pmt-10k_20171231.htm

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

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

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

Indicate by check mark whether the registrant has submitted electronically 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 ☒ No ☐

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

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

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

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

As of June 30, 2017 the aggregate market value of the registrant’s common shares of beneficial interest, $0.01 par value (“common shares”), held by nonaffiliates was $1,195,286,742 based on the closing price as reported on the New York Stock Exchange on that date.

As of February 26, 2018, there were 60,666,592 common shares of the registrant outstanding.

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

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

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

You should not place undue reliance on any forward-looking statement and should consider the following uncertainties and risks, as well as the risks and uncertainties discussed elsewhere in this Report and any subsequent Quarterly Reports on Form 10-Q.

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

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

Forward-looking statements speak only as of the date they are made, and we undertake no obligation to update any forward-looking statement to reflect the impact of circumstances or events that arise after the date the forward-looking statement was made.

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

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

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

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

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

	For the year ended December 31,
	2017			2016			2015			2014			2013
	(in thousands)
Net investment income:
Correspondent production	$	131,981		$	168,530		$	100,400		$	62,897		$	120,683
Credit sensitive strategies		133,400			66,256			108,315			254,922			258,745
Interest rate sensitive strategies		51,777			36,651			39,447			38,269			25,339
Corporate		782			651			603			653			751
	$	317,940		$	272,088		$	248,765		$	356,741		$	405,518
Pre-tax income:
Correspondent production	$	42,938		$	73,842		$	36,390		$	10,960		$	35,679
Credit sensitive strategies		102,214			17,288			66,038			206,738			224,028
Interest rate sensitive strategies		22,683			14,041			20,516			23,371			13,462
Corporate		(43,289	)		(43,408	)		(49,640	)		(61,605	)		(58,534	)
	$	124,546		$	61,763		$	73,304		$	179,464		$	214,635
Total assets at year end:
Correspondent production	$	1,302,245		$	1,734,290		$	1,298,968		$	665,489		$	488,813
Credit sensitive strategies		1,791,447			2,288,886			2,787,064			2,655,500			2,554,464
Interest rate sensitive strategies		2,414,423			2,177,024			1,640,062			1,359,409			1,132,936
Corporate		96,818			157,302			100,830			216,860			127,261
	$	5,604,933		$	6,357,502		$	5,826,924		$	4,897,258		$	4,303,474

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

Our correspondent production business involves purchases of mortgage loans from approved mortgage originators that meet specific criteria related to management experience, financial strength, risk management controls and mortgage loan quality. As of December 31, 2017, we have 613 approved sellers, primarily independent mortgage originators and small banks located across the United States. During 2017, we were the second largest correspondent aggregator in the United States as ranked by Inside Mortgage Finance.

	Year ended December 31,
	2017		2016		2015		2014		2013
	(in thousands)
Correspondent mortgage loan purchases at fair value:
Government-insured or guaranteed	$	42,087,007	$	42,171,914	$	31,945,396	$	16,523,216	$	16,068,253
Agency-eligible		23,742,999		23,930,186		14,360,888		11,474,345		15,358,372
Jumbo		—		10,227		117,714		383,854		582,996
Commercial		69,167		18,112		14,811	—		—
	$	65,899,173	$	66,130,439	$	46,438,809	$	28,381,415	$	32,009,621
Interest rate lock commitments issued	$	65,926,958	$	67,139,108	$	48,138,062	$	27,815,464	$	28,967,903
Gain on mortgage loans acquired for sale (1)	$	74,516	$	106,442	$	51,016	$	35,647	$	98,669
Fair value of mortgage loans at year end pending sale to:
Nonaffiliates	$	989,944	$	868,496	$	614,507	$	428,397	$	345,777
PLS		279,571		804,616		669,288		209,325		112,360
	$	1,269,515	$	1,673,112	$	1,283,795	$	637,722	$	458,137
Number of approved sellers at year-end		613		522		432		344		229

Our correspondent production activities serve as the source of our investments in MSRs and CRT Agreements, and are summarized below:

	Year ended December 31,
	2017		2016		2015		2014		2013
	(in thousands)
Sales of mortgage loans acquired for sale:
To nonaffiliates	$	24,314,165	$	23,525,952	$	14,206,816	$	11,703,015	$	15,818,582
To PennyMac Financial Services, Inc.		42,624,288		42,051,505		31,490,920		16,431,338		16,113,806
	$	66,938,453	$	65,577,457	$	45,697,736	$	28,134,353	$	31,932,388
Net gain on mortgage loans acquired for sale	$	74,516	$	106,442	$	51,016	$	35,647	$	98,669
Sourcing fees received from PLS included in Net gain on mortgage loans acquired for sale	$	12,084	$	11,976	$	8,966	$	4,676	$	4,611
Investment activities driven by correspondent production:
Receipt of MSRs as proceeds from sales of mortgage loans	$	290,309	$	275,092	$	154,474	$	121,333	$	183,032
Deposits of cash securing CRT Agreements	$	152,641	$	306,507	$	147,446	$	—	$	—
Increase in commitments to fund Deposits securing CRT Agreements resulting from sale of mortgage loans under CRT Agreements	$	390,362	$	92,109	$	—	$	—	$	—

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

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

	December 31,
	2017		2016		2015		2014		2013
	(in thousands)
Credit Sensitive Assets
Distressed mortgage loans at fair value
Performing	$	414,785	$	611,584	$	877,438	$	664,266	$	647,266
Nonperforming		353,648		742,988		1,222,956		1,535,317		1,647,527
		768,433		1,354,572		2,100,394		2,199,583		2,294,793
Small balance commercial mortgage loans		9,898		8,961		14,590	—		—
REO and real estate held for investment		207,089		303,393		350,642		303,228		148,080
Credit risk transfer agreements (1)		687,507		465,669		147,593	—		—
Subordinated interest in mortgage loans held in VIE		9,661		8,925		35,484		35,663		33,582
Agency debt		—	—		—		—			12,000
		1,682,588		2,141,520		2,648,703		2,538,474		2,488,455
Interest Rate Sensitive Assets
Agency MBS		989,461		865,061		225,150		195,518		197,401
Non-Agency senior MBS		—		—		97,323		111,845	—
ESS		236,534		288,669		412,425		191,166		138,723
Interest rate hedges (2)		9,303		4,749		2,282		3,016		4,766
Mortgage loans held in a VIE, net of asset-backed financing		3,960		4,346		172,220		325,786		324,655
MSRs		844,781		656,567		459,741		357,780		290,572
		2,084,039		1,819,392		1,369,141		1,185,111		956,117
	$	3,766,627	$	3,960,912	$	4,017,844	$	3,723,585	$	3,444,572

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

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

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

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

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

During 2014, we issued 3.8 million common shares under an ATM Equity Offering Sales Agreement^sm and received net proceeds totaling $89.5 million. We used the proceeds of the 2014 offerings to fund a portion of the purchase price of our mortgage-related investments, to fund the continued growth of our correspondent production business and for general business purposes.

