, or consolidated cash flows.

Note 2—Concentration of Risks

As discussed in Note 1—Organization and Basis of Presentation above, PMT’s operations and investing activities are centered in mortgage-related assets, a substantial portion of which are distressed at acquisition. Many of the mortgage loans in its targeted asset class are purchased at discounts reflecting their distressed state or perceived higher risk of default, as well as a greater likelihood of collateral documentation deficiencies.

Because of the Company’s investment focus, PMT is exposed, to a greater extent than traditional mortgage investors, to the risks that borrowers may be in economic distress and/or may have become unemployed, bankrupt or otherwise unable or unwilling to make payments when due, and to the effects of fluctuations in the residential real estate market on the performance of its investments. Factors influencing these risks include, but are not limited to:

 

    changes in the overall economy and unemployment rates and residential real estate values in the markets where the properties securing the Company’s mortgage loans are located;

 

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    PCM’s ability to identify and the Servicer’s ability to execute optimal resolutions of problem mortgage loans;

 

    the accuracy of valuation information obtained during the Company’s due diligence activities;

 

    PCM’s ability to effectively model, and to develop appropriate model assumptions that properly anticipate, future outcomes;

 

    the level of government support for problem loan resolution and the effect of current and future proposed and enacted legislative and regulatory changes on the Company’s ability to effect cures or resolutions to distressed loans; and

 

    regulatory, judicial and legislative support of the foreclosure process, and the resulting effect on the Company’s ability to acquire and liquidate the real estate securing its portfolio of distressed mortgage loans in a timely manner or at all.

Due to these uncertainties, there can be no assurance that risk management activities identified and executed on PMT’s behalf will prevent significant losses arising from the Company’s investments in real estate-related assets.

A substantial portion of the distressed mortgage loans and REO purchased by the Company has been acquired from or through one or more subsidiaries of Citigroup Inc. The following tables present purchases for the Company’s investment portfolio of mortgage loans and REO (including purchases under forward purchase agreements), and the portion thereof representing assets purchased from or through one or more subsidiaries of Citigroup Inc.:

 

     Quarter ended June 30,      Six months ended June 30,  
     2014      2013      2014      2013  
     (in thousands)  

Investment portfolio purchases:

           

Mortgage loans

   $ 27,203       $ 243,109       $ 284,403       $ 443,582   

REO

     30         89         3,117         89   
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 27,233       $ 243,198       $ 287,520       $ 443,671   
  

 

 

    

 

 

    

 

 

    

 

 

 

Investment portfolio purchases above through one or more subsidiaries of Citigroup Inc.:

           

Mortgage loans

   $ 26,737       $ 242,886       $ 26,737       $ 443,183   

REO

     30         89         68         89   
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 26,767       $ 242,975       $ 26,805       $ 443,272   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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Table of Contents

Following is a summary of the Company’s holdings of assets purchased through one or more subsidiaries of Citigroup Inc.:

 

     June 30,      December 31,  
     2014      2013  
     (in thousands)  

Mortgage loans at fair value

   $ 1,067,099       $ 1,138,131   

Mortgage loans under forward purchase agreements at fair value

     —           218,128   

REO

     111,946         84,726   

REO under forward purchase agreements

     —           8,705   
  

 

 

    

 

 

 
   $ 1,179,045       $ 1,449,690   
  

 

 

    

 

 

 

Total mortgage loans and REO held at period end

   $ 2,938,292       $ 2,966,525   
  

 

 

    

 

 

 

During the year ended December 31, 2013, the Company entered into forward purchase agreements with Citigroup Global Markets Realty Corp. (“CGM”), a subsidiary of Citigroup Inc., to purchase certain nonperforming mortgage loans and REO (collectively, the “CGM Assets”). The CGM Assets were acquired by CGM from unaffiliated money center banks and were held in a trust subsidiary by CGM pending settlement by the Company. The commitment under the forward purchase agreement was settled in full during the quarter ended June 30, 2014.

The Company recognized these assets and related obligations as of the dates of the agreements and recognizes all subsequent income and changes in value relating to such assets. As a result of recognizing these assets, the Company’s consolidated statements of income and cash flows include the following amounts related to the forward purchase agreements:

 

     Quarter ended June 30,     Six months ended June 30,  
     2014     2013     2014     2013  
     (in thousands)  

Statements of income:

        

Interest income

   $ 1,430      $ 260      $ 3,584      $ 260   

Interest expense

   $ 783      $ 251      $ 2,364      $ 251   

Net gain on investments

   $ 1,743      $ (690   $ 803      $ (690

Net loan servicing fees

   $ 201      $ —        $ 517      $ —     

Results of REO

   $ (72   $ —        $ (473   $ —     

Statements of cash flows:

        

Repayments of mortgage loans

   $ 1,084      $ —        $ 3,463      $ —     

Sales of REO

   $ 3,743      $ —        $ 5,365      $ —     

Repayments of borrowings under forward purchase agreements

   $ (214,742   $ —        $ (227,866   $ —     

The Company has no other variable interests in the trust entity or other exposure to the creditors of the trust entity that could expose the Company to loss.

 

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Note 3—Transactions with Related Parties

Following is a summary of the base management and performance incentive fees payable to PFSI recorded by the Company:

 

     Quarter ended June 30,      Six months ended June 30,  
     2014      2013      2014      2013  
     (in thousands)  

Management fee:

  

Base

   $ 5,838       $ 4,575       $ 11,359       $ 8,940   

Performance incentive

     3,074         3,880         5,627         6,007   
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 8,912       $ 8,455       $ 16,986       $ 14,947   
  

 

 

    

 

 

    

 

 

    

 

 

 

In the event of termination of the management agreement between the Company and PFSI, PFSI 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 PFSI, in each case during the 24-month period before termination.

Following is a summary of mortgage loan servicing fees payable to PFSI:

 

     Quarter ended June 30,      Six months ended June 30,  
     2014      2013      2014      2013  
     (in thousands)  

Mortgage loans acquired for sale at fair value:

           

Base

   $ 29       $ 90       $ 46       $ 169   

Activity-based

     51         111         77         183   
  

 

 

    

 

 

    

 

 

    

 

 

 
     80         201         123         352   
  

 

 

    

 

 

    

 

 

    

 

 

 

Distressed mortgage loans:

           

Base

     4,975         3,699         9,941         7,572   

Activity-based

     5,746         2,447         12,132         4,324   
  

 

 

    

 

 

    

 

 

    

 

 

 
     10,721         6,146         22,073         11,896   
  

 

 

    

 

 

    

 

 

    

 

 

 

MSRs:

           

Base

     3,323         2,363         6,471         4,126   

Activity-based

     56         77         104         139   
  

 

 

    

 

 

    

 

 

    

 

 

 
     3,379         2,440         6,575         4,265   
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 14,180       $ 8,787       $ 28,771       $ 16,513   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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Following is a summary of correspondent production activity between the Company and PFSI:

 

     Quarter ended June 30,      Six months ended June 30,  
     2014      2013      2014      2013  
     (in thousands)  

Fulfillment fee expense payable to PFSI

   $ 12,433       $ 22,054       $ 21,335       $ 50,298   

Unpaid principal balance of loans fulfilled by PFSI

   $ 2,991,764       $ 4,323,885       $ 4,911,342       $ 9,110,711   

Sourcing fees received from PFSI

   $ 1,125       $ 1,349       $ 2,017       $ 2,359   

Fair value of loans sold to PFSI

   $ 3,955,329       $ 4,733,767       $ 7,085,859       $ 8,282,163   

At period end:

           

Mortgage loans included in mortgage loans acquired for sale pending sale to PFSI

   $ 304,707       $ 290,567         

Following is a summary of investment activity between the Company and PFSI:

 

     Quarter ended June 30,      Six months ended June 30,  
     2014      2013      2014      2013  
     (in thousands)  

Purchases of excess servicing spread

   $ 52,867       $ —         $ 73,393       $ —     

Interest income from excess servicing spread

   $ 3,138       $ —         $ 6,001       $ —     

Excess servicing spread recapture recognized

   $ 2,525       $ —         $ 4,415       $ —     

MSR recapture recognized

   $ 1       $ 367       $ 9       $ 499   

Other Transactions

In connection with the initial public offering of PMT’s common shares (“IPO”) on August 4, 2009, the Company entered into an agreement with PFSI pursuant to which the Company agreed to reimburse PFSI for the $2.9 million payment that it made to the IPO underwriters if the Company satisfied certain performance measures over a specified period (the “Conditional Reimbursement”). Effective February 1, 2013, the Company amended the terms of the reimbursement agreement to provide for the reimbursement of PFSI of the Conditional Reimbursement if the Company is required to pay PFSI performance incentive fees under the management agreement at a rate of $10 in reimbursement for every $100 of performance incentive fees earned. The reimbursement of the Conditional Reimbursement is subject to a maximum reimbursement in any particular 12-month period of $1.0 million and the maximum amount that may be reimbursed under the agreement is $2.9 million. During the six months ended June 30, 2014, the Company paid $36,000 to PFSI.

The reimbursement agreement also provides for the payment to the underwriters in such offering of the payment that the Company agreed to make to them at the time of the offering if the Company satisfied certain performance measures over a specified period. As PFSI earns performance incentive fees under the management agreement, such underwriters will be paid at a rate of $20 of payments for every $100 of performance incentive fees earned by PFSI. The payment to the underwriters is subject to a maximum reimbursement in any particular 12-month period of $2.0 million and the maximum amount that may be paid under the agreement is $5.9 million. During the quarter and six months ended June 30, 2014, the Company paid $315,000 and $387,000 to the underwriters, respectively.

In the event the termination fee is payable to PFSI under the management agreement and PFSI and the underwriters have not received the full amount of the reimbursements and payments under the reimbursement agreement, such amount will be paid in full. The term of the reimbursement agreement expires on February 1, 2019.

 

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The Company reimburses PFSI and its affiliates for other expenses, including common overhead expenses and other expenses incurred on its behalf by PFSI, in accordance with the terms of its management agreement as summarized below:

 

     Quarter ended June 30,      Six months ended June 30,  
     2014      2013      2014      2013  
     (in thousands)  

Reimbursement of:

           

Common overhead incurred by PFSI

   $ 2,691       $ 3,201       $ 5,269       $ 5,807   

Expenses incurred on the Company’s behalf

     104         585         549         1,834   
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 2,795       $ 3,786       $ 5,818       $ 7,641   
  

 

 

    

 

 

    

 

 

    

 

 

 

Payments and settlements during the period (1)

   $ 14,894       $ 32,616       $ 33,280       $ 65,290   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(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 PFSI.

Amounts due to PFSI are summarized below:

 

     June 30,      December 31,  
     2014      2013  
     (in thousands)  

Servicing fees

   $ 5,208       $ 5,915   

Management fees

     8,912         8,924   

Allocated expenses

     3,764         2,009   

Contingent underwriting fees

     1,752         1,788   
  

 

 

    

 

 

 
   $ 19,636       $ 18,636   
  

 

 

    

 

 

 

Amounts due from affiliates totaled $4.1 million and $6.0 million at June 30, 2014 and December 31, 2013, respectively. At June 30, 2014, the balance represents payments receivable relating to cash flows from the Company’s investment in ESS and amounts receivable relating to unsettled MSR and ESS recaptures. At June 30, 2013, amounts due from affiliates represent amounts receivable pursuant to loan sales to PFSI and reimbursable expenses paid on the affiliates’ behalf by the Company.

PFSI held 75,000 of the Company’s common shares at both June 30, 2014 and December 31, 2013.

Note 4—Earnings Per Share

Basic earnings per share is determined using the two-class method. Under the two-class method, all earnings (distributed and undistributed) are allocated to common shares and participating securities, based on their respective rights to receive dividends. Basic earnings per share is determined using net income reduced by income attributable to the participating securities and divided by the weighted-average common shares outstanding during the period. The Company grants restricted share units which entitle the recipients to receive dividend equivalents during the vesting period on a basis equivalent to the dividends paid to holders of common shares. Unvested share-based compensation awards containing non-forfeitable rights to receive dividends or dividend equivalents (collectively, “dividends”) are classified as “participating securities” and are included in the basic earnings per share calculation using the two-class method.

 

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Table of Contents

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

Diluted earnings per share is determined by dividing net income attributable to diluted shareholders, which adds back to net income the interest expense, net of applicable income taxes, on the Company’s exchangeable senior notes (the “Notes”), by the weighted-average common shares outstanding, assuming all potentially dilutive securities were issued. In periods in which the Company records a loss, potentially dilutive securities are excluded from the diluted loss per share calculation, as their effect on loss per share is anti-dilutive.

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

 

     Quarter ended June 30,     Six months ended June 30,  
     2014     2013     2014     2013  
     (in thousands except per share amounts)  

Basic earnings per share:

        

Net income

   $ 75,211      $ 54,497      $ 113,084      $ 107,793   

Effect of participating securities—share-based compensation awards

     (433     (444     (841     (961
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income attributable to common shareholders

   $ 74,778      $ 54,053      $ 112,243      $ 106,832   
  

 

 

   

 

 

   

 

 

   

 

 

 

Weighted-average shares outstanding

     74,065        59,035        72,803        58,981   

Basic earnings per share

   $ 1.01      $ 0.92      $ 1.54      $ 1.81   
  

 

 

   

 

 

   

 

 

   

 

 

 

Diluted earnings per share:

        

Net income

   $ 75,211      $ 54,497      $ 113,084      $ 107,793   

Interest on exchangeable senior notes, net of income taxes

     2,079        1,382        4,156        1,382   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income attributable to diluted shareholders

   $ 77,290      $ 55,879      $ 117,240      $ 109,175   
  

 

 

   

 

 

   

 

 

   

 

 

 

Weighted-average shares outstanding

     74,065        59,035        72,803        58,981   
  

 

 

   

 

 

   

 

 

   

 

 

 

Potentially dilutive securities:

        

Shares issuable pursuant exchange of the Notes

     8,393        5,709        8,393        2,870   

Shares issuable under share-based compensation plan

     292        360        338        366   
  

 

 

   

 

 

   

 

 

   

 

 

 

Diluted weighted-average number of shares outstanding

     82,750        65,104        81,534        62,217   
  

 

 

   

 

 

   

 

 

   

 

 

 

Diluted earnings per share

   $ 0.93      $ 0.86      $ 1.44      $ 1.75   
  

 

 

   

 

 

   

 

 

   

 

 

 

Note 5—Loan Sales

The Company is a variable interest holder in various special purpose entities that relate to its loan transfer and financing activities. The Company has segregated its involvement with variable interest entities (“VIEs”) between those VIEs which the Company does not consolidate and those VIEs which the Company consolidates.

 

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Table of Contents

Unconsolidated VIEs with Continuing Involvement

The following table summarizes cash flows between the Company and transferees upon sale of loans in transactions where PMT maintains continuing involvement with the mortgage loans as well as unpaid principal balance information at period end:

 

     Quarter ended June 30,      Six months ended June 30,  
     2014      2013      2014      2013  
     (in thousands)  

Cash flows:

           

Proceeds from sales

   $ 2,763,138       $ 3,909,744       $ 4,789,444         9,044,480   

Servicing fees received (1)

   $ 19,019       $ 11,772       $ 34,907       $ 20,908   

Period end information:

           

Unpaid principal balance of mortgage loans outstanding

   $ 29,268,039       $ 19,850,609         

Unpaid principal balance of delinquent mortgage loans:

           

30-89 days delinquent

   $ 90,091       $ 44,436         

90 or more days delinquent

           

Not in foreclosure

     13,325         2,485         

In foreclosure or bankruptcy

     11,306         3,163         
  

 

 

    

 

 

       
     24,631         5,648         
  

 

 

    

 

 

       
   $ 114,722       $ 50,084         
  

 

 

    

 

 

       

 

(1) Net of guarantee fees.

Consolidated VIE

On September 30, 2013, the Company completed a securitization transaction in which a wholly-owned VIE issued $537.0 million in certificates backed by fixed rate prime jumbo mortgage loans of PMT Loan Trust 2013-J1, at a 3.9% weighted yield. The Company retained $366.8 million of those certificates. Management concluded that the Company is the primary beneficiary of the VIE and, as a result, the Company consolidates the VIE. Consolidation of the VIE results in the securitized mortgage loans remaining on the consolidated balance sheets of the Company and the certificates issued by the VIE to nonaffiliates being accounted for as secured financing. The certificates are secured solely by the assets of the VIE and not by any other assets of the Company. The assets of the VIE are the only source of repayment of the certificates.

Note 6—Netting of Financial Instruments

The Company uses derivative financial instruments to manage exposure to interest rate risk created by its MBS, interest rate lock commitments (“IRLC”), mortgage loans acquired for sale at fair value, mortgage loans at fair value, ESS and MSRs. All derivative financial instruments are recorded on the balance sheet at fair value. The Company has elected to net derivative asset and liability positions, and cash collateral obtained (or posted) by (or to) its counterparties when subject to a legally enforceable master netting arrangement. The derivative financial instruments that are not subject to master netting arrangements are IRLCs.

 

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Table of Contents

Offsetting of Derivative Assets

Following is a summary of net derivative assets. As discussed above, all derivatives with the exception of IRLCs are subject to master netting arrangements.

 

     June 30, 2014     December 31, 2013  
     Gross
amounts
of
recognized
assets
     Gross
amounts
offset
in the
consolidated
balance
sheet
    Net
amounts
of assets
presented
in the
consolidated
balance
sheet
    Gross
amounts
of
recognized
assets
     Gross
amounts
offset
in the
consolidated
balance
sheet
    Net
amounts
of assets
presented
in the
consolidated
balance
sheet
 
     (in thousands)  

Derivatives subject to master netting arrangements:

              

MBS put options

   $ 471       $ —        $ 471      $ 272       $ —        $ 272   

MBS call options

     519         —          519        —           —          —     

Forward purchase contracts

     14,723         —          14,723        1,229         —          1,229   

Forward sale contracts

     314         —          314        16,385         —          16,385   

Treasury futures

     545         —          545        —           —          —     

Put options on Eurodollar futures

     181         —          181        566         —          566   

Call options on Eurodollar futures

     214         —          214        —           —          —     

Netting

     —           (13,855     (13,855     —           (12,986     (12,986
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 
     16,967         (13,855     3,112        18,452         (12,986     5,466   

Derivatives not subject to master netting arrangements:

              

Interest rate lock commitments

     11,482         —          11,482        2,510         —          2,510   
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 
   $ 28,449       $ (13,855   $ 14,594      $ 20,962       $ (12,986   $ 7,976   
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

 

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Table of Contents

Derivative Assets and Collateral Held by Counterparty

The following table summarizes by significant counterparty the amount of derivative asset positions after considering master netting arrangements and financial instruments or cash pledged that do not meet the accounting guidance qualifying for netting.

 

     June 30, 2014      December 31, 2013  
            Gross amounts
not offset in the
consolidated
balance sheet
                   Gross amounts
not offset in the
consolidated
balance sheet
        
     Net amount
of assets
presented
in the
consolidated
balance sheet
     Financial
instruments
     Cash
collateral
received
     Net
amount
     Net amount
of assets
presented
in the
consolidated
balance sheet
     Financial
instruments
     Cash
collateral
received
     Net
amount
 
     (in thousands)  

Interest rate lock commitments

   $ 11,482       $ —         $ —         $ 11,482       $ 2,510       $ —         $ —         $ 2,510   

RBS Securities

     433         —           —           433         133         —           —           133   

RJ O’Brien

     940         —           —           940         566         —           —           566   

Nomura

     284         —           —           284         273               273   

JP Morgan

     252         —           —           252         —                 —     

Cantor Fitzgerald LP

     210         —           —           210         613         —           —           613   

Credit Suisse First Boston Mortgage Capital LLC

     138         —           —           138         196         —           —           196   

Bank of America, N.A.

     —           —           —           —           1,024         —           —           1,024   

Other

     855         —           —           855         2,661         —           —           2,661   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 14,594       $ —         $ —         $ 14,594       $ 7,976       $ —         $ —         $ 7,976   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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Table of Contents

Offsetting of Derivative Liabilities and Financial Liabilities

Following is a summary of net derivative liabilities and assets sold under agreements to repurchase. As discussed above, all derivatives with the exception of IRLCs are subject to master netting arrangements. Assets sold under agreements to repurchase do not qualify for netting.

 

     June 30, 2014     December 31, 2013  
     Gross
amounts
of
recognized
liabilities
     Gross
amounts
offset
in the
consolidated
balance
sheet
    Net
amounts
of liabilities
presented
in the
consolidated
balance
sheet
    Gross
amounts
of
recognized
liabilities
     Gross
amounts
offset
in the
consolidated
balance
sheet
    Net
amounts
of liabilities
presented
in the
consolidated
balance
sheet
 
     (in thousands)  

Derivatives subject to master netting arrangements:

              

Forward purchase contracts

   $ 266       $ —        $ 266      $ 7,420       $ —        $ 7,420   

Forward sales contracts

     23,236         —          23,236        1,295         —          1,295   

Netting

     —           (17,550     (17,550     —           (8,015     (8,015
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 
     23,502         (17,550     5,952        8,715         (8,015     700   

Derivatives not subject to master netting arrangements:

              

Interest rate lock commitments

     395         —          395        1,261         —          1,261   
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 
     23,897         (17,550     6,347        9,976         (8,015     1,961   
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Assets sold under agreements to repurchase

     2,701,755         —          2,701,755        2,039,605         —          2,039,605   
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 
   $ 2,725,652       $ (17,550   $ 2,708,102      $ 2,049,581       $ (8,015   $ 2,041,566   
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

 

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Table of Contents

Derivative Liabilities, Financial Liabilities and Collateral Held by Counterparty

The following table summarizes by significant counterparty the amount of derivative liabilities and assets sold under agreements to repurchase after considering master netting arrangements and financial instruments or cash pledged that do not meet the accounting guidance qualifying for offset. All assets sold under agreements to repurchase represent sufficient collateral or exceed the liability amount recorded on the consolidated balance sheet.

 

     June 30, 2014      December 31, 2013  
            Gross amounts
not offset in the
consolidated
balance sheet
                   Gross amounts
not offset in the
consolidated
balance sheet
        
     Net amount of
liabilities
presented
in the
consolidated
balance
sheet
     Financial
instruments
    Cash
collateral
pledged
     Net
amount
     Net amount of
liabilities
presented
in the
consolidated
balance
sheet
     Financial
instruments
    Cash
collateral
pledged
     Net
amount
 
     (in thousands)  

Interest rate lock commitments

   $ 395       $ —        $ —         $ 395       $ 1,261       $ —        $ —         $ 1,261   

Citibank

     843,000         (842,377     —           623         945,015         (944,856     —           159   

Credit Suisse First Boston Mortgage Capital LLC

     734,416         (734,416     —           —           523,546         (523,546     —           —     

Bank of America, N.A.

     610,966         (610,218     —           748         408,452         (408,452     —           —     

RBS Securities

     229,153         (229,153     —           —           —           —          —           —     

Morgan Stanley Bank, N.A.

     155,189         (154,457     —           732         30,226         (30,226     —           —     

Daiwa Capital Markets

     131,334         (131,134     —           200         132,525         (132,525     —           —     

Fannie Mae Capital Markets

     1,021         —          —           1,021         —           —          —           —     

Other

     2,628         —          —           2,628         541         —          —           541   
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

Total

   $ 2,708,102       $ (2,701,755   $ —         $ 6,347       $ 2,041,566       $ (2,039,605   $ —         $ 1,961   
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

Note 7—Fair Value

The Company’s consolidated financial statements include assets and liabilities that are measured based on their fair values. Measurement at fair value may be on a recurring or nonrecurring basis depending on the accounting principles applicable to the specific asset or liability and whether management has elected to carry the item at its fair value as discussed in the following paragraphs.

Fair Value Accounting Elections

Management identified all of its non-cash financial assets and MSRs relating to loans with initial interest rates of more than 4.5% to be accounted for at fair value. Management has elected to account for these financial statement items at fair value so such changes in fair value will be reflected in income as they occur and more timely reflect the results of the Company’s performance. Management has also identified its asset-backed secured financing of the VIE to be accounted for at fair value to reflect the generally offsetting changes in fair value of these borrowings to changes in fair value of the mortgage loans at fair value collateralizing this financing.

For MSRs relating to mortgage loans with initial interest rates of less than or equal to 4.5%, management concluded that such assets present different risks to the Company than MSRs relating to mortgage loans with initial interest rates of more than 4.5% and therefore require a different risk management approach. Management’s risk management efforts relating to these assets are aimed at moderating the effects of non-interest rate risks on fair value, such as the effect of changes in home prices on the assets’ fair values. Management has identified these assets to be accounted for using the amortization method.

 

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Table of Contents

The Company’s risk management efforts in connection with MSRs relating to mortgage loans with initial interest rates of more than 4.5% are generally aimed at moderating the effects of changes in interest rates on the assets’ fair values.

For assets sold under agreements to repurchase, borrowings under forward purchase agreements and the Notes, management has determined that historical cost accounting is more appropriate because under this method debt issuance costs are amortized over the term of the debt, thereby matching the debt issuance cost to the periods benefiting from the usage of the debt.

Financial Statement Items Measured at Fair Value on a Recurring Basis

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

 

     June 30, 2014  
     Level 1      Level 2     Level 3      Total  
     (in thousands)  

Assets:

          

Short-term investments

   $ 104,453       $ —        $ —         $ 104,453   

Mortgage-backed securities at fair value

     —           218,725        —           218,725   

Mortgage loans acquired for sale at fair value

     —           909,085        —           909,085   

Mortgage loans at fair value

     —           541,320        2,156,501         2,697,821   

Excess servicing spread purchased from PFSI

     —           —          190,244         190,244   

Derivative assets:

          

Interest rate lock commitments

     —           —          11,482         11,482   

MBS put options

     —           471        —           471   

MBS call options

     —           519        —           519   

Forward purchase contracts

     —           14,723        —           14,723   

Forward sales contracts

     —           314        —           314   

Treasury futures

     —           545        —           545   

Put options on Eurodollar futures

     —           181        —           181   

Call options on Eurodollar futures

     —           214        —           214   
  

 

 

    

 

 

   

 

 

    

 

 

 

Total derivative assets before netting

     —           16,967        11,482         28,449   

Netting (1)

     —           (13,855     —           (13,855
  

 

 

    

 

 

   

 

 

    

 

 

 

Total derivative assets after netting

     —           3,112        11,482         14,594   
  

 

 

    

 

 

   

 

 

    

 

 

 

Mortgage servicing rights at fair value

     —           —          46,802         46,802   
  

 

 

    

 

 

   

 

 

    

 

 

 
   $ 104,453       $ 1,645,242      $ 2,405,029       $ 4,154,724   
  

 

 

    

 

 

   

 

 

    

 

 

 

Liabilities:

          

Asset-backed secured financing of the variable interest entity at fair value

   $ —         $ 170,201      $ —         $ 170,201   

Derivative liabilities:

          

Interest rate lock commitments

     —           —          395         395   

Forward purchase contracts

     —           266        —           266   

Forward sales contracts

     —           23,236        —           23,236   
  

 

 

    

 

 

   

 

 

    

 

 

 

Total derivative liabilities before netting

     —           23,502        395         23,897   

Netting (1)

     —           (17,550     —           (17,550
  

 

 

    

 

 

   

 

 

    

 

 

 

Total derivative liabilities after netting

     —           5,952        395         6,347   
  

 

 

    

 

 

   

 

 

    

 

 

 

Total liabilities

   $ —         $ 176,153      $ 395       $ 176,548   
  

 

 

    

 

 

   

 

 

    

 

 

 

 

(1) Derivatives are reported net of cash collateral received and paid and, to the extent that the criteria of the accounting guidance covering the offsetting of amounts related to certain contracts are met, positions with the same counterparty are netted as part of a legally enforceable master netting agreement.

 

20


Table of Contents
     December 31, 2013  
     Level 1      Level 2     Level 3      Total  
     (in thousands)  

Assets:

          

Short-term investments

   $ 92,398       $ —        $ —         $ 92,398   

Mortgage-backed securities at fair value

     —           197,401        —           197,401   

Mortgage loans acquired for sale at fair value

     —           458,137        —           458,137   

Mortgage loans at fair value

     —           523,652        2,076,665         2,600,317   

Mortgage loans under forward purchase agreements at fair value

     —           —          218,128         218,128   

Excess servicing spread purchased from PFSI

     —           —          138,723         138,723   

Derivative assets:

          

Interest rate lock commitments

     —           —          2,510         2,510   

MBS put options

     —           272        —           272   

Forward purchase contracts

     —           1,229        —           1,229   

Forward sales contracts

     —           16,385        —           16,385   

Options on Eurodollar futures

     —           566        —           566   
  

 

 

    

 

 

   

 

 

    

 

 

 

Total derivative assets

     —           18,452        2,510         20,962   

Netting (1)

     —           (12,986     —           (12,986
  

 

 

    

 

 

   

 

 

    

 

 

 

Total derivative assets after netting

     —           5,466        2,510         7,976   
  

 

 

    

 

 

   

 

 

    

 

 

 

Mortgage servicing rights at fair value

     —           —          26,452         26,452   
  

 

 

    

 

 

   

 

 

    

 

 

 
   $ 92,398       $ 1,184,656      $ 2,462,478       $ 3,739,532   
  

 

 

    

 

 

   

 

 

    

 

 

 

Liabilities:

          

Asset-backed secured financing of the variable interest entity at fair value

   $ —         $ 165,415      $ —         $ 165,415   

Derivative liabilities:

          

Interest rate lock commitments

     —           —          1,261         1,261   

Forward purchase contracts

     —           7,420        —           7,420   

Forward sales contracts

     —           1,295        —           1,295   
  

 

 

    

 

 

   

 

 

    

 

 

 

Total derivative liabilities

     —           8,715        1,261         9,976   

Netting (1)

     —           (8,015     —           (8,015
  

 

 

    

 

 

   

 

 

    

 

 

 

Total derivative liabilities

     —           700        1,261         1,961   
  

 

 

    

 

 

   

 

 

    

 

 

 

Total liabilities

   $ —         $ 166,115      $ 1,261       $ 167,376   
  

 

 

    

 

 

   

 

 

    

 

 

 

 

(1) Derivatives are reported net of cash collateral received and paid and, to the extent that the criteria of the accounting guidance covering the offsetting of amounts related to certain contracts are met, positions with the same counterparty are netted as part of a legally enforceable master netting agreement.

 

21


Table of Contents

The following is a summary of changes in items measured using Level 3 inputs on a recurring basis:

 

     Quarter ended June 30, 2014  
     Mortgage
loans

at fair value
    Mortgage
loans under
forward
purchase
agreements
    Excess
servicing
spread
    Interest
rate lock
commitments(1)
    Mortgage
servicing
rights
    Total  
     (in thousands)  

Assets:

            

Balance, March 31, 2014

   $ 2,079,020      $ 202,661      $ 151,019      $ 3,271      $ 36,181      $ 2,472,152   

Purchases

     26,737        466        52,867        —          —          80,070   

Repayments and sale

     (140,807     (1,084     (9,080     —          —          (150,971

Accrual of interest

     —          —          3,138        —          —          3,138   

ESS received pursuant to a recapture agreement with PFSI

     —          —          2,362        —          —          2,362   

Interest rate lock commitments issued, net

     —          —          —          19,158        —          19,158   

Capitalization of interest

     17,042        1,057        —          —          —          18,099   

Servicing received as proceeds from sales of mortgage loans

     —          —          —          —          15,385        15,385   

Changes in fair value included in income arising from:

            

Changes in instrument-specific credit risk

     19,326        1,236              20,562   

Other factors

     52,525        507        (10,062     9,563        (4,764     47,769   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
     71,851        1,743        (10,062     9,563        (4,764     68,331   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Transfers of mortgage loans under forward purchase agreements to mortgage loans

     201,443        (201,443     —          —          —          —     

Transfers of mortgage loans to REO

     (98,785     —          —          —          —          (98,785

Transfers of mortgage loans under forward purchase agreements to REO under forward purchase agreements

     —          (3,400     —          —          —          (3,400

Transfers of interest rate lock commitments to mortgage loans acquired for sale at fair value

     —          —          —          (20,905     —          (20,905
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance, June 30, 2014

   $ 2,156,501      $ —        $ 190,244      $ 11,087      $ 46,802      $ 2,404,634   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Changes in fair value recognized during the period relating to assets still held at June 30, 2014

   $ 50,613      $ —        $ (10,062   $ 11,088      $ (4,764   $ 46,875   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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

 

     Quarter ended June 30, 2013  
     Mortgage
loans

at fair value
    Mortgage
loans under
forward
purchase
agreements
    Net interest
rate lock
commitments(1)
    Mortgage
servicing
rights
     Total  
     (in thousands)  

Assets:

           

Balance, March 31, 2013

   $ 1,366,922      $ —        $ 11,052      $ 1,305       $ 1,379,279   

Purchases

     13        243,309        —          186         243,508   

Repayments

     (73,820     —          —          —           (73,820

Interest rate lock commitments issued, net

     —          —          22,240        —           22,240   

Capitalization of interest

     6,584        —          —          —           6,584   

Servicing received as proceeds from sales of mortgage loans

     —          —          —          77         77   

Changes in fair value included in income arising from:

           

Changes in instrument-specific credit risk

     11,050        —               11,050   

Other factors

     36,473        (689     (20,678     260         15,366   
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 
     47,523        (689     (20,678     260         26,416   
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Transfers of mortgage loans to REO

     (37,457     (89          (37,546

Transfers of interest rate lock commitments to mortgage loans acquired for sale

     —          —          (29,581     —           (29,581
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Balance, June 30, 2013

   $ 1,309,765      $ 242,531      $ (16,967   $ 1,828       $ 1,537,157   
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Changes in fair value recognized during the period relating to assets still held at June 30, 2013

   $ 33,292      $ (689   $ (16,967   $ 260       $ 15,896   
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

 

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

 

22


Table of Contents
     Six months ended June 30, 2014  
     Mortgage
loans

at fair value
    Mortgage
loans under
forward
purchase
agreements
    Excess
servicing
spread
    Interest
rate lock
commitments(1)
    Mortgage
servicing
rights
    Total  
     (in thousands)  

Assets:

            

Balance, December 31, 2013

   $ 2,076,665      $ 218,128      $ 138,723      $ 1,249      $ 26,452      $ 2,461,217   

Purchases

     283,017        1,386        73,393        —          —          357,796   

Repayments and sale

     (387,430     (6,413     (16,494     —          —          (410,337

Accrual of interest

     —          —          6,001        —          —          6,001   

ESS received pursuant to a recapture agreement with PFSI

     —          —          3,475        —          —          3,475   

Interest rate lock commitments issued, net

     —          —          —          31,754        —          31,754   

Capitalization of interest

     28,553        1,801        —          —          —          30,354   

Servicing received as proceeds from sales of mortgage loans

     —          —          —          —          27,142        27,142   

Changes in fair value included in income arising from:

            

Changes in instrument-specific credit risk

     42,629        2,269        —          —            44,898   

Other factors

     70,080        (1,466     (14,854     11,993        (6,792     58,961   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
     112,709        803        (14,854     11,993        (6,792     103,859   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Transfers of mortgage loans under forward purchase agreements to mortgage loans

     205,902        (205,902     —          —          —          —     

Transfers of mortgage loans to REO

     (162,915     —          —          —          —          (162,915

Transfers of mortgage loans under forward purchase agreements to REO under forward purchase agreements

     —          (9,803     —          —          —          (9,803

Transfers of interest rate lock commitments to mortgage loans acquired for sale

     —          —          —          (33,909     —          (33,909
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance, June 30, 2014

   $ 2,156,501      $ —        $ 190,244      $ 11,087      $ 46,802      $ 2,404,634   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Changes in fair value recognized during the period relating to assets still held at June 30, 2014

   $ 73,951      $ —        $ (14,854   $ 11,087      $ (6,792   $ 63,392   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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

 

     Six months ended June 30, 2013  
     Mortgage
loans

at fair value
    Mortgage
loans under
forward
purchase
agreements
    Net interest
rate lock
commitments(1)
    Mortgage
servicing
rights
     Total  
     (in thousands)  

Assets:

           

Balance, December 31, 2012

   $ 1,189,971      $ —        $ 19,479      $ 1,346       $ 1,210,796   

Purchases

     200,486        243,309        —          186         443,981   

Repayments

     (135,242     —          —          —           (135,242

Interest rate lock commitments issued, net

     —          —          57,654        —           57,654   

Capitalization of interest

     11,814        —          —          —           11,814   

Servicing received as proceeds from sales of mortgage loans

     —          —          —          104         104   

Changes in fair value included in income arising from:

           

Changes in instrument-specific credit risk

     19,495        —          —          —           19,495   

Other factors

     92,008        (689     (20,678     192         70,833   
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 
     111,503        (689     (20,678     192         90,328   
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Transfers of mortgage loans to REO

     (68,767     (89     —          —           (68,856

Transfers of interest rate lock commitments to mortgage loans acquired for sale

     —          —          (73,422     —           (73,422
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Balance, June 30, 2013

   $ 1,309,765      $ 242,531      $ (16,967   $ 1,828       $ 1,537,157   
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Changes in fair value recognized during the period relating to assets still held at June 30, 2013

   $ 77,771      $ (689   $ (16,967   $ 192       $ 60,307   
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

 

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

 

23


Table of Contents

Following are the fair values and related principal amounts due upon maturity of mortgage loans accounted for under the fair value option (including mortgage loans acquired for sale, mortgage loans at fair value, mortgage loans under forward purchase agreements at fair value and mortgage loans at fair value held by VIE):

 

     June 30, 2014  
     Fair value      Principal
amount due
upon maturity
     Difference  
     (in thousands)  

Mortgage loans acquired for sale:

        

Current through 89 days delinquent

   $ 909,085       $ 866,821       $ 42,264   

90 or more days delinquent (1)

        

Not in foreclosure

     —           —           —     

In foreclosure

     —           —           —     
  

 

 

    

 

 

    

 

 

 
     —           —           —     
  

 

 

    

 

 

    

 

 

 
     909,085         866,821         42,264   
  

 

 

    

 

 

    

 

 

 

Mortgage loans and mortgage loans under forward purchase agreements at fair value:

        

Current through 89 days delinquent

     1,151,747         1,442,755         (291,008

90 or more days delinquent (1)

        

Not in foreclosure

     629,021         1,002,407         (373,386

In foreclosure

     917,053         1,437,698         (520,645
  

 

 

    

 

 

    

 

 

 
     1,546,074         2,440,105         (894,031
  

 

 

    

 

 

    

 

 

 
     2,697,821         3,882,860         (1,185,039
  

 

 

    

 

 

    

 

 

 
   $ 3,606,906       $ 4,749,681       $ (1,142,775
  

 

 

    

 

 

    

 

 

 

 

(1) Loans delinquent 90 or more days are placed on nonaccrual status and previously accrued interest is reversed.

 

24


Table of Contents
     December 31, 2013  
     Fair value      Principal
amount due
upon maturity
     Difference  
     (in thousands)  

Mortgage loans acquired for sale:

        

Current through 89 days delinquent

   $ 457,968       $ 447,224       $ 10,744   

90 or more days delinquent (1)

        

Not in foreclosure

     169         162         7   

In foreclosure

     —           —           —     
  

 

 

    

 

 

    

 

 

 
     169         162         7   
  

 

 

    

 

 

    

 

 

 
     458,137         447,386         10,751   
  

 

 

    

 

 

    

 

 

 

Mortgage loans and mortgage loans under forward purchase agreements at fair value:

        

Current through 89 days delinquent

     1,170,918         1,495,961         (325,043

90 or more days delinquent (1)

        

Not in foreclosure

     738,043         1,190,403         (452,360

In foreclosure

     909,484         1,493,644         (584,160
  

 

 

    

 

 

    

 

 

 
     1,647,527         2,684,047         (1,036,520
  

 

 

    

 

 

    

 

 

 
     2,818,445         4,180,008         (1,361,563
  

 

 

    

 

 

    

 

 

 
   $ 3,276,582       $ 4,627,394       $ (1,350,812
  

 

 

    

 

 

    

 

 

 

 

(1) Loans delinquent 90 or more days are placed on nonaccrual status and previously accrued interest is reversed.

Following are the changes in fair value included in current period income by consolidated statement of income line item for financial statement items accounted for under the fair value option:

 

     Quarter ended June 30, 2014  
     Net gain on
mortgage
loans
acquired
for sale
    Net
interest
income
    Net gain
on
investments
    Net loan
servicing
fees
    Total  
     (in thousands)  

Assets:

          

Short-term investments

   $ —        $ —        $ —        $ —        $ —     

Mortgage-backed securities at fair value

     —          155        4,081        —          4,236   

Mortgage loans acquired for sale at fair value

     31,202          —          —          31,202   

Mortgage loans at fair value

     —          223        88,029        —          88,252   

Mortgage loans under forward purchase agreements at fair value

     —          —          1,743        —          1,743   

Excess servicing spread at fair value

     —          —          (7,537     —          (7,537

Mortgage servicing rights at fair value

     —          —          —          (4,764     (4,764
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
   $ 31,202      $ 378      $ 86,316      $ (4,764   $ 113,132   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Liabilities:

          

Asset-backed secured financing at fair value

   $ (5,175   $ (80   $ —        $ —        $ (5,255
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
   $ (5,175   $ (80   $ —        $ —        $ (5,255
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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Table of Contents
     Quarter ended June 30, 2013  
     Net gain
on mortgage
loans
acquired

for sale
    Net
interest
income
    Net gain
on
investments
    Net loan
servicing
fees
    Total  
     (in thousands)  

Assets:

          

Short-term investments

   $ —        $ —        $ —        $ —        $ —     

Mortgage loans acquired for sale at fair value

     (56,951     —          —          —          (56,951

Mortgage loans at fair value

     —          —          47,523        —          47,523   

Mortgage loans under forward purchase agreements at fair value

     —          —          (689     —          (689

Mortgage servicing rights at fair value

     —          —          —          260        260   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
   $ (56,951   $ —        $ 46,834      $ 260      $ (9,857
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
     Six months ended June 30, 2014  
     Net gain on
mortgage
loans
acquired

for sale
    Net
interest
income
    Net gain
on
investments
    Net loan
servicing
fees
    Total  
     (in thousands)  

Assets:

          

Short-term investments

   $ —        $ —        $ —        $ —        $ —     

Mortgage-backed securities at fair value

     —          188        6,734        —          6,922   

Mortgage loans acquired for sale at fair value

     49,834        —          —          —          49,834   

Mortgage loans at fair value

     —          553        140,194        —          140,747   

Mortgage loans under forward purchase agreements at fair value

     —          —          803        —          803   

Excess servicing spread at fair value

     —          —          (10,438     —          (10,438

Mortgage servicing rights at fair value

     —          —          —          (6,792     (6,792
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
   $ 49,834      $ 741      $ 137,293      $ (6,792   $ 181,076   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Liabilities:

          

Asset-backed secured financing at fair value

   $ (7,954   $ (204   $ —        $ —        $ (8,158
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
   $ (7,954   $ (204   $ —        $ —        $ (8,158
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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Table of Contents
     Six months ended June 30, 2013  
     Net loss on
mortgage
loans
acquired
for sale
    Net
interest
income
     Net gain
(loss)

on
investments
    Net loan
servicing
fees
     Total  
     (in thousands)  

Assets:

            

Short-term investments

   $ —        $ —         $ —        $ —         $ —     

Mortgage loans acquired for sale at fair value

     (32,180     —           —          —           (32,180

Mortgage loans at fair value

     —          —           111,503        —           111,503   

Mortgage loans under forward purchase agreements at fair value

     —          —           (689     —           (689

Mortgage servicing rights at fair value

     —          —           —          192         192   
  

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 
   $ (32,180   $ —         $ 110,814      $ 192       $ 78,826   
  

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Financial Statement Items Measured at Fair Value on a Nonrecurring Basis

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

 

     June 30, 2014  
     Level 1      Level 2      Level 3      Total  
     (in thousands)  

Real estate asset acquired in settlement of loans

   $ —         $ —         $ 102,660       $ 102,660   

Mortgage servicing rights at lower of amortized cost or fair value

     —           —           56,171         56,171   
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ —         $ —         $ 158,831       $ 158,831   
  

 

 

    

 

 

    

 

 

    

 

 

 
     December 31, 2013  
     Level 1      Level 2      Level 3      Total  
     (in thousands)  

Real estate asset acquired in settlement of loans

   $ —         $ —         $ 63,043       $ 63,043   

Real estate asset acquired in settlement of loans under forward purchase agreements

     —           —           7,760         7,760   

Mortgage servicing rights at lower of amortized cost or fair value

     —           —           184,067         184,067   
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ —         $ —         $ 254,870       $ 254,870   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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Table of Contents

The following table summarizes the net losses recognized during the period on assets measured at estimated fair values on a nonrecurring basis:

 

     Quarter ended June 30,     Six months ended June 30,  
     2014     2013     2014     2013  
     (in thousands)  

Real estate asset acquired in settlement of loans

   $ (7,942   $ (4,095   $ (12,525   $ (6,594

Mortgage servicing rights at lower of amortized cost or fair value

     (2,224     1,222        (2,851     3,708   
  

 

 

   

 

 

   

 

 

   

 

 

 
   $ (10,166   $ (2,873   $ (15,376   $ (2,886
  

 

 

   

 

 

   

 

 

   

 

 

 

Real Estate Acquired in Settlement of Loans

The Company measures its investment in REO at the respective properties’ fair values less cost to sell on a nonrecurring basis. The initial carrying value of the REO is measured by cost in the case of purchased REO or by the fair value of the mortgage loan immediately before acquisition in the case of acquisition in settlement of a loan. REO may be subsequently revalued due to the Company receiving greater access to the property, the property being held for an extended period or management receiving indications that the property’s value may not be supported by developing market conditions. Any subsequent change in fair value to a level that is less than or equal to the amount at which the property was initially recorded is recognized in Results of real estate acquired in settlement of loans in the consolidated statements of income.