During 2017, we issued 4,600,000 of our 8.125% Series A Fixed-to-Floating Rate Cumulative Redeemable Preferred Shares of Beneficial Interest, $0.01 par value per share (“Series A Preferred Shares”) and 7,800,000 of our 8.00% Series B Fixed-to-Floating Rate Cumulative Redeemable Preferred Shares of Beneficial Interest, $0.01 par value per share (the “Series B Preferred Shares” and, together with the Series A Preferred Shares, the “Preferred Shares”). We received proceeds of $299.7 million net of issuance costs from these issuances. From, and including, the date of original issuance to, but not including, March 15, 2024 and June 15, 2024, respectively, the Company pays cumulative dividends on the Series A Preferred Shares at a fixed rate of 8.125% and on the Series B Preferred Shares at a fixed rate of 8.00% per annum based on the $25.00 per share liquidation preference. Thereafter, dividends are paid at rates indexed to the U.S. Dollar LIBOR rate.

Our board of trustees has authorized a common share repurchase program under which we may repurchase up to $300 million of our outstanding common shares. Repurchased common shares are canceled upon settlement of the repurchase transactions and returned to the authorized but unissued share pool. Repurchases under this program are summarized below:

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

We maintain multiple master repurchase agreements and mortgage loan participation and sale agreements with money center banks to fund newly originated prime mortgage loans purchased from correspondent sellers. The total unpaid principal balance (“UPB”) outstanding under the facilities in existence as of December 31, 2017 was $1.2 billion.

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

cash flows from us under our repurchase agreement secured by the Ginnie Mae ESS. The total UPB outstanding under this facility as of December 31, 2017 was $144.1 million.

We finance mortgage servicing rights relating to mortgage loans serviced for Fannie Mae and Freddie Mac. In 2017, through PMC and PMH, we entered into a master repurchase agreement with a wholly-owned special purpose entity, which issues variable funding notes and may, in the future, issue term notes that are secured by participation certificates representing a beneficial interest in Fannie Mae MSRs and the related ESS. The notes are repaid through the cash flows received by the special purpose entity as the lender under the repurchase agreement, pursuant to which PMC grants to the special purpose entity a security interest in all of its right, title and interest in, to and under the MSRs and ESS. The total UPB outstanding under this facility as of December 31, 2017 was $100.0 million.

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

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

We are externally managed and advised by PCM pursuant to a management agreement. PCM specializes in and focuses on investments in U.S. mortgage assets. PCM has also served as the investment manager to two private investment funds. The private investment funds sold substantially all of their remaining investment assets on August 9, 2017; therefore, the combined net assets of the entities managed by PCM, of approximately $1.6 billion as of December 31, 2017, was comprised primarily of our shareholders’ equity.

PCM is responsible for administering our business activities and day-to-day operations, including developing our investment strategies, sourcing and acquiring mortgage loans and mortgage-related assets for our investment portfolio, and developing the appropriate approach to be taken by PLS for each loan as it performs its specialty servicing. Pursuant to the terms of the management agreement, PCM provides us with our senior management team, including our officers and support personnel. PCM is subject to the supervision and oversight of our board of trustees and has the functions and authority specified in the management agreement.

We also have a loan servicing agreement with PLS, pursuant to which PLS provides primary and special servicing for our portfolio of residential mortgage loans and MSRs. PLS’ mortgage loan servicing activities include collecting principal, interest and escrow account payments, if any, with respect to mortgage loans, as well as managing loss mitigation, which may include, among other things, collection activities, loan workouts, modifications and refinancings, foreclosures, short sales and sales of REO. Servicing fee rates are based on the delinquency status and other characteristics of the mortgage loans serviced and total servicing compensation is established at levels that our Manager believes are competitive with those charged by other primary servicers and specialty servicers. PLS also provided special servicing to the private investment funds and the entities in which those funds invested. PLS acted as the servicer for mortgage loans with UPB totaling approximately $245.8 billion as of December 31, 2017.

We have a commercial mortgage loan servicing agreement with Midland Loan Services, a Division of PNC Bank, National Association (“Midland”), pursuant to which Midland provides the master servicing for commercial mortgage loans that we acquire and may also provide special servicing, as necessary. We also have a commercial mortgage loan servicing oversight agreement with PLS, pursuant to which PLS provides oversight of Midland, including vendor management, review of reports and procedures for accuracy and timeliness, and monitoring Midland’s activities and performance.

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

qualification and taxation as a REIT under the Internal Revenue Code, and that our manner of operation enables us to meet the requirements for qualification and taxation as a REIT.

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

Even though we have elected to be taxed as a REIT, we are subject to some U.S. federal, state and local taxes on our income or property. A portion of our business is conducted through, and a portion of our income is earned in, our TRS that is subject to corporate income taxation. In general, a TRS of ours may hold assets and engage in activities that we cannot hold or engage in directly and may engage in any real estate or non-real estate related business. A TRS is subject to U.S. federal, state and local corporate income taxes. To maintain our REIT election, at the end of each quarter no more than 25% (20% for years beginning after December 31, 2017) of the value of a REIT’s assets may consist of stock or securities of one or more TRSs.

If our TRS generates net income, our TRS can declare dividends to us, which will be included in our taxable income and necessitate a distribution to our shareholders. Conversely, if we retain earnings at the TRS level, no distribution is required and we can increase shareholders’ equity of the consolidated entity. As discussed in Section 1A of this Report entitled Risk Factors , the combination of the requirement to maintain no more than 25% (20% for years beginning after December 31, 2017) of our assets in the TRS coupled with the effect of TRS dividends on our income tests creates compliance complexities for us in the maintenance of our qualified REIT status.

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

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

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

In acquiring mortgage assets, we compete with specialty finance companies, private funds, other mortgage REITs, thrifts, banks, mortgage bankers, insurance companies, mutual funds, institutional investors, investment banking firms, governmental bodies and other entities, which may also be focused on acquiring mortgage-related assets, and therefore may increase competition for the available supply of mortgage assets suitable for purchase. Many of our competitors are significantly larger than we are and have stronger financial positions and greater access to capital and other resources than we have and may have other advantages over us. Such advantages include the ability to obtain lower-cost financing, such as deposits, and operational efficiencies arising from their larger size. Some of our competitors may have higher risk tolerances or different risk assessments and may not be subject to the operating restraints associated with REIT tax compliance or maintenance of an exclusion from the Investment Company Act, any of which could allow them to consider a wider variety of investments and funding strategies and to establish more relationships with sellers of mortgage assets than we can.

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

In the face of this competition, we have access to PCM’s professionals and their industry expertise, which we believe provides us with a competitive advantage and helps us assess investment risks and determine appropriate pricing for certain potential investments. We expect this relationship to enable us to compete more effectively for attractive investment opportunities. Furthermore, we believe that our access to PLS’s special servicing expertise helps us to maximize the fair value of our distressed residential mortgage loans and provides us with a competitive advantage over other companies with a similar focus.

We believe that current market and regulatory conditions may have adversely affected the financial condition and operations of certain owners of mortgage assets. Further, regulatory and capital issues have contributed to the decision by certain financial institutions to exit or curtail their correspondent production business and to reduce their portfolios of MSRs. Not having a legacy portfolio or the same regulatory or capital issues may enable us to compete more effectively for attractive business or investment opportunities. However, we can provide no assurance that we will be able to achieve our business goals or expectations due to the competitive and other risks that we face.

We have three employees. All of our officers are employees of PennyMac or its affiliates. We do not pay our officers any cash compensation under the terms of our management agreement.

Our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, proxy statements and amendments to those reports filed with or furnished to the United States Securities and Exchange Commission (the “SEC”) pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, are available free of charge at www.pennymacmortgageinvestmenttrust.com through the investor relations section of our website as soon as reasonably practicable after electronically filing such material with the SEC. The SEC maintains an Internet site that contains reports, proxy and information statements and other information regarding our filings at www.sec.gov. In addition, the public may read and copy the materials we file with the SEC at the SEC’s Public Reference Room at 100 F. Street, NE, Washington, D.C. 20549. Information regarding the operation of the Public Reference Room may be obtained by calling the SEC at 1-800-SEC-0330. The above references to our website and the SEC’s website do not constitute incorporation by reference of the information contained on those websites and should not be considered part of this document.

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

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

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

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

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

In addition, the terms of these agreements extend until September 12, 2020, subject to automatic renewal for additional 18-month periods, but any of the agreements may be terminated earlier under certain circumstances or otherwise non-renewed. If any

agreement is terminated or non-renewed and not replaced by a new agreement, it would materially and adversely affect our ability to continue to execute our business plan.

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

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

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

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

For its services under our loan servicing agreement, PLS is entitled to servicing fees that we believe are competitive with those charged by primary servicers and specialty servicers and include fixed per-loan monthly amounts based on the delinquency, bankruptcy and/or foreclosure status of the serviced loan or the REO, as well as activity fees that generally are calculated as a percentage of unpaid principal balance or proceeds realized. PLS is also entitled to customary ancillary income and certain market-based fees and charges, including boarding and deboarding fees, liquidation and disposition fees, and assumption, modification and origination fees. In addition, to the extent we have participated in the Home Affordable Modification Program (“HAMP”) (or other similar mortgage loan modification programs), PLS may be entitled to retain any incentive payments made to it in connection with our participation therein. Because certain of these fees are earned upon reaching a specific milestone, this fee structure may provide PLS with an incentive to foreclose more aggressively or liquidate assets for less than their fair value.

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

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

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

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

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

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

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

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

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

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

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

As we expand the scope of our businesses, we confront potential conflicts of interest relating to our investment activities that are managed by PCM. The SEC and certain other regulators have increased their scrutiny of potential conflicts of interest, and as we expand the scope of our business, we must continue to monitor and address any conflicts between our interests and those of PFSI. We have implemented procedures and controls to be followed when real or potential conflicts of interest arise, but it is possible that potential or perceived conflicts could give rise to the dissatisfaction of, or litigation by, our investors or regulatory enforcement actions. Appropriately dealing with conflicts of interest is complex and difficult, and our reputation could be damaged if we fail, or appear to fail, to deal appropriately with one or more potential or actual conflicts of interest. Regulatory scrutiny, litigation or reputational risk incurred in connection with conflicts of interest would adversely affect our business in a number of ways and may adversely affect our results of operations. Reputational risk incurred in connection with conflicts of interest could negatively affect our financial condition and business, strain our working relationships with regulators and government agencies, expose us to litigation and regulatory action, impact our ability to attract and retain customers, trading counterparties, investors and employees and adversely affect our business, financial condition, liquidity, results of operations and our ability to make distributions to our shareholders.

Reputational risk from negative public opinion is inherent in our business and can result from a number of factors. Negative public opinion can result from our actual or alleged conduct in any number of activities, including lending and debt collection practices, corporate governance, and actions taken by government regulators and community organizations in response to those activities. Negative public opinion can also result from social media and media coverage, whether accurate or not. These factors could tarnish or otherwise strain our working relationships with regulators and government agencies, expose us to litigation and regulatory action, negatively affect our ability to attract and retain customers, trading and financing counterparties and employees and adversely affect our business, financial condition, liquidity, results of operations and our ability to make distributions to our shareholders.

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

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

We are required to comply with a wide array of federal, state and local laws and regulations that regulate, among other things, the manner in which we conduct our loan production and servicing businesses. These regulations directly impact our business and require constant compliance, monitoring and internal and external audits.

Federal, state and local governments have proposed or enacted numerous new laws, regulations and rules related to mortgage loans. Laws, regulations, rules and judicial and administrative decisions relating to mortgage loans include those pertaining to real estate settlement procedures, equal credit opportunity, fair lending, fair credit reporting, truth in lending, fair debt collection practices, service members protections, compliance with net worth and financial statement delivery requirements, compliance with federal and state disclosure and licensing requirements, the establishment of maximum interest rates, finance charges and other charges, qualified mortgages, licensing of loan officers and other personnel, loan officer compensation, secured transactions, property valuations, servicing transfers, payment processing, escrow, communications with consumers, loss mitigation, collection, foreclosure, bankruptcies, repossession and claims-handling procedures, and other trade practices and privacy regulations providing for the use and safeguarding of non-public personal financial information of borrowers. PLS and service providers it uses, including outside counsel retained to process foreclosures and bankruptcies, must also comply with some of these legal requirements.

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

The failure of the mortgage lenders from whom loans were acquired through our correspondent production activities to comply with any applicable laws, regulations and rules may also result in these adverse consequences. PLS has in place a due diligence program designed to assess areas of risk with respect to these acquired loans, including, without limitation, compliance with underwriting guidelines and applicable laws or regulations. However, PLS may not detect every violation of law by these mortgage lenders. Further, to the extent any third party originators or servicers with whom we do business fail to comply with applicable laws or regulations and any of their mortgage loans or MSRs become part of our assets, it could subject us, as an assignee or purchaser of the related mortgage loans or MSRs, to monetary penalties or other losses. In general, if any of our loans are found to have been originated, acquired or serviced by us or a third party in violation of applicable laws or regulations, we could be subject to lawsuits or governmental actions, or we could be fined or incur losses. While we may have contractual rights to seek indemnity or repurchase from certain of these lenders and third party originators and servicers, if any of them is unable to fulfill its indemnity or repurchase obligations to us to a material extent, our business, financial condition, liquidity, results of operations and ability to make distributions to our shareholders could be materially and adversely affected.

The CFPB is active in its monitoring of the residential mortgage origination and servicing sectors. Revised rules and regulations and more stringent enforcement of existing rules and regulations by the CFPB could result in enforcement actions, fines, penalties and the inherent reputational harm that results from such actions.

Under the Dodd-Frank Act, the CFPB is empowered with broad supervision, rulemaking and examination authority to enforce laws involving consumer financial products and services and to ensure, among other things, that consumers receive clear and accurate disclosures regarding financial products and are protected from hidden fees and unfair, deceptive or abusive acts or practices. The CFPB has adopted a number of final regulations under the Dodd-Frank Act regarding truth in lending, “ability to repay,” home mortgage loan disclosure, home mortgage loan origination, fair credit reporting, fair debt collection practices, foreclosure protections, and mortgage servicing rules, including provisions regarding loss mitigation, early intervention, periodic statement requirements and lender-placed insurance.

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

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

Rules and regulations promulgated under the Dodd-Frank Act or by the CFPB, uncertainty regarding recent changes in leadership (including interim leadership) or authority levels within the CFPB, and actions taken or not taken by the CFPB could result in heightened federal and state regulation and oversight of our business activities, materially and adversely affect the manner in which we conduct our business, and increase costs and potential litigation associated with our business activities. Our or PLS’ failure to comply with the laws, rules or regulations to which we are subject, whether actual or alleged, would expose us or PLS to fines, penalties or potential litigation liabilities, including costs, settlements and judgments, any of which could have a material adverse effect on our or PLS’ business, liquidity, financial condition and results of operations and our ability to make distributions to our shareholders.