Mortgage Servicing Rights at Lower of Amortized Cost or Fair Value

The Company evaluates its MSRs at lower of amortized cost or fair value for impairment with reference to the assets’ fair value. For purposes of performing its MSR impairment evaluation, the Company stratifies its MSRs at lower of amortized cost or fair value based on the interest rates borne by the mortgage loans underlying the MSRs. Mortgage loans are grouped into pools of mortgage loans with 50 basis point interest rate ranges for fixed-rate mortgage loans with interest rates between 3% and 4.5% and a single pool for mortgage loans with interest rates below 3%. MSRs relating to adjustable rate mortgage loans with initial interest rates of 4.5% or less are evaluated in a single pool. If the fair value of MSRs in any of the interest rate pools is below the amortized cost of the MSRs reduced by the existing valuation allowance for that pool, those MSRs are impaired.

When MSRs are impaired, the impairment is recognized in current-period income and the carrying value of the MSRs is adjusted using a valuation allowance. If the fair value of the MSRs subsequently increases, the increase in fair value is recognized in current period income only to the extent of the valuation allowance for the respective impairment stratum.

Management periodically reviews the various impairment strata to determine whether the fair value of the impaired MSRs in a given stratum is likely to recover. When management deems recovery of the value to be unlikely in the foreseeable future, a write-down of the cost of the MSRs for that stratum to its estimated recoverable value is charged to the valuation allowance.

Fair Value of Financial Instruments Carried at Amortized Cost

The Company’s cash balances as well as certain of its borrowings are carried at amortized cost. Management has concluded that the fair values of Cash, Assets sold under agreements to repurchase, and Borrowings under forward purchase agreements approximate the agreements’ carrying values due to the immediate realizability of cash at its carrying amount and to the borrowing agreements’ short terms and variable interest rates.

Cash is measured using Level 1 inputs. The Company’s assets sold under agreements to repurchase and borrowings under forward purchase agreements are carried at amortized cost. The Company has classified these financial instruments as “Level 3” financial statement items as of June 30, 2014 due to the lack of current market activity and the Company’s reliance on unobservable inputs to estimate these instruments’ fair values.

 

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Table of Contents

Exchangeable Senior Notes are carried at amortized cost. The fair value of the Notes at June 30, 2014 and December 31, 2013 was $247.1 million and $238.4 million, respectively. The fair value of the Notes is estimated using a broker indication of value. The Company has classified the Notes as “Level 3” financial statement items as of June 30, 2014 due to the lack of current market activity and the use of broker’s indication of value to estimate the instrument’s fair values.

Valuation Techniques and Inputs

Most of the Company’s assets and a portion of its liabilities are carried at fair value with changes in fair value recognized in current period income. A substantial portion of those items are “Level 3” financial statement items which require the use of significant unobservable inputs in the estimation of the assets’ and liabilities’ fair values. Unobservable inputs reflect the Company’s own assumptions about the factors that market participants use in pricing an asset or liability, and are based on the best information available under the circumstances.

PFSI has assigned the responsibility for estimating the fair values of “Level 3” financial statement items to its Financial Analysis and Valuation group (the “FAV group”), which is responsible for valuing and monitoring the Company’s investment portfolios and maintenance of its valuation policies and procedures.

The FAV group reports to PFSI’s valuation committee, which oversees and approves the valuations. The valuation committee includes the chief executive, financial, operating, credit, and asset/liability management officers of PFSI. The FAV group monitors the models used for valuation of the Company’s “Level 3” financial statement items, including the models’ performance versus actual results and reports those results to PFSI’s valuation committee. The results developed in the FAV group’s monitoring activities are used to calibrate subsequent projections used for valuation.

The FAV group is responsible for reporting to PFSI’s valuation committee on a monthly basis on the changes in the valuation of the Level 3 assets and liabilities it values, including major factors affecting the valuation and any changes in model methods and assumptions. To assess the reasonableness of its valuations, the FAV group presents an analysis of the effect on the valuation of each of the changes to the significant inputs to the valuation models.

The following describes the valuation techniques and assumptions used in estimating the fair values of Level 2 and Level 3 financial statement items:

Mortgage-Backed Securities

The Company’s MBS securities are presently Agency MBS. Agency MBS are categorized as “Level 2” financial statement items. Fair value of Agency MBS is estimated based on quoted market prices for similar securities.

Mortgage Loans

Fair value of mortgage loans is estimated based on whether the mortgage loans are saleable into active markets:

 

    Mortgage loans that are saleable into active markets, comprised of the Company’s mortgage loans acquired for sale at fair value and the portion of mortgage loans at fair value held in a VIE, are categorized as “Level 2” financial statement items. The fair values of mortgage loans acquired for sale at fair value are estimated using their quoted market or contracted price or market price equivalent. For the mortgage loans at fair value held in a VIE, the fair values of all of the individual securities issued by the securitization trust are used to derive a price for the mortgage loans.

 

29


Table of Contents
    Loans that are not saleable into active markets, comprised of the Company’s mortgage loans at fair value held outside the VIE and mortgage loans under forward purchase agreements at fair value, are categorized as “Level 3” financial statement items and their fair values are estimated using a discounted cash flow approach. Inputs to the discounted cash flow model include current interest rates, loan amount, payment status, property type or contracted selling price, discount rates and forecasts of future interest rates, home prices, prepayment speeds, default speeds and loss severities.

The valuation process includes the computation by stratum of loan population and a review for reasonableness of various measures such as weighted average life, projected prepayment and default speeds, and projected default and loss percentages. The FAV group computes the effect on the valuation of changes in input variables such as interest rates, home prices, and delinquency status to assess the reasonableness of changes in the loan valuation. The results of the estimates of fair value of “Level 3” mortgage loans are reported to PFSI’s valuation committee as part of its review and approval of monthly valuation results.

Changes in fair value attributable to changes in instrument-specific credit risk are measured by the effect on fair value of the change in the respective loan’s delinquency status at period-end from the later of the beginning of the period or acquisition date.

The significant unobservable inputs used in the fair value measurement of the Company’s mortgage loans at fair value and mortgage loans under forward purchase agreements at fair value are discount rate, home price projections, voluntary prepayment speeds and default speeds. Significant changes in any of those inputs in isolation could result in a significant change to the loans’ fair value measurement. Increases in home price projections are generally accompanied by an increase in voluntary prepayment speeds.

 

30


Table of Contents

Following is a quantitative summary of key inputs used in the valuation of mortgage loans at fair value and mortgage loans under forward purchase agreements at fair value:

 

     Range
     (Weighted average)

Key inputs

   June 30, 2014    December 31, 2013

Mortgage loans at fair value

     

Discount rate

   7.1% – 16.9%    8.7% –16.9%
   (11.8%)    (12.7%)

Twelve-month projected housing price index change

   3.5% – 9.1%    2.5% – 4.3%
   (4.7%)    (3.7%)

Prepayment speed (1)

   0.0% – 6.6%    0.0% – 3.9%
   (2.5%)    (2.0%)

Total prepayment speed (2)

   0.8% – 27.4%    0.3% – 33.9%
   (21.8%)    (24.3%)

Mortgage loans under forward purchase agreements

     

Discount rate

   —      9.5% – 13.5%
   —      (11.9%)

Twelve-month projected housing price index change

   —      3.3% – 4.2%
   —      (3.8%)

Prepayment speed (1)

   —      1.1% – 2.9%
   —      (2.2%)

Total prepayment speed (2)

   —      13.4% – 27.9%
   —      (22.8%)

 

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

Excess Servicing Spread Purchased from PennyMac Financial Services, Inc.

The Company categorizes ESS as a “Level 3” financial statement item. The Company uses a discounted cash flow approach to estimate the fair value of ESS. The key inputs used in the estimation of the fair value of ESS include prepayment speed and discount rate. Significant changes to those inputs in isolation could result in a significant change in the ESS fair value measurement. Changes in these key inputs are not necessarily directly related.

ESS is generally subject to loss in fair value when interest rates decrease. Decreasing mortgage rates normally encourage increased mortgage refinancing activity. Increased refinancing activity reduces the life of the loans underlying the ESS, thereby reducing ESS fair value. Reductions in the fair value of ESS affect income primarily through change in fair value.

Interest income for ESS is accrued using the interest method, based upon the expected interest yield from the ESS through the expected life of the underlying mortgages. Changes to expected interest yield result in a change in interest income which is recorded in Interest income. Changes to expected cash flows result in a change to fair value that is recognized in Net gain (loss) on investments.

 

31


Table of Contents

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

 

     Range  
     (Weighted average)  

Key inputs

   June 30, 2014      December 31, 2013  

Unpaid principal balance of underlying mortgage loans (in thousands)

   $ 27,445,826       $ 20,512,659   

Average servicing fee rate (in basis points)

     31         32   

Average ESS rate (in basis points)

     16         16   

Pricing spread (1)

     1.7% – 14.6%         2.8% - 14.4%   
     (5.1%)         (5.4%)   

Life (in years)

     0.5 - 7.3         0.9 - 8.0   
     (5.9)         (6.1)   

Annual total prepayment speed (2)

     7.6% – 67.0%         7.7% - 48.6%   
     (10.3%)         (9.7%)   

 

(1) 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”) curve for purposes of discounting cash flows relating to ESS.
(2) Prepayment speed is measured using Life Total CPR.

Derivative Financial Instruments

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 mortgage loan will be purchased as a percentage of the commitments it has made (the “pull-through rate”). The Company categorizes IRLCs as “Level 3” financial statement items.

The significant unobservable inputs used in the fair value measurement of the Company’s IRLCs are the pull-through rate and the MSR component of the Company’s estimate of the fair value of the mortgage loans it has committed to purchase. Significant changes in the pull-through rate and the MSR component of the IRLCs, in isolation, could result in a significant change in fair value measurement. The financial effects of changes in these assumptions are generally inversely correlated as increasing interest rates have a positive effect on the fair value of the MSR component of IRLC value, but increase the pull-through rate for loans that have decreased in fair value.

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

 

     Range
(Weighted average)
 

Key inputs

   June 30, 2014      December 31, 2013  

Pull-through rate

     49.0% - 98.0%         64.8% - 98.0%   
     (81.6%)         (86.4%)   

MSR value expressed as:

     

Servicing fee multiple

     1.7 - 5.0         1.4 - 5.1   
     (3.9)         (4.1)   

Percentage of unpaid principal balance

     0.4% - 1.3%         0.4% - 1.3%   
     (1.0%)         (1.0%)   

 

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Table of Contents

The Company estimates the fair value of commitments to sell loans based on quoted MBS prices. The Company estimates the fair value of the interest rate options and futures it purchases and sells based on observed interest rate volatilities in the MBS market.

Real Estate Acquired in Settlement of Loans

REO is measured based on its fair value on a nonrecurring basis and is categorized as a “Level 3” financial statement item. Fair value of REO is estimated by using a current estimate of value from a broker’s price opinion or a full appraisal, or the price given in a current contract of sale.

REO values are reviewed by PCM’s staff appraisers when the Company obtains multiple indications of value and there is a significant difference between the values received. PCM’s staff appraisers will attempt to resolve the difference between the indications of value. In circumstances where the appraisers are not able to generate adequate data to support a value conclusion, the staff appraisers will order an additional appraisal to determine the value.

Mortgage Servicing Rights

MSRs are categorized as “Level 3” financial statement items. The Company uses a discounted cash flow approach to estimate the fair value of MSRs. The key inputs used in the Company’s discounted cash flow model are based on market factors which management believes are consistent with inputs and data used by market participants valuing similar MSRs. The key inputs used in the estimation of the fair value of MSRs include prepayment and default rates of the underlying loans, the applicable pricing spread or discount rate, and annual per-loan cost to service mortgage loans, all of which are unobservable. Significant changes to any of those inputs in isolation could result in a significant change in the MSR fair value measurement. Changes in these key inputs are not necessarily directly related. The results of the estimates of fair value of MSRs are reported to PFSI’s valuation committee as part of their review and approval of monthly valuation results.

MSRs are generally subject to loss in fair value when mortgage interest rates decrease. Decreasing mortgage interest rates normally encourage increased mortgage refinancing activity. Increased refinancing activity reduces the life of the loans underlying the MSRs, thereby reducing MSR fair value. Reductions in the value of MSRs affect income primarily through change in fair value and impairment charges. For MSRs backed by mortgage loans with historically low interest rates, factors other than interest rates (such as housing price changes) take on increasing influence on prepayment behavior of the underlying mortgage loans.

 

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Table of Contents

Following are the key inputs used in determining the fair value of MSRs at the time of initial recognition:

 

     Quarter ended June 30,  
     2014     2013  
     Range
(Weighted average)
 

Key inputs

   Amortized cost     Fair value     Amortized cost     Fair value  
     (MSR recognized and unpaid principal balance of underlying loan amounts in thousands)  

MSR recognized

   $ 13,356      $ 15,385      $ 50,978      $ 77   

Unpaid principal balance of underlying mortgage loans

   $ 1,244,538      $ 1,458,400      $ 3,840,110      $ 27,346   

Weighted-average annual servicing fee rate (in basis points)

     25        25        28        27   

Pricing spread (1)

     6.3% – 14.3%        8.5% – 10.3%        5.4% – 13.5%        6.6% – 11.9%   
     (8.7%)        (9.1%)        (6.5%)        (7.5%)   

Life (in years)

     1.3 – 7.3        3.2 – 7.3        2.6 – 6.9        6.3 – 6.9   
     (6.1)        (7.1)        (6.4)        (6.8)   

Annual total prepayment speed (2)

     7.6% – 50.9%        8.1% – 25.4%        8.5% –23.6%        8.8% – 13.6%   
     (10.4%)        (9.6%)        (9.1%)        (9.3%)   

Annual per-loan cost of servicing

     $68 – $100        $68 – $68        $68 – $140        $68 – $68   
     ($68)        ($68)        ($68)        ($68)   

 

     Six months ended June 30,  
     2014     2013  
     Range
(Weighted average)
 

Key inputs

   Amortized cost     Fair value     Amortized cost     Fair value  
     (MSR recognized and unpaid principal balance of underlying loan amounts in thousands)  

MSR recognized

   $ 22,474      $ 27,142      $ 107,167      $ 104   

Unpaid principal balance of underlying mortgage loans

   $ 2,095,087      $ 2,550,114      $ 8,843,667      $ 29,946   

Weighted-average annual servicing fee rate (in basis points)

     25        25        26        27   

Pricing spread (1)

     6.3% – 14.3%        8.5% – 12.3%        5.4% – 14.4%        6.6% – 14.4%   
     (8.6%)        (9.0%)        (6.8%)        (7.6%)   

Life (in years)

     1.1 – 7.3        2.8 –7.3        2.6 – 6.9        2.8 – 6.9   
     (6.0)        (7.1)        (6.4)        (6.7)   

Annual total prepayment
speed (2)

     7.6% – 56.4%        8.0% – 25.4%        8.5% – 23.6%        8.8% – 27.0%   
     (10.4%)        (9.5%)        (9.1%)        (9.7%)   

Annual per-loan cost of servicing

     $68 – $100        $68 – $68        $68 – $140        $68 – $68   
     ($68)        ($68)        ($68)        ($68)   

 

(1) 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 LIBOR curve for purposes of discounting cash flows relating to MSRs acquired as proceeds from the sale of mortgage loans.
(2) Prepayment speed is measured using Life Total CPR.

 

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Following is a quantitative summary of key inputs used in the valuation of MSRs as of the dates presented, and the effect on the fair value from adverse changes in those assumptions (weighted averages are based upon unpaid principal balance or fair value where applicable):

 

     June 30, 2014     December 31, 2013  
     Range
(Weighted average)
 
     Amortized cost     Fair value     Amortized cost     Fair value  
     (Carrying value, unpaid principal balance and effect on value amounts in thousands)  

Carrying value

   $ 268,682      $ 46,802      $ 264,120      $ 26,452   

Key inputs:

        

Unpaid principal balance of underlying mortgage loans

   $ 24,639,750      $ 4,758,331      $ 23,399,612      $ 2,393,321   

Weighted-average annual servicing fee rate (in basis points)

     26        25        26        26   

Weighted-average note interest rate

     3.72%        4.79%        3.68%        4.78%   

Pricing spread (1) (2)

     6.3% –17.5%        7.6% –15.3%        6.3% –17.5%        7.3% –15.3%   
     (7.4%)        (9.2%)        (6.7%)        (8.6%)   

Effect on fair value of a:

        

5% adverse change

   $ (5,302   $ (827   $ (5,490   $ (488

10% adverse change

   $ (10,427   $ (1,627   $ (10,791   $ (959

20% adverse change

   $ (20,177   $ (3,149   $ (20,861   $ (1,855

Weighted average life (in years)

     1.1 – 7.2        2.4 – 7.2        1.3 – 7.3        2.8 – 7.3   
     (6.4)        (7.0)        (6.7)        (7.2)   

Prepayment speed (1) (3)

     7.7% – 58.9%        8.0% – 30.6%        7.7% – 51.9%        8.0% – 20.0%   
     (8.6%)        (10.2%)        (8.2%)        (8.9%)   

Effect on fair value of a:

        

5% adverse change

   $ (5,495   $ (1,160   $ (5,467   $ (568

10% adverse change

   $ (10,821   $ (2,277   $ (10,765   $ (1,117

20% adverse change

   $ (20,993   $ (4,390   $ (20,886   $ (2,160

Annual per-loan cost of servicing

     $68 – $140        $68 – $140        $68 – $140        $68 – $140   
     ($68)        ($68)        ($68)        ($68)   

Effect on fair value of a:

        

5% adverse change

   $ (1,761   $ (290   $ (1,695   $ (158

10% adverse change

   $ (3,522   $ (580   $ (3,390   $ (316

20% adverse change

   $ (7,043   $ (1,159   $ (6,780   $ (633

 

(1) The effect on value of an adverse change in one of the above-mentioned key inputs may result in recognition of MSR impairment. The extent of impairment recognized will depend on the relationship of fair value to the carrying value of MSRs.
(2) Pricing spread represents a margin that is added 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 LIBOR curve for purposes of discounting cash flows relating to MSRs acquired as proceeds from the sale of mortgage loans and purchased MSRs not backed by pools of distressed mortgage loans.
(3) Prepayment speed is measured using Life Total CPR.

 

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

Note 8—Mortgage Loans Acquired for Sale at Fair Value

Mortgage loans acquired for sale at fair value is comprised of recently originated mortgage loans purchased by the Company for resale. Following is a summary of the distribution of the Company’s mortgage loans acquired for sale at fair value:

 

     June 30, 2014      December 31, 2013  
     Fair
value
     Unpaid
principal
balance
     Fair
value
     Unpaid
principal
balance
 
Loan type    (in thousands)  

Conventional:

           

Agency-eligible

   $ 507,887       $ 485,096       $ 311,162       $ 304,749   

Jumbo

     96,491         93,110         34,615         35,050   

Government-insured or guaranteed

     304,707         288,616         112,360         107,587   
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 909,085       $ 866,822       $ 458,137       $ 447,386   
  

 

 

    

 

 

    

 

 

    

 

 

 

Loans pledged to secure assets sold under agreements to repurchase

   $ 905,044          $ 454,210      
  

 

 

       

 

 

    

The Company is not approved by Ginnie Mae as an issuer of Ginnie Mae-guaranteed securities which are backed by government-insured or guaranteed mortgage loans. The Company transfers government-insured or guaranteed mortgage loans that it purchases from correspondent lenders to PLS, which is a Ginnie Mae-approved issuer, and earns a sourcing fee of three basis points on the unpaid principal balance plus interest earned during the period it holds each such loan.

Note 9—Derivative Financial Instruments

The Company is exposed to price risk relative to its mortgage loans acquired for sale as well as to the IRLCs it issues to correspondent lenders. The Company bears price risk from the time an IRLC is issued to a correspondent lender to the time the purchased mortgage loan is sold. During this period, the Company is exposed to losses if mortgage interest rates increase because the value of the purchase commitment or mortgage loan acquired for sale decreases.

The Company engages in interest rate risk management activities in an effort to reduce the variability of earnings caused by changes in interest rates. To manage the price risk resulting from interest rate risk, the Company uses derivative financial instruments acquired with the intention of moderating the risk that changes in market interest rates will result in unfavorable changes in the fair value of the Company’s MBS, IRLCs and inventory of mortgage loans acquired for sale.

The Company is also exposed to risk relative to the fair value of its MSRs. The Company is exposed to loss in value of its MSRs when interest rates decrease. The Company periodically includes MSRs in its hedging activities.

 

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Beginning in the third quarter of 2013, the Company entered into Eurodollar futures, which settle daily, to economically hedge net fair value changes of a portion of fixed-rate mortgage loans at fair value held in a VIE and MBS securities at fair value and the related variable rate repurchase agreement liabilities indexed to LIBOR. The Company uses the Eurodollar futures with the intention of moderating the risk of rising market interest rates that will result in unfavorable changes in the value of the Company’s fixed-rate assets and economic performance of its LIBOR-indexed variable interest rate repurchase agreement liabilities.

The Company does not use derivative financial instruments for purposes other than in support of its risk management activities other than IRLCs, which are generated in the normal course of business when the Company commits to purchase mortgage loans acquired for sale. The Company records all derivative financial instruments at fair value and records changes in fair value in current period income.

The Company had the following derivative assets and liabilities and related margin deposits recorded within Derivative assets and Derivative liabilities on the consolidated balance sheets:

 

     June 30, 2014     December 31, 2013  
            Fair value            Fair value  
     Notional      Derivative     Derivative     Notional      Derivative     Derivative  

Instrument

   amount      assets     liabilities     amount      assets     liabilities  
     (in thousands)  

Derivatives not designated as hedging instruments:

              

Free-standing derivatives:

              

Interest rate lock commitments

     1,291,181       $ 11,482      $ 395        557,343       $ 2,510      $ 1,261   

Forward sales contracts

     4,185,633         314        23,236        3,588,027         16,385        1,295   

Forward purchase contracts

     3,058,604         14,723        266        2,781,066         1,229        7,420   

MBS put options

     392,500         471        —          55,000         272        —     

MBS call options

     95,000         519        —          110,000         —          —     

Eurodollar futures

     5,562,000         —          —          8,779,000         —          —     

Treasury futures

     85,000         545        —          105,000         —          —     

Call options on Eurodollar futures

     230,000         214          —           —          —     

Put options on Eurodollar futures

     125,000         181        —          52,500         566        —     
     

 

 

   

 

 

      

 

 

   

 

 

 

Total derivative instruments before netting

        28,449        23,897           20,962        9,976   

Netting

        (13,855     (17,550        (12,986     (8,015
     

 

 

   

 

 

      

 

 

   

 

 

 
      $ 14,594      $ 6,347         $ 7,976      $ 1,961   
     

 

 

   

 

 

      

 

 

   

 

 

 

Margin deposits with (collateral received from) derivatives counterparties

      $ 3,695           $ (4,971  
     

 

 

        

 

 

   

The following table summarizes the notional amount activity for derivative contracts used to hedge the Company’s IRLCs and inventory of mortgage loans acquired for sale:

 

     Quarter ended June 30, 2014  

Period/Instrument

   Balance,
beginning
of period
     Additions      Dispositions/
expirations
    Balance,
end

of period
 
     (in thousands)  

Forward purchase contracts

     1,777,353         11,967,081         (10,685,830     3,058,604   

Forward sales contracts

     2,497,960         15,282,582         (13,594,909     4,185,633   

MBS put option

     235,000         290,000         (255,000     270,000   

MBS call option

     —           25,000         —          25,000   

 

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Table of Contents
     Quarter ended June 30, 2013  

Period/Instrument

   Balance,
beginning
of period
     Additions      Dispositions/
expirations
    Balance,
end

of period
 
     (in thousands)  

Forward purchase contracts

     1,890,960         15,323,298         (11,802,474     5,411,784   

Forward sales contracts

     3,224,190         20,418,956         (15,915,080     7,728,066   

MBS put options

     225,000         1,545,000         (1,310,000     460,000   

MBS call options

     350,000         1,000,000         (625,000     725,000   

 

     Six months ended June 30, 2014  

Period/Instrument

   Balance,
beginning
of period
     Additions      Dispositions/
expirations
    Balance,
end

of period
 
     (in thousands)  

Forward purchase contracts

     2,781,066         18,364,898         (18,087,360     3,058,604   

Forward sales contracts

     3,463,027         24,051,521         (23,328,915     4,185,633   

MBS put option

     55,000         695,000         (480,000     270,000   

MBS call option

     110,000         25,000         (110,000     25,000   

 

     Six months ended June 30, 2013  

Period/Instrument

   Balance,
beginning
of period
     Additions      Dispositions/
expirations
    Balance,
end

of period
 
     (in thousands)  

Forward purchase contracts

     2,206,539         27,765,642         (24,560,397     5,411,784   

Forward sales contracts

     4,266,983         38,269,229         (34,808,146     7,728,066   

MBS put options

     495,000         3,025,000         (3,060,000     460,000   

MBS call options

     —           1,900,000         (1,175,000     725,000   

The Company recorded net (losses) gains on derivative financial instruments used to hedge the Company’s IRLCs and inventory of mortgage loans totaling $(28.8) million and $129.1 million for the quarters ended June 30, 2014 and 2013, respectively, and $(39.5) million and $140.1 million for the six months ended June 30, 2014 and 2013, respectively. Derivative gains and losses are included in Net gains on mortgage loans acquired for sale in the Company’s consolidated statements of income.

 

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Table of Contents

The following table summarizes the notional amount activity for derivative contracts used to hedge the Company’s MSRs:

 

     Quarter ended June 30, 2014  

Period/Instrument

   Balance,
beginning
of period
     Additions      Dispositions/
expirations
    Balance,
end of
period
 
     (in thousands)  

Quarter ended June 30, 2014

          

Forward purchase contracts

     —           70,000         (70,000     —     

Forward sales contracts

     —           35,000         (35,000     —     

MBS put option

     —           25,000         —          25,000   

MBS call option

     35,000         70,000         (35,000     70,000   

Treasury Future sale contracts

     —           4,000         (4,000     —     

Treasury Future purchase contracts

     —           4,000         (4,000     —     

Put option on Eurodollar futures

     325,000         40,000         (325,000     40,000   

Call option on Eurodollar futures

     90,000         130,000         (90,000     130,000   

 

     Six months ended June 30, 2014  

Period/Instrument

   Balance,
beginning
of period
     Additions      Dispositions/
expirations
    Balance,
end of
period
 
     (in thousands)  

Six months ended June 30, 2014

          

Forward purchase contracts

     —           70,000         (70,000     —     

Forward sales contracts

     —           60,000         (60,000     —     

MBS put option

     —           25,000         —          25,000   

MBS call option

     —           130,000         (60,000     70,000   

Treasury Future sale contracts

     —           32,800         (32,800     —     

Treasury Future purchase contracts

     —           25,600         (25,600     —     

Put option on Eurodollar futures

     —           365,000         (325,000     40,000   

Call option on Eurodollar futures

     —           280,000         (150,000     130,000   

The Company recorded net gains (losses) on derivative financial instruments used as economic hedges of MSRs totaling $4.3 million and none for the quarters ended June 30, 2014 and 2013, respectively, and $4.2 million and $(2.0) million for the six months ended June 30, 2014 and 2013, respectively. The derivative net gains (losses) are included in Net loan servicing fees in the Company’s consolidated statements of income.

 

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Table of Contents

The following table summarizes the notional amount activity for derivative contracts used to hedge the Company’s net fair value changes of a portion of fixed-rate Mortgage loans at fair value held in a VIE and MBS securities at fair value and the related variable LIBOR rate repurchase agreement liabilities:

 

     Quarter ended June 30, 2014  

Period/Instrument

   Balance,
beginning
of period
     Additions      Dispositions/
expirations
    Balance,
end

of period
 
     (in thousands)  

Quarter ended June 30, 2014

          

Eurodollar Future sale contracts

     6,084,000         336,000         (858,000     5,562,000   

Eurodollar Future purchase contracts

     —           400,000         (400,000     —     

Treasury Future sale contracts

     75,000         113,000         (103,000     85,000   

Treasury Future purchase contracts

     —           93,000         (93,000     —     

Put options on Eurodollar futures

     55,000         85,000         (55,000     85,000   

Call option on Eurodollar futures

     —           100,000         —          100,000   

MBS put option purchase contracts

     25,000         97,500         (25,000     97,500   

 

     Six months ended June 30, 2014  

Period/Instrument

   Balance,
beginning
of period
     Additions      Dispositions/
expirations
    Balance,
end

of period
 
     (in thousands)  

Six months ended June 30, 2014

          

Eurodollar Future sale contracts

     8,779,000         462,000         (3,679,000     5,562,000   

Eurodollar Future purchase contracts

     —           2,997,000         (2,997,000     —     

Treasury Future sale contracts

     105,000         188,000         (208,000     85,000   

Treasury Future purchase contracts

     —           168,000         (168,000     —     

Put options on Eurodollar futures

     52,500         197,000         (164,500     85,000   

Call option on Eurodollar futures

     —           100,000         —          100,000   

MBS put option purchase contracts

     15,000         122,500         (40,000     97,500   

The Company recorded net losses on derivative financial instruments used to hedge the net change in fair value of fixed-rate assets and its variable LIBOR rate repurchase agreement liabilities of $8.2 million for the quarter ended June 30, 2014 and $13.8 million for the six months ended June 30, 2014. The derivative losses are included in Net gain on investments in the Company’s consolidated statements of income. The Company had no similar economic hedges in place for the quarter and six months ended June 30, 2013.

Note 10—Mortgage Loans at Fair Value

Mortgage loans at fair value are comprised of mortgage loans that are not acquired for sale and, to the extent they are not held in a VIE securing an asset-backed financing, may be sold at a later date pursuant to a management determination that such a sale represents the most advantageous liquidation strategy for the identified loan.

 

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Table of Contents

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

 

     June 30, 2014      December 31, 2013  

Loan type

   Fair
value
     Unpaid
principal
balance
     Fair
value
     Unpaid
principal
balance
 
     (in thousands)  

Distressed lending

           

Nonperforming loans

   $ 1,546,074       $ 2,440,105       $ 1,469,686       $ 2,415,446   

Performing loans:

           

Fixed interest rate

     320,212         475,586         310,607         475,568   

Adjustable-rate mortgage (“ARM”)/hybrid

     113,271         152,158         165,327         207,553   

Interest rate step-up

     176,794         281,758         130,906         215,702   

Balloon

     150         210         139         213   
  

 

 

    

 

 

    

 

 

    

 

 

 
     610,427         909,712         606,979         899,036   
  

 

 

    

 

 

    

 

 

    

 

 

 

Mortgage loans held in a VIE securing asset-backed financing

           

Fixed interest rate jumbo

     541,320         533,043         523,652         543,257   
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 2,697,821       $ 3,882,860       $ 2,600,317       $ 3,857,739   
  

 

 

    

 

 

    

 

 

    

 

 

 

Mortgage loans at fair value pledged to secure borrowings at period end:

           

Assets sold under agreements to repurchase

   $ 2,407,512          $ 1,963,266      
  

 

 

       

 

 

    

Mortgage loans held in a consolidated subsidiary whose stock is pledged to secure financings of such loans

   $ 309          $ 989      
  

 

 

       

 

 

    

Mortgage loans held in a VIE securing an asset-backed financing

   $ 541,320          $ 523,652      
  

 

 

       

 

 

    

Following is a summary of certain concentrations of credit risk in the portfolio of mortgage loans at fair value:

 

Concentration

   June 30,
2014
    December 31,
2013
 

Portion of mortgage loans originated between 2005 and 2007

     72     72

Percentage of fair value of mortgage loans with unpaid-principal-balance-to-current-property-value in excess of 100%

     59     61

Percentage of mortgage loans secured by California real estate

     21     24

Additional states contributing 5% or more of mortgage loans

    
 
 
New York
Florida
New Jersey
  
  
  
   
 
 
New York
Florida
New Jersey
  
  
  

 

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Table of Contents

Note 11—Mortgage Loans Under Forward Purchase Agreements at Fair Value

Mortgage loans under forward purchase agreements at fair value are comprised of mortgage loans not acquired for resale. Such loans may be sold at a later date pursuant to a management determination that such a sale represents the most advantageous liquidation strategy for the identified loan. Following is a summary of the distribution of the Company’s mortgage loans under forward purchase agreements at fair value:

 

     June 30, 2014      December 31, 2013  
            Unpaid             Unpaid  
     Fair      principal      Fair      principal  

Loan type

   value      balance      value      balance  
     (in thousands)  

Nonperforming loans

   $ —         $ —         $ 177,841       $ 268,600   

Performing loans:

           

Fixed

     —           —           19,292         29,496   

ARM/hybrid

     —           —           19,510         31,933   

Interest rate step-up

     —           —           1,485         2,455   
  

 

 

    

 

 

    

 

 

    

 

 

 
     —           —           40,287         63,884   
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ —         $ —         $ 218,128       $ 332,484   
  

 

 

    

 

 

    

 

 

    

 

 

 

Following is a summary of certain concentrations of credit risk in the portfolio of mortgage loans under forward purchase agreements at fair value:

 

     June 30,      December 31,  
     2014      2013  

Portion of mortgage loans originated between 2005 and 2007

     —           72

Percentage of mortgage loans secured by California real estate

     —           25

Additional states contributing 5% or more of mortgage loans

        New Jersey   
        Washington   
        New York   
        Maryland   

 

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Table of Contents

Note 12—Real Estate Acquired in Settlement of Loans

Following is a summary of financial information relating to REO:

 

     Quarter ended June 30,     Six months ended June 30,  
     2014     2013     2014     2013  
     (in thousands)  

Balance at beginning of period

   $ 172,987      $ 84,487      $ 138,942      $ 88,078   

Purchases

     —          —          3,049        —     

Transfers from mortgage loans at fair value and advances

     105,245        37,117        174,147        68,803   

Transfers from REO under forward purchase agreements

     12,645        —          12,737        —     

Results of REO:

        

Valuation adjustments, net

     (8,865     (4,978     (17,273     (11,067

Gain on sale, net

     3,590        3,049        5,772        5,885   
  

 

 

   

 

 

   

 

 

   

 

 

 
     (5,275     (1,929     (11,501     (5,182

Proceeds from sales

     (45,131     (30,993     (76,903     (63,017
  

 

 

   

 

 

   

 

 

   

 

 

 

Balance at end of period

   $ 240,471      $ 88,682      $ 240,471      $ 88,682   
  

 

 

   

 

 

   

 

 

   

 

 

 

At period end:

        

REO pledged to secure assets sold under agreements to repurchase

   $ 76,258      $ 9,253       
  

 

 

   

 

 

     

REO held in a consolidated subsidiary whose stock is pledged to secure financings of such properties

   $ 31,426      $ 43,131       
  

 

 

   

 

 

     

Note 13—Real Estate Acquired in Settlement of Loans Under Forward Purchase Agreements

Following is a summary of the activity in REO under forward purchase agreements:

 

     Quarter ended June 30,      Six months ended June 30,  
     2014     2013      2014     2013  
     (in thousands)  

Balance at beginning of period

   $ 13,890      $ —         $ 9,138      $ —     

Purchases

     29        —           68        —     

Transfers from mortgage loans under forward purchase agreements at fair value and advances

     2,542        89         9,369        89   

Transfers to REO

     (12,646     —           (12,737     —     

Results of REO under forward purchase agreements:

         

Valuation adjustments, net

     (294     —           (779     —     

Gain on sale, net

     222        —           306        —     
  

 

 

   

 

 

    

 

 

   

 

 

 
     (72     —           (473     —     

Proceeds from sales

     (3,743     —           (5,365     —     
  

 

 

   

 

 

    

 

 

   

 

 

 

Balance at end of period

   $ —        $ 89       $ —        $ 89   
  

 

 

   

 

 

    

 

 

   

 

 

 

At June 30, 2014, the entire balance of REO under forward purchase agreements was subject to borrowings under forward purchase agreements.

 

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Note 14—Mortgage Servicing Rights

Carried at Fair Value:

Following is a summary of MSRs carried at fair value:

 

     Quarter ended June 30,     Six months ended June 30,  
     2014     2013     2014     2013  
     (in thousands)  

Balance at beginning of period

   $ 36,181      $ 1,305      $ 26,452      $ 1,346   

Additions:

        

Purchases

     —          186        —          186   

MSRs resulting from loan sales

     15,385        77        27,142        104   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total additions

     15,385        263        27,142        290   
  

 

 

   

 

 

   

 

 

   

 

 

 

Change in fair value:

        

Due to changes in valuation inputs or assumptions used in valuation model(1)

     (3,636     312        (4,868     302   

Other changes in fair value(2)

     (1,128     (52     (1,924     (110
  

 

 

   

 

 

   

 

 

   

 

 

 
     (4,764     260        (6,792     192   
  

 

 

   

 

 

   

 

 

   

 

 

 

Sales

     —          —          —          —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Balance at end of period

   $ 46,802      $ 1,828      $ 46,802      $ 1,828   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) Principally reflects changes in pricing spread (discount rate) and prepayment speed inputs, primarily due to changes in interest rates.
(2) Represents changes due to realization of expected cash flows.

 

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Carried at Lower of Amortized Cost or Fair Value:

Following is a summary of MSRs carried at lower of amortized cost or fair value:

 

     Quarter ended June 30,     Six months ended June 30,  
     2014     2013     2014     2013  
     (in thousands)  

Amortized Cost:

        

Balance at beginning of period

   $ 268,450      $ 184,197      $ 266,697      $ 132,977   

Additions:

        

MSRs resulting from loan sales

     13,356        50,978        22,474        107,167   

Purchases

     —          —          —          —     
  

 

 

   

 

 

   

 

 

   

 

 

 
     13,356        50,978        22,474        107,167   
  

 

 

   

 

 

   

 

 

   

 

 

 

Sales

     —          —          —          —     

Amortization

     (7,696     (6,263     (15,061     (11,232

Application of valuation allowance to write down

        

MSRs with other-than temporary impairment

     —          —          —          —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Balance at end of period

     274,110        228,912        274,110        228,912   
  

 

 

   

 

 

   

 

 

   

 

 

 

Valuation Allowance:

        

Balance at beginning of period

     (3,204     (5,061     (2,577     (7,547

(Additions) reversals

     (2,224     1,222        (2,851     3,708   

Application of valuation allowance to write down

        

MSRs with other-than temporary impairment

     —          —          —          —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Balance at end of period

     (5,428     (3,839     (5,428     (3,839
  

 

 

   

 

 

   

 

 

   

 

 

 

MSRs, net

   $ 268,682      $ 225,073      $ 268,682      $ 225,073   
  

 

 

   

 

 

   

 

 

   

 

 

 

Fair value at end of period

   $ 289,226      $ 242,104      $ 289,226      $ 242,104   
  

 

 

   

 

 

   

 

 

   

 

 

 

The following table summarizes the Company’s estimate of amortization of its existing MSRs carried at amortized cost. This projection was developed using the assumptions made by management in its June 30, 2014 valuation of MSRs. The assumptions underlying the following estimate will change as market conditions and portfolio composition and behavior change, causing both actual and projected amortization levels to change over time. Therefore, the following estimates will change in a manner and amount not presently determinable by management.

 

     Estimated MSR  

Year ended June 30,

   amortization  
     (in thousands)  

2015

   $ 27,836   

2016

     27,188   

2017

     25,767   

2018

     24,080   

2019

     22,044   

Thereafter

     147,195   
  

 

 

 

Total

   $ 274,110   
  

 

 

 

 

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Servicing fees relating to MSRs are recorded in Net loan servicing fees on the consolidated statements of income and are summarized below:

 

     Quarter ended June 30,      Six months ended June 30,  
     2014      2013      2014      2013  
     (in thousands)  

Contractually-specified servicing fees

   $ 18,234       $ 11,534       $ 35,051       $ 20,471   
  

 

 

    

 

 

    

 

 

    

 

 

 

Note 15— Assets Sold Under Agreements to Repurchase at Fair Value

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

 

     Quarter ended June 30,     Six months ended June 30,  
     2014     2013     2014     2013  
     (dollars in thousands)  

During the period:

        

Weighted-average interest rate (1)

     2.20     2.45     2.21     2.57

Average balance

   $ 2,253,127      $ 1,385,350      $ 2,025,678      $ 1,304,010   

Total interest expense

   $ 15,143      $ 10,814      $ 27,682      $ 21,526   

Maximum daily amount outstanding

   $ 2,814,572      $ 2,108,956      $ 2,587,434      $ 2,108,956   

Period end:

        

Balance

   $ 2,701,755      $ 2,039,605       

Weighted-average interest rate

     2.09     2.16    

Available borrowing capacity:

        

Committed

   $ 344,923      $ 1,242,189       

Uncommitted

   $ 828,885      $ 50,000       
  

 

 

   

 

 

     
   $ 1,173,808      $ 1,292,189       
  

 

 

   

 

 

     

Margin deposits placed with counterparties

   $ 4,469      $ 19,755       

Fair value of assets securing agreements to repurchase:

        

Mortgage-backed securities

   $ 198,899      $ —         

Mortgage loans acquired for sale at fair value

   $ 905,044      $ 1,305,009       

Mortgage loans at fair value

   $ 2,407,821      $ 1,252,561       

Real estate acquired in settlement of loans

   $ 107,684      $ 52,384       
  

 

 

   

 

 

     
   $ 3,619,448      $ 2,609,954       
  

 

 

   

 

 

     

 

(1) Excludes the amortization of commitment fees and issuance costs of $2.6 million and $5.2 million for the quarter and six months ended June 30, 2014 and $2.3 million and $4.7 million for the quarter and six months ended June 30, 2013, respectively.

Following is a summary of maturities of outstanding assets sold under agreements to repurchase by maturity date:

 

Remaining Maturity at June 30, 2014

   Balance  
     (in thousands)  

Within 30 days

   $ 393,215   

Over 30 to 90 days

     899,290   

Over 90 days to 180 days

     820,116   

Over 180 days to 1 year

     589,134   
  

 

 

 
   $ 2,701,755   
  

 

 

 

Weighted average maturity (in months)

     3.4   

 

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The Company is subject to margin calls during the period the agreements are outstanding and therefore may be required to repay a portion of the borrowings before the respective agreements mature if the value (as determined by the applicable lender) of the assets securing those agreements decreases. Margin deposits are included in Other assets in the consolidated balance sheets.

The amount at risk (the fair value of the assets pledged plus the related margin deposit, less the amount advanced by the counterparty and interest payable) and maturity information relating to the Company’s assets sold under agreements to repurchase is summarized by counterparty below as of June 30, 2014:

Mortgage loans acquired for sale, mortgage loans and REO sold under agreements to repurchase

 

Counterparty

   Amount at risk      Mortgage loans
acquired for sale
Weighted-average
repurchase agreement
maturity 
     Facility maturity  
     (in thousands)                

Credit Suisse First Boston Mortgage Capital LLC

   $ 238,695         September 20, 2014         October 31, 2014   

Bank of America, N.A.

   $ 55,314         September 12, 2014         January 30, 2015   

Morgan Stanley

   $ 10,832         August 20, 2014         December 18, 2014   

The Royal Bank of Scotland Group

   $ 80,264         —           February 17, 2015   

Citibank, N.A.

   $ 539,745         —           July 24, 2014   

Securities sold under agreements to repurchase

 

Counterparty

   Amount at risk      Maturity  
     (in thousands)         

Daiwa Capital Markets America, Inc

   $ 7,412         August 2, 2014   

Credit Suisse First Boston Mortgage Capital LLC

   $ 4,770         July 15, 2014   

Bank of America, N.A.

   $ 2,401         July 15, 2014   

The Company’s debt financing agreements require PMT and certain of its subsidiaries to comply with financial covenants that include a minimum tangible net worth for the Company of $860 million; a minimum tangible net worth for the Operating Partnership of $700 million (net worth was $1.6 billion, which includes PennyMac Holdings, LLC “PMH” and PennyMac Corp. (“PMC”)), PMH of $250 million (net worth was $762.4 million), and PMC of $150 million (net worth was $345.4 million). These tangible net worth requirements limit the subsidiaries’ abilities to transfer funds to the Company.

 

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Note 16—Asset-backed Secured Financing of the Variable Interest Entity at Fair Value

Following is a summary of financial information relating to the asset-backed secured financing of the variable interest entity:

 

     Quarter ended June 30,      Six months ended June 30,  
     2014     2013      2014     2013  
     (dollars in thousands)  

Period end:

         

Balance

   $ 170,201      $ —          

Interest rate

     3.50     —          

During the period:

         

Weighted-average balance

   $ 165,495      $ —         $ 166,190      $ —     

Interest expense

   $ 1,561      $ —         $ 3,178      $ —     

Weighted-average effective interest rate

     3.73     —           3.80     —     

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

Note 17—Exchangeable Senior Notes

PMC issued in a private offering $250 million aggregate principal amount of Notes due May 1, 2020. The Notes bear interest at a rate of 5.375% per year, payable semiannually. The Notes are exchangeable into common shares of the Company at a rate of 33.5733 common shares per $1,000 principal amount of the Notes, which exchange rate increased from the initial exchange rate of 33.5149. The increase in the calculated exchange rate was the result of cash dividends exceeding the dividend threshold amount of $0.57 as provided in the related indenture.

Following is financial information relating to the Notes:

 

     Quarter ended June 30,     Six months ended June 30,  
     2014     2013     2014      2013  
     (dollars in thousands)  

Period end:

         

Balance

   $ 250,000      $ 250,000        

Unamortized issuance costs (1)

   $ 6,388      $ 7,281        

Interest rate

     5.38     5.38     

During the period:

         

Weighted-average balance

   $ 250,000      $ 170,330      $ 250,000       $ 85,635   

Interest expense (2)

   $ 3,588      $ 2,384      $ 7,172       $ 2,384   

 

(1) Unamortized issuance costs are included in Other assets in the consolidated balance sheets.
(2) Total interest expense includes amortization of debt issuance costs of $228,000 and $453,000 during the quarter and six months ended June 30, 2014, respectively, and $144,000 during the quarter and six months ended June 30, 2013.

 

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Note 18—Borrowings under Forward Purchase Agreements

Following is a summary of financial information relating to borrowings under forward purchase agreements:

 

     Quarter ended June 30,     Six months ended June 30,  
     2014     2013     2014     2013  
     (dollars in thousands)  

Period end:

        

Balance

   $ —        $ 244,047       

Interest rate

     0.00     3.00    

Fair value of underlying loans and REO

   $ —        $ 242,621       

During the period:

        

Weighted-average effective interest rate

     2.82     3.00     2.84     3.00

Weighted-average balance

   $ 109,793      $ 33,097      $ 165,471      $ 16,640   

Interest expense

   $ 783      $ 251      $ 2,364      $ 251   

Maximum daily amount outstanding

   $ 226,847      $ 244,047      $ 226,847      $ 244,047   

Note 19—Liability for Losses Under Representations and Warranties

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

 

     Quarter ended June 30,      Six months ended June 30,  
     2014      2013      2014      2013  
     (in thousands)  

Balance, beginning of period

   $ 10,854       $ 6,231       $ 10,110       $ 4,441   

Provision for losses

     1,022         1,437         1,766         3,227   

Incurred losses

     —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Balance, end of period

   $ 11,876       $ 7,668       $ 11,876       $ 7,668   
  

 

 

    

 

 

    

 

 

    

 

 

 

Following is a summary of the Company’s repurchase activity:

 

     Quarter ended June 30,      Six months ended June 30,  
     2014      2013      2014      2013  
     (in thousands)  

During the period:

           

Unpaid principal balance of mortgage loans repurchased

   $ 2,623       $ 292       $ 4,411       $ 1,208   

Unpaid principal balance of repurchased mortgage loans repurchased by correspondent lenders

   $ 1,922       $ 394       $ 2,811       $ 1,104   

At end of period:

           

Unpaid principal balance of mortgage loans subject to pending claims for repurchase

   $ 19,805       $ 824         

Unpaid principal balance of mortgage loans subject to representations and warranties

   $ 29,806,058       $ 19,829,437         

 

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Note 20—Commitments and Contingencies

Litigation

From time to time, the Company may be involved in various proceedings, claims and legal actions arising in the ordinary course of business. As of June 30, 2014, the Company was not involved in any such proceedings, claims or legal actions that in management’s view would reasonably be likely to have a material adverse effect on the Company.

Mortgage Loan Commitments

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

 

     June 30, 2014  
     (in thousands)  

Commitments to purchase mortgage loans:

  

Correspondent production

   $ 1,443,612   

Note 21—Shareholders’ Equity

At June 30, 2014, the Company had approximately $115.0 million of common shares available for issuance under its ATM Equity Offering Sales AgreementSM. During the six months ended June 30, 2014, the Company sold a total of 3,447,022 of its common shares at a weighted average price of $23.92 per share, providing net proceeds to the Company of approximately $81.6 million, net of sales commissions of $889,000.

At June 30, 2013, the Company had approximately $197.5 million available for issuance under its ATM Equity Offering Sales AgreementSM. The Company did not sell any common shares under its ATM Equity OfferingSM Sales Agreement during the six months ended June 30, 2013.

 

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Note 22—Net Gain on Mortgage Loans Acquired for Sale

Net gain on mortgage loans acquired for sale is summarized below:

 

     Quarter ended June 30,     Six months ended June 30,  
     2014     2013     2014     2013  
     (in thousands)  

Cash gain (loss):

        

Sales proceeds, net

   $ (3,173   $ (71,706   $ (6,067   $ (98,952

Hedging activities

     (18,749     32,092        (22,299     45,705   
  

 

 

   

 

 

   

 

 

   

 

 

 
     (21,922     (39,614     (28,366     (53,247

Non cash gain:

        

Receipt of MSRs in loan sale transactions

     28,741        51,055        49,616        107,271   

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

     (1,022     (1,437     (1,766     (3,227

Change in fair value relating to IRLCs, mortgage loans and hedging derivatives held at period end:

        

IRLCs

     7,816        (28,020     9,838        (36,446

Mortgage loans

     6,660        (34,572     8,073        (36,994

Hedging derivatives

     (10,051     97,026        (17,202     96,360   
  

 

 

   

 

 

   

 

 

   

 

 

 
     4,425        34,434        709        22,920   
  

 

 

   

 

 

   

 

 

   

 

 

 
   $ 10,222      $ 44,438      $ 20,193      $ 73,717   
  

 

 

   

 

 

   

 

 

   

 

 

 

Note 23—Net Interest Income

Net interest income is summarized below:

 

     Quarter ended June 30,      Six months ended June 30,  
     2014      2013      2014      2013  
     (in thousands)  

Interest income:

           

Short-term investments

   $ 172       $ 57       $ 324       $ 88   

Mortgage-backed securities

     1,961         —           3,722         —     

Mortgage loans acquired for sale at fair value

     5,574         9,292         9,199         15,615   

Mortgage loans at fair value

     36,231         17,052         65,012         27,549   

Mortgage loans under forward purchase agreements at fair value

     1,430         260         3,584         260   

Excess servicing spread purchased from PFSI, at fair value

     3,138         —           6,001         —     

Other

     12         136         22         160   
  

 

 

    

 

 

    

 

 

    

 

 

 
     48,518         26,797         87,864         43,672   
  

 

 

    

 

 

    

 

 

    

 

 

 

Interest expense:

           

Assets sold under agreements to repurchase

     15,143         10,814         27,682         21,526   

Borrowings under forward purchase agreements

     783         251         2,363         251   

Asset-backed secured financing

     1,561         —           3,178         —     

Exchangeable senior notes

     3,587         2,384         7,171         2,384   

Other

     791         695         1,246         1,219   
  

 

 

    

 

 

    

 

 

    

 

 

 
     21,865         14,144         41,640         25,380   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net interest income

   $ 26,653       $ 12,653       $ 46,224       $ 18,292   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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Note 24—Net Gain on Investments

Net gain on investments is summarized below:

 

     Quarter ended June 30,      Six months ended June 30,  
     2014     2013      2014     2013  
     (in thousands)  

Net gain (loss) on investments:

         

Mortgage-backed securities

   $ 1,467      $ —         $ 2,176      $ —     

Mortgage loans

     84,379        46,834         131,935        110,814   

Asset-backed secured financing

     (5,175     —           (7,954     —     

Excess servicing spread purchased from PFSI, at fair value

     (7,537     —           (10,438     —     
  

 

 

   

 

 

    

 

 

   

 

 

 
   $ 73,134      $ 46,834       $ 115,719      $ 110,814   
  

 

 

   

 

 

    

 

 

   

 

 

 

Note 25—Net Loan Servicing Fees

Net loan servicing fees are summarized below:

 

     Quarter ended June 30,     Six months ended June 30,  
     2014     2013     2014     2013  
     (in thousands)  

Servicing fees (1)

   $ 19,156      $ 12,307      $ 36,688      $ 22,724   

MSR recapture fee receivable from PFSI

     1        367        9        499   

Effect of MSRs:

        

Carried at lower of amortized cost or fair value

        

Amortization

     (7,697     (6,264     (15,061     (11,232

(Provision for) reversal of impairment

     (2,224     1,222        (2,851     3,707   

Carried at fair value - change in fair value

     (4,764     260        (6,792     193   

Gains (losses) on hedging derivatives

     4,286        —          4,186        (1,988
  

 

 

   

 

 

   

 

 

   

 

 

 
     (10,399     (4,782     (20,518     (9,320
  

 

 

   

 

 

   

 

 

   

 

 

 

Net loan servicing fees

   $ 8,758      $ 7,892      $ 16,179      $ 13,903   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) Includes contractually specified servicing and ancillary fees.

Note 26—Share-Based Compensation Plans

On June 30, 2014 and 2013, the Company had one share-based compensation plan. The Company recognized compensation expense, which includes dividend equivalents paid to unvested restricted share unit holders, of $1.6 million and $1.3 million for the three and six months ended June 30, 2014, respectively, and $4.1 million and $3.0 million, for the three and six months ended June 30, 2013, respectively. The Company issued 300,131 and 250,948 restricted share units with a grant date fair value of $6.0 million and 5.2 million for the quarter and six months ended June 30, 2014 and 2013, respectively, and had vestings of 149,529 and 87,154 units during the quarter ended June 30, 2014 and 2013, respectively, and 230,216 and 172,923 units during the six months ended June 30, 2014 and 2013, respectively.

 

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Note 27—Other Expenses

Other expenses are summarized below:

 

     Quarter ended June 30,     Six months ended June 30,  
     2014      2013     2014      2013  
     (in thousands)  

Common overhead allocation from PFSI

   $ 2,638       $ 2,974      $ 5,216       $ 5,266   

Servicing and collection costs

     3,114         (30     3,745         333   

Loan origination

     397         1,468        435         2,446   

Insurance

     252         218        491         429   

Technology

     227         235        474         354   

Other expenses

     526         706        860         1,689   
  

 

 

    

 

 

   

 

 

    

 

 

 
   $ 7,154       $ 5,571      $ 11,221       $ 10,517   
  

 

 

    

 

 

   

 

 

    

 

 

 

Note 28—Income Taxes

The Company had a tax benefit of $1.9 million and $3.5 million for the quarter and six months ended June 30, 2014 and a tax expense of $13.4 million and $16.1 million for the quarter and six months ended June 30, 2013. The Company’s effective tax rate was (2.6)% and (3.2)% for the quarter and six months ended June 30, 2014 compared to 19.8% and 13.0% for the same periods in 2013. The decrease in the Company’s effective tax rate for such periods is due primarily to a loss in the Company’s taxable REIT subsidiary for the quarter and six months ended June 30, 2014 compared to income in that entity for the same periods in 2013. The primary difference between the Company’s effective tax rate and the statutory tax rate is non-taxable REIT income resulting from the deduction for dividends paid.

In general, cash dividends declared by the Company will be considered ordinary income to shareholders for income tax purposes. Some portion of the dividends may be characterized as capital gain distributions or a return of capital.

Note 29—Segments and Related Information

The Company has two segments: correspondent production and investment activities.

 

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

Most of the loans the Company has acquired in its correspondent production activities have been eligible for sale to government-sponsored entities such as Fannie Mae and Freddie Mac or through government agencies such as Ginnie Mae.

 

    The investment activities segment represents the Company’s investments in mortgage-related assets, which include distressed mortgage loans, REO, MBS, MSRs and ESS. The Company seeks to maximize the value of the distressed mortgage loans that it acquires through proprietary loan modification programs, special servicing or other initiatives focused on keeping borrowers in their homes. Where this is not possible, such as in the case of many nonperforming mortgage loans, the Company seeks to effect property resolution in a timely, orderly and economically efficient manner, including through the use of resolution alternatives to foreclosure.

 

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Financial highlights by operating segment are summarized below:

 

Quarter ended June 30, 2014

   Correspondent
production
    Investment
activities
    Intersegment
elimination & other
    Total  
     (in thousands)  

Net investment income:

        

Net gain on mortgage loans acquired for sale

   $ 10,222      $ —        $ —        $ 10,222   

Net gain on investments

     —          73,134        —          73,134   

Interest income

     5,585        44,434        (1,501     48,518   

Interest expense

     (4,881     (18,485     1,501        (21,865
  

 

 

   

 

 

   

 

 

   

 

 

 
     704        25,949        —          26,653   

Net loan servicing fees

     —          8,758          8,758   

Other investment income (loss)

     4,485        (2,696     —          1,789   
  

 

 

   

 

 

   

 

 

   

 

 

 
     15,411        105,145        —          120,556   
  

 

 

   

 

 

   

 

 

   

 

 

 

Expenses:

        

Loan fulfillment, Servicing and Management fees payable to PennyMac Financial Services, Inc.

     12,749        22,776        —          35,525   

Other

     265        11,462        —          11,727   
  

 

 

   

 

 

   

 

 

   

 

 

 
     13,014        34,238        —          47,252   
  

 

 

   

 

 

   

 

 

   

 

 

 

Pre-tax income

   $ 2,397      $ 70,907      $ —        $ 73,304   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total assets at period end

   $ 927,849      $ 3,941,896      $ —        $ 4,869,745   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

Quarter ended June 30, 2013

   Correspondent
production
    Investment
activities
    Intersegment
elimination & other
    Total  
     (in thousands)  

Net investment income:

        

Net gain on mortgage loans acquired for sale

   $ 44,438      $ —        $ —        $ 44,438   

Net gain on investments

     —          46,834        —          46,834   

Interest income

     9,291        19,260        (1,754     26,797   

Interest expense

     (7,536     (8,362     1,754        (14,144
  

 

 

   

 

 

   

 

 

   

 

 

 
     1,755        10,898        —          12,653   

Net loan servicing fees

     —          7,892          7,892   

Other investment income (loss)

     4,752        (1,016     —          3,736   
  

 

 

   

 

 

   

 

 

   

 

 

 
     50,945        64,608        —          115,553   
  

 

 

   

 

 

   

 

 

   

 

 

 

Expenses:

        

Loan fulfillment, Servicing and Management fees payable to PennyMac Financial Services, Inc.

     22,773        16,523        —          39,296   

Other

     69        8,279        —          8,348   
  

 

 

   

 

 

   

 

 

   

 

 

 
     22,842        24,802        —          47,644   
  

 

 

   

 

 

   

 

 

   

 

 

 

Pre-tax income

   $ 28,103      $ 39,806      $ —        $ 67,909   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total assets at period end

   $ 1,384,084      $ 2,260,883      $ (201,583   $ 3,443,384   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

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Six months ended June 30, 2014

   Correspondent
production
    Investment
activities
    Intersegment
elimination & other
    Total  
     (in thousands)  

Net investment income:

        

Net gain on mortgage loans acquired for sale

   $ 20,193      $ —        $ —        $ 20,193   

Net gain on investments

     —          115,719        —          115,719   

Interest income

     9,220        81,032        (2,388     87,864   

Interest expense

     (8,536     (35,492     2,388        (41,640
  

 

 

   

 

 

   

 

 

   

 

 

 
     684        45,540        —          46,224   

Net loan servicing fees

     —          16,179        —          16,179   

Other investment income (loss)

     6,841        (8,005     —          (1,164
  

 

 

   

 

 

   

 

 

   

 

 

 
     27,718        169,433        —          197,151   
  

 

 

   

 

 

   

 

 

   

 

 

 

Expenses:

        

Loan fulfillment, Servicing and Management fees payable to PennyMac Financial Services, Inc.

     21,821        45,271        —          67,092   

Other

     353        20,114        —          20,467   
  

 

 

   

 

 

   

 

 

   

 

 

 
     22,174        65,385        —          87,559   
  

 

 

   

 

 

   

 

 

   

 

 

 

Pre-tax income

   $ 5,544      $ 104,048      $ —        $ 109,592   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total assets at period end

   $ 927,849      $ 3,941,896      $ —        $ 4,869,745   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

Six months ended June 30, 2013

   Correspondent
production
    Investment
activities
    Intersegment
elimination & other
    Total  
     (in thousands)  

Net investment income:

        

Net gain on mortgage loans acquired for sale

   $ 73,717      $ —        $ —        $ 73,717   

Net gain on investments

     —          110,814        —          110,814   

Interest income

     15,615        29,852        (1,795     43,672   

Interest expense

     (13,224     (13,951     1,795        (25,380
  

 

 

   

 

 

   

 

 

   

 

 

 
     2,391        15,901        —          18,292   

Net loan servicing fees

     —          13,903        —          13,903   

Other investment income (loss)

     10,225        (3,582     —          6,643   
  

 

 

   

 

 

   

 

 

   

 

 

 
     86,333        137,036        —          223,369   
  

 

 

   

 

 

   

 

 

   

 

 

 

Expenses:

        

Loan fulfillment, Servicing and Management fees payable to PennyMac Financial Services, Inc.

     48,227        30,247        3,284  (1)      81,758   

Other

     1,123        16,644        —          17,767   
  

 

 

   

 

 

   

 

 

   

 

 

 
     49,350        46,891        3,284        99,525   
  

 

 

   

 

 

   

 

 

   

 

 

 

Pre-tax income

   $ 36,983      $ 90,145      $ (3,284   $ 123,844   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) Corporate absorption of fulfillment fees for transition adjustment related to the amended and restated management agreement effective February 1, 2013.

 

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Note 30—Supplemental Cash Flow Information

 

     Six months ended June 30,  
     2014     2013  
     (in thousands)  

Cash paid for interest

   $ 50,926      $ 25,543   

Income tax (refund) payment

   $ (6,775   $ 962   

Non-cash investing activities:

    

Transfer of mortgage loans and advances to real estate acquired in settlement of loans

   $ 174,147      $ 68,627   

Purchase of mortgage loans financed through forward purchase agreements

   $ 1,386      $ 243,096   

Transfer of mortgage loans under forward purchase agreements to mortgage loans at fair value

   $ 205,903      $ —     

Transfer of mortgage loans under forward purchase agreements and advances to REO under forward purchase agreements

   $ 9,369      $ —     

Receipt of MSRs as proceeds from sales of loans

   $ 49,616      $ 107,271   

Purchase of REO financed through forward purchase agreements

   $ 68      $ 89   

Receipt of ESS pursuant to recapture agreement with PFSI

   $ 3,475      $ —     

Transfer of REO under forward purchase agreements to REO

   $ 12,737      $ —     

Non-cash financing activities:

    

Purchase of mortgage loans financed through forward purchase agreements

   $ 1,386      $ 243,096   

Purchase of REO financed through forward purchase agreements

   $ 68      $ 89   

Transfer of mortgage loans at fair value financed through agreements to repurchase to REO financed under agreements to repurchase

   $ 2,123      $ 16,350   

Dividends payable

   $ 43,743      $ —     

Note 31—Regulatory Net Worth

PMC is a seller-servicer for Fannie Mae and Freddie Mac. To retain its status as an approved seller-servicer, PMC is required to meet Fannie Mae’s and Freddie Mac’s capital standards, which require PMC to maintain a minimum net worth of $55.0 million and $23.4 million, respectively. Management believes that PMC complies with Fannie Mae’s and Freddie Mac’s net worth requirement as of June 30, 2014.

Note 32—Recently Issued Accounting Pronouncements

In June of 2014, the FASB issued Accounting Standards Update No. 2014-11, Repurchase-to-Maturity Transactions, Repurchase Financings, and Disclosures (the “Update”) to the Transfers and Servicing topic of its Accounting Standards Codification. The amendments in the Update require two accounting changes. First, the amendments in the Update change the accounting for repurchase-to-maturity transactions to secured borrowing accounting. Second, for repurchase financing arrangements, the amendments require separate accounting for a transfer of a financial asset executed contemporaneously with a repurchase agreement with the same counterparty, which will result in secured borrowing accounting for the repurchase agreement.

The amendments in the Update require disclosures for certain transactions comprising (1) a transfer of a financial asset accounted for as a sale and (2) an agreement with the same transferee entered into in contemplation of the initial transfer that results in the transferor retaining substantially all of the exposure to the economic return on the transferred financial asset throughout the term of the transaction. The Update also specifies certain disclosure requirements for those transactions outstanding at the reporting date and for repurchase agreements, securities lending transactions and repurchase-to-maturity transactions, the transferor is required to make certain disclosures by type of transaction. The adoption of the Update is not expected to have a material effect on the Company’s consolidated financial statements.

Note 33—Subsequent Events

Management has evaluated all events and transactions through the date the Company issued these consolidated financial statements. During this period:

 

    On July 9, 2014, the Company, through the Operating Partnership and PMC, entered into a Master Repurchase Agreement with Bank of America, N.A. (“BANA”), pursuant to which the Operating Partnership may sell to BANA, and later repurchase, newly originated mortgage loans

 

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  in an aggregate principal amount of up to $550 million, $350 million of which is committed (the “Loan Repo Facility”). Under the terms of the agreement, the Loan Repo Facility is committed to January 30, 2015, and the obligations of the Operating Partnership are fully guaranteed by the Company.

 

    On July 9, 2014, the Company, through PMC, entered into an amendment to its Master Repurchase Agreement, dated November 7, 2011, by and among BANA, PMC, the Company and the Operating Partnership (the “Repurchase Agreement”). Under the terms of the Repurchase Agreement, PMC may sell to, and later repurchase from, BANA newly originated residential mortgage loans that are purchased from correspondent lenders by PMC and held for sale and/or securitization. Pursuant to the terms of the amendment, BANA and PMC agreed that they would not enter into any new transactions and that BANA would no longer be committed to enter into any additional transactions under the Repurchase Agreement. The purpose of the amendment was to wind down the Repurchase Agreement and transfer all financing activity thereunder from the Repurchase Agreement to the Loan Repo Facility described above.

 

    All agreements to repurchase assets that matured between June 30, 2014 and the date of this Report were extended or renewed.

 

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

We are a specialty finance company that invests primarily in residential mortgage loans and mortgage-related assets. Our objective is to provide attractive risk-adjusted returns to our investors over the long-term, principally through dividends and secondarily through capital appreciation. We intend to achieve this objective largely by investing in distressed mortgage assets and mortgage-related assets and acquiring, pooling and selling newly originated prime credit quality residential mortgage loans (“correspondent production”).

We are externally managed by PCM, an indirect subsidiary of PFSI and an investment adviser that specializes in and focuses on residential mortgage loans. Most of our mortgage loan portfolio is serviced by PLS, an indirect subsidiary of PFSI.

During the quarter and six months ended June 30, 2014, we purchased loans with fair values totaling $7.3 billion and $12.3 billion, respectively, in furtherance of our correspondent production business. To the extent that we purchase loans that are insured by the U.S. Department of Housing and Urban Development (“HUD”), through the Federal Housing Administration (“FHA”) or insured or guaranteed by the Veterans Administration (“VA”), we and PLS have agreed that PLS will fulfill and purchase such loans, as PLS is a Ginnie Mae-approved issuer and servicer and we are not. This arrangement has enabled us to compete with other correspondent lenders that purchase both government and conventional loans. We receive a sourcing fee from PLS of three basis points on the unpaid principal balance of each loan that we sell to PLS under such arrangement, and earn interest income on the loan for the time period we hold the loan prior to the sale to PLS. We received sourcing fees totaling $1.1 million and $2.0 million, recorded in Net gain on mortgage loans acquired for sale, relating to $4.0 billion and $7.1 billion of loans at fair value we sold to PLS for the quarter and six months ended June 30, 2014, compared to $1.3 million and $2.4 million relating to $4.7 billion and $8.3 billion of fair value loans we sold to PLS for the quarter and six months ended June 30, 2013, respectively.

We seek to maximize the value of the distressed mortgage loans that we acquire using means that are appropriate for the particular loan, including both proprietary and nonproprietary loan modification programs, special servicing and other initiatives focused on avoiding foreclosure, when possible. When we are unable to effect a cure for a mortgage delinquency, our objective is to effect timely acquisition and/or liquidation of the property securing the loan through the use, in part, of short sales and deed-in-lieu of foreclosure programs. During the quarter and six months ended June 30, 2014, we acquired distressed mortgage loans with fair values totaling $27.2 million and $287.5 million, and we received proceeds from sales, liquidation, and payoffs from our portfolio of distressed mortgage loans and REO totaling $191.1 million and $476.6 million, respectively.

We supplement these activities through participation in other mortgage-related activities, including:

 

    Acquisition of MSRs or ESS from MSRs. We believe that MSR and ESS investments may allow us to earn attractive current returns and to leverage the loan servicing and origination capabilities of PLS to improve the assets’ value. During the quarter and six months ended June 30, 2014, we purchased ESS with a fair value totaling $52.9 million and $73.4 million, respectively.

We also intend to continue to retain the MSRs that we receive as a portion of the proceeds from our sale or securitization of mortgage loans through our correspondent production operation. During the quarter and six months ended June 30, 2014, we retained MSRs with a fair value at initial recognition totaling $28.7 million and $49.6 million, respectively, compared to $51.1 million and $107.3 million during the quarter and six months ended June 30, 2013.

 

    To the extent that we transfer correspondent production loans into private label securitizations, retention of a portion of the securities created in the securitization transaction.

 

    Acquisition of REIT-eligible mortgage-backed or mortgage-related securities.

 

    Providing inventory financing of mortgage loans for mortgage lenders. We believe this activity may result in attractive investment assets and will supplement and make our correspondent production business more attractive to lenders from which we acquire newly originated loans.

 

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We conduct substantially all of our operations, and make substantially all of our investments, through our Operating Partnership and its subsidiaries. We are the sole limited partner and one of our subsidiaries is the sole general partner of our Operating Partnership.

We believe that we qualify to be taxed as a REIT. We believe that we will not be subject to federal income tax on that portion of our income that is distributed to shareholders as long as we meet certain asset, income and share ownership tests. If we fail to qualify as a REIT, and do not qualify for certain statutory relief provisions, our profits will be subject to income taxes and we may be precluded from qualifying as a REIT for the four tax years following the year we lose our REIT qualification.

A portion of our activities, including our correspondent production business, is conducted in a taxable REIT subsidiary (“our TRS”), which is subject to corporate federal and state income taxes. Accordingly, we make a provision for income taxes with respect to the operations of our TRS. We expect that the effective rate for the provision for income taxes may be volatile in future periods. Our goal is to manage the business to take full advantage of the tax benefits afforded to us as a REIT.

Observations on Current Market Opportunities

Our business is affected by macroeconomic conditions in the United States, including economic growth, unemployment rates, the residential housing market and interest rate levels and expectations. During the second quarter of 2014, real U.S. gross domestic product expanded at an annual rate of 4.0% compared to a revised 2.1% decrease for the first quarter of 2014 and a 2.5% increase for the second quarter of 2013. The national unemployment rate was 6.1% at June 30, 2014 and compares to a revised seasonally adjusted rate of 7.5% at June 30, 2013 and 6.7% at March 31, 2014. While delinquency rates on residential real estate loans continue to decrease, they remain elevated compared to historical rates. As reported by the Federal Reserve Bank, during the first quarter of 2014, the delinquency rate on residential real estate loans held by commercial banks was 7.8%, a reduction from 9.7% during the first quarter of 2013.

The seasonally adjusted annual rate of existing home sales for June 2014 was 2.3% lower than for June 2013 and the national median existing home price for all housing types was $223,300, a 4.3% increase from June 2013. On a national level, foreclosure filings during the second quarter of 2014 decreased by 19% as compared to the second quarter of 2013. Foreclosure activity across the country is on a decreasing trend; however, it is expected to remain above historical average levels through 2014 and beyond.

Thirty-year fixed mortgage interest rates ranged from a low of 4.16% to a high of 4.34% during the second quarter of 2014. During the second quarter of 2013, thirty-year fixed mortgage interest rates ranged from a low of 3.45% to a high of 4.07% (Source: the Federal Home Loan Mortgage Corporation’s Weekly Primary Mortgage Market Survey).

Changes in fixed rate residential mortgage loan interest rates generally follow changes in long term U.S. Treasury yields. Toward the end of the second quarter of 2013, an increase in these Treasury yields led to an increase in mortgage loan interest rates. As a result of this increase in mortgage loan interest rates, market volumes for mortgage originations have decreased led by a reduction in refinance activity.

Mortgage lenders originated an estimated $295 billion of home loans during the quarter ended June 30, 2014, down 52.9% from the quarter ended June 30, 2013. Mortgage originations are forecast to continue to decline, with current industry estimates for 2014 totaling $1.2 trillion compared to $1.9 trillion for 2013 (Source: Average of Fannie Mae, Freddie Mac and Mortgage Bankers Association forecasts).

In recent periods, we have seen increased competition from new and existing market participants in our correspondent production business, as well as reductions in the overall level of refinancing activity. We believe that this change in supply and demand within the marketplace has been driving lower production margins in recent periods, which is reflected in our results of operations in our gains on mortgage loans acquired for sale. During the first several months of 2013, gains on mortgage loans acquired for sale benefited from wider secondary spreads (the difference between interest rates charged to borrowers and yields on mortgage-backed securities in the secondary market); however, secondary spreads narrowed in subsequent months and we expect them to continue to normalize toward their long-term averages in 2014.

 

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We believe there is significant long-term market opportunity in non-Agency jumbo mortgage loans. Pricing for non-Agency AAA rated bonds has steadily improved since the beginning of the year, however liquidity is fairly limited. During the six months ended June 30, 2014, prime jumbo MBS issuance totaled $2.1 billion in unpaid principal balance compared to $7.9 billion during the six months ended June 30, 2013. During the six months ended June 30, 2014, we produced approximately $93.4 million in unpaid principal balance (“UPB”) of jumbo loans, compared to $115.5 million in UPB of jumbo loans produced during the six months ended June 30, 2013.

Our Manager continues to see substantial volumes of distressed residential mortgage loan sales (sales of loan pools that consist of either nonperforming loans, troubled but performing loans or a combination thereof) offered for sale by a limited number of sellers. During the second quarter of 2014, our Manager reviewed 57 mortgage loan pools with UPB totaling approximately $18.2 billion. This compares to our Manager’s review of 36 mortgage loan pools with unpaid principal balances totaling approximately $11.1 billion and one pool of real estate acquired in settlement of loans totaling approximately $108 million during the second quarter of 2013. During the quarter and six months ended June 30, 2014, we acquired distressed loans with fair value totaling $27.2 million and $287.5 million, respectively, and $242.7 million and $443.2 million during the same periods in 2013. While we expect to see a continued supply of distressed whole loans, we believe the pricing for recent transactions has been less attractive for buyers. We remain patient and selective in making new investments in distressed whole loans and we continue to monitor the market to assess best execution opportunities for our existing distressed portfolio investments.

 

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Results of Operations

The following is a summary of our key performance measures:

 

     Quarter ended June 30,      Six months ended
June 30,
 
     2014      2013      2014      2013  
     (in thousands except per share amounts)  

Net investment income

   $ 120,556       $ 115,553       $ 197,151       $ 223,369   

Income before provision for income taxes by segment:

           

Correspondent production

   $ 2,397       $ 28,103       $ 5,544       $ 36,983   

Investment activities

     70,907         39,806         104,048         90,145   

Other (1)

     —           —           —           (3,284
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 73,304       $ 67,909       $ 109,592       $ 123,844   

Net income

   $ 75,211       $ 54,497       $ 113,084       $ 107,793   

Earnings per share:

           

Basic

   $ 1.01       $ 0.92       $ 1.54       $ 1.81   

Diluted

   $ 0.93       $ 0.86       $ 1.44       $ 1.75   

Dividends per share:

           

Declared

   $ 0.59       $ 0.57       $ 1.18       $ 1.14   

Paid

   $ 0.59       $ 0.57       $ 1.18       $ 1.14   

Investment activities:

           

Distressed mortgage loans and REO:

           

Purchases

   $ 27,233       $ 243,198       $ 287,520       $ 443,671   

Cash proceeds from liquidation activities

   $ 200,764       $ 104,814       $ 486,324       $ 198,259   

MBS:

           

Purchases

   $ 19,638       $ —         $ 19,638       $ —     

Cash proceeds from repayment and sales

   $ 3,441       $ —         $ 5,419       $ —     

ESS:

           

Purchases from PFSI

   $ 52,867       $ —         $ 73,393       $ —     

Cash proceeds from repayments

   $ 9,081       $ —         $ 16,494       $ —     

Per share prices during the period:

           

High

   $ 24.15       $ 26.07       $ 24.44       $ 28.73   

Low

   $ 20.78       $ 19.17       $ 20.78       $ 16.75   

At period end

   $ 21.94       $ 22.95       $ 21.94       $ 19.73   

At period end:

           

Total assets

   $ 4,869,745       $ 3,443,384         

Book value per share

   $ 21.27       $ 21.06         

 

(1) Represents corporate absorption of fulfillment fees for transition adjustment relating to the amended and restated mortgage banking and warehouse services agreement effective February 1, 2013.

During the quarter and six months ended June 30, 2014, we recorded net income of $75.2 million and $113.1 million, or $0.93 and $1.44 per diluted share, respectively. Our net income for the quarter and six months ended June 30, 2014 reflects net gains on our investments in financial instruments (comprised of net gain on investments and net gain on mortgage loans acquired for sale) totaling $83.4 million and $135.9 million, including $63.7 million and $96.9 million of valuation gains on mortgage loans at fair value, and mortgage loans under forward purchase agreements at fair value. These gains were supplemented by $26.7 million and $46.2 million of net interest income, respectively. During the quarter and six months ended June 30, 2014, we purchased $7.3 billion and $12.3 billion in fair value of newly originated mortgage loans. We recognized gains on such loans totaling approximately $10.2 million and $20.2 million. At June 30, 2014, we held mortgage loans acquired for sale with fair values totaling $909.1 million, including $304.7 million that were pending sale to PLS.

 

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During the quarter and six months ended June 30, 2013, we recorded net income of $54.5 million and $107.8 million, or $0.86 and $1.75 per diluted share, respectively. Our net income for the quarter and six months ended June 30, 2013 reflects net gains on our investments in financial instruments totaling $91.3 million and $184.5 million (comprised of net gain on investments and net gain on mortgage loans acquired for sale), including $38.8 million and $94.4 million of valuation gains on mortgage loans at fair value and mortgage loans under forward purchase agreements at fair value. These gains were supplemented by $12.7 million and $18.3 million of net interest income. During the quarter and six months ended June 30, 2013, we purchased $8.9 billion and $17.8 billion, respectively, in fair value of newly originated mortgage loans. We recognized gains on such loans totaling approximately $44.4 million and $73.7 million, respectively. At June 30, 2013, we held mortgage loans acquired for sale with fair values totaling $1.3 billion, including $290.6 million that were pending sale to PLS.

Our net income increased during the quarter and six months ended June 30, 2014 due to increased pretax income in our investment activities segment partially offset by decreased pre-tax income in our correspondent production segment. In our investment activities, our average investment portfolio was approximately $3.1 billion and $3.0 billion during the quarter and six months ended June 30, 2014, an increase of $1.8 billion, or 136%, and $1.8 billion, or 141%, over the quarter and six months ended June 30, 2013, respectively. During the quarter and six months ended June 30, 2014, we recognized net investment income totaling approximately $105.1 million and $169.4 million in our investment activities segment, an increase of $40.5 million, or 63%, and $32.4 million, or 24%, from the quarter and six months ended June 30, 2013. During the quarter and six months ended June 30, 2013, we recognized net investment income totaling approximately $64.6 million and $137.0 million, respectively.

In our correspondent production activities, we received proceeds of $2.8 billion and $4.8 billion during the quarter and six months ended June 30, 2014, from the sale of mortgage loans to nonaffiliates and issued $3.8 billion and $6.0 billion of IRLCs relating to Agency and jumbo mortgage loans, a decrease of $1.8 billion, or 32% and $3.9 billion, or 39%, from the same period in 2013. During 2014, rising interest rates negatively affected demand for mortgage loans as well as increased competition in the mortgage market, reducing both the volume of loans we purchased and the margins on our net gain on mortgage loans acquired for sale. As a result, we sold fewer loans during 2014 as compared to 2013, and our net gain on loans acquired for sale decreased by $34.2 million, or 77% and $53.5 million, or 73% during the quarter and six months ended June 30, 2014.

Net Investment Income

During the quarter and six months ended June 30, 2014, we recorded net investment income of $120.6 million and $197.2 million, respectively, comprised primarily of net gain on investments of $73.1 million and $115.7 million, supplemented by $26.7 million and $46.2 million of net interest income, $10.2 million and $20.2 million of net gain on mortgage loans acquired for sale, $8.8 million and $16.2 million of net loan servicing fees, and $4.5 million and $6.8 million of loan origination fees, partially offset by $5.3 million and $12.0 million of losses from results of REO, respectively. This compares to net investment income of $115.6 million and $223.4 million recognized during the quarter and six months ended June 30, 2013, comprised primarily of net gains on investments of $46.8 million and $110.8 million supplemented by gain on sale of loans acquired for sale of $44.4 million and $73.7 million, $12.7 million and $18.3 million of net interest income, $4.8 million and $10.2 million of loan origination fees and $7.9 million and $13.9 million of net loan servicing fees, partially offset by $1.9 million and $5.2 million from results of REO, respectively.

Net investment income includes non-cash fair value adjustments. Because we have elected to record our mortgage loan investments (which include mortgage loans at fair value and mortgage loans under forward purchase agreements at fair value), a substantial portion of the income we record with respect to such loans results from non-cash changes in fair value. Net investment income also includes non-cash fair value adjustments related to mortgage loans acquired for sale at fair value, IRLCs, and the related derivatives we use to hedge such assets and non-cash interest income arising from capitalization of delinquent interest on mortgage loans upon completion of the modification of such loans and accrual of unearned discounts relating to mortgage loans held in a VIE, as well as non-cash fair value adjustments relating to MSRs and ESS.

 

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The amounts of non-cash fair value and interest income adjustments are as follows:

 

     Quarter ended June 30,     Six months ended June 30,  
     2014     2013     2014     2013  
     (in thousands)  

Net gain on mortgage loans acquired for sale

        

Mortgage loans acquired for sale

   $ 6,660      $ (34,572   $ 8,073      $ (36,994

IRLCs

     7,816        (28,020     9,838        (36,446

Hedging derivatives

     (10,051     97,026        (17,202     96,360   
  

 

 

   

 

 

   

 

 

   

 

 

 
     4,425        34,434        709        22,920   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net interest income

        

Capitalization of interest pursuant to mortgage loan modifications

     17,883        6,584        30,353        11,814   

Accrual of unearned discounts relating to loans held in a variable interest entity

     223        —          553        —     
  

 

 

   

 

 

   

 

 

   

 

 

 
     18,106        6,584        30,906        11,814   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net gain (loss) on investments

        

Mortgage-backed securities:

        

Agency

     4,081        —          6,734        —     

Non Agency

     184        —          184        —     

Mortgage loans:

        

at fair value

     72,871        39,484        115,951        95,100   

at fair value under forward purchase agreements

     1,842        (690     463        (690
  

 

 

   

 

 

   

 

 

   

 

 

 
     74,713        38,794        116,414        94,410   

ESS

     (7,537     —          (10,438     —     
  

 

 

   

 

 

   

 

 

   

 

 

 
     71,441        38,794        112,894        94,410   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net loan servicing fees - MSR valuation adjustments

     (5,860     1,534        (7,720     4,010   
  

 

 

   

 

 

   

 

 

   

 

 

 
   $ 88,112      $ 81,346      $ 136,789      $ 133,154   
  

 

 

   

 

 

   

 

 

   

 

 

 

Cash is generated when mortgage loan investments are monetized through payoffs or sales, when payment of principal and interest occur on such loans, generally after they are modified, or upon the sale of the property securing a mortgage loan that has been settled through acquisition of the property securing the loan has been sold. We receive proceeds on the sale of mortgage loans acquired for sale that include both cash and the fair value of MSRs and we recognize a liability for potential losses relating to representations and warranties created in the loan sales transactions. Cash flows relating to hedging instruments are generally produced when the instruments mature or when we effectively cancel the transactions through an offsetting trade.

 

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Cash flows and gains from liquidation of distressed mortgage loan investments and REO are summarized below:

 

     Quarter ended June 30,      Six months ended June 30,  
     2014      2013      2014      2013  
     (in thousands)  

Proceeds

   $ 191,129       $ 104,351       $ 476,584       $ 198,259   

Accumulated net gains (1)

   $ 30,809       $ 11,844       $ 87,024       $ 19,884   

Net gains on liquidation (2)

   $ 13,694       $ 11,088       $ 22,707       $ 22,289   

Average investment in mortgage loans and REO

   $ 2,785,185       $ 1,272,947       $ 2,727,750       $ 1,264,067   

 

(1) Represents valuation gains and losses recognized during the period we held the respective asset but excludes the gain or loss recorded upon sale or repayment of the respective asset.
(2) Represents the gain or loss recognized upon sale or repayment of the respective asset.