We are highly dependent on the Agencies and the Federal Housing Finance Agency (“FHFA”), as the conservator of Fannie Mae and Freddie Mac, and any changes in these entities or their current roles could materially and adversely affect our business, liquidity, financial condition and results of operations.

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

The disposition of the conservatorship of Fannie Mae and Freddie Mac continues to be debated between the U.S. Congress and the executive branch of the U.S. federal government. Any changes in laws and regulations affecting the relationship between Fannie Mae and Freddie Mac and the U.S. federal government could adversely affect our business and prospects. Although the U.S. Treasury has committed capital to Fannie Mae and Freddie Mac, these actions may not be adequate for their needs. If Fannie Mae and Freddie Mac are adversely affected by events such as ratings downgrades, inability to obtain necessary government funding, lack of success in resolving repurchase demands to lenders, foreclosure problems and delays and problems with mortgage insurers, they could suffer

losses and fail to honor their guarantees and other obligations. Any discontinuation of, or significant reduction in, the operation of Fannie Mae or Freddie Mac or any significant adverse change in their capital structure, financial condition, activity levels in the primary or secondary mortgage markets or underwriting criteria could materially and adversely affect our business, liquidity, financial condition, results of operations and our ability to make distributions to our shareholders.

The roles of Fannie Mae and Freddie Mac could be significantly restructured, reduced or eliminated and the nature of the guarantees could be considerably limited relative to historical measurements. Elimination of the traditional roles of Fannie Mae and Freddie Mac, or any changes to the nature or extent of the guarantees provided by Fannie Mae and Freddie Mac or the fees, terms and guidelines that govern our selling and servicing relationships with them, such as increases in the guarantee fees we are required to pay, initiatives that increase the number of repurchase demands and/or the manner in which they are pursued, or possible limits on delivery volumes imposed upon us and other sellers/servicers, could also materially and adversely affect our business, including our ability to sell and securitize loans that we acquire through our correspondent production activities, and the performance, liquidity and market value of our investments. Moreover, any changes to the nature of the GSEs or their guarantee obligations could redefine what constitutes an Agency MBS and could have broad adverse implications for the market and our business, financial condition, liquidity, results of operations and ability to make distributions to our shareholders.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

The success of our business strategies and our results of operations are materially affected by current conditions in the mortgage markets, the financial markets and the economy generally. Continuing concerns over factors including inflation, deflation, unemployment, personal and business income taxes, healthcare, energy costs, geopolitical issues, the availability and cost of credit, the mortgage markets and the real estate markets have contributed to increased volatility and unclear expectations for the economy and markets going forward. The mortgage markets have been and continue to be affected by changes in the lending landscape, defaults, credit losses and significant liquidity concerns. A destabilization of the real estate and mortgage markets or deterioration in

these markets may adversely affect the performance and fair value of our investments, reduce our loan production volume, reduce the profitability of servicing mortgages or adversely affect our ability to sell mortgage loans that we acquire, either at a profit or at all. Any of the foregoing could materially and adversely affect our business, financial condition, liquidity, results of operations and ability to make distributions to our shareholders.

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

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

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

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

In addition, we invest in certain assets, including MSRs and ESS, for which financing has historically been difficult to obtain. We currently leverage certain of our MSRs and ESS under secured financing arrangements. Our Freddie Mac MSRs are pledged to secure borrowings under a loan and security agreement, while our Fannie Mae MSRs are pledged to a special purpose entity, which issues variable funding notes and may, in the future, issue term notes that are secured by such Fannie Mae MSRs and repaid through the cash flows received by the special purpose entity as the lender under a repurchase agreement with PMC.

Our Ginnie Mae ESS is sold under a repurchase agreement to PLS as part of a structured finance transaction. PLS, in turn, pledges our Ginnie Mae ESS along with all of its Ginnie Mae MSRs under a repurchase agreement to a special purpose entity, which issues variable funding notes and term notes that are secured by such Ginnie Mae assets. The notes are repaid through the cash flows received by the special purpose entity as the lender under its repurchase agreement with PLS, which, in turn, receives cash flows from us under our repurchase agreement secured by the Ginnie Mae ESS. In each case, similar to our repurchase agreements, the cash that we receive under these secured financing arrangements is less than the fair value of the assets and a decrease in the value of the pledged collateral can result in a margin call. Should a margin call occur, we may be required to liquidate assets at a disadvantageous time, which could cause us to incur further losses. If we are unable to satisfy a margin call, the secured parties may sell the collateral, which may result in significant losses to us.

Each of the secured financing arrangements pursuant to which we finance MSRs and ESS is further subject to the terms of an acknowledgement agreement with Fannie Mae, Freddie Mac or Ginnie Mae, as applicable, pursuant to which our and the secured parties’ rights are subordinate in all respects to the rights of the applicable Agency. Accordingly, the exercise by either Fannie Mae, Freddie Mac or Ginnie Mae of its rights under the applicable acknowledgment agreement, including at the direction of the secured parties or as a result of any action or inaction of PLS and whether or not we are in breach of our repurchase agreement with PLS, could result in the extinguishment of our and the secured parties’ rights in the related collateral and result in significant losses to us.

Our repurchase agreements to finance nonperforming loans and other distressed mortgage assets are complex and difficult to manage. This is due in part to the nature of the underlying assets securing such financings, which do not produce consistent cash flows and which require specific activities to be performed at specific points in time in order to preserve value. Our inability to comply with the terms and conditions of these facilities could materially and adversely impact us.

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

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

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

Although our governing documents contain no limitation on the amount of debt we may incur, the lenders under our repurchase agreements require us and/or our subsidiaries to comply with various financial covenants, including those relating to tangible net worth, profitability and our ratio of total liabilities to tangible net worth. Our lenders also require us to maintain minimum amounts of cash or cash equivalents sufficient to maintain a specified liquidity position. If we are unable to maintain these liquidity levels, we could be forced to sell additional investments at a loss and our financial condition could deteriorate rapidly.

Our existing credit and financing agreements also impose other financial and non‑financial covenants and restrictions on us that impact our flexibility to determine our operating policies and investment strategies by limiting our ability to incur certain types of indebtedness; grant liens; engage in consolidations, mergers and asset sales, make restricted payments and investments; and enter into transactions with affiliates. In our credit and financing agreements, we agree to certain covenants and restrictions and we make representations about the assets sold or pledged under these agreements. We also agree to certain events of default (subject to certain materiality thresholds and grace periods), including payment defaults, breaches of financial and other covenants and/or certain representations and warranties, cross-defaults, servicer termination events, ratings downgrades, guarantor defaults, bankruptcy or insolvency proceedings and other events of default and remedies customary for these types of agreements. If we default on our obligations under a credit or financing agreement, fail to comply with certain covenants and restrictions or breach our representations and are unable to cure, the lender may be able to terminate the transaction or its commitments, accelerate any amounts outstanding, require us to post additional collateral or repurchase the assets, and/or cease entering into any other credit transactions with us.

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

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

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

We have used and, in the future, may use securitization and other non-recourse long-term financing for our investments. In such structures, our lenders typically have only a claim against the assets included in the securitizations rather than a general claim against us as an entity. Such long-term financing has been limited and, in certain instances, unavailable for certain of our investments. Prior to any such future financing, we generally finance our investments with relatively short-term facilities until a sufficient portfolio is accumulated or such financing becomes available. As a result, we are subject to the risks that we would not be able to obtain suitable non-recourse long-term financing or otherwise acquire, during the period that any short-term facilities are available, sufficient eligible assets or securities to maximize the efficiency of a securitization.