The increase in net investment income during the quarter ended June 30, 2014, as compared to the quarter ended June 30, 2013, primarily reflects the increase in net fair value gains in our investments in mortgage loans at fair value partially offset by reductions in net gain on mortgage loans acquired for sale during 2014 as compared to 2013. Increases in gain on our investments in mortgage loans are due primarily to portfolio growth and observed increased marketplace demand for performing mortgage loans in our investment portfolio, partially tempered by an increase in the projected loss severity for long-held severely delinquent loans.

The decrease in gains on mortgage loans acquired for sale is due to both the decrease in volume of mortgage loans sold and reduced margin on the loans sold as a result increasing competition as well as to the generally rising interest rate environment that prevailed during the quarter and six months ended June 30, 2014 when compared to the same periods in 2013.

 

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Net Gain on Mortgage Loans Acquired for Sale

Our net gains on mortgage loans acquired for sale are summarized below:

 

     Quarter ended June 30,     Six months ended June 30,  
     2014     2013     2014     2013  
     (in thousands)  

Cash gain (loss):

        

Sales proceeds, net

   $ (3,173   $ (71,706   $ (6,067   $ (98,952

Hedging activities

     (18,749     32,092        (22,299     45,705   
  

 

 

   

 

 

   

 

 

   

 

 

 
     (21,922     (39,614     (28,366     (53,247

Non cash gain:

        

Receipt of MSRs in loan sale transactions

     28,741        51,055        49,616        107,271   

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

     (1,022     (1,437     (1,766     (3,227

Change in fair value relating to IRLCs, mortgage loans and hedging derivatives held at period end:

        

IRLCs

     7,816        (28,020     9,838        (36,446

Mortgage loans

     6,660        (34,572     8,073        (36,994

Hedging derivatives

     (10,051     97,026        (17,202     96,360   
  

 

 

   

 

 

   

 

 

   

 

 

 
     4,425        34,434        709        22,920   
  

 

 

   

 

 

   

 

 

   

 

 

 
   $ 10,222      $ 44,438      $ 20,193      $ 73,717   
  

 

 

   

 

 

   

 

 

   

 

 

 

Notional (Loan) amount of IRLCs issued

   $ 3,784,024      $ 5,543,256      $ 6,015,404      $ 9,893,621   

Purchases of mortgage loans acquired for sale

        

At fair value

   $ 7,302,157      $ 8,904,708      $ 12,345,381      $ 17,753,860   

Unpaid principal balance

   $ 6,986,131      $ 8,585,531      $ 11,815,719      $ 17,111,151   

Proceeds from sales of mortgage loans acquired for sale:

        

Cash:

        

Sales to nonaffiliated investors

   $ 2,763,138      $ 3,909,743      $ 4,789,444      $ 9,044,479   

Sales of government-insured and guaranteed loans to PFSI

     3,955,329        4,733,767        7,085,859        8,282,163   
  

 

 

   

 

 

   

 

 

   

 

 

 
   $ 6,718,467      $ 8,643,510      $ 11,875,303      $ 17,326,642   
  

 

 

   

 

 

   

 

 

   

 

 

 

Increase (decrease) in gain on mortgage loans acquired for sale due to:

        

Change in fair value of IRLCs

   $ 35,836      $ (36,645   $ 46,284      $ (43,608

Change in volume of loans sold

     (16,376     25,223        (35,437     73,574   

Change in gain margin

     (53,452     36,926        (64,029     10,677   

Change in sourcing fees received from PFSI

     (224     888        (342     1,658   
  

 

 

   

 

 

   

 

 

   

 

 

 
   $ (34,216   $ 26,392      $ (53,524   $ 42,301   
  

 

 

   

 

 

   

 

 

   

 

 

 

Our net gain on mortgage loans acquired for sale includes both cash and non-cash elements. We receive proceeds on sale that include both cash and our estimate of the fair value of MSRs. We also recognize a liability for potential losses relating to representations and warranties created in the loan sales transactions.

The change in our cash loss on mortgage loans acquired for sale during the quarter ended June 30, 2014 reflects the decreased volume of mortgage loan sales during the quarter ended June 30, 2014 as compared to the quarter ended June 30, 2013 as a result of reductions in the size of the mortgage market resulting from rising interest rates beginning in the second half of 2013.

 

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We recognize a substantial portion of our net gain on mortgage loans acquired for sale at fair value before we purchase the loan. In the course of our correspondent production activities, we make contractual commitments to correspondent lenders to purchase loans at specified terms. We call these commitments interest rate lock commitments, or IRLCs. We recognize the value of IRLCs at the time we make the commitment to the correspondent lender and adjust the fair value of such IRLCs as the loan approaches the point of purchase or the transaction is canceled.

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

Pull-through rates and MSR fair values are based on our estimates as these inputs are difficult to observe in the mortgage marketplace. Changes in our estimate of the probability that a mortgage loan will fund and changes in interest rates are updated as the mortgage loans move through the purchase process and may result in significant changes in the estimates of the value of the IRLCs. Such changes are reflected in the change in fair value of IRLCs which is a component of our Gain on mortgage loans acquired for sale in the period of the change. The financial effects of changes in these assumptions are generally inversely correlated. Increasing interest rates have a positive effect on the fair value of the MSR component of IRLC value but increase the pull-through rate for loans that decrease in fair value.

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

 

     Range
(Weighted average)

Key inputs

   June 30, 2014   December 31, 2013

Pull-through rate

   49.0% - 98.0%   64.8% - 98.0%
   (81.6%)   (86.4%)

MSR value expressed as:

    

Servicing fee multiple

   1.7 - 5.0   1.4 - 5.1
   (3.9)   (4.1)

Percentage of unpaid principal balance

   0.4% - 1.3%   0.4% - 1.3%
   (1.0%)   (1.0%)

MSRs represent the value of a contract that obligates us to service mortgage loans on behalf of the purchaser of the loan in exchange for servicing fees and the right to collect certain ancillary income from the borrower. We recognize MSRs initially at our estimate of the fair value of the contract to service the loans. As economic fundamentals influencing the loans we sell with servicing rights retained change, our estimate of the cash we expect to generate from the MSRs and, therefore, the fair value of MSRs will also change. As a result, we will record changes in fair value as a component of Net loan servicing fees for the MSRs we carry at fair value and we may recognize changes in fair value relating to our MSRs carried at the lower of amortized cost or fair value depending on the relationship of the asset’s fair value to its carrying value at the measurement date.

 

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Following are the key inputs used in estimating the fair value of MSRs at the time of initial recognition:

 

     Quarter ended June 30,  
     2014     2013  
     Range
(Weighted average)
 

Key inputs

   Amortized cost     Fair value     Amortized cost     Fair value  
     (MSR recognized and unpaid principal balance of underlying loan amounts in thousands)  

MSR recognized

   $ 13,356      $ 15,385      $ 50,978      $ 77   

Unpaid principal balance of underlying mortgage loans

   $ 1,244,538      $ 1,458,400      $ 3,840,110      $ 27,346   

Weighted-average annual servicing fee rate (in basis points)

     25        25        28        27   

Pricing spread (1)

     6.3% – 14.3%        8.5% – 10.3%        5.4% – 13.5%        6.6% - 11.9%   
     (8.7%)        (9.1%)        (6.5%)        (7.5%)   

Life (in years)

     1.3 – 7.3        3.2 – 7.3        2.6 – 6.9        6.3 - 6.9   
     (6.1)        (7.1)        (6.4)        (6.8)   

Annual total prepayment speed (2)

     7.6% – 50.9%        8.1% – 25.4%        8.5% – 23.6%        8.8% - 13.6%   
     (10.4%)        (9.6%)        (9.1%)        (9.3%)   

Annual per-loan cost of servicing

     $68 – $100        $68 – $68        $68 – $140        $68 - $68   
     ($68)        ($68)        ($68)        ($68)   

 

     Six months ended June 30,  
     2014     2013  
     Range
(Weighted average)
 

Key inputs

   Amortized cost     Fair value     Amortized cost     Fair value  
     (MSR recognized and unpaid principal balance of underlying loan amounts in thousands)  

MSR recognized

   $ 22,474      $ 27,142      $ 107,167      $ 104   

Unpaid principal balance of underlying mortgage loans

   $ 2,095,087      $ 2,550,114      $ 8,843,667      $ 29,946   

Weighted-average annual servicing fee rate (in basis points)

     25        25        26        27   

Pricing spread (1)

     6.3% – 14.3%        8.5% – 12.3%        5.4% – 14.4%        6.6% - 14.4%   
     (8.6%)        (9.0%)        (6.8%)        (7.6%)   

Life (in years)

     1.1 – 7.3        2.8 – 7.3        2.6 - 6.9        2.8 - 6.9   
     (6.0)        (7.1)        (6.4)        (6.7)   

Annual total prepayment speed (2)

     7.6% – 56.4%        8.0% – 25.4%        8.5% – 23.6%        8.8% - 27.0%   
     (10.4%)        (9.5%)        (9.1%)        (9.7%)   

Annual per-loan cost of servicing

     $68 - $100        $68 - $68        $68 – $140        $68 - $68   
     ($68)        ($68)        ($68)        ($68)   

 

(1) 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 LIBOR curve for purposes of discounting cash flows relating to MSRs acquired as proceeds from the sale of mortgage loans.
(2) Annual total prepayment speed is measured using Life Total Conditional Prepayment Rate (“CPR”).

We also provide for our estimate of the future losses that we may be required to incur as a result of our breach of representations and warranties provided to the purchasers of the loans we sold. Our agreements with the Agencies include representations and warranties related to the loans we sell to the Agencies. The representations and warranties require adherence to Agency origination and underwriting guidelines, including but not limited to the validity of the lien securing the loan, property eligibility, borrower credit, income and asset requirements, and compliance with applicable federal, state and local law.

 

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

Following is a summary of the repurchase activity and unpaid principal balance of mortgage loans subject to representations and warranties:

 

     Quarter ended June 30,      Six months ended June 30,  
     2014      2013      2014      2013  
     (in thousands)  

During the period:

           

Unpaid principal balance of mortgage loans repurchased

   $ 2,623       $ 292       $ 4,411       $ 1,208   

Unpaid principal balance of repurchased mortgage loans repurchased by correspondent lenders

   $ 1,922       $ 394       $ 2,811       $ 1,104   

At end of period:

           

Unpaid principal balance of mortgage loans subject to pending claims for repurchase

   $ 19,805       $ 824         

Unpaid principal balance of mortgage loans subject to representations and warranties

   $ 29,806,058       $ 19,829,437         

During the quarter and six months ended June 30, 2014, we repurchased mortgage loans with unpaid principal balances totaling $2.6 million and $4.4 million, respectively, and incurred no losses relating to such repurchases primarily as a result of our ability to recover any losses inherent in the repurchased loan from the selling correspondent lender. As the outstanding balance of loans we purchase and sell subject to representations and warranties increases and the loans sold season, we expect the level of repurchase activity to increase.

As economic fundamentals change, and as investor and Agency evaluation of their loss mitigation strategies (including claims under representations and warranties) change and as the mortgage market and general economic changes affect our correspondent lenders, the level of repurchase activity and ensuing losses will change, which may be material to our financial condition and results of operations.

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

 

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Following is a summary of our liability for representations and warranties in the consolidated balance sheets:

 

     Quarter ended June 30,      Six months ended June 30,  
     2014      2013      2014      2013  
     (in thousands)  

Balance, beginning of period

   $ 10,854       $ 6,231       $ 10,110       $ 4,441   

Provision for losses

     1,022         1,437         1,766         3,227   

Incurred losses

     —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Balance, end of period

   $ 11,876       $ 7,668       $ 11,876       $ 7,668   
  

 

 

    

 

 

    

 

 

    

 

 

 

The level of the recourse liability is difficult to estimate and requires considerable management judgment. The level of mortgage loan repurchase losses is dependent on economic factors, investor loss mitigation strategies, our ability to recover any losses inherent in the repurchased loan from the selling correspondent lender and other external conditions that may change over the lives of the underlying loans. Our representations and warranties are generally not subject to stated limits of exposure. However, we believe that the current unpaid principal balance of loans sold by us to date represents the maximum exposure to repurchases related to representations and warranties. We believe the amount and range of reasonably possible losses in relation to the recorded liability is not material to our financial condition or results of operations.

Our hedging activities relating to correspondent production primarily involve forward sales and purchases of our IRLCs and mortgage loans acquired for sale as well as purchases of put and call MBS options.

Following is a summary of the notional activity in our hedging derivatives for our investment activities related to our IRLCs and inventory of mortgage loans acquired for sale:

 

     Quarter ended June 30, 2014  

Period/Instrument

   Balance,
beginning
of period
     Additions      Dispositions/
expirations
    Balance,
end of
period
 
     (in thousands)  

Forward purchase contracts

     1,777,353         11,967,081         (10,685,830     3,058,604   

Forward sales contracts

     2,497,960         15,282,582         (13,594,909     4,185,633   

MBS put option

     235,000         290,000         (255,000     270,000   

MBS call option

     —           25,000         —          25,000   

 

     Quarter ended June 30, 2013  

Period/Instrument

   Balance,
beginning
of period
     Additions      Dispositions/
expirations
    Balance,
end

of period
 
     (in thousands)  

Forward purchase contracts

     1,890,960         15,323,298         (11,802,474     5,411,784   

Forward sales contracts

     3,224,190         20,418,956         (15,915,080     7,728,066   

MBS put options

     225,000         1,545,000         (1,310,000     460,000   

MBS call options

     350,000         1,000,000         (625,000     725,000   

 

     Six months ended June 30, 2014  

Period/Instrument

   Balance,
beginning
of period
     Additions      Dispositions/
expirations
    Balance,
end of
period
 
     (in thousands)  

Forward purchase contracts

     2,781,066         18,364,898         (18,087,360     3,058,604   

Forward sales contracts

     3,463,027         24,051,521         (23,328,915     4,185,633   

MBS put option

     55,000         695,000         (480,000     270,000   

MBS call option

     110,000         25,000         (110,000     25,000   

 

     Six months ended June 30, 2013  

Period/Instrument

   Balance,
beginning
of period
     Additions      Dispositions/
expirations
    Balance,
end

of period
 
     (in thousands)  

Forward purchase contracts

     2,206,539         27,765,642         (24,560,397     5,411,784   

Forward sales contracts

     4,266,983         38,269,229         (34,808,146     7,728,066   

MBS put options

     495,000         3,025,000         (3,060,000     460,000   

MBS call options

     —           1,900,000         (1,175,000     725,000   

 

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Loan Origination Fees

Loan origination fees represent fees we charge correspondent lenders relating to our purchase of loans from those lenders. The decrease in fees during 2014 compared to 2013 is due to a decrease in production volume.

Net Gain on Investments

During the quarter and six months ended June 30, 2014, we recognized net gains on MBS, mortgage loans and ESS totaling $73.1 million and $115.7 million, respectively. This compares to recognized net gains on investments totaling $46.8 million and $110.8 million during the quarter and six months ended June 30, 2013, respectively. The increase is primarily due to increased valuation gains in our portfolio of mortgage loans, including mortgage loans under forward purchase agreements.

The average portfolio balance of distressed mortgage loan investments (mortgage loans at fair value excluding mortgage loans at fair value held in a VIE and mortgage loans under forward purchase agreements at fair value) increased $1.4 billion, or 111%, and $1.4 billion, or 115%, during the quarter and six months ended June 30, 2014 as compared to the same period in 2013.

Net gains on mortgage loans at fair value and mortgage loans under forward purchase agreements at fair value are summarized below:

 

     Quarter ended June 30,      Six months ended June 30,  
     2014      2013      2014      2013  
     (in thousands)  

Valuation changes:

           

Performing loans

   $ 39,123       $ 4,700       $ 38,882       $ 27,684   

Nonperforming loans

     24,587         34,094         58,001         66,726   
  

 

 

    

 

 

    

 

 

    

 

 

 
     63,710         38,794         96,883         94,410   

Payoffs

     7,490         8,040         13,109         16,404   

Sales

     2,395         —           3,520         —     
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 73,595       $ 46,834       $ 113,512       $ 110,814   
  

 

 

    

 

 

    

 

 

    

 

 

 

Average portfolio balance

   $ 2,570,533       $ 1,219,196       $ 2,537,168       $ 1,177,454   
  

 

 

    

 

 

    

 

 

    

 

 

 

Because we have elected to record our mortgage loans and mortgage loans under forward purchase agreements at fair value, a substantial portion of the income we record with respect to such loans results from changes in fair value. Valuation changes amounted to $63.7 million and $38.8 million in the quarters ended June 30, 2014 and 2013, respectively, and $96.9 million and $94.4 million in the six months ended June 30, 2014 and 2013, respectively.

The valuation changes on performing loans is affected by the capitalization of delinquent interest on loans we modify. When we capitalize interest in a loan modification, we increase the carrying value of the loan. However, the modification may not result in an immediate increase in the loan’s fair value. As a result, the interest income we recognize is generally offset by a valuation loss. Valuation gains on loans with capitalized interest generally accrue as the borrower demonstrates performance in the periods following the capitalization. During the quarter and six months ended June 30, 2014, we capitalized interest totaling $18.1 million and $30.4 million compared to $6.6 and $11.8 for the quarter and six months ended June 30, 2013.

The increase in valuation gains reflects portfolio growth and observed and realized increases in demand for performing mortgage loans that resulted in a reduction of the discount rate we apply to our estimate of cash flows to be generated by our performing loans and an increase in such loans’ valuations. The increase in the valuation gains for performing loans was partially tempered by an increase in the projected loss severity for long-held severely delinquent loans.

Cash is generated when mortgage loans and mortgage loans under forward purchase agreements are monetized through payoffs or sales, when we receive payments of principal and interest on such loans, generally after they are modified, or when the property securing a mortgage loan that has been settled through transfer of the

 

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property to us has been sold.

During the quarters ended June 30, 2014 and 2013, we received proceeds from liquidation of mortgage loans and REO of $191.1 million and $104.4 million, respectively, and during the six-month periods ended June 30, 2014 and 2013, we received proceeds from liquidation of mortgage loans and REO of $476.6 million and $198.3 million, respectively. These proceeds include $70.3 million and $264.3 million from the sale of $81.3 million and $313.4 million in unpaid principal balance of mortgage loans during the quarter and six months ended June 30, 2014, respectively. For each period’s liquidations, we had recorded accumulated gains on the liquidated assets during the period we held those assets totaling $30.8 million and $11.8 million for the quarters ended June 30, 2014 and 2013, respectively, and $87.0 million and $19.9 million for the six-month periods ended June 30, 2014 and 2013, respectively, and we recorded additional gains of $13.7 million and $11.1 million for the quarters ended June 30, 2014 and 2013, respectively, and $22.7 million and $22.3 million for the six months ended June 30, 2014 and 2013, respectively, when the assets were liquidated.

During the quarters ended June 30, 2014 and 2013, we recognized gains on mortgage loan payoffs as summarized below:

 

     Quarter ended June 30,      Six months ended June 30,  
     2014      2013      2014      2013  
     (dollars in thousands)  

Number of loans

     353         349         681         642   

Unpaid principal balance

   $ 98,360       $ 94,313       $ 178,076       $ 174,956   

Gain recognized at payoff

   $ 7,489       $ 8,040       $ 13,109       $ 16,404   

Gains on sales of distressed mortgage loans are summarized below:

 

     Quarter ended June 30,      Six months ended June 30,  
     2014      2013      2014      2013  
     (dollars in thousands)  

Number of loans

     396         —           1,362         —     

Unpaid principal balance

   $ 81,294       $ —         $ 313,420       $ —     

Gain recognized at sale

   $ 2,395       $ —         $ 3,520       $ —     

 

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The following tables present a summary of loan modifications completed:

 

     Quarter ended June 30,     Six months ended June 30,  
     2014     2013     2014     2013  

Modification type (1)

   Number
of

loans
     Balance
of

loans (2)
    Number
of

loans
     Balance
of

loans (2)
    Number
of

loans
     Balance
of
loans (2)
    Number
of

loans
     Balance
of
loans (2)
 
     (dollars in thousands)  

Rate reduction

     412       $ 100,752        149       $ 32,226        766       $ 180,641        272       $ 59,131   

Term extension

     482         122,371        127         28,816        870         216,040        238         51,396   

Capitalization of interest and fees

     615         155,083        250         54,442        1,116         273,352        468         100,627   

Principal forbearance

     218         65,245        60         16,157        369         112,172        109         25,088   

Principal reduction

     288         73,228        122         28,056        542         137,046        196         48,397   

Total

     615         155,083        250         54,442        1,116         273,352        468         100,627   

Defaults of mortgage loans modified in the prior year period

      $ 2,388         $ 2,796         $ 6,197         $ 7,134   

As a percentage of balance of loans before modification

        6        10        9        9

Defaults during the period of mortgage loans modified since acquisitions(3)

      $ 21,140         $ 11,060         $ 49,648         $ 20,983   

As a percentage of balance of loans before modification

        7        6        18        11

Repayments and sales of mortgage loans modified in the prior year period

      $ 13,153         $ 6,438         $ 36,654         $ 17,997   

As a percentage of balance of loans before modification

        25        18        37        18

 

(1) Modification type categories are not mutually exclusive and a modification of a single loan may be counted in multiple categories, if applicable. The total number of modifications noted in the table is therefore lower than the sum of all of the categories.
(2) Before modification.
(3) Represents defaults of mortgage loans during the period that have been modified by us at any point since acquisition.

The following table summarizes the average impact of the modifications noted above to the terms of the loans modified:

 

    Quarter ended June 30,     Six months ended June 30,  
    2014     2013     2014     2013  
Category   Before
modification
    After
modification
    Before
modification
    After
modification
    Before
modification
    After
modification
    Before
modification
    After
modification
 
    (dollars in thousands)  

Loan balance

  $ 252      $ 256      $ 218      $ 197      $ 245      $ 246      $ 215      $ 197   

Remaining term (months)

    327        417        311        447        323        417        312        445   

Interest rate

    5.30     3.68     5.89     4.18     5.44     3.71     5.93     4.17

Forbeared principal

  $ —        $ 15      $ —        $ 7      $ —        $ 13      $ —        $ 6   

Implementing long-term, sustainable loan modification is one means by which we endeavor to increase the value of the distressed mortgage loans which we have typically purchased at discounts to their unpaid principal balance. Before the disruption of the mortgage securitization markets in 2008, an active market in securitizations of reperforming and modified mortgage loans existed. As a result of the disruptions that occurred in 2008, the market for securities backed by such loans has become illiquid.

As discussed above, during the quarter and six months ended June 30, 2014, we had our first significant sales of reperforming mortgage assets. We received proceeds of $70.3 million and $264.3 million from the sale of $81.3 million and $313.4 million in unpaid principal balance of mortgage loans during the quarter and six months ended June 30, 2014, respectively. There can be no assurance that this form of monetization will continue to be a reliable means of liquidating reperforming mortgage assets in the future. We continue to monitor and explore the market for loan sales or securitizations backed by reperforming and modified mortgage loans as a means of recovering our investment in such loans in the future.

 

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Absent sale or securitization of reperforming and modified mortgage loans, and unlike liquidation of a defaulted mortgage loan, we expect that recovery of our investment in a performing modified mortgage loan will take place generally over a period of several years, during which we earn and collect interest income on the loan. Our current expectations are that we will receive cash on modified mortgage loans through monthly borrower payments, HAMP incentive payments, payoffs or acquisition of the property securing the loans and liquidation of the property in the event the borrower subsequently defaults. Due to the recent addition of new modification programs, both through HAMP and proprietary programs, trends in default performance are difficult to discern. However, the addition of these new modification programs resulted in an increase in the volume of our modification activity to date during 2014.

Large-scale refinancing of modified mortgage loans is not expected to occur for several years. Borrowers who have recently modified their mortgage loans typically have credit profiles that do not qualify them for refinancing or have loans on properties whose loan-to-value ratios exceed current underwriting guidelines for new mortgage loans. Further, modified mortgage loans require a period of acceptable borrower performance, generally 12 months of timely mortgage payments, for consideration in most Agency refinance programs.

Certain programs such as the FHA’s Negative Equity Refinance Program allow homeowners whose modified mortgage amount exceeds the fair value of the property securing the loan to refinance immediately following a modification. Our utilization of this program remains consistent in 2014 as compared to 2013. We continue to explore methods of accelerating recovery of our investment of modified mortgage loans through solicitations of refinancings of such loans into Agency-eligible loans which result in a full or partial repayment of our investment.

During the quarter and six months ended June 30, 2014, we recognized gains on MBS of $1.5 million and $2.2 million, respectively, net of hedging activities. The gains we recognized were due to decreases in market yields during the quarter. We did not hold any MBS during the six-month period ended June 30, 2013.

 

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Net Interest Income

Net interest income is summarized below:

 

     Quarter ended June 30, 2014  
     Interest income/expense             Annualized %  
     Coupon      Discount/     Total      Average      interest  
      fees (1)        balance      yield/cost  
     (dollars in thousands)  

Assets:

             

Correspondent production:

             

Mortgage loans acquired for sale at fair value

   $ 5,574       $ —        $ 5,574       $ 514,344         4.29

Investment activities:

             

Short-term investments

     172         —          172         136,116         0.50

Mortgage -backed securities:

             

Agency

     1,712         83        1,795         193,802         3.66

Non-Agency prime jumbo

     95         71        166         19,668         3.34
  

 

 

    

 

 

   

 

 

    

 

 

    
     1,807         154        1,961         213,470         3.63
  

 

 

    

 

 

   

 

 

    

 

 

    

Mortgage loans:

             

at fair value

     36,008         223        36,231         2,472,804         5.80

under forward purchase agreements at fair value

     1,430         —          1,430         97,729         5.79
  

 

 

    

 

 

   

 

 

    

 

 

    
     37,438         223        37,661         2,570,533         5.79
  

 

 

    

 

 

   

 

 

    

 

 

    

ESS

     3,139         —          3,139         155,515         7.98

Total investment activities

     42,556         377        42,933         3,075,634         5.52
  

 

 

    

 

 

   

 

 

    

 

 

    

Other interest

     11         —          11         —        
  

 

 

    

 

 

   

 

 

    

 

 

    
   $ 48,141       $ 377      $ 48,518       $ 3,589,978         5.35
  

 

 

    

 

 

   

 

 

    

 

 

    

Liabilities:

             

Assets sold under agreements to repurchase

   $ 12,547       $ 2,596      $ 15,143       $ 2,253,127         2.66

Borrowings under forward purchase agreements

     783         —          783         109,793         2.82

Asset backed secured financing

     1,481         80        1,561         165,495         3.73

Exchangeable senior notes

     3,359         228        3,587         250,000         5.68
  

 

 

    

 

 

   

 

 

    

 

 

    
     18,170         2,904        21,074         2,778,415         3.03
  

 

 

    

 

 

   

 

 

    

 

 

    

Other interest - Servicing

     791         —          791         —        
  

 

 

    

 

 

   

 

 

    

 

 

    
     18,961         2,904        21,865         2,778,415         3.10
  

 

 

    

 

 

   

 

 

    

 

 

    

Net interest income

   $ 29,180       $ (2,527   $ 26,653         
  

 

 

    

 

 

   

 

 

       

Net interest margin

                2.97

Net interest spread

                2.25

 

(1) Amounts in this column represent accrual of unearned discounts and amortization of facility commitment fees for liabilities.

 

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     Quarter ended June 30, 2013  
     Interest income/expense             Annualized %  
     Coupon      Discount/     Total      Average      interest  
      fees (1)        balance      yield/cost  
     (dollars in thousands)  

Assets:

             

Correspondent production:

             

Mortgage loans acquired for sale at fair value

   $ 9,292       $ —        $ 9,292       $ 1,042,735         3.52

Investment activities:

             

Short-term investments

     57         —          57         82,450         0.27

Mortgage loans:

             

at fair value

     17,052         —          17,052         1,186,186         5.69

under forward purchase agreements at fair value

     260         —          260         33,010         3.12
  

 

 

    

 

 

   

 

 

    

 

 

    
     17,312         —          17,312         1,219,196         5.62
  

 

 

    

 

 

   

 

 

    

 

 

    

Total investment activities

     17,369         —          17,369         1,301,646         5.34
  

 

 

    

 

 

   

 

 

    

 

 

    

Other Interest

     136         —          136         —        
  

 

 

    

 

 

   

 

 

    

 

 

    
   $ 26,797       $ —        $ 26,797       $ 2,344,381         4.52
  

 

 

    

 

 

   

 

 

    

 

 

    

Liabilities:

             

Assets sold under agreements to repurchase

   $ 8,561       $ 2,253      $ 10,814       $ 1,385,350         3.12

Borrowings under forward purchase agreements

     251         —          251         33,096         3.00

Exchangeable senior notes

     2,240         144        2,384         170,330         3.39
  

 

 

    

 

 

   

 

 

    

 

 

    
     11,052         2,397        13,449         1,588,776         3.39

Other interest - Servicing

     695         —          695         —        
  

 

 

    

 

 

   

 

 

    

 

 

    
     11,747         2,397        14,144         1,588,776         3.52
  

 

 

    

 

 

   

 

 

    

 

 

    

Net interest income

   $ 15,050       $ (2,397   $ 12,653         
  

 

 

    

 

 

   

 

 

       

Net interest margin

                2.16

Net interest spread

                1.00

 

(1) Amounts in this column represent accrual of unearned discounts and amortization of facility commitment fees for liabilities.

 

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Table of Contents
     Six months ended June 30, 2014  
     Interest income/expense             Annualized %  
     Coupon      Discount/     Total      Average      interest  
        fees (1)        balance      yield/cost  
     (dollars in thousands)  

Assets:

             

Correspondent production:

             

Mortgage loans acquired for sale at fair value

   $ 9,199       $ —        $ 9,199       $ 424,890         4.31

Investment activities:

             

Short-term investments

     324         —          324         116,458         0.55

Mortgage -backed securities:

             

Agency

     3,440         116        3,556         194,977         3.63

Non-Agency prime jumbo

     95         71        166         19,668         5.45
  

 

 

    

 

 

   

 

 

    

 

 

    
     3,535         187        3,722         214,645         3.45
  

 

 

    

 

 

   

 

 

    

 

 

    

Mortgage loans:

             

at fair value

     64,459         553        65,012         2,386,352         5.42

under forward purchase agreements at fair value

     3,584         —          3,584         150,816         4.73
  

 

 

    

 

 

   

 

 

    

 

 

    
     68,043         553        68,596         2,537,168         5.42

ESS

     6,001         —          6,001         145,891         8.18
  

 

 

    

 

 

   

 

 

    

 

 

    

Total investment activities

     77,903         740        78,643         3,014,162         5.19

Other interest

     22         —          22         —        
  

 

 

    

 

 

   

 

 

    

 

 

    
   $ 87,124       $ 740      $ 87,864       $ 3,439,052         5.08
  

 

 

    

 

 

   

 

 

    

 

 

    

Liabilities:

             

Assets sold under agreements to repurchase

   $ 22,462       $ 5,220      $ 27,682       $ 2,025,678         2.72

Borrowings under forward purchase agreements

     2,363         —          2,363         165,471         2.84

Asset backed secured financing

     2,974         204        3,178         166,190         3.80

Exchangeable senior notes

     6,718         453        7,171         250,000         5.71
  

 

 

    

 

 

   

 

 

    

 

 

    
     34,517         5,877        40,394         2,607,339         3.08
  

 

 

    

 

 

   

 

 

    

 

 

    

Other interest - Servicing

     1,246         —          1,246         —        
  

 

 

    

 

 

   

 

 

    

 

 

    
     35,763         5,877        41,640         2,607,339         3.18
  

 

 

    

 

 

   

 

 

    

 

 

    

Net interest income

   $ 51,361       $ (5,137   $ 46,224         
  

 

 

    

 

 

   

 

 

       

Net interest margin

                2.67

Net interest spread

                1.91

 

(1) Amounts in this column represent accrual of unearned discounts and amortization of facility commitment fees for liabilities.

 

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     Six months ended June 30, 2013  
     Interest income/expense             Annualized %  
     Coupon      Discount/     Total      Average      interest  
        fees (1)        balance      yield/cost  
     (dollars in thousands)  

Assets:

             

Correspondent production:

             

Mortgage loans acquired for sale at fair value

   $ 15,615       $ —        $ 15,615       $ 937,707         3.33

Investment activities:

             

Short-term investments

     88         —          88         73,224         0.24

Mortgage loans:

             

at fair value

     27,549         —          27,549         1,160,858         4.75

under forward purchase agreements at fair value

     260         —          260         16,596         3.12
  

 

 

    

 

 

   

 

 

    

 

 

    
     27,809         —          27,809         1,177,454         4.72
  

 

 

    

 

 

   

 

 

    

 

 

    

Total investment activities

     27,897         —          27,897         1,250,678         4.46
             
  

 

 

    

 

 

   

 

 

    

 

 

    

Other Interest

     160         —          160         —        
  

 

 

    

 

 

   

 

 

    

 

 

    
   $ 43,672       $ —        $ 43,672       $ 2,188,385         3.97
  

 

 

    

 

 

   

 

 

    

 

 

    

Liabilities:

             

Assets sold under agreements to repurchase

   $ 16,862       $ 4,664      $ 21,526       $ 1,304,010         3.30

Borrowings under forward purchase agreements

     251         —          251         16,640         3.00

Exchangeable senior notes

     2,240         144        2,384         85,635         5.54
  

 

 

    

 

 

   

 

 

    

 

 

    
     19,353         4,808        24,161         1,406,285         3.42

Other interest - Servicing

     1,219         —          1,219         —        
  

 

 

    

 

 

   

 

 

    

 

 

    
     20,572         4,808        25,380         1,406,285         3.59
  

 

 

    

 

 

   

 

 

    

 

 

    

Net interest income

   $ 23,100       $ (4,808   $ 18,292         
  

 

 

    

 

 

   

 

 

       

Net interest margin

                1.67

Net interest spread

                0.38

 

(1) Amounts in this column represent accrual of unearned discounts and amortization of facility commitment fees for liabilities.

 

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

 

     Quarter ended June 30, 2014
vs.
Quarter ended June 30, 2013
    Six months ended June 30, 2014
vs.
Six months ended June 30, 2013
 
     Increase (decrease)
due to changes in
    Increase (decrease)
due to changes in
 
                 Total                 Total  
     Rate     Volume     change     Rate     Volume     change  
     (in thousands)  

Correspondent production:

            

Mortgage loans acquired for sale at fair value

   $ 1,704      $ (5,422   $ (3,718   $ 3,778      $ (10,194   $ (6,416

Investment activities:

            

Money market investment

     64        51        115        163        73        236   

Mortgage -backed securities:

            

Agency

     —          1,795        1,795        —          3,556        3,556   

Non-Agency prime jumbo

     —          166        166        —          166        166   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
     —          1,961        1,961        —          3,722        3,722   

Mortgage loans:

            

at fair value

     334        18,845        19,179        4,606        32,857        37,463   

under forward purchase agreements

     356        814        1,170        200        3,124        3,324   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total mortgage loans

     690        19,659        20,349        4,806        35,981        40,787   

ESS

     —          3,139        3,139        —          6,001        6,001   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total investment activities

     754        24,810        25,564        4,969        45,777        50,746   

Other interest

     —          (125     (125     —          (138     (138
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
     2,458        19,263        21,721        8,747        35,445        44,192   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Assets sold under agreements to repurchase:

     (843     5,172        4,329        (1,161     7,317        6,156   

Borrowings under forward purchase agreement

     (16     548        532        (14     2,126        2,112   

Asset backed secured financing

     —          1,561        1,561        —          3,178        3,178   

Exchangeable senior notes

     61        1,142        1,203        75        4,712        4,787   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Interest bearing liabilities

     (798     8,423        7,625        (1,100     17,333        16,233   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other interest - servicing

     —          96        96        —          27        27   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
     (798     8,519        7,721        (1,100     17,360        16,260   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net interest income

   $ 3,256      $ 10,744      $ 14,000      $ 9,847      $ 18,085      $ 27,932   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

In the quarter and six months ended June 30, 2014, we earned net interest income of $26.7 million and $46.2 million, respectively, compared to $12.7 million and $18.3 million for the same periods in 2013. The increase in net interest income between the quarters was primarily due to an increase in average interest-earning assets for the quarter and six months ended June 30, 2014 as compared to the same periods in 2013 supplemented by a 53% and 65% increase in our yield-cost spread.

We earned interest income on our portfolio of Agency MBS totaling $2.0 million and $3.7 million for the quarter and six months ended June 30, 2014, respectively. We did not hold Agency MBS during the quarter ended June 30, 2013.

In the quarter and six months ended June 30, 2014, we recognized interest income on mortgage loans at fair value and mortgage loans under forward purchase agreements at fair value totaling $37.7 million and $68.6 million, respectively, including $18.1 million and $30.4 million, respectively, of interest capitalized pursuant to loan modifications, which compares to $17.3 million and $27.8 million, including $6.6 million and $11.8 million of interest capitalized pursuant to loan modifications, in the quarter and six months ended June 30, 2013. The increases in interest income are due primarily to growth in the average balance of our mortgage loan portfolio of $1.4 billion, or 111%, and $1.4 billion, or 115%, for the quarter and six months ended June 30, 2014 when compared to the same period in 2013.

 

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At June 30, 2014, approximately 72% of the fair value of our distressed mortgage loan portfolio was nonperforming, as compared to 67% at June 30, 2013. We do not accrue interest on nonperforming loans and generally do not recognize revenues during the period we hold REO. We calculate the yield on our mortgage loan portfolio based on the portfolio’s average fair value, which most closely reflects our investment in the mortgage loans. Accordingly, the yield we realize on our distressed mortgage loans is substantially higher than would be recorded based on the loans’ unpaid principal balances as we typically purchase our distressed mortgage loans at substantial discounts to their UPB.

Nonperforming loans and REO generally take longer to generate cash flow than performing loans due to the time required to work with borrowers to resolve payment issues through our modification programs and to acquire and liquidate the property securing the mortgage loans. The value and returns we realize from these assets are determined by our ability to assist borrowers in curing defaults, or when curing of borrower defaults is not a viable solution, by our ability to effectively manage the liquidation process. As a participant in HAMP, we are required to comply with the process specified by the HAMP program before liquidating a loan, and this may extend the resolution process. At June 30, 2014, we held $1.5 billion in fair value of nonperforming loans and $240.5 million in carrying value of REO.

During the quarter and six months ended June 30, 2014, we incurred interest expense totaling $21.9 million and $41.6 million, respectively, as compared to $14.1 million and $25.4 million, respectively, during the quarter and six months ended June 30, 2013. Our interest cost on interest bearing liabilities was 3.03% and 3.08% for the quarter and six months ended June 30, 2014 as compared to 3.39% and 3.42% during the quarter and six months ended June 30, 2013. The increase in interest expense reflects our increased use of borrowings in support of growth of our balance sheet, partially offset by the effect of lower borrowing costs relating to our mortgage loans at fair value during 2014 as compared to 2013.

Net Loan Servicing Fees

When we sell mortgage loans, we generally enter into a contract to service the mortgage loans and recognize the fair value of such contracts as MSRs. Under these contracts, we are required to perform loan servicing functions in exchange for fees and the right to other compensation. The servicing functions, which are performed on our behalf by PLS, typically include, among other responsibilities, collecting and remitting loan payments; responding to borrower inquiries; accounting for principal and interest, holding custodial (impound) funds for payment of property taxes and insurance premiums; counseling delinquent mortgagors; and supervising foreclosures and property dispositions.

Net loan servicing fees are summarized below:

 

     Quarter ended June 30,     Six months ended June 30,  
     2014     2013     2014     2013  
     (in thousands)  

Servicing fees (1)

   $ 19,156      $ 12,307      $ 36,688      $ 22,724   

MSR recapture fee receivable from PFSI

     1        367        9        498   

Effect of MSRs:

        

Carried at lower of amortized cost or fair value

        

Amortization

     (7,697     (6,264     (15,061     (11,232

(Provision for) reversal of impairment

     (2,224     1,222        (2,851     3,708   

Carried at fair value - change in fair value

     (4,764     260        (6,792     193   

Gains (losses) on hedging derivatives

     4,286        —          4,186        (1,988
  

 

 

   

 

 

   

 

 

   

 

 

 
     (10,399     (4,782     (20,518     (9,319
  

 

 

   

 

 

   

 

 

   

 

 

 

Net loan servicing fees

   $ 8,758      $ 7,892      $ 16,179      $ 13,903   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) Includes contractually specified servicing and ancillary fees.

 

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Net loan servicing fees increased $900,000 and $2.3 million during the quarter and six months ended June 30, 2014 compared to the same periods in 2013. The increase was primarily due to a $6.8 million and $14.0 million increase, respectively, in servicing fees, offset by a $5.6 million and $11.2 million increase, respectively, in the effect of MSRs on net loan servicing fees. The increase in servicing fees is attributable to continued growth in our mortgage loan servicing portfolio. Offsetting the increase in servicing fees was MSR activity which included increased amortization arising from growth in the MSR asset along with the recognition of fair value decreases and impairment as compared to net increases in fair value in the prior period.

Effective February 1, 2013, we entered into an MSR recapture agreement that requires PLS to transfer to us the increases MSRs with respect to new mortgage loans originated in refinancing transactions where PLS refinances a mortgage loan for which we previously held the MSRs. PLS is generally required to transfer MSRs relating to such mortgage loans (or, under certain circumstances, other mortgage loans) that have an aggregate unpaid principal balance that is not less than 30% of the aggregate unpaid principal balance of all the loans so originated. Where the fair value of the aggregate MSRs to be transferred for the applicable month is less than $200,000, PLS may, at its option, settle in cash with PMT in an amount equal to such fair market value in lieu of transferring such MSRs. We recognized approximately $9,000 of such income during the six months ended June 30, 2014.

As our investment in MSRs grows, we expect that the effect of amortization, impairment and changes in fair value will have an increasing influence on our net income. MSRs have a significant effect on net loan servicing fees, driven primarily by our monthly re-measurement of the fair value of MSRs. The fair value of MSRs is difficult to determine because MSRs are not actively traded in observable standalone markets and are sensitive to changes in interest rate levels and marketplace expectations of future interest rates. Considerable judgment is required to estimate the fair values of these assets and the exercise of such judgment can significantly affect our income.

Our MSR valuation process combines the use of a discounted cash flow model and analysis of current market data to arrive at an estimate of fair value at each balance sheet date. The cash flow and prepayment assumptions used in our Manager’s discounted cash flow model are based on market factors and include the historical performance of its managed MSRs, which our Manager believes are consistent with assumptions and data used by market participants valuing similar MSRs.

The key inputs used in the valuation of MSRs include mortgage prepayment speeds and discount rates. These variables can, and generally do, change from period to period as market conditions change. Therefore, the fair value of MSRs changes from period to period. PCM’s valuation committee reviews and approves the fair value estimates of our MSRs.

We account for MSRs either at the asset’s fair value with changes in fair value recorded in current period earnings or by using the amortization method with the MSRs carried at the lower of amortized cost or fair value based on whether we view the underlying mortgages as being sensitive to prepayments resulting from changing market interest rates. We have identified an initial mortgage interest rate of 4.5% as the threshold for whether such mortgage loans are sensitive to changes in interest rates:

 

    Our risk management efforts in connection with MSRs relating to mortgage loans with initial interest rates of more than 4.5% are aimed at moderating the effects of changes in interest rates on the assets’ fair values.

 

    For MSRs relating to mortgage loans with initial interest rates of less than or equal to 4.5%, we have concluded that such assets present different risks than MSRs relating to mortgage loans with initial interest rates of more than 4.5% and therefore require a different risk management approach. Our risk management efforts relating to these assets are aimed at moderating the effects of non-interest rate risks on fair value, such as the effect of changes in home prices on the assets’ fair values. We have identified these assets to be accounted for using the amortization method.

 

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Our MSRs are summarized by the basis on which we account for the assets below:

 

     June 30,     December 31,  
     2014     2013  
     (in thousands)  

MSRs carried at fair value

   $ 46,802      $ 26,452   
  

 

 

   

 

 

 

MSR carried at lower of amortized cost or fair value:

    

Amortized cost

   $ 274,110      $ 266,697   

Valuation allowance

     (5,428     (2,577
  

 

 

   

 

 

 

Carrying value

   $ 268,682      $ 264,120   
  

 

 

   

 

 

 

Fair value

   $ 289,226      $ 289,737   
  

 

 

   

 

 

 

Total MSR:

    

Carrying value

   $ 315,484      $ 290,572   
  

 

 

   

 

 

 

Fair value

   $ 336,028      $ 316,189   
  

 

 

   

 

 

 

Unpaid principal balance of mortgage loans underlying MSRs

   $ 29,268,039      $ 25,792,933   
  

 

 

   

 

 

 

Average servicing fee rate (in basis points)

    

MSRs carried at lower of amortized cost or fair value

     26        26   

MSRs carried at fair value

     25        26   

Average note interest rate

    

MSRs carried at lower of amortized cost or fair value

     3.72     3.68

MSRs carried at fair value

     4.79     4.78

 

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Key assumptions used in determining the fair value of MSRs and estimates of the sensitivity of MSR values to changes in these assumptions are as follows:

 

     June 30, 2014     December 31, 2013  
     Range
(Weighted average)
 
     Amortized cost     Fair value     Amortized cost     Fair value  
     (Carrying value, unpaid principal balance and effect on value amounts in thousands)  

Carrying value

   $ 268,682      $ 46,802      $ 264,120      $ 26,452   

Key inputs:

        

Unpaid principal balance of underlying mortgage loans

   $ 24,639,750      $ 4,758,331      $ 23,399,612      $ 2,393,321   

Weighted-average annual servicing fee rate (in basis points)

     26        25        26        26   

Weighted-average note interest rate

     3.72%        4.79%        3.68%        4.78%   
  

 

 

   

 

 

   

 

 

   

 

 

 

Pricing spread (1) (2)

     6.3% – 17.5%        7.6% – 15.3%        6.3% – 17.5%        7.3% – 15.3%   
     (7.4%)        (9.2%)        (6.7%)        (8.6%)   

Effect on fair value of a:

        

5% adverse change

   $ (5,302   $ (827   $ (5,490   $ (488

10% adverse change

   $ (10,427   $ (1,627   $ (10,791   $ (959

20% adverse change

   $ (20,177   $ (3,149   $ (20,861   $ (1,855
  

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average life (in years)

     1.1 - 7.2        2.4 - 7.2        1.3 - 7.3        2.8 - 7.3   
     (6.4)        (7.0)        (6.7)        (7.2)   

Prepayment speed (1) (3)

     7.7% – 58.9%        8.0% – 30.6%        7.7% - 51.9%        8.0% - 20.0%   
     (8.6%)        (10.2%)        (8.2%)        (8.9%)   

Effect on fair value of a:

        

5% adverse change

   $ (5,495   $ (1,160   $ (5,467   $ (568

10% adverse change

   $ (10,821   $ (2,277   $ (10,765   $ (1,117

20% adverse change

   $ (20,993   $ (4,390   $ (20,886   $ (2,160
  

 

 

   

 

 

   

 

 

   

 

 

 

Annual per-loan cost of servicing

     $68 – $140        $68 – $140        $68 – $140        $68 – $140   
     ($68)        ($68)        ($68)        ($68)   

Effect on fair value of a:

        

5% adverse change

   $ (1,761   $ (290   $ (1,695   $ (158

10% adverse change

   $ (3,522   $ (580   $ (3,390   $ (316

20% adverse change

   $ (7,043   $ (1,159   $ (6,780   $ (633

 

(1) The effect on value of an adverse change in one of the above-mentioned key inputs may result in recognition of MSR impairment. The extent of impairment recognized will depend on the relationship of fair value to the carrying value of MSRs.
(2) Pricing spread represents a margin that is added 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 LIBOR curve for purposes of discounting cash flows relating to MSRs acquired as proceeds from the sale of mortgage loans and purchased MSRs not backed by pools of distressed mortgage loans.
(3) Prepayment speed is measured using Life Total CPR.

 

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Significant changes to any of the key assumptions shown above in isolation could result in a significant change in the MSR fair value measurement. Changes in these key assumptions are not necessarily directly related. The preceding sensitivity analyses are limited in that they were performed as of a particular point in time; only contemplate the movements in the indicated variables; do not incorporate changes in the variables in relation to other variables; are subject to the accuracy of various models and inputs used; and do not take into account other factors that would affect our overall financial performance in such scenarios, including operational adjustments made by our Manager to account for changing circumstances. For these reasons, the preceding estimates should not be viewed as earnings forecasts.

Results of Real Estate Acquired in Settlement of Loans

Results of REO includes the gains or losses we record upon sale of the properties as well as valuation adjustments we record during the period we hold those properties. During the quarter and six months ended June 30, 2014, we recorded net losses of $5.3 million and $12.0 million, respectively, in Results of real estate acquired in settlement of loans as compared to net losses of $1.9 million and $5.2 million, respectively, for the quarter and six months ended June 30, 2013.

Results of REO are summarized below:

 

     Quarter ended June 30,     Six months ended June 30,  
     2014     2013     2014     2013  
     (dollars in thousands)  

During the period:

        

Proceeds from sales of REO

   $ 48,874      $ 30,993      $ 82,268      $ 63,017   

Results of real estate acquired in settlement of loans:

        

Valuation adjustments, net

     (9,159     (4,978     (18,052     (11,067

Gain on sale, net

     3,811        3,049        6,078        5,885   
  

 

 

   

 

 

   

 

 

   

 

 

 
   $ (5,348   $ (1,929   $ (11,974   $ (5,182
  

 

 

   

 

 

   

 

 

   

 

 

 

Number of properties sold

     489        288        813        546   

Average carrying value of REO

   $ 214,652      $ 86,761      $ 190,582      $ 86,613   

Period end:

        

Carrying value

   $ 240,471      $ 88,771       

Number of properties in inventory

     1,619        640       

The increase in losses from REOs during the quarter and six months ended June 30, 2014 compared to the same periods in 2013 was due to slower property value appreciation during the quarter ended June 30, 2014 as compared to the quarter ended June 30, 2013, along with growth in the inventory of properties held between the periods. Since REO is carried at the lower of cost or fair value, we recognize valuation losses on properties where decreases in fair value are indicated but are generally unable to record fair value increases until the date of sale of properties.

 

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Expenses

Our expenses are summarized below:

 

     Quarter ended June 30,      Six months ended June 30,  
     2014      2013      2014      2013  
     (in thousands)  

Expenses payable to PFSI:

           

Loan fulfillment fees

   $ 12,433       $ 22,054       $ 21,335       $ 50,298   

Loan servicing fees

     14,180         8,787         28,771         16,513   

Management fees

     8,912         8,455         16,986         14,947   

Professional services

     2,690         1,339         4,421         3,723   

Compensation

     1,883         1,438         4,825         3,527   

Other

     7,154         5,571         11,221         10,517   
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 47,252       $ 47,644       $ 87,559       $ 99,525   
  

 

 

    

 

 

    

 

 

    

 

 

 

Expenses decreased $392,000, or 1%, and $12.0 million, or 12%, during the quarter and six months ended June 30, 2014, respectively, compared to the same periods in 2013. This decrease was primarily a result of lower fulfillment fees, reflecting decreased correspondent production activities, partially offset by increased servicing fees reflecting growth in both our investments in mortgage loans at fair value and our MSR portfolio.

Loan Fulfillment Fees

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

 

     Quarter ended June 30,      Six months ended June 30,  
     2014      2013      2014      2013  
     (in thousands)  

Fulfillment fee expense

   $ 12,433       $ 22,054       $ 21,335       $ 50,298   

UPB of loans fulfilled by PFSI

   $ 2,991,764       $ 4,323,885       $ 4,911,342       $ 9,110,711   

The decrease in loan fulfillment fees of $9.6 million and $29.0 million during the quarter and six months ended June 30, 2014, respectively, compared to the same periods in 2013 is primarily due to the decrease in the volume of Agency-eligible and jumbo mortgage loans we purchased in our correspondent production activities.

Loan Servicing Fees

Loan servicing fees increased by $5.4 million, or 61%, and $12.3 million, or 74%, during the quarter and six months ended June 30, 2014, respectively, compared to the same periods in 2013. Loan servicing fees increase as our investment in mortgage loans and MSRs increases. During the quarter ended June 30, 2014, our average investment in mortgage loans increased by 111%, compared to the quarter ended June 30, 2013. Our servicing portfolio increased to $29.3 billion at June 30, 2014 from $19.9 billion at June 30, 2013.

Included in loan servicing fees are activity-based fees, which increased by $3.2 million during the quarter ended June 30, 2014, generally relating to the increase in loan resolution activities during the quarter and six months ended June 30, 2014. We amended our servicing agreement with PFSI effective January 1, 2014, to limit the supplemental fees we pay PFSI to no more than $700,000 per quarter. During the quarter and six months ended June 30, 2014, we paid PFSI $700,000 and $1.4 million, respectively, in supplemental servicing fees relating to our MSR servicing portfolio. Supplemental servicing fees are a component of the total base servicing fee and compensate PFSI for providing certain services that servicers generally do not provide but are required by us because we have no employees or infrastructure.

 

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Loan servicing fees payable to PFSI and subsidiaries are summarized below:

 

     Quarter ended June 30,      Six months ended June 30,  
     2014      2013      2014      2013  
     (in thousands)  

Mortgage loans acquired for sale at fair value:

           

Base

   $ 29       $ 90       $ 46       $ 169   

Activity-based

     51         111         77         183   
  

 

 

    

 

 

    

 

 

    

 

 

 
     80         201         123         352   
  

 

 

    

 

 

    

 

 

    

 

 

 

Distressed mortgage loans:

           

Base

     4,975         3,699         9,941         7,572   

Activity-based

     5,746         2,447         12,132         4,324   
  

 

 

    

 

 

    

 

 

    

 

 

 
     10,721         6,146         22,073         11,896   
  

 

 

    

 

 

    

 

 

    

 

 

 

MSRs:

           

Base

     3,323         2,363         6,471         4,126   

Activity-based

     56         77         104         139   
  

 

 

    

 

 

    

 

 

    

 

 

 
     3,379         2,440         6,575         4,265   
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 14,180       $ 8,787       $ 28,771       $ 16,513   
  

 

 

    

 

 

    

 

 

    

 

 

 

The components of our management fee payable to PFSI are summarized below:

 

     Quarter ended June 30,      Six months ended June 30,  
     2014      2013      2014      2013  
     (in thousands)  

Management fee:

  

Base

   $ 5,838       $ 4,575       $ 11,359       $ 8,940   

Performance incentive

     3,074         3,880         5,627         6,007   
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 8,912       $ 8,455       $ 16,986       $ 14,947   
  

 

 

    

 

 

    

 

 

    

 

 

 

Management Fees

Management fees increased by $457,000 and $2.0 million during the quarter and six months ended June 30, 2014, respectively, due to the effect of growth in shareholders’ equity on the base management fee we pay to PFSI and recognition of performance incentive fees in 2014, which only were incurred beginning February 1, 2013. The increase in performance incentive fees resulted in part from a change in our management agreement with PFSI. Effective February 1, 2013, the management agreement was amended to adjust the basis on which both the base management fee and performance incentive fee are determined. Specifically, we amended:

 

    The base management fee rate from 1.5% per year of shareholders’ equity to a base management fee schedule based on tiered management fee rates beginning with a rate of 1.5% per year of shareholders’ equity for the first $2.0 billion of shareholders’ equity and reduced rates as the balance of shareholders’ equity increases. Our shareholders’ equity did not reach a level that would have resulted in a reduced base management fee rate.

 

    The definition of “net income” for purposes of determining the performance incentive fee to net income as determined in compliance with U.S. GAAP. Previously, “net income” for purposes of determining the performance incentive fee began with net income as determined in compliance with U.S. GAAP and was adjusted for non-cash gains and losses included in our income.

 

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We expect our management fees to fluctuate in the future based on: (1) changes in our shareholders’ equity with respect to our base management fee; and (2) the level of our profitability in excess of the return thresholds specified in our management agreement with respect to the performance incentive fee.

Professional Services

Professional services expense increased during the quarter and six months ended June 30, 2014 as compared to the quarter and six months ended June 30, 2013 by $1.4 million and $698,000, respectively, due to increased legal fees including those relating to the sales of reperforming loans during the quarter and six months ended June 30, 2014, partially offset by reduced due diligence expenses reflecting reduced distressed mortgage loan acquisition activity.

Other Expenses

Other expenses are summarized below:

 

     Quarter ended June 30,     Six months ended June 30,  
           2014                  2013                 2014                  2013        
     (in thousands)  

Common overhead allocation from PFSI

   $ 2,638       $ 2,974      $ 5,216       $ 5,266   

Servicing and collection costs

     3,114         (30     3,745         333   

Loan origination

     397         1,468        435         2,446   

Insurance

     252         218        491         429   

Technology

     227         235        474         354   

Other expenses

     526         706        860         1,689   
  

 

 

    

 

 

   

 

 

    

 

 

 
   $ 7,154       $ 5,571      $ 11,221       $ 10,517   
  

 

 

    

 

 

   

 

 

    

 

 

 

Other expenses increased during the quarter and six months ended June 30, 2014 as compared to the quarter and six months ended June 30, 2013 by $1.6 million and $704,000, respectively, primarily due to higher servicing and collection costs associated with the administration and sale of seasoned distressed loans, partially offset by decreased expenses associated with certain of our correspondent production activities.

Income Taxes

We have elected to treat PMC as a TRS. Income from a TRS is only included as a component of REIT taxable income to the extent that the TRS makes dividend distributions of income to the REIT. No such dividend distributions have been made to date.

A TRS is subject to corporate federal and state income tax. Accordingly, a provision for income taxes for PMC is included in the accompanying Consolidated Statements of Income.

The provision for income taxes decreased by $15.3 million and $19.5 million for the quarter and six months ended June 30, 2014 compared to the same periods in 2013. The Company had a tax benefit of $1.9 million and $3.5 million for the quarter and six months ended June 30, 2014 and a tax expense of $13.4 million and $16.1 million for the quarter and six months ended June 30, 2013. The Company’s effective tax rate was (2.6)% and (3.2)% for the quarter and six months ended June 30, 2014 compared to 19.8% and 13.0% for the same periods in 2013. The decrease in the Company’s effective tax rate for the quarter and six months ended June 30, 2014 compared to the prior periods in 2013 is due primarily to a loss in the company’s taxable REIT subsidiary for the quarter and six months ended June 30, 2014 compared to income in that entity for the same periods in 2013. The primary difference between the Company’s effective tax rate and the statutory tax rate is non-taxable REIT income resulting from the deduction for dividends paid.

In general, cash dividends declared by us will be considered ordinary income to shareholders for income tax purposes. Some portion of the dividends may be characterized as capital gain distributions or a return of capital.

 

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Balance Sheet Analysis

Following is a summary of key balance sheet items:

 

     June 30,      December 31,  
     2014      2013  
     (in thousands)  

Assets

     

Cash

   $ 37,902       $ 27,411   

Investments:

     

Short-term investments

     104,453         92,398   

Mortgage-backed securities

     218,725         197,401   

Mortgage loans acquired for sale at fair value

     909,085         458,137   

Mortgage loans at fair value

     2,697,821         2,818,445   

Excess servicing spread

     190,244         138,723   

Derivative assets

     14,594         7,976   

Real estate acquired in settlement of loans

     240,471         148,080   

Mortgage servicing rights

     315,484         290,572   
  

 

 

    

 

 

 
     4,690,877         4,151,732   

Other assets

     140,966         131,774   
  

 

 

    

 

 

 

Total assets

   $ 4,869,745       $ 4,310,917   
  

 

 

    

 

 

 

Liabilities

     

Borrowings:

     

Assets sold under agreements to repurchase

   $ 2,701,755       $ 2,039,605   

Borrowings under forward purchase agreements

     —           226,580   

Asset-backed secured financing of the variable interest entity

     170,201         165,415   

Exchangeable senior notes

     250,000         250,000   
  

 

 

    

 

 

 
     3,121,956         2,681,600   

Other liabilities

     170,629         162,203   
  

 

 

    

 

 

 

Total liabilities

     3,292,585         2,843,803   

Shareholders’ equity

     1,577,160         1,467,114   
  

 

 

    

 

 

 

Total liabilities and shareholders’ equity

   $ 4,869,745       $ 4,310,917   
  

 

 

    

 

 

 

Total assets increased by approximately $558.8 million, or 13%, during the period from December 31, 2013 through June 30, 2014, primarily due to an increase in mortgage loans acquired for sale at fair value of $450.9 million, a $51.5 million increase in ESS and an increase in REO of $92.4 million, partly offset by a $120.6 million decrease in mortgage loans at fair value. Our asset acquisitions are summarized below.

 

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Asset Acquisitions

Correspondent Production

Following is a summary of our correspondent production acquisitions:

 

     Quarter ended June 30,      Six months ended June 30,  
     2014      2013      2014      2013  
     (in thousands)  

Correspondent production loan purchases:

           

Government-insured or guaranteed

   $ 4,209,932       $ 4,480,570       $ 7,276,142       $ 8,417,013   

Agency-eligible

     3,010,028         4,315,652         4,974,383         9,220,206   

Jumbo

     82,197         108,486         94,856         116,641   
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 7,302,157       $ 8,904,708       $ 12,345,381       $ 17,753,860   
  

 

 

    

 

 

    

 

 

    

 

 

 

Fair value of correspondent production loans in inventory at period end

   $ 909,085       $ 1,309,830         

Gain on mortgage loans acquired for sale

   $ 10,222       $ 44,438       $ 20,193       $ 73,717   

During the quarter and six months ended June 30, 2014, we purchased for sale $7.3 billion and $12.3 billion, respectively, in fair value of correspondent production loans compared to $8.9 billion and $17.8 billion, respectively, in fair value of correspondent production loans during the quarter and six months ended June 30, 2013. The decrease in correspondent purchases is a result of the effects of increasing interest rates on the size of the mortgage market during the quarter ended June 30, 2014 as compared to the quarter ended June 30, 2013.

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

Investment Portfolio

Following is a summary of our acquisitions of mortgage investments other than correspondent production acquisitions as shown in the preceding table:

 

     Quarter ended June 30,      Six months ended June 30,  
     2014      2013      2014      2013  
     (in thousands)  

Distressed mortgage loans (1)(2)

           

Performing

   $ 735       $ 43,923       $ 735       $ 57,084   

Nonperforming

     26,002         198,787         282,282         386,099   
  

 

 

    

 

 

    

 

 

    

 

 

 
     26,737         242,710         283,017         443,183   

REO (2)

     29         —           3,117         —     

MSRs

     28,741         51,241         49,616         107,457   

ESS purchased from PennyMac Financial Services, Inc.

     52,867         —           73,393         —     
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 108,375       $ 293,951       $ 409,143       $ 550,640   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) Performance status as of the date of acquisition.
(2) $26.8 million of distressed assets were acquired from or through one or more subsidiaries of Citigroup Inc. during the quarter and six months ended June 30, 2014 compared to $243.0 million and $443.3 million distressed assets so acquired during the quarter and six months ended June 30, 2013, respectively.

 

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Our acquisitions during the quarters ended June 30, 2014 and June 30, 2013 were financed through the use of a combination of equity and borrowings. We continue to identify additional means of increasing our investment portfolio through cash flow from our business operations, existing investments, borrowings, and transactions that minimize current cash outlays. However, we expect that, over time, our ability to continue our investment activities portfolio growth will depend on our ability to raise additional equity capital.

Investment Portfolio Composition

Mortgage-Backed Securities

Our portfolio of MBS is backed by 30-year fixed interest rate mortgage loans. Following is a summary of our MBS portfolio.

 

     June 30, 2014     December 31, 2013  
                   Average                   Average  
     Fair             Life            Market     Fair             Life            Market  
   value      Principal      (in years)      Coupon     yield     value      Principal      (in years)      Coupon     yield  
     (dollars in thousands)  

Agency:

                          

Freddie Mac

   $ 142,486       $ 138,637         5.20         3.50     2.85   $ 141,106       $ 142,186         7.23         3.50     3.63

Fannie Mae

     58,342         56,669         5.70         3.50     2.86     56,295         56,593         7.49         3.50     3.57

Prime jumbo

     17,897         19,624         7.01         2.13     3.65     —           —           —           0.00     0.00
  

 

 

    

 

 

           

 

 

    

 

 

         
   $ 218,725       $ 214,930         5.50         3.37     2.97   $ 197,401       $ 198,779         7.30         3.50     3.59
  

 

 

    

 

 

           

 

 

    

 

 

         

Mortgage Loans

The relationship of the fair value of our mortgage loans at fair value and mortgage loans under forward purchase agreements (excluding mortgage loans acquired for sale at fair value and mortgage loans at fair value held by VIE) to the fair value of the real estate collateral underlying the loans is summarized below:

 

     June 30, 2014      December 31, 2013  
     Loan      Collateral      Loan      Collateral  
     (in thousands)  

Fair values:

           

Performing loans

   $ 610,427       $ 899,574       $ 647,266       $ 986,075   

Nonperforming loans

     1,546,074         2,190,461         1,647,527         2,331,605   
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 2,156,501       $ 3,090,035       $ 2,294,793       $ 3,317,680   
  

 

 

    

 

 

    

 

 

    

 

 

 

The collateral values presented above do not represent our assessment of the amount of future cash flows to be realized from the mortgage loans and/or underlying collateral. Future cash flows will be influenced by, among other considerations, changes in borrower performance, our asset disposition strategies with respect to individual loans, the costs and expenses we incur in the disposition process and changes in the underlying collateral values.

The collateral values summarized above are estimated and may change over time due to various factors including our level of access to the properties securing the loans, changes in the real estate market or the condition of individual properties. The collateral values presented do not include any costs that would typically be incurred in obtaining the property in settlement of the loan, readying the property for sale or in the sale of a property.

 

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Following is a summary of the distribution of our mortgage loans at fair value (excluding mortgage loans acquired for sale at fair value and mortgage loans at fair value held by VIE):

 

     June 30, 2014     December 31, 2013  
     Performing loans     Nonperforming loans     Performing loans     Nonperforming loans  
                  Average                  Average                  Average                  Average  
     Fair      %     note     Fair      %     note     Fair      %     note     Fair      %     note  

Loan type

   value      total     rate     value      total     rate     value      total     rate     value      total     rate  
     (dollars in thousands)     (dollars in thousands)  

Fixed

   $ 320,212         52     4.85   $ 656,592         42     5.97   $ 329,899         51     5.00   $ 751,611         46     6.03

ARM/Hybrid

     113,271         19     3.24     861,988         56     5.13     184,837         29     3.46     877,086         53     5.07

Interest rate step-up

     176,794         29     2.31     26,137         2     2.49     132,391         20     2.32     18,830         1     3.31

Balloon

     150         0     2.00     1,357         0     5.18     139         0     2.00     —           0     0.00
  

 

 

    

 

 

     

 

 

    

 

 

     

 

 

    

 

 

     

 

 

    

 

 

   
   $ 610,427         100     3.79   $ 1,546,074         100     5.45   $ 647,266         100     4.01   $ 1,647,527         100     5.50
  

 

 

    

 

 

     

 

 

    

 

 

     

 

 

    

 

 

     

 

 

    

 

 

   
     June 30, 2014     December 31, 2013  
     Performing loans     Nonperforming loans     Performing loans     Nonperforming loans  
                  Average                  Average                  Average                  Average  
     Fair      %     note     Fair      %     note     Fair      %     note     Fair      %     note  

Lien position

   value      total     rate     value      total     rate     value      total     rate     value      total     rate  
     (dollars in thousands)     (dollars in thousands)  

1st lien

   $ 609,733         100     3.79   $ 1,545,893         100     5.44   $ 646,703         100     4.01   $ 1,647,457         100     5.50

2nd lien

     694         0     4.50     181         0     10.30     563         0     4.97     70         0     10.62

Unsecured

     —           0     0.00     —           0     0.00     —           0     0.00     —           0     0.00
  

 

 

    

 

 

     

 

 

    

 

 

     

 

 

    

 

 

     

 

 

    

 

 

   
   $ 610,427         100     3.79   $ 1,546,074         100     5.45   $ 647,266         100     4.01   $ 1,647,527         100     5.50
  

 

 

    

 

 

     

 

 

    

 

 

     

 

 

    

 

 

     

 

 

    

 

 

   
     June 30, 2014     December 31, 2013  
     Performing loans     Nonperforming loans     Performing loans     Nonperforming loans  
                  Average                  Average                  Average                  Average  
     Fair      %     note     Fair      %     note     Fair      %     note     Fair      %     note  

Occupancy

   value      total     rate     value      total     rate     value      total     rate     value      total     rate  
     (dollars in thousands)     (dollars in thousands)  

Owner occupied

   $ 500,855         83     3.88   $ 820,745         53     5.42   $ 543,633         84     4.02   $ 915,279         56     5.47

Investment property

     106,805         17     3.39     723,257         47     5.47     95,181         15     3.95     729,558         44     5.54

Other

     2,767         0     4.24     2,072         0     5.55     8,452         1     4.13     2,690         0     5.10
  

 

 

    

 

 

     

 

 

    

 

 

     

 

 

    

 

 

     

 

 

    

 

 

   
   $ 610,427         100     3.79   $ 1,546,074         100     5.45   $ 647,266         100     4.01   $ 1,647,527         100     5.50
  

 

 

    

 

 

     

 

 

    

 

 

     

 

 

    

 

 

     

 

 

    

 

 

   
     June 30, 2014     December 31, 2013  
     Performing loans     Nonperforming loans     Performing loans     Nonperforming loans  
                  Average                  Average                  Average                  Average  
     Fair      %     note     Fair      %     note     Fair      %     note     Fair      %     note  

Loan age

   value      total     rate     value      total     rate     value      total     rate     value      total     rate  
     (dollars in thousands)     (dollars in thousands)  

Less than 12 months

   $ 393         0     4.17   $ —           0     0.42   $ 444         0     3.54   $ —           0     0.42

12 - 35 months

     801         0     3.47     792         0     4.64     11,063         2     2.64     3,075         0     4.07

36 - 59 months

     30,486         5     3.52     32,754         2     3.74     54,150         8     3.49     55,669         3     4.25

60 months or more

     578,747         95     3.81     1,512,528         98     5.49     581,609         90     4.09     1,588,783         97     5.55
  

 

 

    

 

 

     

 

 

    

 

 

     

 

 

    

 

 

     

 

 

    

 

 

   
   $ 610,427         100     3.79   $ 1,546,074         100     5.45   $ 647,266         100     4.01   $ 1,647,527         100     5.50
  

 

 

    

 

 

     

 

 

    

 

 

     

 

 

    

 

 

     

 

 

    

 

 

   

 

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     June 30, 2014     December 31, 2013  
     Performing loans     Nonperforming loans     Performing loans     Nonperforming loans  
                  Average                  Average                  Average                  Average  
Origination    Fair      %     note     Fair      %     note     Fair      %     note     Fair      %     note  

FICO score

   value      total     rate     value      total     rate     value      total     rate     value      total     rate  
     (dollars in thousands)     (dollars in thousands)  

Less than 600

   $ 167,594         28     4.22   $ 277,497         18     5.79   $ 159,814         25     4.51   $ 306,375         19     5.93

600-649

     130,152         21     4.01     290,815         19     5.43     130,561         20     4.33     303,402         18     5.60

650-699

     153,180         25     3.66     454,703         29     5.41     157,600         24     3.85     469,526         28     5.42

700-749

     116,660         19     3.21     370,378         24     5.31     131,930         20     3.40     399,819         24     5.26

750 or greater

     42,841         7     3.41     152,681         10     5.27     67,361         11     3.52     168,405         11     5.29
  

 

 

    

 

 

     

 

 

    

 

 

     

 

 

    

 

 

     

 

 

    

 

 

   
   $ 610,427         100     3.79   $ 1,546,074         100     5.45   $ 647,266         100     4.01   $ 1,647,527         100     5.50
  

 

 

    

 

 

     

 

 

    

 

 

     

 

 

    

 

 

     

 

 

    

 

 

   
     June 30, 2014     December 31, 2013  
     Performing loans     Nonperforming loans     Performing loans     Nonperforming loans  
                  Average                  Average                  Average                  Average  
     Fair      %     note     Fair      %     note     Fair      %     note     Fair      %     note  

Current loan-to-value (1)

   value      total     rate     value      total     rate     value      total     rate     value      total     rate  
     (dollars in thousands)     (dollars in thousands)  

Less than 80%

   $ 120,517         20     4.35   $ 224,811         15     5.53   $ 145,449         23     4.49   $ 223,442         14     5.60

80% - 99.99%

     161,093         26     3.96     372,155         24     5.38     188,505         29     4.00     355,451         22     5.34

100% - 119.99%

     177,543         29     3.64     369,731         24     5.43     174,830         27     3.83     413,316         25     5.50

120% or greater

     151,274         25     3.54     579,377         37     5.46     138,482         21     3.89     655,318         39     5.54
  

 

 

    

 

 

     

 

 

    

 

 

     

 

 

    

 

 

     

 

 

    

 

 

   
   $ 610,427         100     3.79   $ 1,546,074         100     5.45   $ 647,266         100     4.01   $ 1,647,527         100     5.50
  

 

 

    

 

 

     

 

 

    

 

 

     

 

 

    

 

 

     

 

 

    

 

 

   

 

(1) Current loan-to-value is calculated based on the unpaid principal balance of the mortgage loan and our estimate of the value of the mortgaged property.

 

     June 30, 2014     December 31, 2013  
     Performing loans     Nonperforming loans     Performing loans     Nonperforming loans  
                  Average                  Average                  Average                  Average  
Geographic    Fair      %     note     Fair      %     note     Fair      %     note     Fair      %     note  

distribution

   value      total     rate     value      total     rate     value      total     rate     value      total     rate  
     (dollars in thousands)     (dollars in thousands)  

California

   $ 156,001         26     3.15   $ 305,846         20     4.61   $ 184,457         28     3.37   $ 370,347         23     4.60

New York

     58,318         10     3.45     282,566         18     5.89     37,944         6     4.29     188,021         11     5.97

Florida

     41,146         7     3.73     192,870         13     5.88     55,115         9     3.68     234,362         14     5.91

New Jersey

     29,429         5     3.23     171,553         11     5.66     *         *        *        161,344         10     5.65

Other

     325,533         52     4.22     593,239         38     5.40     369,750         57     4.47     693,453         42     5.68
  

 

 

    

 

 

     

 

 

    

 

 

     

 

 

    

 

 

     

 

 

    

 

 

   
   $ 610,427         100     3.79   $ 1,546,074         100     5.45   $ 647,266         100     4.01   $ 1,647,527         100     5.50
  

 

 

    

 

 

     

 

 

    

 

 

     

 

 

    

 

 

     

 

 

    

 

 

   

 

* Not included in the states representing the largest percentages as of the dates presented.

 

     June 30, 2014     December 31, 2013  
     Performing loans     Nonperforming loans     Performing loans     Nonperforming loans  
                  Average                  Average                  Average                  Average  
     Fair      %     note     Fair      %     note     Fair      %     note     Fair      %     note  

Payment status

   value      total     rate     value      total     rate     value      total     rate     value      total     rate  
     (dollars in thousands)     (dollars in thousands)  

Current

   $ 456,512         75     3.69   $ —           0     0.00   $ 501,218         77     3.90   $ —           0     0.00

30 days delinquent

     104,164         17     4.14     —           0     0.00     100,395         16     4.32     —           0     0.00

60 days delinquent

     49,751         8     4.01     —           0     0.00     45,653         7     4.40     —           0     0.00

90 days or more days delinquent

        0     0.00        0     0.00              

Not in foreclosure

     —           0     0.00     629,021         41     5.00     —           0     0.00     738,043         45     5.11

In foreclosure

     —           0     0.00     917,053         59     5.76     —           0     0.00     909,484         55     5.82
  

 

 

    

 

 

     

 

 

    

 

 

     

 

 

    

 

 

     

 

 

    

 

 

   
   $ 610,427         100     3.79   $ 1,546,074         100     5.45   $ 647,266         100     4.01   $ 1,647,527         100     5.50
  

 

 

    

 

 

     

 

 

    

 

 

     

 

 

    

 

 

     

 

 

    

 

 

   

 

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We believe that our current fair value estimates are representative of fair value at the reporting date. However, the market for distressed mortgage assets is illiquid with a limited number of participants. Furthermore, our business strategy is to enhance value during the period in which the loans are held. Therefore, any resulting appreciation or depreciation in the fair value of the loans is recorded during such holding period and ultimately realized at the end of the holding period.

Following is a comparison of the valuation techniques and key inputs we use in the valuation of our financial assets using “Level 3” inputs:

 

     Range
     (Weighted average)

Key inputs

   June 30, 2014   December 31, 2013

Mortgage loans at fair value

    

Discount rate

   7.1% – 16.9%   8.7% – 16.9%
   (11.8%)   (12.7%)

Twelve-month projected housing price index change

   3.5% – 9.1%   2.5% – 4.3%
   (4.7%)   (3.7%)

Prepayment speed (1)

   0.0% – 6.6%   0.0% – 3.9%
   (2.5%)   (2.0%)

Total prepayment speed (2)

   0.8% – 27.4%   0.3% – 33.9%
   (21.8%)   (24.3%)

Mortgage loans under forward purchase agreements

    

Discount rate

   —     9.5% – 13.5%
   —     (11.9%)

Twelve-month projected housing price index change

   —     3.3% – 4.2%
   —     (3.8%)

Prepayment speed (1)

   —     1.1% – 2.9%
   —     (2.2%)

Total prepayment speed (2)

   —     13.4% – 27.9%
   —     (22.8%)

 

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

We monitor and value our investments in pools of distressed mortgage loans either by acquisition date or by payment status of the loans. Most of the measures we use to value and monitor the loan portfolio, such as projected prepayment and default speeds and discount rates, are applied or output at the pool level. The characteristics of the individual loans, such as loan size, loan-to-value ratio and current delinquency status, can vary widely within a pool.

The weighted average discount rate used in the valuation of mortgage loans at fair value decreased from 12.7% at December 31, 2013 to 11.8% at June 30, 2014 as market returns for similar assets decreased during the period.

The weighted average twelve-month projected housing price index (“HPI”) change increased from 3.7% at December 31, 2013 to 4.7% at June 30, 2014 due to slightly different expectations in various geographies and different state composition of the portfolio.

The total prepayment speed of our portfolio of mortgage loans at fair value decreased from 24.3% at December 31, 2013 to 21.8% at June 30, 2014, largely due to our revised expectations of run off compared to our estimate at December 31, 2013.

 

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Real Estate Acquired in Settlement of Loans

Following is a summary of our REO by attribute:

 

     June 30, 2014     December 31, 2013  

Property type

   Fair value      % total     Fair value      % total  
     (dollars in thousands)  

1 - 4 dwelling units

   $ 169,825         71   $ 108,341         73

Planned unit development

     24,241         10     23,106         15

Condominium/Co-op

     29,716         12     9,805         7

5+ dwelling units

     16,689         7     6,828         5
  

 

 

    

 

 

   

 

 

    

 

 

 
   $ 240,471         100   $ 148,080         100
  

 

 

    

 

 

   

 

 

    

 

 

 

 

     June 30, 2014     December 31, 2013  

Geographic distribution

   Fair value      % total     Fair value      % total  
     (dollars in thousands)  

California

   $ 44,720         19   $ 25,224         17

Florida

     38,793         16     21,659         15

Maryland

     23,304         10     7,688         5

Illinois

     12,408         5     *         *   

Other

     121,246         50     93,509         63
  

 

 

    

 

 

   

 

 

    

 

 

 
   $ 240,471         100   $ 148,080         100
  

 

 

    

 

 

   

 

 

    

 

 

 

 

* Not included in the states representing the largest percentages as of the dates presented.

Following is a summary of the status of our portfolio of acquisitions by quarter acquired (excluding acquisitions for the quarter ended June 30, 2014 due to close proximity of current status to quarter-end):

 

     Acquisitions for the quarter
ended
 
     March 31, 2014  
     At     June 30,  
     purchase     2014  
     (dollars in millions)  

Unpaid principal balance

   $ 439.0      $ 424.9   

Pool factor (1)

     1.00        0.97   

Collection status:

    

Delinquency

    

Current

     6.2     10.3

30 days

     0.7     1.5

60 days

     0.7     1.6

over 90 days

     37.5     28.6

In foreclosure

     53.8     51.8

REO

     1.1     6.3

 

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     Acquisitions for the quarter ended  
     December 31, 2013     September 30, 2013     June 30, 2013     March 31, 2013  
     At     June 30,     At     June 30,     At     June 30,     At     June 30,  
     purchase     2014     purchase     2014     purchase     2014     purchase     2014  
     (dollars in millions)  

Unpaid principal balance

   $ 507.3      $ 486.1      $ 929.5      $ 828.4      $ 397.3      $ 345.6      $ 366.2      $ 272.6   

Pool factor (1)

     1.00        0.96        1.00        0.89        1.00        0.87        1.00        0.74   

Collection status:

              

Delinquency

              

Current

     1.4     6.9     0.8     11.1     4.8     20.4     1.6     36.7

30 days

     0.2     0.9     0.3     1.4     7.4     6.0     1.5     7.9

60 days

     0.0     0.2     0.7     0.8     7.6     3.7     3.5     4.1

over 90 days

     38.3     30.4     58.6     34.8     45.3     25.3     82.2     22.1

In foreclosure

     60.0     54.1     39.6     42.8     34.9     35.0     11.2     19.4

REO

     0.0     7.6     0.0     9.2     0.0     9.6     0.0     9.7
     Acquisitions for the quarter ended  
     December 31, 2012     September 30, 2012     June 30, 2012     March 31, 2012  
     At     June 30,     At     June 30,     At     June 30,     At     June 30,  
     purchase     2014     purchase     2014     purchase     2014     purchase     2014  
     (dollars in millions)  

Unpaid principal balance

   $ 290.3      $ 211.9      $ 357.2      $ 234.5      $ 402.5      $ 176.0      $ 0.0      $ 0.0   

Pool factor (1)

     1.00        0.73        1.00        0.66        1.00        0.44        —          —     

Collection status:

              

Delinquency

              

Current

     3.1     25.6     0.0     21.1     45.0     35.5     0.0     0.0

30 days

     1.3     7.2     0.0     1.8     4.0     10.5     0.0     0.0

60 days

     5.4     4.4     0.1     1.9     4.3     4.8     0.0     0.0

over 90 days

     57.8     18.4     49.1     17.5     31.3     23.4     0.0     0.0

In foreclosure

     32.4     27.5     50.8     40.4     15.3     17.2     0.0     0.0

REO

     0.0     17.0     0.0     17.2     0.1     8.6     0.0     0.0

 

     Acquisitions for the quarter ended  
     December 31, 2011     September 30, 2011     June 30, 2011     March 31, 2011  
     At     June 30,     At     June 30,     At     June 30,     At     June 30,  
     purchase     2014     purchase     2014     purchase     2014     purchase     2014  
     (dollars in millions)  

Unpaid principal balance

   $ 49.0      $ 29.3      $ 542.6      $ 185.9      $ 259.8      $ 105.8      $ 515.1      $ 183.1   

Pool factor (1)

     1.00        0.60        1.00        0.34        1.00        0.41        1.00        0.36   

Collection status:

              

Delinquency

              

Current

     0.2     31.5     0.6     20.8     11.5     26.2     2.0     23.2

30 days

     0.1     3.4     1.3     3.9     6.5     8.6     1.9     5.8

60 days

     0.2     5.2     2.0     3.2     5.2     3.9     3.9     2.9

over 90 days

     70.4     22.8     22.6     27.0     31.2     24.0     25.9     18.8

In foreclosure

     29.0     28.1     73.0     33.1     43.9     26.9     66.3     39.0

REO

     0.0     9.0     0.4     12.0     1.7     10.4     0.0     10.3

 

(1) Ratio of unpaid principal balance remaining to unpaid principal balance at acquisition.

Cash Flows

Our cash flows resulted in a net increase in cash of $10.5 million during the six months ended June 30, 2014. The increase was due to cash provided in our investing and financing activities exceeding cash used by our operating activities.

 

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Operating activities

Cash used by operating activities totaled $570.5 million during the six months ended June 30, 2014 compared to cash used in operating activities of $440.6 million during the six months ended June 30, 2013. Cash used by operating activities in both periods is primarily attributable to growth in our inventory of mortgage loans acquired for sale.

Investing activities

Net cash provided by our investing activities was $112.8 million for the six months ended June 30, 2014 and reflects liquidations of investments in excess of new investment acquisitions. We realized cash inflows from repayments of mortgage loans and MBS, repayments of ESS and sales of REO totaling $508.2 million. Partially offsetting these cash inflows were the use of cash to purchase mortgage loans at fair value, ESS and REO of $379.1 million during the six months ended June 30, 2014.

Approximately 38% of our investments, comprised of short-term investments, MBS, non-correspondent production mortgage loans, ESS, REO and MSRs, were nonperforming assets as of June 30, 2014. Nonperforming assets include mortgage loans delinquent 90 or more days and REO. Accordingly, we expect that these assets will require a longer period to produce cash flow and the timing and amount of cash flows from these assets is less certain than for performing assets. During the six months ended June 30, 2014, we transferred $183.5 million of mortgage loans to REO and realized cash proceeds from the sales and repayments of mortgage loans at fair values and REO totaling $486.3 million.

As discussed above, our investing activities include the purchase of long-term assets which are not presently cash flowing or are at risk of interruption of cash flows in the near future. Furthermore, much of the investment income we recognize is in the form of valuation adjustments we record recognizing our estimates of the net appreciation in fair value of the assets as we work with borrowers to either modify their loans or acquire the property securing their loans in settlement thereof. Accordingly, the cash associated with a substantial portion of our revenues is often realized as part of the proceeds of the liquidation of the assets, either through payoff or sale of the mortgage loan or through acquisition and subsequent sale of the property securing the loans, many months after we record the revenues.

The following table illustrates, for assets liquidated during the periods presented, the net gain (loss) in value that we accumulated over the period during which we owned the liquidated assets, as compared to the proceeds actually received and the additional net gain (loss) realized upon liquidation of such assets:

 

     Quarter ended June 30,  
     2014      2013  
     Proceeds      Accumulated
gains (losses) (2)
     Gain on
liquidation (3)
     Proceeds      Accumulated
gains (losses) (2)
     Gain on
liquidation (3)
 
     (in thousands)  

Mortgage loans (1)

   $ 142,255       $ 27,580       $ 9,883       $ 73,358       $ 10,689       $ 8,039   

REO

     48,874         3,229         3,811         30,993         1,155         3,049   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   $ 191,129       $ 30,809       $ 13,694       $ 104,351       $ 11,844       $ 11,088   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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     Six months ended June 30,  
     2014      2013  
     Proceeds      Accumulated
gains (losses) (2)
     Gain on
liquidation(3)
     Proceeds      Accumulated
gains (losses) (2)
     Gain on
liquidation (3)
 
     (in thousands)  

Mortgage loans (1)

   $ 394,316       $ 80,822       $ 16,629       $ 135,242       $ 17,706       $ 16,404   

REO

     82,268         6,202         6,078         63,017         2,178         5,885   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   $ 476,584       $ 87,024       $ 22,707       $ 198,259       $ 19,884       $ 22,289   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) For the quarter and six months ended June 30, 2014, the amounts include a sale of reperforming loans with loan sale proceeds of $70.3 million and $264.3 million, accumulated gains of $18.6 million and $62.8 million, and $2.4 million and $3.5 million gain on liquidation, respectively.
(2) Represents valuation gains and losses recognized during the period we held the respective asset but excludes the gain or loss recorded upon sale or repayment of the respective asset.
(3) Represents the gain or loss recognized upon sale or repayment of the respective asset.