We also bear the risk that we would not be able to obtain new short-term facilities or would not be able to renew any short-term facilities after they expire should we need more time to obtain long-term financing or seek and acquire sufficient eligible assets or securities for a future securitization. If we are unable to obtain and renew short-term facilities or to consummate securitizations to finance our investments on a long-term basis, we may be required to seek other forms of potentially less attractive financing or to liquidate assets at an inopportune time or unfavorable price. In addition, conditions in the capital markets may make the issuance of any securitization less attractive to us even when we do have sufficient eligible assets or securities. While we would intend to retain the unrated equity component of securitizations and, therefore, still have exposure to any investments included in such securitizations, our inability to enter into such securitizations may increase our overall exposure to risks associated with direct ownership of such investments, including the risk of default.

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

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

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

In addition, our ability to finance ESS relating to Ginnie Mae MSRs is currently dependent on pass through financing we obtain through our Servicer, which retains the MSRs associated with the ESS we acquire. After our initial acquisition of ESS, we then finance the acquired ESS with our Servicer under an underlying loan and security agreement, and our Servicer, in turn, re-pledges the ESS (along with the related MSRs it retains) to a third party lender under a master repurchase agreement. There can be no assurance that our Servicer will continue to make this pass through financing available to us or that the third party lender will continue to either permit our Servicer to provide such pass through financing to us or otherwise provide financing to our Servicer for MSRs and ESS.

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

We cannot assure you that we will have access to any debt or equity capital on favorable terms or at the desired times, or at all. Our inability to raise such capital or obtain financing on favorable terms could materially and adversely impact our business, financial condition, liquidity, results of operations and our ability to make distributions to shareholders.

In addition, we have been authorized to repurchase up to $300 million of our common shares pursuant to a share repurchase program approved by our board of trustees. As of December 31, 2017, we had $94.1 million of our common shares remaining under the current board authorization, and we may continue to repurchase shares to the extent we believe it is in the Company’s best interest to do so. Increased activity in our share repurchase program will have the effect of reducing our common shares outstanding, market value and shareholders’ equity, any or all of which could adversely affect the assessment by our lenders, credit providers or other counterparties regarding our net worth and, therefore, negatively impact our ability to raise new capital.

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

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

During March 2017, we issued 4,600,000 of 8.125% Series A Fixed-to-Floating Rate Cumulative Redeemable Preferred Shares of Beneficial Interest, $0.01 par value per share. During July 2017, we also issued 7,800,000 of 8.00% Series B Fixed-to-Floating Rate Cumulative Redeemable Preferred Shares of Beneficial Interest, $0.01 par value per share. Our outstanding preferred shares have preferences on distribution payments, including liquidating distributions, which could limit our ability to make distributions, including liquidating distributions, to holders of our common shares.

In 2013, our wholly-owned subsidiary, PMC, issued $250 million of Exchangeable Notes that are exchangeable under certain circumstances for our common shares. Upon liquidation, holders of our debt securities and other loans would receive a distribution of our available assets before holders of our common shares and holders of the Exchangeable Notes could receive a distribution of PMC’s available assets before holders of our common shares.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

The success and growth of our correspondent production activities will depend, in part, upon PLS’ ability to adapt to and implement technological changes.

Our correspondent production activities are currently dependent, in part, upon the ability of PLS to effectively interface with our mortgage lenders and other third parties and to efficiently process loan fundings and closings. The correspondent production process is becoming more dependent upon technological advancement. Maintaining and improving new technology and becoming proficient with it may also require significant capital expenditures by PLS. PLS will have to continue to develop and invest in these technological capabilities to remain competitive and its failure to do so could adversely affect our business, financial condition, liquidity, results of operations and ability to make distributions to our shareholders.

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

We are not approved as a Ginnie Mae issuer and servicer. As a result, we are unable to produce or acquire Ginnie Mae MSRs and we earn significantly less income in connection with our acquisition of government loans as opposed to conventional loans. Further, market demand for government loans over conventional loans may increase or PLS may offer pricing to our approved correspondent sellers for government loans that is more competitive in the market than pricing for conventional loans, the result of which may be our acquisition of a greater proportion or amount of government loans. Any significant increase in the percentage or amount of government loans we acquire could adversely impact our business, financial condition, liquidity, results of operations and ability to make distributions to our shareholders.

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

We operate in a highly competitive industry that could become even more competitive as a result of economic, legislative, regulatory and technological changes. Large commercial banks and savings institutions and other independent mortgage lenders and servicers are becoming increasingly competitive in the acquisition of newly originated mortgage loans. Many of these institutions have significantly greater resources and access to capital than we do, which may give them the benefit of a lower cost of funds. Additionally, our existing and potential competitors may decide to modify their business models to compete more directly with our correspondent production business. For example, non-bank loan servicers may try to leverage their servicing operations to develop or expand a correspondent production business. Since the withdrawal of a number of large participants from these markets following the financial crisis in 2008, there have been relatively few large non-bank participants; however, the loosening of regulatory standards could result in a significant investment of capital and attract more non-banks to participate. As more non-bank entities enter these markets and as more commercial banks aggressively compete, our correspondent production activities may generate lower volumes and/or margins.

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

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

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

Effective internal controls are necessary for us to provide reliable financial reports and effectively prevent fraud. We may in the future discover areas of our internal controls that need improvement. Section 404 of the Sarbanes-Oxley Act requires us to evaluate and report on our internal control over financial reporting and have our independent auditors annually attest to our evaluation, as well as issue their own opinion on our internal control over financial reporting. While we have undertaken substantial work to comply with Section 404, we cannot be certain that we will be successful in maintaining adequate control over our financial reporting and financial processes. Furthermore, as we continue to grow our business, our internal controls will become more complex, and we will require significantly more resources to ensure our internal controls remain effective. If we or our independent auditors discover a material weakness, the disclosure of that fact, even if quickly remedied, could result in an event of default under one or more of our lending arrangements and/or reduce the market value of our common shares. Additionally, the existence of any material weakness or significant deficiency could require management to devote significant time and incur significant expense to remediate any such material weakness or significant deficiency, and management may not be able to remediate any such material weakness or significant deficiency in a timely manner, or at all. Accordingly, our failure to maintain effective internal control over financial reporting could result in misstatements of our financial results or restatements of our financial statements or otherwise have a material adverse effect on our business, financial condition, liquidity, results of operations and ability to make distributions to our shareholders.

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

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

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

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

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

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

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

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

Our retention of credit risk underlying mortgage loans we sell to Fannie Mae is inherently uncertain and exposes us to significant risk of loss.

In conjunction with our correspondent business, we have entered into CRT Agreements with Fannie Mae, whereby we sell pools of mortgage loans into Fannie Mae-guaranteed securitizations while retaining a portion of the credit risk and an interest-only (“IO”) ownership interest in such mortgage loans. Our retention of credit risk subjects us to risks associated with delinquency and foreclosure similar to the risks associated with owning the underlying mortgage loans, and exposes us to risk of loss greater than the risks associated with selling the mortgage loans to Fannie Mae without the retention of such credit risk. Further, the risks associated with delinquency and foreclosure may in some instances be greater than the risks associated with owning the underlying mortgage loans because the structure of certain of the CRT Agreements provides that we may be required to realize losses in the event of delinquency or foreclosure even where there is ultimately no loss realized with respect to the underlying loan (e.g., as a result of a borrower’s re-performance). In addition to the risks specific to credit, we are also exposed to market risk and, as a result of prevailing market conditions or the economy generally, may be required to incur unrealized losses associated with adverse changes to the fair value of the CRT Agreements. Any loss we incur may be significant and may reduce distributions to our shareholders and materially and adversely affect the market value of our common shares.