The amounts included in accumulated gains and gains on liquidation do not include the cost of managing the liquidated assets which may be substantial depending on the collection status of the loan at acquisition and on our success in working with the borrower to resolve the source of distress in the loan. Accumulated gains include the amount of accumulated valuation gains and losses recognized throughout the holding period and, in the case of REO, includes direct transaction costs incurred in the sale of the property. Accordingly, the preceding amounts do not represent periodic earnings on a cash basis and the amount of gain will have accumulated over varying periods depending on the holding periods and liquidation speed for individual assets.

The primary expenses incurred at a loan level in managing our portfolio of distressed assets are servicing and activity fees. From the time of acquisition of the distressed assets through their deboarding dates, we incurred servicing and activity fees of $3.1 million for assets liquidated during the quarter ended June 30, 2014; $1.6 million for assets liquidated during the quarter ended June 30, 2013; and $8.1 million and $4.4 million for assets liquidated during the six months ended June 30, 2014 and 2013, respectively.

Financing activities

Net cash provided by financing activities was $468.2 million for the six months ended June 30, 2014, which was primarily used to fund the increase in our inventory of mortgage loans acquired for sale and mortgage loans at fair value. We do not raise equity or enter into borrowings for the purpose of financing the payment of dividends. We believe that our cash flows from the liquidation of our investments, which include accumulated gains recorded during the periods we hold those investments, along with our cash earnings, are adequate to fund our operating expenses and dividend payment requirements. As our business continues to grow, we manage our liquidity in the aggregate and are reinvesting our cash flows in new investments as well as using such cash to fund our dividend requirements.

Liquidity and Capital Resources

Our liquidity reflects our ability to meet our current obligations (including the purchase of loans from correspondent lenders, our operating expenses and, when applicable, retirement of, and margin calls relating to, our debt and derivatives positions), make investments as our Manager identifies them and make distributions to our shareholders. We generally need to distribute at least 90% of our taxable income each year (subject to certain adjustments) to our shareholders to qualify as a REIT under the Internal Revenue Code. This distribution requirement limits our ability to retain earnings and thereby replenish or increase capital to support our activities.

We expect our primary sources of liquidity to be proceeds from liquidations from our portfolio of distressed assets, cash earnings on our investments, cash flows from business activities, and proceeds from

 

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borrowings and/or additional equity offerings. We do not expect repayments from contractual cash flows from our investments to be a primary source of liquidity as the majority of our distressed asset investments are nonperforming. Our portfolio of distressed mortgage loans was acquired with the expectation that the majority of the cash flows associated with these investments would result from liquidation of the loan or the property securing the loan, rather than from scheduled principal and interest payments. Our mortgage loans acquired for sale are generally held for fifteen days or less, and therefore are not expected to generate significant cash flows from principal repayments.

Our current leverage strategy is to finance our assets where we believe such borrowing is prudent, appropriate and available. We have made borrowings in the form of borrowings under forward purchase agreements, and sales of assets under agreements to repurchase. We entered into two long-term financing agreements during the year ended December 31, 2013. To the extent available to us, we expect in the future to obtain long-term financing for assets with estimated future lives of more than one year; this may include term financing and securitization of performing (including newly purchased jumbo mortgage loans), nonperforming and/or reperforming mortgage loans.

The two long-term financing transactions are as follows:

 

    In April 2013, our wholly-owned subsidiary, PMC, completed a private offering of $250.0 million of Notes due 2020. The Notes bear interest at a rate of 5.375% per year, payable semiannually. The Notes are exchangeable into common shares of the Company at a rate of 33.5733 common shares per $1,000 principal amount of the Notes, which exchange rate increased from the initial exchange rate of 33.5149 (equivalent to an initial exchange price of approximately $29.84 per common share). The increase in the calculated exchange rate was the result of cash dividends exceeding the dividend threshold amount of $0.57 as provided in the related indenture. The exchange rate is subject to adjustment upon the occurrence of other certain events, but will not be adjusted for any accrued and unpaid interest. The Notes will mature May 1, 2020, unless repurchased or exchanged in accordance with their terms before such date.

 

    In September 2013, we financed $536.8 million at fair value of jumbo loans through a private-label securitization transaction. We sold $174.5 million of senior bonds backed by the loans and retained the remaining securities from the transaction, with a portion intended as long-term investments. We intend to sell a portion of the securities in the future as investor demand for private-label securities increases. We do not have plans to do additional financings through private-label securitizations until market conditions for such transactions improve.

We will continue to finance most of our assets on a short-term basis until long-term financing on favorable terms becomes more accessible. Our short-term financings will be primarily in the form of agreements to repurchase and other secured lending and structured finance facilities, pending the ultimate disposition of the assets, whether through sale, securitization or liquidation. Because a significant portion of our current debt facilities consist of short-term borrowings, we expect to renew these facilities in advance of maturity in order to ensure our ongoing liquidity and access to capital or otherwise allow ourselves sufficient time to replace any necessary financing.

Our repurchase agreements represent the sales of assets together with agreements for us to buy back the assets at a later date. During the quarter and six months ended June 30, 2014, the average balance outstanding under agreements to repurchase securities, mortgage loans, mortgage loans acquired for sale, mortgage loans held by VIE and REO totaled $2.3 billion and 2.0 billion, and the maximum daily amount outstanding under such agreements totaled $2.8 billion and 2.6 billion, respectively. The difference between the maximum and average daily amounts outstanding was due to the timing of our mortgage loan purchases through our correspondent production segment and settlements of the mortgage loans into securities and our use of excess cash to temporarily reduce our borrowings. The total facility size of our borrowings was approximately $3.9 billion at June 30, 2014.

 

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As of June 30, 2014 and December 31, 2013, we financed our investments in MBS, our inventory of mortgage loans acquired for sale at fair value, mortgage loans at fair value, mortgage loans at fair value held by VIE, and REO under agreements to repurchase and forward purchase agreements as follows:

 

     June 30, 2014     December 31, 2013  
     (dollars in thousands)  

Assets financed

   $ 3,790,376      $ 3,447,587   

Total assets in classes of assets financed

   $ 4,066,102      $ 3,787,478   

Borrowings

   $ 2,871,956      $ 2,431,600   

Percentage of invested assets pledged

     93     91

Advance rate against pledged assets

     76     71

Leverage ratio(1)

     1.98     1.83

 

(1) All borrowings divided by shareholders’ equity at period end.

As discussed above, all of our repurchase agreements and forward purchase agreements have short-term maturities:

 

    The transactions relating to mortgage loans and REO under agreements to repurchase mature between September 8, 2014 and February 17, 2015 and provide for the sale to major financial institution counterparties based on the fair value of the mortgage loans sold. The agreements provide for terms of approximately one year.

We do not currently have secured financing for our investments in MSRs and ESS. Direct leverage on these assets has been difficult to obtain due to the requirement of each Agency that its rights and interest in the MSRs and ESS remain senior to those of any lender extending credit. If we are unable to finance these asset classes, continued aggregation of MSRs and acquisition of ESS could place stress on our capital and liquidity positions or require us to forego attractive investment opportunities.

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

 

    profitability at each of the Company and our Operating Partnership, for at least one (1) of the previous two consecutive fiscal quarters, as of the end of each fiscal quarter, for both the prior two (2) calendar quarters and the prior three (3) calendar quarters;

 

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

 

    a minimum tangible net worth for the Company of $860 million; a minimum tangible net worth for our Operating Partnership of $700 million; a minimum tangible net worth for PMH of $250 million; and a minimum tangible net worth for PMC of $150 million;

 

    a maximum ratio of total liabilities to tangible net worth of less than 10:1 for PMC and 5:1 for the Company, our Operating Partnership and PMH; and

 

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

Although these financial covenants limit the amount of indebtedness we may incur and impact our liquidity through minimum cash reserve requirements, we believe that these covenants currently provide us with sufficient flexibility to successfully operate our business and obtain the financing necessary to achieve that purpose.

PLS is also subject to various financial covenants, both as a borrower under its own financing arrangements and as our Servicer under certain of our debt financing agreements. The most significant of these financial covenants currently include the following:

 

    positive net income during each calendar quarter;

 

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    a minimum in unrestricted cash and cash equivalents of $20 million;

 

    a minimum tangible net worth of $90 million; and

 

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

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

The transactions relating to mortgage loans and/or equity interests in special purpose entities holding real property under agreements to repurchase contain margin call provisions that, upon notice from the applicable lender at its option, require us to transfer cash or additional mortgage loans or real property, as applicable, in an amount sufficient to eliminate any margin deficit. A margin deficit will generally result from any decrease in the market value (as determined by the applicable lender) of the assets subject to an agreement to repurchase. Upon notice from the applicable lender, we will generally be required to satisfy the margin call on the day of such notice or within one business day thereafter, depending on the timing of the notice.

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

Off-Balance Sheet Arrangements and Aggregate Contractual Obligations

Off-Balance Sheet Arrangements and Guarantees

As of June 30, 2014, we have not entered into any off-balance sheet arrangements or guarantees.

Contractual Obligations

As of June 30, 2014, we had on-balance sheet contractual obligations of $2.7 billion for the financing of assets under agreements to repurchase with maturities between January 2, 2014 and December 18, 2014 as well as forward purchase agreements with maturities between June 16, 2014 and June 30, 2014. We also had contractual obligations of $250. 0 million in the Notes.

As of June 30, 2014, we had contractual obligations to purchase mortgage loans for resale totaling approximately $1.4 million. Of the $1.4 million in commitments to purchase mortgage loans for resale, we recorded IRLCs of $11.5 million on our balance sheet as assets under the caption Derivative assets and $395,000 as liabilities under the caption Derivative liabilities.

All agreements to repurchase assets that matured between June 30, 2014 and the date of this Report have been renewed, extended or repaid and are described in Note 16—Assets Sold Under Agreements to Repurchase at Fair Value in the accompanying consolidated financial statements.

 

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Payment obligations under these agreements are summarized below:

 

     Payments due by period  

Contractual obligations

   Total      Less than
1 year
     1 - 3
years
     3 - 5
years
     More
than
5 years
 
     (in thousands)  

Commitments to purchase mortgage loans from correspondent lenders

   $ 1,443,612       $ 1,443,612       $ —         $ —         $ —     

Assets sold under agreements to repurchase

     2,701,755         2,701,755         —           —           —     

Asset-backed secured financing

     168,676         —           —           —           168,676   

Exchangeable senior notes

     250,000         —           —           —           250,000   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 4,564,043       $ 4,145,367       $ —         $ —         $ 418,676   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

The amount at risk (the fair value of the assets pledged plus the related margin deposit, less the amount advanced by the counterparty and interest payable) relating to the Company’s assets sold under agreements to repurchase and forward purchase agreements is summarized by counterparty below as of June 30, 2014:

 

Counterparty

   Amount at risk  
     (in thousands)  

Citibank, N.A.

   $ 540,781   

Credit Suisse First Boston Mortgage Capital LLC

     243,465   

The Royal Bank of Scotland Group

     80,264   

Bank of America, N.A.

     57,715   

Morgan Stanley Bank, N.A.

     10,832   

Daiwa Capital Markets America, Inc

     7,412   
  

 

 

 
   $ 940,469   
  

 

 

 

Management Agreement. We are externally managed and advised by our Manager pursuant to a management agreement, which was amended and restated effective February 1, 2013. Our management agreement requires our Manager to oversee our business affairs in conformity with the investment policies that are approved and monitored by our board of trustees. Our Manager is responsible for our day-to-day management and will perform such services and activities related to our assets and operations as may be appropriate.

Pursuant to our management agreement, our Manager collects a base management fee and may collect a performance incentive fee, both payable quarterly and in arrears. The term of our management agreement expires on February 1, 2017, subject to automatic renewal for additional 18-month periods, unless terminated earlier in accordance with the terms of the agreement.

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

Pursuant to our management agreement, the base management fee is equal to the sum of (i) 1.5% per annum of shareholders’ equity up to $2 billion, (ii) 1.375% per annum of shareholders’ equity in excess of $2 billion and up to $5 billion, and (iii) 1.25% per annum of shareholders’ equity in excess of $5 billion. The base management fee is paid in cash.

 

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The performance incentive fee is calculated at a defined annualized percentage of the amount by which “net income,” on a rolling four-quarter basis and before deducting the incentive fee, exceeds certain levels of return on “equity.” For the purpose of determining the amount of the performance incentive fee, “net income” is defined as net income or loss computed in accordance with GAAP and certain other non-cash charges determined after discussions between our Manager and our independent trustees and approval by a majority of our independent trustees. For this purpose, “equity” is the weighted average of the issue price per common share of all of our public offerings, multiplied by the weighted average number of common shares outstanding (including restricted share units) in the four-quarter period.

The performance incentive fee is calculated quarterly and escalates as net income (stated as a percentage of return on equity) increases over certain thresholds. On each calculation date, the threshold amounts represent a stated return on equity, plus or minus a “high watermark” adjustment. The performance fee payable for any quarter is equal to: (a) 10% of the amount by which net income for the quarter exceeds (i) an 8% return on equity plus the high watermark, up to (ii) a 12% return on equity; plus (b) 15% of the amount by which net income for the quarter exceeds (i) a 12% return on equity plus the high watermark, up to (ii) a 16% return on equity; plus (c) 20% of the amount by which net income for the quarter exceeds a 16% return on equity plus the high watermark.

The “high watermark” is the quarterly adjustment that reflects the amount by which the net income (stated as a percentage of return on equity) in that quarter exceeds or falls short of the lesser of 8% and the Fannie Mae MBS Yield (the target yield) for such quarter. The “high watermark” starts at zero and is adjusted quarterly. If the net income is lower than the target yield, the high watermark is increased by the difference. If the net income is higher than the target yield, the high watermark is reduced by the difference. Each time a performance incentive fee is earned, the high watermark returns to zero. As a result, the threshold amounts required for our Manager to earn a performance incentive fee are adjusted cumulatively based on the performance of our net income over (or under) the target yield, until the net income in excess of the target yield exceeds the then-current cumulative high watermark amount, and a performance incentive fee is earned. The performance incentive fee may be paid in cash or in our common shares (subject to a limit of no more than 50% paid in common shares), at our option.

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

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

Servicing Agreement. We have entered into a servicing agreement with our Servicer pursuant to which our Servicer provides servicing for our portfolio of residential mortgage loans. The loan servicing provided by our Servicer includes collecting principal, interest and escrow account payments, if any, with respect to mortgage loans, as well as managing loss mitigation, which may include, among other things, collection activities, loan workouts, modifications, foreclosures and short sales. Our Servicer also engages in certain loan origination activities that include refinancing mortgage loans and financings that facilitate sales of real estate owned properties, or REOs. The term of our servicing agreement, as amended, expires on February 1, 2017, subject to automatic renewal for additional 18-month periods, unless terminated earlier in accordance with the terms of the agreement.

 

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The base servicing fees for distressed whole loans are calculated based on a monthly per-loan dollar amount, with the actual dollar amount for each loan based on the delinquency, bankruptcy and/or foreclosure status of such loan or the related underlying real estate. Presently, the base servicing fees for distressed whole loans range from $30 per month for current loans up to $125 per month for loans that are severely delinquent and in foreclosure.

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

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

To the extent that our Servicer participates in HAMP (or other similar mortgage loan modification programs), our Servicer is entitled to retain any incentive payments made to it and to which it is entitled under HAMP, provided that, with respect to any incentive payments paid to our Servicer in connection with a mortgage loan modification for which we previously paid our Servicer a modification fee, our Servicer is required to reimburse us an amount equal to the incentive payments.

In addition, because we do not have any employees or infrastructure, our Servicer is required to provide a range of services and activities significantly greater in scope than the services provided in connection with a customary servicing arrangement. For these services, our Servicer receives a supplemental servicing fee of $25 per month for each distressed whole loan and $3.25 per month for each other subserviced loan; provided, however, that from and after January 1, 2014, the aggregate supplemental servicing fees for all loans that are owned by a third party investor and with respect to which we have acquired the related servicing rights (and that are not distressed whole loans) shall not exceed $700,000 in any fiscal quarter. Our Servicer is entitled to reimbursement for all customary, bona fide reasonable and necessary out-of-pocket expenses incurred by our Servicer in connection with the performance of its servicing obligations.

Mortgage Banking and Warehouse Services Agreement. We have also entered into a mortgage banking and warehouse services agreement (the “MBWS agreement”), pursuant to which our Servicer provides us with certain mortgage banking services, including fulfillment and disposition-related services, with respect to loans acquired by us from correspondent lenders, and certain warehouse lending services, including fulfillment and administrative services, with respect to loans financed by us for our warehouse lending clients. The term of our MBWS agreement expires on February 1, 2017, subject to automatic renewal for additional 18-month periods, unless terminated earlier in accordance with the terms of the agreement.

Under our MBWS agreement, our Servicer has agreed to provide the mortgage banking services exclusively for our benefit, and our Servicer and its affiliates are prohibited from providing such services for any other third party. However, such exclusivity and prohibition shall not apply, and certain other duties instead will be imposed upon our Servicer, if we are unable to purchase or finance mortgage loans as contemplated under our MBWS agreement for any reason.

 

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In consideration for the mortgage banking services provided by our Servicer with respect to our acquisition of mortgage loans, our Servicer is entitled to a fulfillment fee based on the type of mortgage loan that we acquire and equal to a percentage of the unpaid principal balance of such mortgage loan. Presently, the applicable percentages are (i) 0.50% for conventional mortgage loans, (ii) 0.88% for loans sold in accordance with the Ginnie Mae Mortgage-Backed Securities Guide, (iii) 0.80% for HARP mortgage loans with a loan-to-value ratio of 105% or less, (iv) 1.20% for HARP mortgage loans with a loan-to-value ratio of greater than 105%, and (v) 0.50% for all other mortgage loans not contemplated above; provided, however, that PLS may, in its sole discretion, reduce the amount of the applicable fulfillment fee and credit the amount of such reduction to the reimbursement otherwise due as described below. This reduction may only be credited to the reimbursement applicable to the month in which the related mortgage was funded.

At this time, we do not hold the Ginnie Mae approval required to issue Ginnie Mae MBS and act as a servicer. Accordingly, under our MBWS agreement, our Servicer currently purchases loans saleable in accordance with the Ginnie Mae Mortgage-Backed Securities Guide “as is” and without recourse of any kind from us at cost less an administrative fee paid by the correspondent lender to us plus accrued interest and a sourcing fee of three basis points.

In the event that we purchase mortgage loans with an aggregate unpaid principal balance in any month greater than $2.5 billion, our Servicer has agreed to discount the amount of such fulfillment fees by reimbursing us an amount equal to the product of (i) 0.025%, and (ii) the amount of unpaid principal balance in excess of $2.5 billion and less than or equal to $5.0 billion, plus (b) the product of (i) 0.05%, and (ii) the amount of unpaid principal balance in excess of $5 billion.

In consideration for the mortgage banking services provided by our Servicer with respect to our acquisition of mortgage loans under our Servicer’s early purchase program, our Servicer is entitled to fees accruing (i) at a rate equal to $25,000 per annum, and (ii) in the amount of $50 for each mortgage loan that we acquire. In consideration for the warehouse services provided by our Servicer with respect to mortgage loans that we finance for our warehouse lending clients, with respect to each facility, our Servicer is entitled to fees accruing (i) at a rate equal to $25,000 per annum, and (ii) in the amount of $50 for each mortgage loan that we finance thereunder. Where we have entered into both an early purchase agreement and a warehouse lending agreement with the same client, our Servicer shall only be entitled to one $25,000 per annum fee and, with respect to any mortgage loan that becomes subject to both such agreements, only one $50 per loan fee.

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

MSR Recapture Agreement. Effective February 1, 2013, we entered into an MSR recapture agreement with our Servicer. Pursuant to the terms of our MSR recapture agreement, if our Servicer refinances via its retail lending business loans for which we previously held the MSRs, our Servicer is generally required to transfer and convey to us, without cost to us, the MSRs with respect to new mortgage loans originated in those refinancings (or, under certain circumstances, other mortgage loans) that have an aggregate unpaid principal balance that is not less than 30% of the aggregate unpaid principal balance of all the loans so originated. Where the fair market value of the aggregate MSRs to be transferred for the applicable month is less than $200,000, our Servicer may, at its option, wire cash to us in an amount equal to such fair market value in lieu of transferring such MSRs. The initial term of our MSR recapture agreement expires, unless terminated earlier in accordance with the terms of the agreement, on February 1, 2017, subject to automatic renewal for additional 18-month periods, unless terminated in accordance with the terms of the agreement.

Spread Acquisition and MSR Servicing Agreements. Effective February 1, 2013, we entered into a master spread acquisition and MSR servicing agreement (the “2/1/13 Spread Acquisition Agreement”), pursuant to which we may acquire from our Servicer the rights to receive certain ESS arising from MSRs acquired by our Servicer from banks and other third party financial institutions. Our Servicer is generally required to service or subservice the related mortgage loans for the applicable agency or investor. The terms of each transaction under the 2/1/13 Spread Acquisition Agreement are subject to the terms thereof, as modified and supplemented by the terms of a confirmation executed in connection with such transaction.

 

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To the extent our Servicer refinances any of the mortgage loans relating to the ESS we have acquired, the 2/1/13 Spread Acquisition Agreement contains recapture provisions requiring that our Servicer transfer to us, at no cost, the ESS relating to a certain percentage of the unpaid principal balance of the newly originated mortgage loans. To the extent the fair market value of the aggregate ESS to be transferred for the applicable month is less than $200,000, our Servicer may, at its option, wire cash to us in an amount equal to such fair market value in lieu of transferring such ESS.

On December 30, 2013, we entered into a second master spread acquisition and MSR servicing agreement with our Servicer (the “12/30/13 Spread Acquisition Agreement”). The terms of the 12/30/13 Spread Acquisition Agreement are substantially similar to the terms of the 2/1/13 Spread Acquisition Agreement, except that we only intend to purchase ESS relating to Ginnie Mae MSRs under the 12/30/13 Spread Acquisition Agreement.

To the extent our Servicer refinances any of the mortgage loans relating to the ESS we have acquired, the 12/30/13 Spread Acquisition Agreement also contains recapture provisions requiring that our Servicer transfer to us, at no cost, the ESS relating to a certain percentage of the unpaid principal balance of the newly originated mortgage loans. However, under the 12/30/13 Spread Acquisition Agreement, in any month where the transferred ESS relating to newly originated Ginnie Mae mortgage loans is not equivalent to at least 90% of the product of the excess servicing fee rate and the unpaid principal balance of the refinanced mortgage loans, our Servicer is also required to transfer additional ESS or cash in the amount of such shortfall. Similarly, in any month where the transferred ESS relating to modified Ginnie Mae mortgage loans is not equivalent to at least 90% of the product of the excess servicing fee rate and the unpaid principal balance of the modified mortgage loans, the 12/30/13 Spread Acquisition Agreement contains provisions that require our Servicer 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, our Servicer may, at its option, wire cash to us in an amount equal to such fair market value in lieu of transferring such ESS.

In connection with our entry into the 12/30/13 Spread Acquisition Agreement, we were also required to enter into a Security and Subordination Agreement (the “Security Agreement”) with Credit Suisse First Boston Mortgage Capital LLC (“CSFB”). Under the terms of the Security Agreement, we pledged to CSFB our rights under the 12/30/13 Spread Acquisition Agreement and our interest in any ESS purchased thereunder. The Security Agreement was required as a result of a separate loan and security agreement between our Servicer and CSFB (the “LSA”), pursuant to which our Servicer pledged to CSFB all of its rights and interests in the Ginnie Mae MSRs it owns or acquires, and a separate acknowledgement agreement with respect thereto, by and among Ginnie Mae, CSFB and our Servicer. As a condition to permitting our Servicer to transfer to us the ESS relating to a portion of those pledged Ginnie Mae MSRs, CSFB required such transfer to be subject to CSFB’s continuing lien on the ESS, the pledge and acknowledgement of which were effected pursuant to the Security Agreement. CSFB’s lien on the ESS remains subordinate to the rights and interests of Ginnie Mae pursuant to the provisions of the 12/30/13 Spread Acquisition Agreement and the terms of the acknowledgement agreement.

The Security Agreement contains representations, warranties and covenants by us that are substantially similar to those contained in our other financing arrangements with CSFB. The Security Agreement also permits CSFB to liquidate our ESS along with the related MSRs to the extent there exists an event of default under the LSA, and it contains certain trigger events, including breaches of representations, warranties or covenants and defaults under other of our credit facilities, that would require our Servicer to either (i) repay in full the outstanding loan amount under the LSA or (ii) repurchase the ESS from us at fair market value. To the extent our Servicer is unable to repay the loan under the LSA or repurchase our ESS, an event of default would exist under the LSA, thereby entitling CSFB to liquidate the ESS and the related MSRs. In the event our ESS is liquidated as a result of certain actions or inactions of our Servicer, we generally would be entitled to seek indemnity under the 12/30/13 Spread Acquisition Agreement.

Reimbursement Agreement. In connection with the initial public offering of our common shares (“IPO”), on August 4, 2009, we entered into an agreement with our Manager pursuant to which we agreed to reimburse our Manager for the $2.9 million payment that it made to the underwriters for the IPO (the “Conditional

 

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Reimbursement”) if we satisfied certain performance measures over a specified period of time. Effective February 1, 2013, we amended the terms of the reimbursement agreement to provide for the reimbursement of our Manager of the Conditional Reimbursement if we are required to pay our Manager performance incentive fees under our management agreement at a rate of $10 in reimbursement for every $100 of performance incentive fees earned. The reimbursement of the Conditional Reimbursement is subject to a maximum reimbursement in any particular 12-month period of $1.0 million and the maximum amount that may be reimbursed under the agreement is $2.9 million. The reimbursement agreement also provides for the payment to the IPO underwriters of the payment that we agreed to make to them at the time of the IPO if we satisfied certain performance measures over a specified period of time. As our Manager earns performance incentive fees under our management agreement, the IPO underwriters will be paid at a rate of $20 of payments for every $100 of performance incentive fees earned by our Manager. The payment to the underwriters is subject to a maximum reimbursement in any particular 12-month period of $2.0 million and the maximum amount that may be paid under the agreement is $5.9 million.

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

Quantitative and Qualitative Disclosures About Market Risk

Market risk is the exposure to loss resulting from changes in interest rates, foreign currency exchange rates, commodity prices, equity prices, real estate values and other market-based risks. The primary market risks that we are exposed to are real estate risk, credit risk, interest rate risk, prepayment risk, inflation risk and market value risk. A substantial portion of our investments are comprised of nonperforming loans. We believe that such assets’ fair values respond primarily to changes in the fair value of the real estate securing such loans.

The following table summarizes the estimated change in fair value of our portfolio of our portfolio of distressed mortgage loans (comprised of mortgage loans at fair value, excluding mortgage loans at fair value held by VIE) as of June 30, 2014, given several hypothetical (instantaneous) changes in home values from those used in estimating fair value:

 

Property value shift in %    -15%     -10%     -5%     +5%     +10%     +15%  
     (dollars in thousands)  

Fair value

   $ 1,936,221      $ 2,015,253      $ 2,088,825      $ 2,217,930      $ 2,273,373      $ 2,323,059   

Change in fair value:

            

$

   $ (220,280   $ (141,248   $ (67,676   $ 61,429      $ 116,872      $ 166,559   

%

     (10.21 )%      (6.55 )%      (3.14 )%      2.85     5.42     7.72

The following table summarizes the estimated change in fair value of our mortgage loans at fair value held by VIE as of June 30, 2014, net of the effect of changes in fair value of the related asset-backed secured financing of the VIE at fair value, given several hypothetical (instantaneous) changes in interest rates and parallel shifts in the yield curve:

 

Interest rate shift in basis points    -200     -100     -50     50     100     200  
     (dollar in thousands)  

Fair value

   $ 383,132      $ 384,298      $ 379,673      $ 361,402      $ 351,542      $ 332,608   

Change in fair value:

            

$

   $ 12,014      $ 13,180      $ 8,555      $ (9,716   $ (19,576   $ (38,510

%

     3.24     3.55     2.31     (2.62 )%      (5.27 )%      (10.38 )% 

 

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Mortgage Servicing Rights

The following tables summarize the estimated change in fair value of MSRs accounted for using the amortization method as of June 30, 2014, given several shifts in pricing spreads, prepayment speed and annual per-loan cost of servicing:

 

Pricing spread shift in %    -20%     -10%     -5%     +5%     +10%     +20%  
     (dollars in thousands)  

Fair value

   $ 312,394      $ 300,399      $ 294,715      $ 283,924      $ 278,799      $ 269,049   

Change in fair value:

            

$

   $ 23,168      $ 11,173      $ 5,489      $ (5,302   $ (10,427   $ (20,177

%

     8.01     3.86     1.90     (1.83 )%      (3.61 )%      (6.98 )% 

 

Prepayment speed shift in %    -20%     -10%     -5%     +5%     +10%     +20%  
     (dollars in thousands)  

Fair value

   $ 313,065      $ 300,757      $ 294,899      $ 283,731      $ 278,405      $ 268,233   

Change in fair value:

            

$

   $ 23,838      $ 11,531      $ 5,673      $ (5,495   $ (10,821   $ (20,993

%

     8.24     3.99     1.96     (1.90 )%      (3.74 )%      (7.26 )% 

 

Per-loan servicing cost shift in %    -20%     -10%     -5%     +5%     +10%     +20%  
     (dollars in thousands)  

Fair value

   $ 296,269      $ 292,748      $ 290,987      $ 287,465      $ 285,705      $ 282,183   

Change in fair value:

            

$

   $ 7,043      $ 3,522      $ 1,761      $ (1,761   $ (3,522   $ (7,043

%

     2.44     1.22     0.61     (0.61 )%      (1.22 )%      (2.44 )% 

The following tables summarize the estimated change in fair value of MSRs accounted for using the fair value option method as of June 30, 2014, given several shifts in pricing spreads, prepayment speed and annual per-loan cost of servicing:

 

Pricing spread shift in %    -20%     -10%     -5%     +5%     +10%     +20%  
     (dollars in thousands)  

Fair value

   $ 50,414      $ 48,544      $ 47,658      $ 45,975      $ 45,176      $ 43,654   

Change in fair value:

            

$

   $ 3,611      $ 1,742      $ 856      $ (827   $ (1,627   $ (3,149

%

     7.72     3.72     1.83     (1.77 )%      (3.48 )%      (6.73 )% 

 

Prepayment speed shift in %    -20%     -10%     -5%     +5%     +10%     +20%  
     (dollars in thousands)  

Fair value

   $ 51,918      $ 49,260      $ 48,008      $ 45,642      $ 44,525      $ 42,412   

Change in fair value:

            

$

   $ 5,115      $ 2,458      $ 1,205      $ (1,160   $ (2,277   $ (4,390

%

     10.93     5.25     2.57     (2.48 )%      (4.87 )%      (9.38 )% 

 

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Per-loan servicing cost shift in %    -20%     -10%     -5%     +5%     +10%     +20%  
     (dollars in thousands)  

Fair value

   $ 47,962      $ 47,382      $ 47,092      $ 46,513      $ 46,223      $ 45,643   

Change in fair value:

            

$

   $ 1,159      $ 580      $ 290      $ (290   $ (580   $ (1,159

%

     2.48     1.24     0.62     (0.62 )%      (1.24 )%      (2.48 )% 

Excess servicing spread

The following tables summarize the estimated change in fair value of our ESS as of June 30, 2014, given several shifts in pricing spreads and prepayment speed:

 

Pricing spread shift in %    -20%     -10%     -5%     +5%     +10%     +20%  
     (dollars in thousands)  

Fair value

   $ 199,426      $ 194,727      $ 192,459      $ 188,079      $ 185,963      $ 181,870   

Change in fair value:

            

$

   $ 9,182      $ 4,483      $ 2,215      $ (2,165   $ (4,281   $ (8,374

%

     4.83     2.36     1.16     (1.14 )%      (2.25 )%      (4.40 )% 

 

Prepayment speed shift in %    -20%     -10%     -5%     +5%     +10%     +20%  
     (dollars in thousands)  

Fair value

   $ 209,090      $ 199,286      $ 194,675      $ 185,983      $ 181,882      $ 174,132   

Change in fair value:

            

$

   $ 18,847      $ 9,043      $ 4,431      $ (4,261   $ (8,361   $ (16,112

%

     9.91     4.75     2.33     (2.24 )%      (4.40 )%      (8.47 )% 

Factors That May Affect Our Future Results

This 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.

 

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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 as set forth in Item 1A. “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2013.

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

 

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

 

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

 

    events or circumstances which undermine confidence in the financial markets or otherwise have a broad impact on financial markets, such as the sudden instability or collapse of large depository institutions or other significant corporations, terrorist attacks, natural or man-made disasters, or threatened or actual armed conflicts;

 

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

 

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

 

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

 

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

 

    the concentration of credit risks to which we are exposed;

 

    the degree and nature of our competition;

 

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

 

    changes in personnel and lack of availability of qualified personnel at our Manager, Servicer or their affiliates;

 

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

 

    the adequacy of our cash reserves and working capital;

 

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

 

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

 

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

 

    the performance, financial condition and liquidity of borrowers;

 

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

 

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

 

    the quality and enforceability of the collateral documentation evidencing our ownership and rights in the assets in which we invest;

 

    increased rates of delinquency, default and/or decreased recovery rates on our investments;

 

    our ability to foreclose on our investments in a timely manner or at all;

 

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    increased prepayments of the mortgages and other loans underlying our MBS or relating to our MSRs, excess servicing spread and other investments;

 

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

 

    the effect of the accuracy of or changes in the estimates we make about uncertainties, contingencies and asset and liability valuations when measuring and reporting upon our financial condition and results of operations;

 

    our failure to maintain appropriate internal controls over financial reporting;

 

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

 

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

 

    developments in the secondary markets for our mortgage loan products;

 

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

 

    changes in regulations or the occurrence of other events that impact the business, operations or prospects of government agencies such as the Ginnie Mae, FHA or the VA, or government-sponsored entities such as Fannie Mae or the Freddie Mac, or such changes that increase the cost of doing business with such entities;

 

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

 

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

 

    changes in government support of homeownership;

 

    changes in government or government-sponsored home affordability programs;

 

    limitations imposed on our business and our ability to satisfy complex rules for us to qualify as a REIT for U.S. federal income tax purposes and qualify for an exclusion from the Investment Company Act of 1940 and the ability of certain of our subsidiaries to qualify as REITs or as a TRS for U.S. federal income tax purposes, as applicable, and our ability and the ability of our subsidiaries to operate effectively within the limitations imposed by these rules;

 

    changes in governmental regulations, accounting treatment, tax rates and similar matters (including changes to laws governing the taxation of REITs, or the exclusions from registration as an investment company);

 

    our ability to make distributions to our shareholders in the future;

 

    the effect of public opinion on our reputation; and

 

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

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, income and/or financial condition.

Forward-looking statements speak only as of the date they are made, and we undertake no obligation to update any forward-looking statement to reflect the impact of circumstances or events that arise after the date the forward-looking statement was made.

 

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Item 3. Quantitative and Qualitative Disclosures About Market Risk

In response to this Item 3, the information set forth on pages 105 through 107 is incorporated herein by reference.

Item 4. Controls and Procedures

Disclosure Controls and Procedures

We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our reports filed under the Securities Exchange Act of 1934 (the “Exchange Act”) is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosures. However, no matter how well a control system is designed and operated, it can provide only reasonable, not absolute, assurance that it will detect or uncover failures within the Company to disclose material information otherwise required to be set forth in our periodic reports.

Our management has conducted an evaluation, with the participation of our Chief Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures as of the end of the period covered by this Report as required by paragraph (b) of Rules 13a-15 and 15d-15 under the Exchange Act. Based on our evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures were effective, as of the end of the period covered by this Report, to provide reasonable assurance that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the applicable rules and forms, and that it is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.

Internal Control over Financial Reporting

There has been no change in our internal control over financial reporting during the quarter ended June 30, 2014 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

From time to time, we may be involved in various legal proceedings, claims and actions arising in the ordinary course of business. As of June 30, 2014, we were not involved in any such legal proceedings, claims or actions that management believes would be reasonably likely to have a material adverse effect on us.

Item 1A. Risk Factors

There are no material changes from the risk factors set forth under Item 1A. “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2013, filed with the SEC on February 28, 2014.

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

None

Item 3. Defaults Upon Senior Securities

None

 

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Item 4. Mine Safety Disclosures

Not applicable

Item 5. Other Information

None

 

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Item 6 Exhibits and Financial Statement Schedules

 

Exhibit

Number

  

Exhibit Description

    3.1    Declaration of Trust of PennyMac Mortgage Investment Trust, as amended and restated (incorporated by reference to Exhibit 3.1 of our Quarterly Report on Form 10-Q for the quarter ended September 30, 2009).
    3.2    Amended and Restated Bylaws of PennyMac Mortgage Investment Trust (incorporated by reference to Exhibit 3.1 of our Current Report on Form 8-K filed on August 13, 2013).
    4.1    Specimen Common Share Certificate of PennyMac Mortgage Investment Trust (incorporated by reference to Exhibit 4.1 of our Quarterly Report on Form 10-Q for the quarter ended September 30, 2009).
    4.2    Indenture for Senior Debt Securities, dated as of April 30, 2013, among PennyMac Corp., PennyMac Mortgage Investment Trust and The Bank of New York Mellon Trust Company, N.A. (incorporated by reference to Exhibit 4.1 of our Current Report on Form 8-K filed on April 30, 2013).
    4.3    First Supplemental Indenture, dated as of April 30, 2013, among PennyMac Corp., PennyMac Mortgage Investment Trust and The Bank of New York Mellon Trust Company, N.A. (incorporated by reference to Exhibit 4.2 of our Current Report on Form 8-K filed on April 30, 2013).
    4.4    Form of 5.375% Exchangeable Senior Notes due 2020 (included in Exhibit 4.3).
  10.1    Amended and Restated Limited Partnership Agreement of PennyMac Operating Partnership, L.P. (incorporated by reference to Exhibit 10.2 of our Quarterly Report on Form 10-Q for the quarter ended September 30, 2009).
  10.2    Registration Rights Agreement, dated as of August 4, 2009, among PennyMac Mortgage Investment Trust, Stanford L. Kurland, David A. Spector, BlackRock Holdco II, Inc., Highfields Capital Investments LLC and Private National Mortgage Acceptance Company, LLC (incorporated by reference to Exhibit 10.1 of our Quarterly Report on Form 10-Q for the quarter ended September 30, 2009).
  10.3    Amended and Restated Underwriting Fee Reimbursement Agreement, dated as of February 1, 2013, by and among PennyMac Mortgage Investment Trust, PennyMac Operating Partnership, L.P. and PNMAC Capital Management, LLC (incorporated by reference to Exhibit 1.6 of our Current Report on Form 8-K filed on February 7, 2013).
  10.4    Amended and Restated Management Agreement, dated as of February 1, 2013, among PennyMac Mortgage Investment Trust, PennyMac Operating Partnership, L.P. and PNMAC Capital Management, LLC (incorporated by reference to Exhibit 1.1 of our Current Report on Form 8-K filed on February 7, 2013).
  10.5    Amended and Restated Flow Servicing Agreement, dated as of February 1, 2013, between PennyMac Operating Partnership, L.P. and PennyMac Loan Services, LLC (incorporated by reference to Exhibit 1.2 of our Current Report on Form 8-K filed on February 7, 2013).
  10.6    Second Amended and Restated Flow Servicing Agreement, dated as of March 1, 2013, between PennyMac Operating Partnership, L.P. and PennyMac Loan Services, LLC (incorporated by reference to Exhibit 10.14 of our Quarterly Report on Form 10-Q for the quarter ended March 31, 2013).
  10.7    Amendment No. 1 to Second Amended and Restated Flow Servicing Agreement, dated as of November 14, 2013, between PennyMac Operating Partnership, L.P. and PennyMac Loan Services, LLC (incorporated by reference to Exhibit 10.1 of our Current Report on Form 8-K filed on November 20, 2013).
  10.8    Amendment No. 2 to Second Amended and Restated Flow Servicing Agreement, dated as of June 1, 2014, between PennyMac Operating Partnership, L.P. and PennyMac Loan Services, LLC.
  10.9†    PennyMac Mortgage Investment Trust 2009 Equity Incentive Plan (incorporated by reference to Exhibit 10.5 of our Quarterly Report on Form 10-Q for the quarter ended September 30, 2009).

 

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Exhibit

Number

  

Exhibit Description

  10.10†    Form of Restricted Share Unit Award Agreement under the PennyMac Mortgage Investment Trust 2009 Equity Incentive Plan (incorporated by reference to Exhibit 10.8 to Amendment No. 3 to the Company’s Registration Statement on Form S-11, filed with the SEC on July 24, 2009).
  10.11    Master Repurchase Agreement, dated as of November 2, 2010, among PennyMac Corp., PennyMac Mortgage Investment Trust Holdings I, LLC, and Wells Fargo Bank, National Association (incorporated by reference to Exhibit 10.11 of our Quarterly Report on Form 10-Q for the quarter ended September 30, 2010).
  10.12    Amendment Number One to Master Repurchase Agreement, dated as of August 18, 2011, among PennyMac Corp., PennyMac Mortgage Investment Trust Holdings I, LLC, and Wells Fargo Bank, National Association (incorporated by reference to Exhibit 10.13 of our Quarterly Report on Form 10-Q for the quarter ended September 30, 2011).
  10.13    Amendment Number Two to Master Repurchase Agreement, dated as of September 28, 2011, among PennyMac Corp., PennyMac Mortgage Investment Trust Holdings I, LLC, and Wells Fargo Bank, National Association (incorporated by reference to Exhibit 10.14 of our Quarterly Report on Form 10-Q for the quarter ended September 30, 2011).
  10.14    Amendment Number Three to Master Repurchase Agreement, dated as of December 30, 2011, among PennyMac Corp., PennyMac Mortgage Investment Trust Holdings I, LLC, and Wells Fargo Bank, National Association (incorporated by reference to Exhibit 10.15 of our Annual Report on Form 10-K for the year ended December 31, 2011).
  10.15    Amendment Number Four to Master Repurchase Agreement, dated as of December 28, 2012, among PennyMac Corp., PennyMac Mortgage Investment Trust Holdings I, LLC, and Wells Fargo Bank, National Association (incorporated by reference to Exhibit 10.17 of our Annual Report on Form 10-K for the year ended December 31, 2012).
  10.16    Master Repurchase Agreement, dated as of November 2, 2010, among Credit Suisse First Boston Mortgage Capital LLC, PennyMac Corp., PennyMac Mortgage Investment Trust and PennyMac Operating Partnership, L.P. (incorporated by reference to Exhibit 10.13 of our Quarterly Report on Form 10-Q for the quarter ended September 30, 2010).
  10.17    Amendment Number One to Master Repurchase Agreement, dated as of May 20, 2011, among Credit Suisse First Boston Mortgage Capital LLC, PennyMac Corp., PennyMac Mortgage Investment Trust and PennyMac Operating Partnership, L.P. (incorporated by reference to Exhibit 10.15 of our Quarterly Report on Form 10-Q for the quarter ended June 30, 2011).
  10.18    Amendment Number Two to Master Repurchase Agreement, dated as of July 14, 2011, among Credit Suisse First Boston Mortgage Capital LLC, PennyMac Corp., PennyMac Mortgage Investment Trust and PennyMac Operating Partnership, L.P. (incorporated by reference to Exhibit 10.20 of our Quarterly Report on Form 10-Q for the quarter ended September 30, 2011).
  10.19    Amendment Number Three to Master Repurchase Agreement, dated as of October 7, 2011, among Credit Suisse First Boston Mortgage Capital LLC, PennyMac Corp., PennyMac Mortgage Investment Trust and PennyMac Operating Partnership, L.P. (incorporated by reference to Exhibit 10.21 of our Quarterly Report on Form 10-Q for the quarter ended September 30, 2011).
  10.20    Amendment Number Four to Master Repurchase Agreement, dated as of November 1, 2011, among Credit Suisse First Boston Mortgage Capital LLC, PennyMac Corp., PennyMac Mortgage Investment Trust and PennyMac Operating Partnership, L.P. (incorporated by reference to Exhibit 10.22 of our Quarterly Report on Form 10-Q for the quarter ended September 30, 2011).
  10.21    Amendment Number Five to Master Repurchase Agreement, dated as of November 30, 2011, among Credit Suisse First Boston Mortgage Capital LLC, PennyMac Corp., PennyMac Mortgage Investment Trust and PennyMac Operating Partnership, L.P. (incorporated by reference to Exhibit 1.1 of our Current Report on Form 8-K filed on November 30, 2011).

 

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Exhibit

Number

  

Exhibit Description

  10.22    Amendment Number Six to Master Repurchase Agreement, dated as of March 29, 2012, among Credit Suisse First Boston Mortgage Capital LLC, PennyMac Corp., PennyMac Mortgage Investment Trust and PennyMac Operating Partnership, L.P. (incorporated by reference to Exhibit 10.25 of our Quarterly Report on Form 10-Q for the quarter ended March 31, 2012).
  10.23    Amendment Number Seven to Master Repurchase Agreement, dated as of July 25, 2012, among Credit Suisse First Boston Mortgage Capital LLC, PennyMac Corp., PennyMac Mortgage Investment Trust and PennyMac Operating Partnership, L.P. (incorporated by reference to Exhibit 1.1 of our Current Report on Form 8-K filed on July 31, 2012).
  10.24    Amendment Number Eight to Master Repurchase Agreement, dated as of September 26, 2012, among Credit Suisse First Boston Mortgage Capital LLC, PennyMac Corp., PennyMac Mortgage Investment Trust and PennyMac Operating Partnership, L.P. (incorporated by reference to Exhibit 1.1 of our Current Report on Form 8-K filed on October 1, 2012).
  10.25    Amendment Number Nine to Master Repurchase Agreement, dated as of October 29, 2012, among Credit Suisse First Boston Mortgage Capital LLC, PennyMac Corp., PennyMac Mortgage Investment Trust and PennyMac Operating Partnership, L.P. (incorporated by reference to Exhibit 1.1 of our Current Report on Form 8-K filed on October 29, 2012).
  10.26    Amended and Restated Master Repurchase Agreement, dated as of June 1, 2013, among Credit Suisse First Boston Mortgage Capital LLC, PennyMac Corp., PennyMac Mortgage Investment Trust and PennyMac Operating Partnership, L.P. (incorporated by reference to Exhibit 10.1 of our Current Report on Form 8-K filed June 5, 2013).
  10.27    Amendment No. 1 to Amended and Restated Master Repurchase Agreement, dated as of August 29, 2013, among Credit Suisse First Boston Mortgage Capital LLC, PennyMac Corp., PennyMac Mortgage Investment Trust and PennyMac Operating Partnership, L.P. (incorporated by reference to Exhibit 10.1 of our Current Report on Form 8-K filed September 5, 2013).
  10.28    Amendment No. 2 to Amended and Restated Master Repurchase Agreement, dated as of October 1, 2013, among Credit Suisse First Boston Mortgage Capital LLC, PennyMac Corp., PennyMac Mortgage Investment Trust and PennyMac Operating Partnership, L.P. (incorporated by reference to Exhibit 10.31 of our Annual Report on Form 10-K for the year ended December 31, 2013).
  10.29    Amendment No. 3 to Amended and Restated Master Repurchase Agreement, dated as of December 27, 2013, among Credit Suisse First Boston Mortgage Capital LLC, PennyMac Corp., PennyMac Mortgage Investment Trust and PennyMac Operating Partnership, L.P. (incorporated by reference to Exhibit 10.1 of our Current Report on Form 8-K filed January 3, 2014).
  10.30    Amendment No. 4 to Amended and Restated Master Repurchase Agreement, dated as of December 31, 2013, among Credit Suisse First Boston Mortgage Capital LLC, PennyMac Corp., PennyMac Mortgage Investment Trust and PennyMac Operating Partnership, L.P. (incorporated by reference to Exhibit 10.33 of our Annual Report on Form 10-K for the year ended December 31, 2013).
  10.31    Amendment No. 5 to Amended and Restated Master Repurchase Agreement, dated as of January 10, 2014, among Credit Suisse First Boston Mortgage Capital LLC, PennyMac Corp., PennyMac Mortgage Investment Trust and PennyMac Operating Partnership, L.P. (incorporated by reference to Exhibit 10.33 of our Quarterly Report on Form 10-Q for the quarter ended March 31, 2014).
  10.32    Amendment No. 6 to Amended and Restated Master Repurchase Agreement, dated as of February 21, 2014, among Credit Suisse First Boston Mortgage Capital LLC, PennyMac Corp., PennyMac Mortgage Investment Trust and PennyMac Operating Partnership, L.P. (incorporated by reference to Exhibit 10.3 of our Current Report on Form 8-K filed on February 24, 2014).
  10.33    Amendment No. 7 to Amended and Restated Master Repurchase Agreement, dated as of May 22, 2014, among Credit Suisse First Boston Mortgage Capital LLC, PennyMac Corp., PennyMac Mortgage Investment Trust and PennyMac Operating Partnership, L.P.

 

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Exhibit

Number

  

Exhibit Description

  10.34    Guaranty, dated as of November 2, 2010, by PennyMac Mortgage Investment Trust and PennyMac Operating Partnership, L.P. and Credit Suisse First Boston Mortgage Capital LLC (incorporated by reference to Exhibit 10.14 of our Quarterly Report on Form 10-Q for the quarter ended September 30, 2010).
  10.35    Master Repurchase Agreement, dated as of December 9, 2010, among PennyMac Corp., PennyMac Mortgage Investment Trust Holdings I, LLC, and PennyMac Loan Services, LLC, and Citibank, N.A. (incorporated by reference to Exhibit 1.1 of our Current Report on Form 8-K filed on December 15, 2010).
  10.36    Amendment Number One to the Master Repurchase Agreement, dated as of February 25, 2011, by and among Citibank, N.A. and PennyMac Corp., PennyMac Mortgage Investment Trust Holdings I, LLC and PennyMac Loan Services, LLC (incorporated by reference to Exhibit 1.1 of our Current Report on Form 8-K filed on March 3, 2011).
  10.37    Amendment Number Two to the Master Repurchase Agreement, dated as of December 8, 2011, by and among Citibank, N.A. and PennyMac Corp., PennyMac Mortgage Investment Trust Holdings I, LLC and PennyMac Loan Services, LLC (incorporated by reference to Exhibit 10.28 of our Annual Report on Form 10-K for the year ended December 31, 2011).
  10.38    Amendment Number Three to the Master Repurchase Agreement, dated as of February 24, 2012, by and among Citibank, N.A. and PennyMac Corp., PennyMac Mortgage Investment Trust Holdings I, LLC and PennyMac Loan Services, LLC (incorporated by reference to Exhibit 10.30 of our Quarterly Report on Form 10-Q for the quarter ended March 31, 2012).
  10.39    Amendment Number Four to the Master Repurchase Agreement, dated as of April 13, 2012, by and among Citibank, N.A. and PennyMac Corp., PennyMac Mortgage Investment Trust Holdings I, LLC and PennyMac Loan Services, LLC (incorporated by reference to Exhibit 10.32 of our Quarterly Report on Form 10-Q for the quarter ended June 30, 2012).
  10.40    Amendment Number Five to the Master Repurchase Agreement, dated as of April 20, 2012, by and among Citibank, N.A. and PennyMac Corp., PennyMac Mortgage Investment Trust Holdings I, LLC and PennyMac Loan Services, LLC (incorporated by reference to Exhibit 10.33 of our Quarterly Report on Form 10-Q for the quarter ended June 30, 2012).
  10.41    Amendment Number Six to the Master Repurchase Agreement, dated as of May 31, 2012, by and among Citibank, N.A. and PennyMac Corp., PennyMac Mortgage Investment Trust Holdings I, LLC and PennyMac Loan Services, LLC (incorporated by reference to Exhibit 1.1 of our Current Report on Form 8-K filed on June 5, 2012).
  10.42    Amendment Number Seven to the Master Repurchase Agreement, dated as of November 13, 2012, by and among Citibank, N.A. and PennyMac Corp., PennyMac Mortgage Investment Trust Holdings I, LLC and PennyMac Loan Services, LLC (incorporated by reference to Exhibit 10.39 of our Annual Report on Form 10-K for the year ended December 31, 2012).
  10.43    Amendment Number Eight to the Master Repurchase Agreement, dated as of December 31, 2012, by and among Citibank, N.A. and PennyMac Corp., PennyMac Mortgage Investment Trust Holdings I, LLC and PennyMac Loan Services, LLC (incorporated by reference to Exhibit 10.40 of our Annual Report on Form 10-K for the year ended December 31, 2012).
  10.44    Amendment Number Nine to the Master Repurchase Agreement, dated as of March 12, 2013, by and among Citibank, N.A. and PennyMac Corp., PennyMac Mortgage Investment Trust Holdings I, LLC and PennyMac Loan Services, LLC (incorporated by reference to Exhibit 1.1 of our Current Report on Form 8-K filed on March 13, 2013).
  10.45    Amendment Number Ten to the Master Repurchase Agreement, dated as of April 19, 2013, by and among Citibank, N.A. and PennyMac Corp., PennyMac Mortgage Investment Trust Holdings I, LLC and PennyMac Loan Services, LLC (incorporated by reference to Exhibit 10.47 of our Quarterly Report on Form 10-Q for the quarter ended June 30, 2013).

 

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Exhibit

Number

  

Exhibit Description

  10.46    Amendment Number Eleven to the Master Repurchase Agreement, dated as of June 25, 2013, by and among Citibank, N.A. and PennyMac Corp., PennyMac Mortgage Investment Trust Holdings I, LLC and PennyMac Loan Services, LLC (incorporated by reference to Exhibit 10.48 of our Quarterly Report on Form 10-Q for the quarter ended June 30, 2013).
  10.47    Amendment Number Twelve to the Master Repurchase Agreement, dated as of July 25, 2013, by and among Citibank, N.A. and PennyMac Corp., PennyMac Mortgage Investment Trust Holdings I, LLC and PennyMac Loan Services, LLC (incorporated by reference to Exhibit 1.1 of our Current Report on Form 8-K filed on July 31, 2013).
  10.48    Amendment Number Thirteen to the Master Repurchase Agreement, dated as of September 26, 2013, by and among Citibank, N.A. and PennyMac Corp., PennyMac Mortgage Investment Trust Holdings I, LLC and PennyMac Loan Services, LLC (incorporated by reference to Exhibit 10.48 of our Annual Report on Form 10-K for the year ended December 31, 2013).
  10.49    Amendment Number Fourteen to the Master Repurchase Agreement, dated as of February 5, 2014, by and among Citibank, N.A. and PennyMac Corp., PennyMac Mortgage Investment Trust Holdings I, LLC and PennyMac Loan Services, LLC (incorporated by reference to Exhibit 10.11 of our Current Report on Form 8-K filed on February 6, 2014).
  10.50    Amendment Number Fifteen to the Master Repurchase Agreement, dated as of May 13, 2014, by and among Citibank, N.A. and PennyMac Corp., PennyMac Mortgage Investment Trust Holdings I, LLC and PennyMac Loan Services, LLC.
  10.51    Guaranty Agreement, dated as of December 9, 2010, by PennyMac Mortgage Investment Trust in favor of Citibank, N.A. (incorporated by reference to Exhibit 1.2 of our Current Report on Form 8-K filed on December 15, 2010).
  10.52    Amended and Restated Master Repurchase Agreement, dated as of August 25, 2011, among Credit Suisse First Boston Mortgage Capital LLC, PennyMac Corp., PennyMac Mortgage Investment Trust Holdings I, LLC and PennyMac Mortgage Investment Trust (incorporated by reference to Exhibit 10.28 of our Quarterly Report on Form 10-Q for the quarter ended September 30, 2011).
  10.53    Amendment No. 1 to Amended and Restated Master Repurchase Agreement, dated as of June 6, 2012, among Credit Suisse First Boston Mortgage Capital LLC, PennyMac Corp., PennyMac Mortgage Investment Trust Holdings I, LLC and PennyMac Mortgage Investment Trust (incorporated by reference to Exhibit 10.38 of our Quarterly Report on Form 10-Q for the quarter ended June 30, 2012).
  10.54    Amendment No. 2 to Amended and Restated Master Repurchase Agreement, dated as of March 28, 2013, among Credit Suisse First Boston Mortgage Capital LLC, PennyMac Corp., PennyMac Mortgage Investment Trust Holdings I, LLC and PennyMac Mortgage Investment Trust (incorporated by reference to Exhibit 10.50 of our Quarterly Report on Form 10-Q for the quarter ended March 31, 2013).

 

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Exhibit

Number

  

Exhibit Description

  10.55    Amendment No. 3 to Amended and Restated Master Repurchase Agreement, dated as of May 8, 2013, among Credit Suisse First Boston Mortgage Capital LLC, PennyMac Corp., PennyMac Mortgage Investment Trust Holdings I, LLC and PennyMac Mortgage Investment Trust (incorporated by reference to Exhibit 10.51 of our Quarterly Report on Form 10-Q for the quarter ended March 31, 2013).
  10.56    Amendment No. 4 to Amended and Restated Master Repurchase Agreement, dated as of October 1, 2013, among Credit Suisse First Boston Mortgage Capital LLC, PennyMac Corp., PennyMac Mortgage Investment Trust Holdings I, LLC and PennyMac Mortgage Investment Trust (incorporated by reference to Exhibit 10.54 of our Annual Report on Form 10-K for the year ended December 31, 2013).
  10.57    Amendment No. 5 to Amended and Restated Master Repurchase Agreement, dated as of December 27, 2013, among Credit Suisse First Boston Mortgage Capital LLC, PennyMac Corp., PennyMac Holdings, LLC and PennyMac Mortgage Investment Trust (incorporated by reference to Exhibit 10.3 of our Current Report on Form 8-K filed on January 3, 2014).
  10.58    Amendment No. 6 to Amended and Restated Master Repurchase Agreement, dated as of December 31, 2013, among Credit Suisse First Boston Mortgage Capital LLC, PennyMac Corp., PennyMac Holdings, LLC and PennyMac Mortgage Investment Trust (incorporated by reference to Exhibit 10.56 of our Annual Report on Form 10-K for the year ended December 31, 2013).
  10.59    Master Repurchase Agreement, dated as of November 7, 2011, among Bank of America, N.A., PennyMac Corp., PennyMac Mortgage Investment Trust and PennyMac Operating Partnership, L.P. (incorporated by reference to Exhibit 1.1 of our Current Report on Form 8-K filed on November 14, 2011).
  10.60    Amendment No. 1 to Master Repurchase Agreement, dated as of August 17, 2012, among Bank of America, N.A., PennyMac Corp., PennyMac Mortgage Investment Trust and PennyMac Operating Partnership, L.P. (incorporated by reference to Exhibit 10.45 of our Quarterly Report on Form 10-Q for the quarter ended September 30, 2012).
  10.61    Amendment No. 2 to Master Repurchase Agreement, dated as of January 3, 2013, among Bank of America, N.A., PennyMac Corp., PennyMac Mortgage Investment Trust and PennyMac Operating Partnership, L.P. (incorporated by reference to Exhibit 1.1 of our Current Report on Form 8-K filed on January 7, 2013).
  10.62    Amendment No. 3 to Master Repurchase Agreement, dated as of March 28, 2013, among Bank of America, N.A., PennyMac Corp., PennyMac Mortgage Investment Trust and PennyMac Operating Partnership, L.P. (incorporated by reference to Exhibit 1.1 of our Current Report on Form 8-K filed on April 3, 2013).
  10.63    Amendment No. 4 to Master Repurchase Agreement, dated as of January 31, 2014, among Bank of America, N.A., PennyMac Corp., PennyMac Mortgage Investment Trust and PennyMac Operating Partnership, L.P. (incorporated by reference to Exhibit 10.1 of our Current Report on Form 8-K filed on February 6, 2014).
  10.64    Amendment No. 5 to Master Repurchase Agreement, dated as of March 27, 2014, among Bank of America, N.A., PennyMac Corp., PennyMac Mortgage Investment Trust and PennyMac Operating Partnership, L.P. (incorporated by reference to Exhibit 10.64 of our Quarterly Report on Form 10-Q for the quarter ended March 31, 2014).
  10.65    Amendment No. 6 to Master Repurchase Agreement, dated as of July 9, 2014, among Bank of America, N.A., PennyMac Corp., PennyMac Mortgage Investment Trust and PennyMac Operating Partnership, L.P. (incorporated by reference to Exhibit 10.3 of our Current Report on Form 8-K filed on July 14, 2014).
  10.66    Guaranty, dated as of November 7, 2011, by PennyMac Mortgage Investment Trust and PennyMac Operating Partnership, L.P., in favor of Bank of America, N.A. (incorporated by reference to Exhibit 1.1 of our Current Report on Form 8-K filed on November 14, 2011).

 

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Exhibit

Number

  

Exhibit Description

  10.67    Master Repurchase Agreement, dated as of March 29, 2012, among Credit Suisse First Boston Mortgage Capital LLC, PennyMac Mortgage Investment Trust Holdings I, LLC, PennyMac Mortgage Investment Trust and PennyMac Operating Partnership, L.P. (incorporated by reference to Exhibit 1.1 of our Current Report on Form 8-K filed on April 4, 2012).
  10.68    Amendment No. 1 to Master Repurchase Agreement, dated as of July 25, 2012, among Credit Suisse First Boston Mortgage Capital LLC, PennyMac Mortgage Investment Trust Holdings I, LLC, PennyMac Mortgage Investment Trust and PennyMac Operating Partnership, L.P. (incorporated by reference to Exhibit 1.2 of our Current Report on Form 8-K filed on July 31, 2012).
  10.69    Amendment No. 2 to Master Repurchase Agreement, dated as of September 26, 2012, among Credit Suisse First Boston Mortgage Capital LLC, PennyMac Mortgage Investment Trust Holdings I, LLC, PennyMac Mortgage Investment Trust and PennyMac Operating Partnership, L.P. (incorporated by reference to Exhibit 1.2 of our Current Report on Form 8-K filed on October 1, 2012).
  10.70    Amendment No. 3 to Master Repurchase Agreement, dated as of October 29, 2012, among Credit Suisse First Boston Mortgage Capital LLC, PennyMac Mortgage Investment Trust Holdings I, LLC, PennyMac Mortgage Investment Trust and PennyMac Operating Partnership, L.P. (incorporated by reference to Exhibit 1.2 of our Current Report on Form 8-K filed on October 31, 2012).
  10.71    Amendment No. 4 to Master Repurchase Agreement, dated as of June 1, 2013, among Credit Suisse First Boston Mortgage Capital LLC, PennyMac Mortgage Investment Trust Holdings I, LLC, PennyMac Mortgage Investment Trust and PennyMac Operating Partnership, L.P. (incorporated by reference to Exhibit 10.2 of our Current Report on Form 8-K filed on June 5, 2013).
  10.72    Amendment No. 5 to Master Repurchase Agreement, dated as of August 29, 2013, among Credit Suisse First Boston Mortgage Capital LLC, PennyMac Mortgage Investment Trust Holdings I, LLC, PennyMac Mortgage Investment Trust and PennyMac Operating Partnership, L.P. (incorporated by reference to Exhibit 10.2 of our Current Report on Form 8-K filed on September 5, 2013).
  10.73    Amendment No. 6 to Master Repurchase Agreement, dated as of September 27, 2013, among Credit Suisse First Boston Mortgage Capital LLC, PennyMac Mortgage Investment Trust Holdings I, LLC, PennyMac Mortgage Investment Trust and PennyMac Operating Partnership, L.P. (incorporated by reference to Exhibit 10.75 of our Quarterly Report on Form 10-Q for the quarter ended September 30, 2013).
  10.74    Amendment No. 7 to Master Repurchase Agreement, dated as of October 1, 2013, among Credit Suisse First Boston Mortgage Capital LLC, PennyMac Mortgage Investment Trust Holdings I, LLC, PennyMac Operating Partnership, L.P. and PennyMac Mortgage Investment Trust (incorporated by reference to Exhibit 10.69 of our Annual Report on Form 10-K for the year ended December 31, 2013).
  10.75    Amendment No. 8 to Master Repurchase Agreement, dated as of December 27, 2013, among Credit Suisse First Boston Mortgage Capital LLC, PennyMac Holdings, LLC, PennyMac Operating Partnership, L.P. and PennyMac Mortgage Investment Trust (incorporated by reference to Exhibit 10.2 of our Current Report on Form 8-K filed on January 3, 2014).
  10.76    Amendment No. 9 to Master Repurchase Agreement, dated as of December 31, 2013, among Credit Suisse First Boston Mortgage Capital LLC, PennyMac Holdings, LLC, PennyMac Operating Partnership, L.P. and PennyMac Mortgage Investment Trust (incorporated by reference to Exhibit 10.71 of our Annual Report on Form 10-K for the year ended December 31, 2013).
  10.77    Amendment No. 10 to Master Repurchase Agreement, dated as of January 10, 2014, among Credit Suisse First Boston Mortgage Capital LLC, PennyMac Holdings, LLC, PennyMac Operating Partnership, L.P. and PennyMac Mortgage Investment Trust (incorporated by reference to Exhibit 10.76 of our Quarterly Report on Form 10-Q for the quarter ended March 31, 2014).
  10.78    Amendment No. 11 to Master Repurchase Agreement, dated as of February 21, 2014, among Credit Suisse First Boston Mortgage Capital LLC, PennyMac Holdings, LLC, PennyMac Operating Partnership, L.P. and PennyMac Mortgage Investment Trust (incorporated by reference to Exhibit 10.4 of our Current Report on Form 8-K filed on February 24, 2014).

 

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Exhibit

Number

  

Exhibit Description

  10.79    Amendment No. 12 to Master Repurchase Agreement, dated as of May 22, 2014, among Credit Suisse First Boston Mortgage Capital LLC, PennyMac Holdings, LLC, PennyMac Operating Partnership, L.P. and PennyMac Mortgage Investment Trust.
  10.80    Guaranty, dated as of March 29, 2012, by PennyMac Mortgage Investment Trust and PennyMac Operating Partnership, L.P. in favor of Credit Suisse First Boston Mortgage Capital LLC (incorporated by reference to Exhibit 1.2 of our Current Report on Form 8-K filed on March 29, 2012).
  10.81    Master Repurchase Agreement, dated as of May 24, 2012, among Citibank, N.A., PennyMac Corp. and PennyMac Loan Services, LLC (incorporated by reference to Exhibit 1.1 of our Current Report on Form 8-K filed on May 30, 2012).
  10.82    Amendment Number One to the Master Repurchase Agreement, dated as of October 15, 2012, among Citibank, N.A., PennyMac Corp. and PennyMac Loan Services, LLC (incorporated by reference to Exhibit 1.1 of our Current Report on Form 8-K filed on October 16, 2012).
  10.83    Amendment Number Two to the Master Repurchase Agreement, dated as of November 13, 2012, among Citibank, N.A., PennyMac Corp. and PennyMac Loan Services, LLC (incorporated by reference to Exhibit 10.62 of our Annual Report on Form 10-K for the year ended December 31, 2012).
  10.84    Amendment Number Three to the Master Repurchase Agreement, dated as of December 31, 2012, among Citibank, N.A., PennyMac Corp. and PennyMac Loan Services, LLC (incorporated by reference to Exhibit 10.72 of our Quarterly Report on Form 10-Q for the quarter ended March 31, 2013).
  10.85    Amendment Number Four to the Master Repurchase Agreement, dated as of May 23, 2013, among Citibank, N.A., PennyMac Corp. and PennyMac Loan Services, LLC (incorporated by reference to Exhibit 10.77 of our Quarterly Report on Form 10-Q for the quarter ended June 30, 2013).
  10.86    Amendment Number Five to the Master Repurchase Agreement, dated as of June 25, 2013, among Citibank, N.A., PennyMac Corp. and PennyMac Loan Services, LLC (incorporated by reference to Exhibit 10.78 of our Quarterly Report on Form 10-Q for the quarter ended June 30, 2013).
  10.87    Amendment Number Six to Master Repurchase Agreement, dated as of July 25, 2013, among Citibank, N.A., PennyMac Corp. and PennyMac Loan Services, LLC (incorporated by reference to Exhibit 1.2 of our Current Report on Form 8-K filed on July 31, 2013).
  10.88    Amendment Number Seven to Master Repurchase Agreement, dated as of February 5, 2014, among Citibank, N.A., PennyMac Corp. and PennyMac Loan Services, LLC (incorporated by reference to Exhibit 10.12 of our Current Report on Form 8-K filed on February 6, 2014).
  10.89    Guaranty, dated as of May 24, 2012, by PennyMac Mortgage Investment Trust in favor of Citibank, N.A. (incorporated by reference to Exhibit 1.2 of our Current Report on Form 8-K filed on May 30, 2012).
  10.90    Master Repurchase Agreement, dated as of July 2, 2012, among Barclays Bank PLC, PennyMac Corp., PennyMac Loan Services, LLC and PennyMac Mortgage Investment Trust (incorporated by reference to Exhibit 1.1 of our Current Report on Form 8-K filed on July 10, 2012).
  10.91    Amendment No. 1 to PennyMac Master Repurchase Agreement, dated as of February 1, 2013, among PennyMac Corp., PennyMac Loan Services, LLC, PennyMac Mortgage Investment Trust and Barclays Bank PLC (incorporated by reference to Exhibit 10.81 of our Quarterly Report on Form 10-Q for the quarter ended June 30, 2013).
  10.92    Amendment No. 2 to PennyMac Master Repurchase Agreement, dated as of June 28, 2013, among PennyMac Corp., PennyMac Loan Services, LLC, PennyMac Mortgage Investment Trust and Barclays Bank PLC (incorporated by reference to Exhibit 10.82 of our Quarterly Report on Form 10-Q for the quarter ended June 30, 2013).

 

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Exhibit

Number

  

Exhibit Description

  10.93    Master Repurchase Agreement, dated as of September 28, 2012, among Credit Suisse First Boston Mortgage Capital LLC, PennyMac Operating Partnership, L.P. and PennyMac Mortgage Investment Trust (incorporated by reference to Exhibit 1.1 of our Current Report on Form 8-K filed on October 3, 2012).
  10.94    Amendment No. 1 to Master Repurchase Agreement, dated as of May 8, 2013, among Credit Suisse First Boston Mortgage Capital LLC, PennyMac Operating Partnership, L.P. and PennyMac Mortgage Investment Trust (incorporated by reference to Exhibit 10.80 of our Quarterly Report on Form 10-Q for the quarter ended March 31, 2013).
  10.95    Amendment No. 2 to Master Repurchase Agreement, dated as of December 31, 2013, among Credit Suisse First Boston Mortgage Capital LLC, PennyMac Operating Partnership, L.P. and PennyMac Mortgage Investment Trust (incorporated by reference to Exhibit 10.90 of our Annual Report on Form 10-K for the year ended December 31, 2013).
  10.96    Amendment No. 3 to Master Repurchase Agreement, dated as of January 10, 2014, among Credit Suisse First Boston Mortgage Capital LLC, PennyMac Operating Partnership, L.P. and PennyMac Mortgage Investment Trust (incorporated by reference to Exhibit 10.98 of our Quarterly Report on Form 10-Q for the quarter ended March 31, 2014).
  10.97    Guaranty, dated as of September 28, 2012, by PennyMac Mortgage Investment Trust in favor of Credit Suisse First Boston Mortgage Capital LLC (incorporated by reference to Exhibit 1.2 of our Current Report on Form 8-K filed on October 3, 2012).
  10.98    Master Repurchase Agreement, dated as of November 20, 2012, among PennyMac Corp., Morgan Stanley Bank, N.A. and Morgan Stanley Mortgage Capital Holdings LLC (incorporated by reference to Exhibit 1.1 of our Current Report on Form 8-K filed on November 26, 2012).
  10.99    Amendment Number One to the Master Repurchase Agreement, dated as of August 20, 2013, among PennyMac Corp., Morgan Stanley Bank, N.A. and Morgan Stanley Mortgage Capital Holdings LLC (incorporated by reference to Exhibit 10.96 of our Quarterly Report on Form 10-Q for the quarter ended September 30, 2013).
  10.100    Amendment Number Two to the Master Repurchase Agreement, dated as of August 26, 2013, among PennyMac Corp., Morgan Stanley Bank, N.A. and Morgan Stanley Mortgage Capital Holdings LLC (incorporated by reference to Exhibit 10.97 of our Quarterly Report on Form 10-Q for the quarter ended September 30, 2013).
  10.101    Amendment Number Three to Master Repurchase Agreement, dated as of November 14, 2013, among PennyMac Corp., Morgan Stanley Bank, N.A. and Morgan Stanley Mortgage Capital Holdings LLC (incorporated by reference to Exhibit 10.95 of our Annual Report on Form 10-K for the year ended December 31, 2013).
  10.102    Amendment Number Four to Master Repurchase Agreement, dated as of December 19, 2013, among PennyMac Corp., Morgan Stanley Bank, N.A. and Morgan Stanley Mortgage Capital Holdings LLC (incorporated by reference to Exhibit 10.96 of our Annual Report on Form 10-K for the year ended December 31, 2013).
  10.103    Guaranty, dated as of November 20, 2012, by PennyMac Mortgage Investment Trust in favor of Morgan Stanley Bank, N.A. and Morgan Stanley Mortgage Capital Holdings LLC (incorporated by reference to Exhibit 1.2 of our Current Report on Form 8-K filed on November 26, 2012).
  10.104    Mortgage Banking and Warehouse Services Agreement, dated as of February 1, 2013, by and between PennyMac Loan Services, LLC and PennyMac Corp. (incorporated by reference to Exhibit 1.3 of our Current Report on Form 8-K filed on February 7, 2013).
  10.105    Amendment No. 1 to Mortgage Banking and Warehouse Services Agreement, dated as of March 1, 2013, by and between PennyMac Loan Services, LLC and PennyMac Corp. (incorporated by reference to Exhibit 10.85 of our Quarterly Report on Form 10-Q for the quarter ended March 31, 2013).

 

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Exhibit

Number

  

Exhibit Description

  10.106    Amendment No. 2 to Mortgage Banking and Warehouse Services Agreement, dated as of August 14, 2013, by and between PennyMac Loan Services, LLC and PennyMac Corp. (incorporated by reference to Exhibit 1.1 of our Current Report on Form 8-K filed on August 19, 2013).
  10.107    MSR Recapture Agreement, dated as of February 1, 2013, by and between PennyMac Loan Services, LLC and PennyMac Corp. (incorporated by reference to Exhibit 1.4 of our Current Report on Form 8-K filed on February 7, 2013).
  10.108    Amendment No. 1 to MSR Recapture Agreement, dated as of August 1, 2013, by and between PennyMac Loan Services, LLC and PennyMac Corp. (incorporated by reference to Exhibit 10.103 of our Quarterly Report on Form 10-Q for the quarter ended September 30, 2013).
  10.109    Master Spread Acquisition and MSR Servicing Agreement, dated as of February 1, 2013, by and between PennyMac Loan Services, LLC and PennyMac Operating Partnership, L.P. (incorporated by reference to Exhibit 1.5 of our Current Report on Form 8-K filed on February 7, 2013).
  10.110    Amendment No. 1 to Master Spread Acquisition and MSR Servicing Agreement, dated as of September 30, 2013, by and between PennyMac Loan Services, LLC and PennyMac Operating Partnership, L.P. (incorporated by reference to Exhibit 10.105 of our Quarterly Report on Form 10-Q for the quarter ended September 30, 2013).
  10.111    Amendment No. 2 to Master Spread Acquisition and MSR Servicing Agreement, dated as of November 14, 2013, by and between PennyMac Loan Services, LLC and PennyMac Operating Partnership, L.P. (incorporated by reference to Exhibit 10.105 of our Annual Report on Form 10-K for the year ended December 31, 2013).
  10.112    Amendment No. 3 to Master Spread Acquisition and MSR Servicing Agreement, dated as of March 19, 2014, by and between PennyMac Loan Services, LLC and PennyMac Operating Partnership, L.P. (incorporated by reference to Exhibit 10.114 of our Quarterly Report on Form 10-Q for the quarter ended March 31, 2014).
  10.113    Master Spread Acquisition and MSR Servicing Agreement, dated as of December 30, 2013, by and between PennyMac Loan Services, LLC and PennyMac Holdings, LLC (incorporated by reference to Exhibit 10.4 of our Current Report on Form 8-K filed on January 3, 2014).
  10.114    Amendment No. 1 to Master Spread Acquisition and MSR Servicing Agreement, dated as of June 1, 2014, by and between PennyMac Loan Services, LLC and PennyMac Holdings, LLC.
  10.115    Security and Subordination Agreement, dated as of December 30, 2013, between Credit Suisse First Boston Mortgage Capital LLC and PennyMac Holdings, LLC (incorporated by reference to Exhibit 10.5 of our Current Report on Form 8-K filed on January 3, 2014).
  10.116    Master Repurchase Agreement, dated as of February 18, 2014, between The Royal Bank of Scotland PLC, PennyMac Corp., PennyMac Holdings, LLC, and PennyMac Operating Partnership, L.P. (incorporated by reference to Exhibit 10.1 of our Current Report on Form 8-K filed on February 24, 2014).
  10.117    Guaranty, dated as of February 18, 2014, of PennyMac Mortgage Investment Trust in favor of The Royal Bank of Scotland PLC (incorporated by reference to Exhibit 10.2 of our Current Report on Form 8-K filed on February 24, 2014).
  10.118    Confidentiality Agreement, dated as of February 6, 2013, between Private National Mortgage Acceptance Company, LLC and PennyMac Mortgage Investment Trust (incorporated by reference to Exhibit 1.7 of our Current Report on Form 8-K filed on February 7, 2013).
  10.119    Amended and Restated Confidentiality Agreement, dated as of March 1, 2013, between Private National Mortgage Acceptance Company, LLC and PennyMac Mortgage Investment Trust (incorporated by reference to Exhibit 10.89 of our Quarterly Report on Form 10-Q for the quarter ended March 31, 2013).

 

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Exhibit

Number

  

Exhibit Description

  10.120    Letter Agreement, dated as of June 14, 2013, between PennyMac Corp. and Citigroup Global Markets Realty Corp. (incorporated by reference to Exhibit 10.98 of our Quarterly Report on Form 10-Q for the quarter ended June 30, 2013).*
  10.121    Letter Agreement, dated as of June 28, 2013, between PennyMac Corp. and Citigroup Global Markets Realty Corp. (incorporated by reference to Exhibit 10.99 of our Quarterly Report on Form 10-Q for the quarter ended June 30, 2013).*
  10.122    Mortgage Loan Participation Purchase and Sale Agreement, dated as of December 23, 2011, among Bank of America, N.A., PennyMac Corp., PennyMac Mortgage Investment Trust and PennyMac Operating Partnership, L.P. (incorporated by reference to Exhibit 10.2 of our Current Report on Form 8-K filed on February 6, 2014).
  10.123    Amendment No. 1 to Mortgage Loan Participation Purchase and Sale Agreement, dated as of August 17, 2012, among Bank of America, N.A., PennyMac Corp., PennyMac Mortgage Investment Trust and PennyMac Operating Partnership, L.P. (incorporated by reference to Exhibit 10.3 of our Current Report on Form 8-K filed on February 6, 2014).
  10.124    Amendment No. 2 to Mortgage Loan Participation Purchase and Sale Agreement, dated as of October 29, 2012, among Bank of America, N.A., PennyMac Corp., PennyMac Mortgage Investment Trust and PennyMac Operating Partnership, L.P. (incorporated by reference to Exhibit 10.4 of our Current Report on Form 8-K filed on February 6, 2014).
  10.125    Amendment No. 3 to Mortgage Loan Participation Purchase and Sale Agreement, dated as of December 5, 2012, among Bank of America, N.A., PennyMac Corp., PennyMac Mortgage Investment Trust and PennyMac Operating Partnership, L.P. (incorporated by reference to Exhibit 10.5 of our Current Report on Form 8-K filed on February 6, 2014).
  10.126    Amendment No. 4 to Mortgage Loan Participation Purchase and Sale Agreement, dated as of January 3, 2013, among Bank of America, N.A., PennyMac Corp., PennyMac Mortgage Investment Trust and PennyMac Operating Partnership, L.P. (incorporated by reference to Exhibit 10.6 of our Current Report on Form 8-K filed on February 6, 2014).
  10.127    Amendment No. 5 to Mortgage Loan Participation Purchase and Sale Agreement, dated as of March 28, 2013, among Bank of America, N.A., PennyMac Corp., PennyMac Mortgage Investment Trust and PennyMac Operating Partnership, L.P. (incorporated by reference to Exhibit 10.7 of our Current Report on Form 8-K filed on February 6, 2014).
  10.128    Amendment No. 6 to Mortgage Loan Participation Purchase and Sale Agreement, dated as of January 2, 2014, among Bank of America, N.A., PennyMac Corp., PennyMac Mortgage Investment Trust and PennyMac Operating Partnership, L.P. (incorporated by reference to Exhibit 10.8 of our Current Report on Form 8-K filed on February 6, 2014).
  10.129    Amendment No. 7 to Mortgage Loan Participation Purchase and Sale Agreement, dated as of January 31, 2014, among Bank of America, N.A., PennyMac Corp., PennyMac Mortgage Investment Trust and PennyMac Operating Partnership, L.P. (incorporated by reference to Exhibit 10.9 of our Current Report on Form 8-K filed on February 6, 2014).
  10.130    Amendment No. 8 to Mortgage Loan Participation Purchase and Sale Agreement, dated as of March 27, 2014, among Bank of America, N.A., PennyMac Corp., PennyMac Mortgage Investment Trust and PennyMac Operating Partnership, L.P.
  10.131    Guaranty, dated as of December 23, 2011, by PennyMac Mortgage Investment Trust and PennyMac Operating Partnership, L.P. in favor of Bank of America, N.A. (incorporated by reference to Exhibit 10.10 of our Current Report on Form 8-K filed on February 6, 2014).
  10.132    Master Repurchase Agreement, dated as of July 9, 2014, among Bank of America, N.a., PennyMac Operating Partnership, L.P. and PennyMac Mortgage Investment Trust (incorporated by reference to Exhibit 10.1 of our Current Report on Form 8-K filed on July 14, 2014).

 

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Exhibit

Number

 

Exhibit Description

  10.133   Guaranty, dated as of July 9, 2014, by PennyMac Mortgage Investment Trust in favor of Bank of America, N.A. (incorporated by reference to Exhibit 10.2 of our Current Report on Form 8-K filed on July 14, 2014).
  31.1   Certification of Stanford L. Kurland pursuant to Rule 13a-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
  31.2   Certification of Anne D. McCallion pursuant to Rule 13a-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
  32.1**   Certification of Stanford L. Kurland pursuant to Rule 13a-14(b) and 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
  32.2**   Certification of Anne D. McCallion pursuant to Rule 13a-14(b) and 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101   Interactive data files pursuant to Rule 405 of Regulation S-T: (i) the Consolidated Balance Sheets as of June 30, 2014 and December 31, 2013, (ii) the Consolidated Statements of Income for the quarters ended June 30, 2014 and 2013, (iii) the Consolidated Statements of Changes in Shareholders’ Equity for the quarters ended June 30, 2014 and 2013, (iv) the Consolidated Statements of Cash Flows for the quarters ended June 30, 2014 and 2013 and (v) the Notes to the Consolidated Financial Statements.

 

* Certain terms have been redacted pursuant to requests for confidential treatment submitted to the Securities and Exchange Commission concurrently with the filing of this Report.
** The certifications attached hereto as Exhibits 32.1 and 32.2 are furnished to the SEC pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and shall not be deemed filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, nor shall it be deemed incorporated by reference in any filing under the Securities Act of 1933, except as shall be expressly set forth by specific reference in such filing.
Indicates management contract or compensatory plan or arrangement.

 

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

   

PENNYMAC MORTGAGE INVESTMENT TRUST

(Registrant)

Dated: August 11, 2014     By:  

/s/    STANFORD L. KURLAND        

      Stanford L. Kurland
      Chairman of the Board and Chief Executive Officer
Dated: August 11, 2014     By:  

/s/    ANNE D. MCCALLION        

      Anne D. McCallion
      Chief Financial Officer


Table of Contents

FORM 10-Q

June 30, 2014

INDEX OF EXHIBITS

 

Exhibit

Number

  

Exhibit Description

  3.1    Declaration of Trust of PennyMac Mortgage Investment Trust, as amended and restated (incorporated by reference to Exhibit 3.1 of our Quarterly Report on Form 10-Q for the quarter ended September 30, 2009).
  3.2    Amended and Restated Bylaws of PennyMac Mortgage Investment Trust (incorporated by reference to Exhibit 3.1 of our Current Report on Form 8-K filed on August 13, 2013).
  4.1    Specimen Common Share Certificate of PennyMac Mortgage Investment Trust (incorporated by reference to Exhibit 4.1 of our Quarterly Report on Form 10-Q for the quarter ended September 30, 2009).
  4.2    Indenture for Senior Debt Securities, dated as of April 30, 2013, among PennyMac Corp., PennyMac Mortgage Investment Trust and The Bank of New York Mellon Trust Company, N.A. (incorporated by reference to Exhibit 4.1 of our Current Report on Form 8-K filed on April 30, 2013).
  4.3    First Supplemental Indenture, dated as of April 30, 2013, among PennyMac Corp., PennyMac Mortgage Investment Trust and The Bank of New York Mellon Trust Company, N.A. (incorporated by reference to Exhibit 4.2 of our Current Report on Form 8-K filed on April 30, 2013).
  4.4    Form of 5.375% Exchangeable Senior Notes due 2020 (included in Exhibit 4.3).
10.1    Amended and Restated Limited Partnership Agreement of PennyMac Operating Partnership, L.P. (incorporated by reference to Exhibit 10.2 of our Quarterly Report on Form 10-Q for the quarter ended September 30, 2009).
10.2    Registration Rights Agreement, dated as of August 4, 2009, among PennyMac Mortgage Investment Trust, Stanford L. Kurland, David A. Spector, BlackRock Holdco II, Inc., Highfields Capital Investments LLC and Private National Mortgage Acceptance Company, LLC (incorporated by reference to Exhibit 10.1 of our Quarterly Report on Form 10-Q for the quarter ended September 30, 2009).
10.3    Amended and Restated Underwriting Fee Reimbursement Agreement, dated as of February 1, 2013, by and among PennyMac Mortgage Investment Trust, PennyMac Operating Partnership, L.P. and PNMAC Capital Management, LLC (incorporated by reference to Exhibit 1.6 of our Current Report on Form 8-K filed on February 7, 2013).
10.4    Amended and Restated Management Agreement, dated as of February 1, 2013, among PennyMac Mortgage Investment Trust, PennyMac Operating Partnership, L.P. and PNMAC Capital Management, LLC (incorporated by reference to Exhibit 1.1 of our Current Report on Form 8-K filed on February 7, 2013).
10.5    Amended and Restated Flow Servicing Agreement, dated as of February 1, 2013, between PennyMac Operating Partnership, L.P. and PennyMac Loan Services, LLC (incorporated by reference to Exhibit 1.2 of our Current Report on Form 8-K filed on February 7, 2013).
10.6    Second Amended and Restated Flow Servicing Agreement, dated as of March 1, 2013, between PennyMac Operating Partnership, L.P. and PennyMac Loan Services, LLC (incorporated by reference to Exhibit 10.14 of our Quarterly Report on Form 10-Q for the quarter ended March 31, 2013).
10.7    Amendment No. 1 to Second Amended and Restated Flow Servicing Agreement, dated as of November 14, 2013, between PennyMac Operating Partnership, L.P. and PennyMac Loan Services, LLC (incorporated by reference to Exhibit 10.1 of our Current Report on Form 8-K filed on November 20, 2013).
10.8    Amendment No. 2 to Second Amended and Restated Flow Servicing Agreement, dated as of June 1, 2014, between PennyMac Operating Partnership, L.P. and PennyMac Loan Services, LLC.
10.9†    PennyMac Mortgage Investment Trust 2009 Equity Incentive Plan (incorporated by reference to Exhibit 10.5 of our Quarterly Report on Form 10-Q for the quarter ended September 30, 2009).