CRT Agreements also represent a type of investment that is new to the market and, as such, inherently uncertain and illiquid. There can be no assurance that this investment type will continue to be offered by Fannie Mae or supported by the FHFA or that it will produce the desired returns. Further, our projected returns are highly dependent on certain internal and external models, and it is uncertain whether such models are sufficiently accurate to support our projected returns and/or avoid potentially significant losses.

Our CRT Agreements may not be eligible REIT assets, may be required to be held in our TRS, and a significant portion of our income from these investments may therefore be subject to U.S. federal and state income taxation in order not to jeopardize our REIT status.

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

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

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

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

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

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

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

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

We historically acquired distressed residential mortgage loans and mortgage-related assets where the borrower had failed to make timely payments of principal and/or interest or where the loan was performing but subsequently could or did become nonperforming, and there are no limits on the percentage of nonperforming assets we may hold. A portion of these loans still have current loan-to-value ratios in excess of 100%, meaning the amount owed on the loan exceeds the value of the underlying real estate. Further, the borrowers on such loans may be in economic distress and/or may have become unemployed, bankrupt or otherwise unable or unwilling to make payments when due. Moreover, as we continue to liquidate our portfolio of distressed mortgage loans and mortgage-related assets and transition into other investment types, the distressed assets remaining in our portfolio often entail characteristics that make disposition or liquidation more challenging, including, among other things, severe document deficiencies or underlying real estate located in states with extended foreclosure timelines. If PLS as our primary and special servicer is not able to adequately address or mitigate the issues concerning these loans, we may incur significant losses. Any loss we incur may be significant and may reduce distributions to our shareholders and materially and adversely affect the market value of our common shares.

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

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

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

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

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

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

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

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

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

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

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

Our investments in subordinated loans or subordinated MBS could subject us to increased risk of losses. In the event a borrower defaults on a subordinated loan and lacks sufficient assets to satisfy such loan, we may lose all or a significant part of our investment. In the event a borrower becomes subject to bankruptcy proceedings, we will not have any recourse to the assets, if any, of the borrower that are not pledged to secure our loan. If a borrower defaults on our subordinated loan or on its senior debt (i.e., a first-lien loan, in the case of a residential mortgage loan, or a contractually or structurally senior loan, in the case of a commercial mortgage loan), or in the event of a borrower bankruptcy, our subordinated loan will be satisfied only after all senior debt is paid in full. As a result, we may not recover all or even a significant part of our investment, which could result in losses. In the case of commercial mortgage loans where senior debt exists, the presence of intercreditor arrangements may also limit our ability to amend our loan documents, assign our loan, accept prepayments, exercise our remedies and control decisions made in bankruptcy proceedings relating to borrowers.

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

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

Our investments in commercial mortgage loans and other commercial real estate-related loans are dependent upon the success of the multifamily real estate market and may be affected by substantial competition in our market areas and other conditions that could materially and adversely affect our business, financial condition, liquidity, results of operations and ability to make distributions to our shareholders.

The multifamily real estate market is a highly competitive business. We acquire mortgage loans secured by multifamily properties. The profitability of these investments will be closely tied to the overall success of and competition in the multifamily real estate market. Various changes in real estate conditions may impact the multifamily and commercial real estate sectors. Any negative trends in such real estate conditions may reduce the availability of attractive acquisition opportunities and the performance of our existing investments and, as a result, adversely affect our results of operations. These conditions include:

Moreover, other factors may adversely affect the multifamily real estate market, including changes in government regulations and other laws, rules and regulations governing real estate, zoning or taxes, changes in the economy and interest rate levels, the potential liability under environmental and other laws, increases in delinquency and foreclosure rates, and other unforeseen events. Any or all of these factors could subject us to increased risk of loss, negatively impact the multifamily real estate market and, as a result, reduce the availability of attractive acquisition opportunities. Any such increased risk of loss or reduction in attractive acquisition opportunities could materially and adversely affect our business, financial condition, liquidity, results of operations and ability to make distributions to our shareholders.

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

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

Our inability to promptly foreclose upon defaulted mortgage loans could increase our cost of doing business and/or diminish our expected return on investments.

Our ability to promptly foreclose upon defaulted mortgage loans and liquidate the underlying real property plays a critical role in our valuation of the assets in which we invest and our expected return on those investments. There are a variety of factors that may inhibit our ability, through PLS, to foreclose upon a mortgage loan and liquidate the real property within the time frames we model as part of our valuation process or within the statutes of limitation under applicable state law. These factors include, without limitation: extended foreclosure timelines in states that require judicial foreclosure, including states where we hold high concentrations of mortgage loans; significant collateral documentation deficiencies; federal, state or local laws that are borrower friendly, including legislative action or initiatives designed to provide homeowners with assistance in avoiding residential mortgage loan foreclosures and that serve to delay the foreclosure process; HAMP and similar programs that require specific procedures to be followed to explore the refinancing of a mortgage loan prior to the commencement of a foreclosure proceeding; and declines in real estate values and sustained high levels of unemployment that increase the number of foreclosures and place additional pressure on the judicial and administrative systems.

A decline in the fair value of the real estate underlying our mortgage loans or that we acquire, whether through foreclosure or otherwise, may result in reduced risk-adjusted returns or losses.

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

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

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

Weather conditions and man-made or natural disasters such as hurricanes, tornadoes, earthquakes, floods, droughts, fires and other environmental conditions can damage properties that we own or that collateralize loans we own or service. In addition, the properties where we conduct business could be adversely impacted. Future adverse weather conditions and man-made or natural disasters could also adversely impact the demand for, and value of, our assets, as well as the cost to service or manage such assets, directly impact the value of our assets through damage, destruction or loss, and thereafter materially impact the availability or cost of insurance to protect against these events. Although we believe our owned real estate and the properties collateralizing our loan assets or underlying our MSR assets are adequately covered by insurance, we cannot predict at this time if we or our borrowers will be able to obtain appropriate coverage at a reasonable cost in the future, or if we will be able to continue to pass along all of the costs of insurance. In addition, there is a risk that one or more of the insurers of property on which we held an interest may not be able to fulfill their obligations with respect to claims payments due to a deterioration in its financial condition.

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

Many of our investments are unrated or, where any credit ratings are assigned to our investments, they will be subject to ongoing evaluations and revisions and we cannot assure you that those ratings will not be downgraded.

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

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

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

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

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

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

The fair values of some of our investments are not readily determinable. We measure the fair value of these investments monthly, but the fair value at which our assets are recorded may differ from the values we ultimately realize. Ultimate realization of the fair value of an asset depends to a great extent on economic and other conditions that change during the time period over which the investment is held and are beyond the control of PCM, us or our board of trustees. Further, fair value is only an estimate based on good faith judgment of the price at which an investment can be sold since transacted prices of investments can only be determined by negotiation between a willing buyer and seller. In certain cases, PCM’s estimation of the fair value of our investments includes inputs provided by third-party dealers and pricing services, and valuations of certain securities or other assets in which we invest are often difficult to obtain and are subject to judgments that may vary among market participants. Changes in the estimated fair values of those assets are directly charged or credited to earnings for the period. If we were to liquidate a particular asset, the realized value may be more than or less than the amount at which such asset was recorded. Accordingly, in either event, the value of our common shares could be materially and adversely affected by our determinations regarding the fair value of our investments, and such valuations may fluctuate over short periods of time.

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

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

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

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

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

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

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

When we purchase mortgage assets, our counterparty typically makes customary representations and warranties to us about such assets. Our residential mortgage loan purchase agreements may entitle us to seek indemnity or demand repurchase or substitution of the loans in the event our counterparty breaches a representation or warranty given to us. However, there can be no assurance that our mortgage loan purchase agreements will contain appropriate representations and warranties, that we will be able to enforce our contractual right to demand repurchase or substitution, or that our counterparty will remain solvent or otherwise be willing and able to

honor its obligations under our mortgage loan purchase agreements. Further, a significant portion of our nonperforming assets was purchased from or through a small number of sellers who generally also provide us with financing, creating a concentration of risk and a potential conflict of interest with key sources of financing. Our inability to obtain indemnity or require repurchase of a significant number of loans could materially and adversely affect our business, financial condition, liquidity, results of operations and our ability to make distributions to our shareholders.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

In August 2011, the SEC solicited public comment through a concept release on a wide range of issues relating to the Section 3(c)(5)(C) exemption from the Investment Company Act, including the nature of the assets that qualify for purposes of the exemption and whether mortgage-related REITs should be regulated in a manner similar to investment companies. There can be no assurance that the laws and regulations governing the Investment Company Act status of REITs, including guidance and interpretations from the Division of Investment Management of the SEC regarding the exceptions and exclusions therefrom, will not change in a manner that

adversely affects our operations. If the SEC takes action that could result in our or our subsidiaries’ failure to maintain an exception or exclusion from the Investment Company Act, we could, among other things, be required to (a) restructure our operations to avoid being required to register as an investment company, (b) effect sales of our assets in a manner that, or at a time when, we would not otherwise choose to do so or (c) register as an investment company (which, among other things, would require us to comply with the leverage constraints applicable to investment companies), any of which could negatively affect the value of our common shares, the sustainability of our business model, our financial condition, liquidity, results of operations and ability to make distributions to our shareholders.

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

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

We intend to operate so that we and each of our subsidiaries are not required to register as investment companies under the Investment Company Act. We believe that our subsidiary, PennyMac Corp. (“PMC”), to the extent it does not qualify under Section 3(c)(5)(C), would qualify for the exemption provided in Section 3(c)(6) because it has been, and is expected to continue to be, primarily engaged, directly or through majority-owned subsidiaries, in (1) the business of purchasing or otherwise acquiring mortgages or other liens on and interests in real estate (from which not less than 25% of its gross income during its last fiscal year was and will continue to be derived), together with (2) an additional business or businesses other than investing, reinvesting, owning, holding, or trading in securities, namely the business of servicing mortgages. Although we expect not less than 25% of PMC’s gross income to be derived from originating, purchasing, or acquiring mortgages or liens on and interests in real estate, there can be no assurances that the composition of PMC’s gross income will remain the same over time.

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

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

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

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

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

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

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

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

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

We also engage in business activities that are required to be conducted in a TRS. In order to meet the REIT qualification requirements, or to avert the imposition of a 100% tax that applies to certain gains derived by a REIT from dealer property or inventory, we hold a significant portion of our assets through, and derive a significant portion of our taxable income and gains in, a TRS, subject to the limitation that securities in TRSs may not represent more than 25% (20% for years beginning after December 31, 2017) of our assets in order for us to remain qualified as a REIT. All taxable income and gains derived from the assets held from time to time in our TRS are subject to regular corporate income taxation.

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

Currently, no more than 25% of the value of a REIT’s assets may consist of stock or securities of one or more TRSs (at the end of each quarter). For taxable years beginning after December 31, 2017, no more than 20% of the value of a REIT’s assets may consist of stock or securities of one or more TRSs. We may potentially have to modify our activities or the capital structure of those TRSs in order to comply with the new limitation and maintain our qualification as a REIT. While we intend to manage our affairs so as to satisfy this requirement, there can be no assurance that we will be able to do so in all market circumstances and even if we are able to do so, compliance with this rule may reduce our flexibility in operating our business. Although a TRS is subject to U.S. federal, state and local income tax on its taxable income, we may from time to time need to make distributions of such after-tax income in order to keep the value of our TRS below 25% (or 20% for taxable years beginning after December 31, 2017) of our total assets. However, for purposes of one of the tests we must satisfy to qualify as a REIT, at least 75% of our gross income must in each taxable year generally be from real estate assets. While we monitor our compliance with both this income test and the limitation on the percentage of our assets represented by TRS securities, the two may at times be in conflict with one another. That is, it is possible that we may wish to distribute a dividend from a TRS in order to reduce the value of our TRS below 25% (20% for years beginning after December 31, 2017) of the required percentage of our assets, but be unable to do so without violating the requirement that 75% of our gross income in the taxable year be derived from real estate assets. There can be no assurance that we will be able to comply with either or both of these tests in all market conditions. Our inability to comply with both of these tests could have a material adverse effect on our business, financial condition, liquidity, results of operations, qualification as a REIT and ability to make distributions to our shareholders.

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

The Internal Revenue Code provides for a 20% maximum federal income tax rate for dividends paid by regular United States corporations to eligible domestic shareholders that are individuals, trusts or estates. Dividends paid by REITs are generally not eligible for these reduced rates. While H.R. 1, commonly known as the 2017 Tax Cuts and Job Act (the “Tax Act”), which was enacted on December 22, 2017, generally may allow domestic shareholders to deduct from their taxable income one-fifth of the REIT ordinary dividends payable to them for taxable years beginning after December 31, 2017 and before January 1, 2026, the effective rate for such REIT dividends still remains higher than rates for regular corporate dividends paid to high-taxed individuals. The more favorable rates applicable to regular corporate dividends could cause investors who are individuals, trusts and estates to perceive investments in REITs to be relatively less attractive as a federal income tax matter than investments in the stocks of non-REIT corporations that pay dividends, which could materially and adversely affect the value of the stock of REITs, including our common shares.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

If our Operating Partnership failed to qualify as a disregarded entity for U.S. federal income tax purposes, we could fail to qualify as a REIT and suffer other adverse consequences.

We believe that our Operating Partnership is organized and operated in a manner so as to be treated as a disregarded entity, and not an association or publicly traded partnership taxable as a corporation, for U.S. federal income tax purposes. As a disregarded entity, it is not subject to U.S. federal income tax on its income. Instead, its income is included in the calculation of our income. No assurance can be provided, however, that the IRS will not challenge its status as a partnership or disregarded entity for U.S. federal income tax purposes, or that a court would not sustain such a challenge. If the IRS were successful in treating our Operating Partnership as an association or publicly-traded partnership taxable as a corporation for U.S. federal income tax purposes, we could fail to meet the gross income tests and certain of the asset tests applicable to REITs and, accordingly, could cease to qualify as a REIT. Also, the failure of our Operating Partnership to qualify as a partnership or a disregarded entity would cause it to become subject to U.S. federal corporate income tax, which would reduce significantly the amount of its cash available for debt service and for distribution.