Table of Contents

Exhibit

Number

  

Exhibit Description

10.10†    Form of Restricted Share Unit Award Agreement under the PennyMac Mortgage Investment Trust 2009 Equity Incentive Plan (incorporated by reference to Exhibit 10.8 to Amendment No. 3 to the Company’s Registration Statement on Form S-11, filed with the SEC on July 24, 2009).
10.11    Master Repurchase Agreement, dated as of November 2, 2010, among PennyMac Corp., PennyMac Mortgage Investment Trust Holdings I, LLC, and Wells Fargo Bank, National Association (incorporated by reference to Exhibit 10.11 of our Quarterly Report on Form 10-Q for the quarter ended September 30, 2010).
10.12    Amendment Number One to Master Repurchase Agreement, dated as of August 18, 2011, among PennyMac Corp., PennyMac Mortgage Investment Trust Holdings I, LLC, and Wells Fargo Bank, National Association (incorporated by reference to Exhibit 10.13 of our Quarterly Report on Form 10-Q for the quarter ended September 30, 2011).
10.13    Amendment Number Two to Master Repurchase Agreement, dated as of September 28, 2011, among PennyMac Corp., PennyMac Mortgage Investment Trust Holdings I, LLC, and Wells Fargo Bank, National Association (incorporated by reference to Exhibit 10.14 of our Quarterly Report on Form 10-Q for the quarter ended September 30, 2011).
10.14    Amendment Number Three to Master Repurchase Agreement, dated as of December 30, 2011, among PennyMac Corp., PennyMac Mortgage Investment Trust Holdings I, LLC, and Wells Fargo Bank, National Association (incorporated by reference to Exhibit 10.15 of our Annual Report on Form 10-K for the year ended December 31, 2011).
10.15    Amendment Number Four to Master Repurchase Agreement, dated as of December 28, 2012, among PennyMac Corp., PennyMac Mortgage Investment Trust Holdings I, LLC, and Wells Fargo Bank, National Association (incorporated by reference to Exhibit 10.17 of our Annual Report on Form 10-K for the year ended December 31, 2012).
10.16    Master Repurchase Agreement, dated as of November 2, 2010, among Credit Suisse First Boston Mortgage Capital LLC, PennyMac Corp., PennyMac Mortgage Investment Trust and PennyMac Operating Partnership, L.P. (incorporated by reference to Exhibit 10.13 of our Quarterly Report on Form 10-Q for the quarter ended September 30, 2010).
10.17    Amendment Number One to Master Repurchase Agreement, dated as of May 20, 2011, among Credit Suisse First Boston Mortgage Capital LLC, PennyMac Corp., PennyMac Mortgage Investment Trust and PennyMac Operating Partnership, L.P. (incorporated by reference to Exhibit 10.15 of our Quarterly Report on Form 10-Q for the quarter ended June 30, 2011).
10.18    Amendment Number Two to Master Repurchase Agreement, dated as of July 14, 2011, among Credit Suisse First Boston Mortgage Capital LLC, PennyMac Corp., PennyMac Mortgage Investment Trust and PennyMac Operating Partnership, L.P. (incorporated by reference to Exhibit 10.20 of our Quarterly Report on Form 10-Q for the quarter ended September 30, 2011).
10.19    Amendment Number Three to Master Repurchase Agreement, dated as of October 7, 2011, among Credit Suisse First Boston Mortgage Capital LLC, PennyMac Corp., PennyMac Mortgage Investment Trust and PennyMac Operating Partnership, L.P. (incorporated by reference to Exhibit 10.21 of our Quarterly Report on Form 10-Q for the quarter ended September 30, 2011).
10.20    Amendment Number Four to Master Repurchase Agreement, dated as of November 1, 2011, among Credit Suisse First Boston Mortgage Capital LLC, PennyMac Corp., PennyMac Mortgage Investment Trust and PennyMac Operating Partnership, L.P. (incorporated by reference to Exhibit 10.22 of our Quarterly Report on Form 10-Q for the quarter ended September 30, 2011).
10.21    Amendment Number Five to Master Repurchase Agreement, dated as of November 30, 2011, among Credit Suisse First Boston Mortgage Capital LLC, PennyMac Corp., PennyMac Mortgage Investment Trust and PennyMac Operating Partnership, L.P. (incorporated by reference to Exhibit 1.1 of our Current Report on Form 8-K filed on November 30, 2011).
10.22    Amendment Number Six to Master Repurchase Agreement, dated as of March 29, 2012, among Credit Suisse First Boston Mortgage Capital LLC, PennyMac Corp., PennyMac Mortgage Investment Trust and PennyMac Operating Partnership, L.P. (incorporated by reference to Exhibit 10.25 of our Quarterly Report on Form 10-Q for the quarter ended March 31, 2012).
10.23    Amendment Number Seven to Master Repurchase Agreement, dated as of July 25, 2012, among Credit Suisse First Boston Mortgage Capital LLC, PennyMac Corp., PennyMac Mortgage Investment Trust and PennyMac Operating Partnership, L.P. (incorporated by reference to Exhibit 1.1 of our Current Report on Form 8-K filed on July 31, 2012).


Table of Contents

Exhibit

Number

  

Exhibit Description

10.24    Amendment Number Eight to Master Repurchase Agreement, dated as of September 26, 2012, among Credit Suisse First Boston Mortgage Capital LLC, PennyMac Corp., PennyMac Mortgage Investment Trust and PennyMac Operating Partnership, L.P. (incorporated by reference to Exhibit 1.1 of our Current Report on Form 8-K filed on October 1, 2012).
10.25    Amendment Number Nine to Master Repurchase Agreement, dated as of October 29, 2012, among Credit Suisse First Boston Mortgage Capital LLC, PennyMac Corp., PennyMac Mortgage Investment Trust and PennyMac Operating Partnership, L.P. (incorporated by reference to Exhibit 1.1 of our Current Report on Form 8-K filed on October 29, 2012).
10.26    Amended and Restated Master Repurchase Agreement, dated as of June 1, 2013, among Credit Suisse First Boston Mortgage Capital LLC, PennyMac Corp., PennyMac Mortgage Investment Trust and PennyMac Operating Partnership, L.P. (incorporated by reference to Exhibit 10.1 of our Current Report on Form 8-K filed June 5, 2013).
10.27    Amendment No. 1 to Amended and Restated Master Repurchase Agreement, dated as of August 29, 2013, among Credit Suisse First Boston Mortgage Capital LLC, PennyMac Corp., PennyMac Mortgage Investment Trust and PennyMac Operating Partnership, L.P. (incorporated by reference to Exhibit 10.1 of our Current Report on Form 8-K filed September 5, 2013).
10.28    Amendment No. 2 to Amended and Restated Master Repurchase Agreement, dated as of October 1, 2013, among Credit Suisse First Boston Mortgage Capital LLC, PennyMac Corp., PennyMac Mortgage Investment Trust and PennyMac Operating Partnership, L.P. (incorporated by reference to Exhibit 10.31 of our Annual Report on Form 10-K for the year ended December 31, 2013).
10.29    Amendment No. 3 to Amended and Restated Master Repurchase Agreement, dated as of December 27, 2013, among Credit Suisse First Boston Mortgage Capital LLC, PennyMac Corp., PennyMac Mortgage Investment Trust and PennyMac Operating Partnership, L.P. (incorporated by reference to Exhibit 10.1 of our Current Report on Form 8-K filed January 3, 2014).
10.30    Amendment No. 4 to Amended and Restated Master Repurchase Agreement, dated as of December 31, 2013, among Credit Suisse First Boston Mortgage Capital LLC, PennyMac Corp., PennyMac Mortgage Investment Trust and PennyMac Operating Partnership, L.P. (incorporated by reference to Exhibit 10.33 of our Annual Report on Form 10-K for the year ended December 31, 2013).
10.31    Amendment No. 5 to Amended and Restated Master Repurchase Agreement, dated as of January 10, 2014, among Credit Suisse First Boston Mortgage Capital LLC, PennyMac Corp., PennyMac Mortgage Investment Trust and PennyMac Operating Partnership, L.P. (incorporated by reference to Exhibit 10.33 of our Quarterly Report on Form 10-Q for the quarter ended March 31, 2014).
10.32    Amendment No. 6 to Amended and Restated Master Repurchase Agreement, dated as of February 21, 2014, among Credit Suisse First Boston Mortgage Capital LLC, PennyMac Corp., PennyMac Mortgage Investment Trust and PennyMac Operating Partnership, L.P. (incorporated by reference to Exhibit 10.3 of our Current Report on Form 8-K filed on February 24, 2014).
10.33    Amendment No. 7 to Amended and Restated Master Repurchase Agreement, dated as of May 22, 2014, among Credit Suisse First Boston Mortgage Capital LLC, PennyMac Corp., PennyMac Mortgage Investment Trust and PennyMac Operating Partnership, L.P.
10.34    Guaranty, dated as of November 2, 2010, by PennyMac Mortgage Investment Trust and PennyMac Operating Partnership, L.P. and Credit Suisse First Boston Mortgage Capital LLC (incorporated by reference to Exhibit 10.14 of our Quarterly Report on Form 10-Q for the quarter ended September 30, 2010).
10.35    Master Repurchase Agreement, dated as of December 9, 2010, among PennyMac Corp., PennyMac Mortgage Investment Trust Holdings I, LLC, and PennyMac Loan Services, LLC, and Citibank, N.A. (incorporated by reference to Exhibit 1.1 of our Current Report on Form 8-K filed on December 15, 2010).
10.36    Amendment Number One to the Master Repurchase Agreement, dated as of February 25, 2011, by and among Citibank, N.A. and PennyMac Corp., PennyMac Mortgage Investment Trust Holdings I, LLC and PennyMac Loan Services, LLC (incorporated by reference to Exhibit 1.1 of our Current Report on Form 8-K filed on March 3, 2011).
10.37    Amendment Number Two to the Master Repurchase Agreement, dated as of December 8, 2011, by and among Citibank, N.A. and PennyMac Corp., PennyMac Mortgage Investment Trust Holdings I, LLC and PennyMac Loan Services, LLC (incorporated by reference to Exhibit 10.28 of our Annual Report on Form 10-K for the year ended December 31, 2011).
10.38    Amendment Number Three to the Master Repurchase Agreement, dated as of February 24, 2012, by and among Citibank, N.A. and PennyMac Corp., PennyMac Mortgage Investment Trust Holdings I, LLC and PennyMac Loan Services, LLC (incorporated by reference to Exhibit 10.30 of our Quarterly Report on Form 10-Q for the quarter ended March 31, 2012).


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Exhibit Description

10.39    Amendment Number Four to the Master Repurchase Agreement, dated as of April 13, 2012, by and among Citibank, N.A. and PennyMac Corp., PennyMac Mortgage Investment Trust Holdings I, LLC and PennyMac Loan Services, LLC (incorporated by reference to Exhibit 10.32 of our Quarterly Report on Form 10-Q for the quarter ended June 30, 2012).
10.40    Amendment Number Five to the Master Repurchase Agreement, dated as of April 20, 2012, by and among Citibank, N.A. and PennyMac Corp., PennyMac Mortgage Investment Trust Holdings I, LLC and PennyMac Loan Services, LLC (incorporated by reference to Exhibit 10.33 of our Quarterly Report on Form 10-Q for the quarter ended June 30, 2012).
10.41    Amendment Number Six to the Master Repurchase Agreement, dated as of May 31, 2012, by and among Citibank, N.A. and PennyMac Corp., PennyMac Mortgage Investment Trust Holdings I, LLC and PennyMac Loan Services, LLC (incorporated by reference to Exhibit 1.1 of our Current Report on Form 8-K filed on June 5, 2012).
10.42    Amendment Number Seven to the Master Repurchase Agreement, dated as of November 13, 2012, by and among Citibank, N.A. and PennyMac Corp., PennyMac Mortgage Investment Trust Holdings I, LLC and PennyMac Loan Services, LLC (incorporated by reference to Exhibit 10.39 of our Annual Report on Form 10-K for the year ended December 31, 2012).
10.43    Amendment Number Eight to the Master Repurchase Agreement, dated as of December 31, 2012, by and among Citibank, N.A. and PennyMac Corp., PennyMac Mortgage Investment Trust Holdings I, LLC and PennyMac Loan Services, LLC (incorporated by reference to Exhibit 10.40 of our Annual Report on Form 10-K for the year ended December 31, 2012).
10.44    Amendment Number Nine to the Master Repurchase Agreement, dated as of March 12, 2013, by and among Citibank, N.A. and PennyMac Corp., PennyMac Mortgage Investment Trust Holdings I, LLC and PennyMac Loan Services, LLC (incorporated by reference to Exhibit 1.1 of our Current Report on Form 8-K filed on March 13, 2013).
10.45    Amendment Number Ten to the Master Repurchase Agreement, dated as of April 19, 2013, by and among Citibank, N.A. and PennyMac Corp., PennyMac Mortgage Investment Trust Holdings I, LLC and PennyMac Loan Services, LLC (incorporated by reference to Exhibit 10.47 of our Quarterly Report on Form 10-Q for the quarter ended June 30, 2013).
10.46    Amendment Number Eleven to the Master Repurchase Agreement, dated as of June 25, 2013, by and among Citibank, N.A. and PennyMac Corp., PennyMac Mortgage Investment Trust Holdings I, LLC and PennyMac Loan Services, LLC (incorporated by reference to Exhibit 10.48 of our Quarterly Report on Form 10-Q for the quarter ended June 30, 2013).
10.47    Amendment Number Twelve to the Master Repurchase Agreement, dated as of July 25, 2013, by and among Citibank, N.A. and PennyMac Corp., PennyMac Mortgage Investment Trust Holdings I, LLC and PennyMac Loan Services, LLC (incorporated by reference to Exhibit 1.1 of our Current Report on Form 8-K filed on July 31, 2013).
10.48    Amendment Number Thirteen to the Master Repurchase Agreement, dated as of September 26, 2013, by and among Citibank, N.A. and PennyMac Corp., PennyMac Mortgage Investment Trust Holdings I, LLC and PennyMac Loan Services, LLC (incorporated by reference to Exhibit 10.48 of our Annual Report on Form 10-K for the year ended December 31, 2013).
10.49    Amendment Number Fourteen to the Master Repurchase Agreement, dated as of February 5, 2014, by and among Citibank, N.A. and PennyMac Corp., PennyMac Mortgage Investment Trust Holdings I, LLC and PennyMac Loan Services, LLC (incorporated by reference to Exhibit 10.11 of our Current Report on Form 8-K filed on February 6, 2014).
10.50    Amendment Number Fifteen to the Master Repurchase Agreement, dated as of May 13, 2014, by and among Citibank, N.A. and PennyMac Corp., PennyMac Mortgage Investment Trust Holdings I, LLC and PennyMac Loan Services, LLC.
10.51    Guaranty Agreement, dated as of December 9, 2010, by PennyMac Mortgage Investment Trust in favor of Citibank, N.A. (incorporated by reference to Exhibit 1.2 of our Current Report on Form 8-K filed on December 15, 2010).
10.52    Amended and Restated Master Repurchase Agreement, dated as of August 25, 2011, among Credit Suisse First Boston Mortgage Capital LLC, PennyMac Corp., PennyMac Mortgage Investment Trust Holdings I, LLC and PennyMac Mortgage Investment Trust (incorporated by reference to Exhibit 10.28 of our Quarterly Report on Form 10-Q for the quarter ended September 30, 2011).
10.53    Amendment No. 1 to Amended and Restated Master Repurchase Agreement, dated as of June 6, 2012, among Credit Suisse First Boston Mortgage Capital LLC, PennyMac Corp., PennyMac Mortgage Investment Trust Holdings I, LLC and PennyMac Mortgage Investment Trust (incorporated by reference to Exhibit 10.38 of our Quarterly Report on Form 10-Q for the quarter ended June 30, 2012).


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Exhibit Description

10.54    Amendment No. 2 to Amended and Restated Master Repurchase Agreement, dated as of March 28, 2013, among Credit Suisse First Boston Mortgage Capital LLC, PennyMac Corp., PennyMac Mortgage Investment Trust Holdings I, LLC and PennyMac Mortgage Investment Trust (incorporated by reference to Exhibit 10.50 of our Quarterly Report on Form 10-Q for the quarter ended March 31, 2013).
10.55    Amendment No. 3 to Amended and Restated Master Repurchase Agreement, dated as of May 8, 2013, among Credit Suisse First Boston Mortgage Capital LLC, PennyMac Corp., PennyMac Mortgage Investment Trust Holdings I, LLC and PennyMac Mortgage Investment Trust (incorporated by reference to Exhibit 10.51 of our Quarterly Report on Form 10-Q for the quarter ended March 31, 2013).
10.56    Amendment No. 4 to Amended and Restated Master Repurchase Agreement, dated as of October 1, 2013, among Credit Suisse First Boston Mortgage Capital LLC, PennyMac Corp., PennyMac Mortgage Investment Trust Holdings I, LLC and PennyMac Mortgage Investment Trust (incorporated by reference to Exhibit 10.54 of our Annual Report on Form 10-K for the year ended December 31, 2013).
10.57    Amendment No. 5 to Amended and Restated Master Repurchase Agreement, dated as of December 27, 2013, among Credit Suisse First Boston Mortgage Capital LLC, PennyMac Corp., PennyMac Holdings, LLC and PennyMac Mortgage Investment Trust (incorporated by reference to Exhibit 10.3 of our Current Report on Form 8-K filed on January 3, 2014).
10.58    Amendment No. 6 to Amended and Restated Master Repurchase Agreement, dated as of December 31, 2013, among Credit Suisse First Boston Mortgage Capital LLC, PennyMac Corp., PennyMac Holdings, LLC and PennyMac Mortgage Investment Trust (incorporated by reference to Exhibit 10.56 of our Annual Report on Form 10-K for the year ended December 31, 2013).
10.59    Master Repurchase Agreement, dated as of November 7, 2011, among Bank of America, N.A., PennyMac Corp., PennyMac Mortgage Investment Trust and PennyMac Operating Partnership, L.P. (incorporated by reference to Exhibit 1.1 of our Current Report on Form 8-K filed on November 14, 2011).
10.60    Amendment No. 1 to Master Repurchase Agreement, dated as of August 17, 2012, among Bank of America, N.A., PennyMac Corp., PennyMac Mortgage Investment Trust and PennyMac Operating Partnership, L.P. (incorporated by reference to Exhibit 10.45 of our Quarterly Report on Form 10-Q for the quarter ended September 30, 2012).
10.61    Amendment No. 2 to Master Repurchase Agreement, dated as of January 3, 2013, among Bank of America, N.A., PennyMac Corp., PennyMac Mortgage Investment Trust and PennyMac Operating Partnership, L.P. (incorporated by reference to Exhibit 1.1 of our Current Report on Form 8-K filed on January 7, 2013).
10.62    Amendment No. 3 to Master Repurchase Agreement, dated as of March 28, 2013, among Bank of America, N.A., PennyMac Corp., PennyMac Mortgage Investment Trust and PennyMac Operating Partnership, L.P. (incorporated by reference to Exhibit 1.1 of our Current Report on Form 8-K filed on April 3, 2013).
10.63    Amendment No. 4 to Master Repurchase Agreement, dated as of January 31, 2014, among Bank of America, N.A., PennyMac Corp., PennyMac Mortgage Investment Trust and PennyMac Operating Partnership, L.P. (incorporated by reference to Exhibit 10.1 of our Current Report on Form 8-K filed on February 6, 2014).
10.64    Amendment No. 5 to Master Repurchase Agreement, dated as of March 27, 2014, among Bank of America, N.A., PennyMac Corp., PennyMac Mortgage Investment Trust and PennyMac Operating Partnership, L.P. (incorporated by reference to Exhibit 10.64 of our Quarterly Report on Form 10-Q for the quarter ended March 31, 2014).
10.65    Amendment No. 6 to Master Repurchase Agreement, dated as of July 9, 2014, among Bank of America, N.A., PennyMac Corp., PennyMac Mortgage Investment Trust and PennyMac Operating Partnership, L.P. (incorporated by reference to Exhibit 10.3 of our Current Report on Form 8-K filed on July 14, 2014).
10.66    Guaranty, dated as of November 7, 2011, by PennyMac Mortgage Investment Trust and PennyMac Operating Partnership, L.P., in favor of Bank of America, N.A. (incorporated by reference to Exhibit 1.1 of our Current Report on Form 8-K filed on November 14, 2011).
10.67    Master Repurchase Agreement, dated as of March 29, 2012, among Credit Suisse First Boston Mortgage Capital LLC, PennyMac Mortgage Investment Trust Holdings I, LLC, PennyMac Mortgage Investment Trust and PennyMac Operating Partnership, L.P. (incorporated by reference to Exhibit 1.1 of our Current Report on Form 8-K filed on April 4, 2012).
10.68    Amendment No. 1 to Master Repurchase Agreement, dated as of July 25, 2012, among Credit Suisse First Boston Mortgage Capital LLC, PennyMac Mortgage Investment Trust Holdings I, LLC, PennyMac Mortgage Investment Trust and PennyMac Operating Partnership, L.P. (incorporated by reference to Exhibit 1.2 of our Current Report on Form 8-K filed on July 31, 2012).


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Exhibit Description

10.69    Amendment No. 2 to Master Repurchase Agreement, dated as of September 26, 2012, among Credit Suisse First Boston Mortgage Capital LLC, PennyMac Mortgage Investment Trust Holdings I, LLC, PennyMac Mortgage Investment Trust and PennyMac Operating Partnership, L.P. (incorporated by reference to Exhibit 1.2 of our Current Report on Form 8-K filed on October 1, 2012).
10.70    Amendment No. 3 to Master Repurchase Agreement, dated as of October 29, 2012, among Credit Suisse First Boston Mortgage Capital LLC, PennyMac Mortgage Investment Trust Holdings I, LLC, PennyMac Mortgage Investment Trust and PennyMac Operating Partnership, L.P. (incorporated by reference to Exhibit 1.2 of our Current Report on Form 8-K filed on October 31, 2012).
10.71    Amendment No. 4 to Master Repurchase Agreement, dated as of June 1, 2013, among Credit Suisse First Boston Mortgage Capital LLC, PennyMac Mortgage Investment Trust Holdings I, LLC, PennyMac Mortgage Investment Trust and PennyMac Operating Partnership, L.P. (incorporated by reference to Exhibit 10.2 of our Current Report on Form 8-K filed on June 5, 2013).
10.72    Amendment No. 5 to Master Repurchase Agreement, dated as of August 29, 2013, among Credit Suisse First Boston Mortgage Capital LLC, PennyMac Mortgage Investment Trust Holdings I, LLC, PennyMac Mortgage Investment Trust and PennyMac Operating Partnership, L.P. (incorporated by reference to Exhibit 10.2 of our Current Report on Form 8-K filed on September 5, 2013).
10.73    Amendment No. 6 to Master Repurchase Agreement, dated as of September 27, 2013, among Credit Suisse First Boston Mortgage Capital LLC, PennyMac Mortgage Investment Trust Holdings I, LLC, PennyMac Mortgage Investment Trust and PennyMac Operating Partnership, L.P. (incorporated by reference to Exhibit 10.75 of our Quarterly Report on Form 10-Q for the quarter ended September 30, 2013).
10.74    Amendment No. 7 to Master Repurchase Agreement, dated as of October 1, 2013, among Credit Suisse First Boston Mortgage Capital LLC, PennyMac Mortgage Investment Trust Holdings I, LLC, PennyMac Operating Partnership, L.P. and PennyMac Mortgage Investment Trust (incorporated by reference to Exhibit 10.69 of our Annual Report on Form 10-K for the year ended December 31, 2013).
10.75    Amendment No. 8 to Master Repurchase Agreement, dated as of December 27, 2013, among Credit Suisse First Boston Mortgage Capital LLC, PennyMac Holdings, LLC, PennyMac Operating Partnership, L.P. and PennyMac Mortgage Investment Trust (incorporated by reference to Exhibit 10.2 of our Current Report on Form 8-K filed on January 3, 2014).
10.76    Amendment No. 9 to Master Repurchase Agreement, dated as of December 31, 2013, among Credit Suisse First Boston Mortgage Capital LLC, PennyMac Holdings, LLC, PennyMac Operating Partnership, L.P. and PennyMac Mortgage Investment Trust (incorporated by reference to Exhibit 10.71 of our Annual Report on Form 10-K for the year ended December 31, 2013).
10.77    Amendment No. 10 to Master Repurchase Agreement, dated as of January 10, 2014, among Credit Suisse First Boston Mortgage Capital LLC, PennyMac Holdings, LLC, PennyMac Operating Partnership, L.P. and PennyMac Mortgage Investment Trust (incorporated by reference to Exhibit 10.76 of our Quarterly Report on Form 10-Q for the quarter ended March 31, 2014)
10.78    Amendment No. 11 to Master Repurchase Agreement, dated as of February 21, 2014, among Credit Suisse First Boston Mortgage Capital LLC, PennyMac Holdings, LLC, PennyMac Operating Partnership, L.P. and PennyMac Mortgage Investment Trust (incorporated by reference to Exhibit 10.4 of our Current Report on Form 8-K filed on February 24, 2014).
10.79    Amendment No. 12 to Master Repurchase Agreement, dated as of May 22, 2014, among Credit Suisse First Boston Mortgage Capital LLC, PennyMac Holdings, LLC, PennyMac Operating Partnership, L.P. and PennyMac Mortgage Investment Trust.
10.80    Guaranty, dated as of March 29, 2012, by PennyMac Mortgage Investment Trust and PennyMac Operating Partnership, L.P. in favor of Credit Suisse First Boston Mortgage Capital LLC (incorporated by reference to Exhibit 1.2 of our Current Report on Form 8-K filed on March 29, 2012).
10.81    Master Repurchase Agreement, dated as of May 24, 2012, among Citibank, N.A., PennyMac Corp. and PennyMac Loan Services, LLC (incorporated by reference to Exhibit 1.1 of our Current Report on Form 8-K filed on May 30, 2012).


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Exhibit Description

10.82    Amendment Number One to the Master Repurchase Agreement, dated as of October 15, 2012, among Citibank, N.A., PennyMac Corp. and PennyMac Loan Services, LLC (incorporated by reference to Exhibit 1.1 of our Current Report on Form 8-K filed on October 16, 2012).
10.83    Amendment Number Two to the Master Repurchase Agreement, dated as of November 13, 2012, among Citibank, N.A., PennyMac Corp. and PennyMac Loan Services, LLC (incorporated by reference to Exhibit 10.62 of our Annual Report on Form 10-K for the year ended December 31, 2012).
10.84    Amendment Number Three to the Master Repurchase Agreement, dated as of December 31, 2012, among Citibank, N.A., PennyMac Corp. and PennyMac Loan Services, LLC (incorporated by reference to Exhibit 10.72 of our Quarterly Report on Form 10-Q for the quarter ended March 31, 2013).
10.85    Amendment Number Four to the Master Repurchase Agreement, dated as of May 23, 2013, among Citibank, N.A., PennyMac Corp. and PennyMac Loan Services, LLC (incorporated by reference to Exhibit 10.77 of our Quarterly Report on Form 10-Q for the quarter ended June 30, 2013).
10.86    Amendment Number Five to the Master Repurchase Agreement, dated as of June 25, 2013, among Citibank, N.A., PennyMac Corp. and PennyMac Loan Services, LLC (incorporated by reference to Exhibit 10.78 of our Quarterly Report on Form 10-Q for the quarter ended June 30, 2013).
10.87    Amendment Number Six to Master Repurchase Agreement, dated as of July 25, 2013, among Citibank, N.A., PennyMac Corp. and PennyMac Loan Services, LLC (incorporated by reference to Exhibit 1.2 of our Current Report on Form 8-K filed on July 31, 2013).
10.88    Amendment Number Seven to Master Repurchase Agreement, dated as of February 5, 2014, among Citibank, N.A., PennyMac Corp. and PennyMac Loan Services, LLC (incorporated by reference to Exhibit 10.12 of our Current Report on Form 8-K filed on February 6, 2014).
10.89    Guaranty, dated as of May 24, 2012, by PennyMac Mortgage Investment Trust in favor of Citibank, N.A. (incorporated by reference to Exhibit 1.2 of our Current Report on Form 8-K filed on May 30, 2012).
10.90    Master Repurchase Agreement, dated as of July 2, 2012, among Barclays Bank PLC, PennyMac Corp., PennyMac Loan Services, LLC and PennyMac Mortgage Investment Trust (incorporated by reference to Exhibit 1.1 of our Current Report on Form 8-K filed on July 10, 2012).
10.91    Amendment No. 1 to PennyMac Master Repurchase Agreement, dated as of February 1, 2013, among PennyMac Corp., PennyMac Loan Services, LLC, PennyMac Mortgage Investment Trust and Barclays Bank PLC (incorporated by reference to Exhibit 10.81 of our Quarterly Report on Form 10-Q for the quarter ended June 30, 2013).
10.92    Amendment No. 2 to PennyMac Master Repurchase Agreement, dated as of June 28, 2013, among PennyMac Corp., PennyMac Loan Services, LLC, PennyMac Mortgage Investment Trust and Barclays Bank PLC (incorporated by reference to Exhibit 10.82 of our Quarterly Report on Form 10-Q for the quarter ended June 30, 2013).
10.93    Master Repurchase Agreement, dated as of September 28, 2012, among Credit Suisse First Boston Mortgage Capital LLC, PennyMac Operating Partnership, L.P. and PennyMac Mortgage Investment Trust (incorporated by reference to Exhibit 1.1 of our Current Report on Form 8-K filed on October 3, 2012).
10.94    Amendment No. 1 to Master Repurchase Agreement, dated as of May 8, 2013, among Credit Suisse First Boston Mortgage Capital LLC, PennyMac Operating Partnership, L.P. and PennyMac Mortgage Investment Trust (incorporated by reference to Exhibit 10.80 of our Quarterly Report on Form 10-Q for the quarter ended March 31, 2013).
10.95    Amendment No. 2 to Master Repurchase Agreement, dated as of December 31, 2013, among Credit Suisse First Boston Mortgage Capital LLC, PennyMac Operating Partnership, L.P. and PennyMac Mortgage Investment Trust (incorporated by reference to Exhibit 10.90 of our Annual Report on Form 10-K for the year ended December 31, 2013).
10.96    Amendment No. 3 to Master Repurchase Agreement, dated as of January 10, 2014, among Credit Suisse First Boston Mortgage Capital LLC, PennyMac Operating Partnership, L.P. and PennyMac Mortgage Investment Trust (incorporated by reference to Exhibit 10.98 of our Quarterly Report on Form 10-Q for the quarter ended March 31, 2014).
10.97    Guaranty, dated as of September 28, 2012, by PennyMac Mortgage Investment Trust in favor of Credit Suisse First Boston Mortgage Capital LLC (incorporated by reference to Exhibit 1.2 of our Current Report on Form 8-K filed on October 3, 2012).
10.98    Master Repurchase Agreement, dated as of November 20, 2012, among PennyMac Corp., Morgan Stanley Bank, N.A. and Morgan Stanley Mortgage Capital Holdings LLC (incorporated by reference to Exhibit 1.1 of our Current Report on Form 8-K filed on November 26, 2012).


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Exhibit Description

10.99    Amendment Number One to the Master Repurchase Agreement, dated as of August 20, 2013, among PennyMac Corp., Morgan Stanley Bank, N.A. and Morgan Stanley Mortgage Capital Holdings LLC (incorporated by reference to Exhibit 10.96 of our Quarterly Report on Form 10-Q for the quarter ended September 30, 2013).
10.100    Amendment Number Two to the Master Repurchase Agreement, dated as of August 26, 2013, among PennyMac Corp., Morgan Stanley Bank, N.A. and Morgan Stanley Mortgage Capital Holdings LLC (incorporated by reference to Exhibit 10.97 of our Quarterly Report on Form 10-Q for the quarter ended September 30, 2013).
10.101    Amendment Number Three to Master Repurchase Agreement, dated as of November 14, 2013, among PennyMac Corp., Morgan Stanley Bank, N.A. and Morgan Stanley Mortgage Capital Holdings LLC (incorporated by reference to Exhibit 10.95 of our Annual Report on Form 10-K for the year ended December 31, 2013).
10.102    Amendment Number Four to Master Repurchase Agreement, dated as of December 19, 2013, among PennyMac Corp., Morgan Stanley Bank, N.A. and Morgan Stanley Mortgage Capital Holdings LLC (incorporated by reference to Exhibit 10.96 of our Annual Report on Form 10-K for the year ended December 31, 2013).
10.103    Guaranty, dated as of November 20, 2012, by PennyMac Mortgage Investment Trust in favor of Morgan Stanley Bank, N.A. and Morgan Stanley Mortgage Capital Holdings LLC (incorporated by reference to Exhibit 1.2 of our Current Report on Form 8-K filed on November 26, 2012).
10.104    Mortgage Banking and Warehouse Services Agreement, dated as of February 1, 2013, by and between PennyMac Loan Services, LLC and PennyMac Corp. (incorporated by reference to Exhibit 1.3 of our Current Report on Form 8-K filed on February 7, 2013).
10.105    Amendment No. 1 to Mortgage Banking and Warehouse Services Agreement, dated as of March 1, 2013, by and between PennyMac Loan Services, LLC and PennyMac Corp. (incorporated by reference to Exhibit 10.85 of our Quarterly Report on Form 10-Q for the quarter ended March 31, 2013).
10.106    Amendment No. 2 to Mortgage Banking and Warehouse Services Agreement, dated as of August 14, 2013, by and between PennyMac Loan Services, LLC and PennyMac Corp. (incorporated by reference to Exhibit 1.1 of our Current Report on Form 8-K filed on August 19, 2013).
10.107    MSR Recapture Agreement, dated as of February 1, 2013, by and between PennyMac Loan Services, LLC and PennyMac Corp. (incorporated by reference to Exhibit 1.4 of our Current Report on Form 8-K filed on February 7, 2013).
10.108    Amendment No. 1 to MSR Recapture Agreement, dated as of August 1, 2013, by and between PennyMac Loan Services, LLC and PennyMac Corp. (incorporated by reference to Exhibit 10.103 of our Quarterly Report on Form 10-Q for the quarter ended September 30, 2013).
10.109    Master Spread Acquisition and MSR Servicing Agreement, dated as of February 1, 2013, by and between PennyMac Loan Services, LLC and PennyMac Operating Partnership, L.P. (incorporated by reference to Exhibit 1.5 of our Current Report on Form 8-K filed on February 7, 2013).
10.110    Amendment No. 1 to Master Spread Acquisition and MSR Servicing Agreement, dated as of September 30, 2013, by and between PennyMac Loan Services, LLC and PennyMac Operating Partnership, L.P. (incorporated by reference to Exhibit 10.105 of our Quarterly Report on Form 10-Q for the quarter ended September 30, 2013).
10.111    Amendment No. 2 to Master Spread Acquisition and MSR Servicing Agreement, dated as of November 14, 2013, by and between PennyMac Loan Services, LLC and PennyMac Operating Partnership, L.P. (incorporated by reference to Exhibit 10.105 of our Annual Report on Form 10-K for the year ended December 31, 2013).
10.112    Amendment No. 3 to Master Spread Acquisition and MSR Servicing Agreement, dated as of March 19, 2014, by and between PennyMac Loan Services, LLC and PennyMac Operating Partnership, L.P. (incorporated by reference to Exhibit 10.114 of our Quarterly Report on Form 10-Q for the quarter ended March 31, 2014).
10.113    Master Spread Acquisition and MSR Servicing Agreement, dated as of December 30, 2013, by and between PennyMac Loan Services, LLC and PennyMac Holdings, LLC (incorporated by reference to Exhibit 10.4 of our Current Report on Form 8-K filed on January 3, 2014).
10.114    Amendment No. 1 to Master Spread Acquisition and MSR Servicing Agreement, dated as of June 1, 2014, by and between PennyMac Loan Services, LLC and PennyMac Holdings, LLC.


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Exhibit Description

10.115    Security and Subordination Agreement, dated as of December 30, 2013, between Credit Suisse First Boston Mortgage Capital LLC and PennyMac Holdings, LLC (incorporated by reference to Exhibit 10.5 of our Current Report on Form 8-K filed on January 3, 2014).
10.116    Master Repurchase Agreement, dated as of February 18, 2014, between The Royal Bank of Scotland PLC, PennyMac Corp., PennyMac Holdings, LLC, and PennyMac Operating Partnership, L.P. (incorporated by reference to Exhibit 10.1 of our Current Report on Form 8-K filed on February 24, 2014).
10.117    Guaranty, dated as of February 18, 2014, of PennyMac Mortgage Investment Trust in favor of The Royal Bank of Scotland PLC (incorporated by reference to Exhibit 10.2 of our Current Report on Form 8-K filed on February 24, 2014).
10.118    Confidentiality Agreement, dated as of February 6, 2013, between Private National Mortgage Acceptance Company, LLC and PennyMac Mortgage Investment Trust (incorporated by reference to Exhibit 1.7 of our Current Report on Form 8-K filed on February 7, 2013).
10.119    Amended and Restated Confidentiality Agreement, dated as of March 1, 2013, between Private National Mortgage Acceptance Company, LLC and PennyMac Mortgage Investment Trust (incorporated by reference to Exhibit 10.89 of our Quarterly Report on Form 10-Q for the quarter ended March 31, 2013).
10.120    Letter Agreement, dated as of June 14, 2013, between PennyMac Corp. and Citigroup Global Markets Realty Corp. (incorporated by reference to Exhibit 10.98 of our Quarterly Report on Form 10-Q for the quarter ended June 30, 2013).*
10.121    Letter Agreement, dated as of June 28, 2013, between PennyMac Corp. and Citigroup Global Markets Realty Corp. (incorporated by reference to Exhibit 10.99 of our Quarterly Report on Form 10-Q for the quarter ended June 30, 2013).*
10.122    Mortgage Loan Participation Purchase and Sale Agreement, dated as of December 23, 2011, among Bank of America, N.A., PennyMac Corp., PennyMac Mortgage Investment Trust and PennyMac Operating Partnership, L.P. (incorporated by reference to Exhibit 10.2 of our Current Report on Form 8-K filed on February 6, 2014).
10.123    Amendment No. 1 to Mortgage Loan Participation Purchase and Sale Agreement, dated as of August 17, 2012, among Bank of America, N.A., PennyMac Corp., PennyMac Mortgage Investment Trust and PennyMac Operating Partnership, L.P. (incorporated by reference to Exhibit 10.3 of our Current Report on Form 8-K filed on February 6, 2014).
10.124    Amendment No. 2 to Mortgage Loan Participation Purchase and Sale Agreement, dated as of October 29, 2012, among Bank of America, N.A., PennyMac Corp., PennyMac Mortgage Investment Trust and PennyMac Operating Partnership, L.P. (incorporated by reference to Exhibit 10.4 of our Current Report on Form 8-K filed on February 6, 2014).
10.125    Amendment No. 3 to Mortgage Loan Participation Purchase and Sale Agreement, dated as of December 5, 2012, among Bank of America, N.A., PennyMac Corp., PennyMac Mortgage Investment Trust and PennyMac Operating Partnership, L.P. (incorporated by reference to Exhibit 10.5 of our Current Report on Form 8-K filed on February 6, 2014).
10.126    Amendment No. 4 to Mortgage Loan Participation Purchase and Sale Agreement, dated as of January 3, 2013, among Bank of America, N.A., PennyMac Corp., PennyMac Mortgage Investment Trust and PennyMac Operating Partnership, L.P. (incorporated by reference to Exhibit 10.6 of our Current Report on Form 8-K filed on February 6, 2014).
10.127    Amendment No. 5 to Mortgage Loan Participation Purchase and Sale Agreement, dated as of March 28, 2013, among Bank of America, N.A., PennyMac Corp., PennyMac Mortgage Investment Trust and PennyMac Operating Partnership, L.P. (incorporated by reference to Exhibit 10.7 of our Current Report on Form 8-K filed on February 6, 2014).
10.128    Amendment No. 6 to Mortgage Loan Participation Purchase and Sale Agreement, dated as of January 2, 2014, among Bank of America, N.A., PennyMac Corp., PennyMac Mortgage Investment Trust and PennyMac Operating Partnership, L.P. (incorporated by reference to Exhibit 10.8 of our Current Report on Form 8-K filed on February 6, 2014).
10.129    Amendment No. 7 to Mortgage Loan Participation Purchase and Sale Agreement, dated as of January 31, 2014, among Bank of America, N.A., PennyMac Corp., PennyMac Mortgage Investment Trust and PennyMac Operating Partnership, L.P. (incorporated by reference to Exhibit 10.9 of our Current Report on Form 8-K filed on February 6, 2014).
10.130    Amendment No. 8 to Mortgage Loan Participation Purchase and Sale Agreement, dated as of March 27, 2014, among Bank of America, N.A., PennyMac Corp., PennyMac Mortgage Investment Trust and PennyMac Operating Partnership, L.P.
10.131    Guaranty, dated as of December 23, 2011, by PennyMac Mortgage Investment Trust and PennyMac Operating Partnership, L.P. in favor of Bank of America, N.A. (incorporated by reference to Exhibit 10.10 of our Current Report on Form 8-K filed on February 6, 2014).


Table of Contents

Exhibit

Number

 

Exhibit Description

10.132   Master Repurchase Agreement, dated as of July 9, 2014, among Bank of America, N.a., PennyMac Operating Partnership, L.P. and PennyMac Mortgage Investment Trust (incorporated by reference to Exhibit 10.1 of our Current Report on Form 8-K filed on July 14, 2014).
10.133   Guaranty, dated as of July 9, 2014, by PennyMac Mortgage Investment Trust in favor of Bank of America, N.A. (incorporated by reference to Exhibit 10.2 of our Current Report on Form 8-K filed on July 14, 2014).
31.1   Certification of Stanford L. Kurland pursuant to Rule 13a-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2   Certification of Anne D. McCallion pursuant to Rule 13a-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1**   Certification of Stanford L. Kurland pursuant to Rule 13a-14(b) and 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2**   Certification of Anne D. McCallion pursuant to Rule 13a-14(b) and 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101   Interactive data files pursuant to Rule 405 of Regulation S-T: (i) the Consolidated Balance Sheets as of June 30, 2014 and December 31, 2013, (ii) the Consolidated Statements of Income for the quarters ended June 30, 2014 and 2013, (iii) the Consolidated Statements of Changes in Shareholders’ Equity for the quarters ended June 30, 2014 and 2013, (iv) the Consolidated Statements of Cash Flows for the quarters ended June 30, 2014 and 2013 and (v) the Notes to the Consolidated Financial Statements.

 

* Certain terms have been redacted pursuant to requests for confidential treatment submitted to the Securities and Exchange Commission concurrently with the filing of this Report.
** The certifications attached hereto as Exhibits 32.1 and 32.2 are furnished to the SEC pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and shall not be deemed filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, nor shall it be deemed incorporated by reference in any filing under the Securities Act of 1933, except as shall be expressly set forth by specific reference in such filing.
Indicates management contract or compensatory plan or arrangement.