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

A REIT’s net income from prohibited transactions is subject to a 100% tax. In general, prohibited transactions are sales or other dispositions of property, other than foreclosure property, but including mortgage loans, held primarily for sale to customers in the ordinary course of business. We might be subject to this tax if we were to dispose of or securitize loans in a manner that was treated as a sale of the loans for U.S. federal income tax purposes. Therefore, in order to avoid the prohibited transactions tax, we may choose to engage in certain sales of loans through a TRS and not at the REIT level, and may limit the structures we utilize for our securitization transactions, even though the sales or structures might otherwise be beneficial to us. We may hold a substantial amount of assets in one or more TRSs that are subject to corporate income tax on its earnings, which may reduce the cash flow generated by us and our subsidiaries in the aggregate, and our ability to make distributions to our shareholders.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

From time to time, we may be involved in various legal actions, claims and proceedings arising in the ordinary course of business. As of December 31, 2017, we were not involved in any material legal actions, claims or proceedings.

Our common shares are listed on the New York Stock Exchange (Symbol: PMT). As of February 20, 2018, our common shares were held by 24,499 beneficial holders. The following table sets forth the high and low sales prices (as reported by the New York Stock Exchange) for our common shares and the amount of cash dividends declared during the last two years:

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

There were no sales of unregistered equity securities during the year ended December 31, 2017.

The following table provides information about our common share repurchases during the year ended December 31, 2017:

Period	Total number of shares purchased		Average price paid per share		Total number of shares purchased as part of publicly announced plans or programs (a)		Amount available for future share repurchases under the plans or programs (a)
							(in thousands)
January 1, 2017 – January 31, 2017		—	$	—		—	$	185,292
February 1, 2017 – February 28, 2017		—	$	—		—	$	185,292
March 1, 2017 – March 31, 2017		138,935	$	16.60		138,935	$	182,987
April 1, 2017 – April 30, 2017		—	$	—		—	$	182,987
May 1, 2017 – May 31, 2017		—	$	—		—	$	182,987
June 1, 2017 – June 30, 2017		—	$	—		—	$	182,987
July 1, 2017 – July 31, 2017		—	$	—		—	$	182,987
August 1, 2017 – August 31, 2017		97,658	$	17.28		97,658	$	181,299
September 1, 2017 – September 30, 2017		869,219	$	16.95		869,219	$	166,569
October 1, 2017 – October 31, 2017		30,000	$	17.58		30,000	$	166,041
November 1, 2017 – November 30, 2017		1,702,611	$	15.48		1,702,611	$	139,680
December 1, 2017 – December 31, 2017		2,808,919	$	16.23		2,808,919	$	94,094
		5,647,342	$	16.15		5,647,342	$	94,094

We have adopted an equity incentive plan which provides for the issuance of equity based awards, including share options, restricted shares, restricted share units, unrestricted common share awards, LTIP units (a special class of partnership interests in our Operating Partnership) and other awards based on our shares that may be awarded by us directly to our officers and trustees, and the members, officers, trustees, directors and employees of PFSI and its subsidiaries or other entities that provide services to us and the employees of such other entities. The equity incentive plan is administered by our compensation committee, pursuant to authority delegated by our board of trustees, which has the authority to make awards to the eligible participants referenced above, and to determine what form the awards will take, and the terms and conditions of the awards. Our equity incentive plan allows for grants of equity-based awards up to an aggregate of 8% of our issued and outstanding common shares on a diluted basis at the time of the award. However, the total number of shares available for issuance under the plan cannot exceed 40 million.

The following table provides information as of December 31, 2017 concerning our common shares authorized for issuance under our equity incentive plan:

The following financial data should be read in conjunction with Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and Item 8, “Financial Statements and Supplementary Data.” The table below presents, as of and for the dates indicated, selected historical financial information for us. The condensed consolidated statements of income data for the years ended December 31, 2017, 2016, and 2015 and the condensed consolidated balance sheets data at December 31, 2017, and 2016 have been derived from our audited financial statements included elsewhere in this Report. The condensed consolidated statements of income data for the years ended December 31, 2014 and 2013 and the condensed consolidated balance sheets data at December 31, 2015, 2014, and 2013 have been derived from our Company’s audited consolidated financial statements that are not included in this Report.

	Year ended December 31,
	2017			2016			2015			2014			2013
	(dollars in thousands, except per share data)
Condensed Consolidated Statements of Income:
Net investment income:
Net gain on investments	$	96,384		$	7,175		$	53,985		$	201,809		$	207,758
Net gain on mortgage loans acquired for sale		74,516			106,442			51,016			35,647			98,669
Net mortgage loan servicing fees		69,240			54,789			49,319			37,893			32,791
Net interest income		43,805			72,354			76,637			86,759			57,640
Other		33,995			31,328			17,808			(5,367	)		8,660
		317,940			272,088			248,765			356,741			405,518
Expenses:
Expenses payable to PennyMac Financial Services, Inc.		146,007			157,737			129,224			136,276			151,535
Other		47,387			52,588			46,237			41,001			39,348
		193,394			210,325			175,461			177,277			190,883
Income before provision for income taxes		124,546			61,763			73,304			179,464			214,635
Provision for (benefit from) income taxes		6,797			(14,047	)		(16,796	)		(15,080	)		14,445
Net income	$	117,749		$	75,810		$	90,100		$	194,544		$	200,190
Pre-tax income by segment:
Correspondent production	$	42,938		$	73,842		$	36,390		$	10,960		$	35,679
Credit sensitive strategies		102,214			17,288			66,038			206,738			224,028
Interest rate sensitive strategies		22,683			14,041			20,516			23,371			13,462
Corporate		(43,289	)		(43,408	)		(49,640	)		(61,605	)		(58,534	)
	$	124,546		$	61,763		$	73,304		$	179,464		$	214,635
Condensed Consolidated Balance Sheets:
Investments:
Short-term investments	$	18,398		$	122,088		$	41,865		$	139,900		$	92,398
Mortgage-backed securities at fair value		989,461			865,061			322,473			307,363			197,401
Mortgage loans acquired for sale at fair value		1,269,515			1,673,112			1,283,795			637,722			458,137
Mortgage loans at fair value (1)		1,089,473			1,721,741			2,555,788			2,726,952			2,818,445
Credit risk transfer agreement deposits and derivatives		687,507			465,669			147,593			—			—
Real estate acquired in settlement of loans (2)		162,865			274,069			341,846			303,228			148,080
Real estate held for investment		44,224			29,324			8,796			—			—
Excess servicing spread purchased from PFSI		236,534			288,669			412,425			191,166			138,723
Mortgage servicing rights		844,781			656,567			459,741			357,780			290,572
		5,342,758			6,096,300			5,574,322			4,664,111			4,143,756
Other assets		262,175			261,202			252,602			233,147			159,718
Total assets	$	5,604,933		$	6,357,502		$	5,826,924		$	4,897,258		$	4,303,474
Borrowings:
Assets sold under agreements to repurchase and mortgage loan participation purchase and sale agreement	$	3,225,374		$	3,809,918		$	3,128,780		$	2,749,249		$	2,039,003
Notes payable		—			275,106			236,015			—			—
Exchangeable senior notes		247,186			246,089			245,054			244,079			243,159
Asset-backed financing of a VIE at fair value		307,419			353,898			247,690			165,920			165,415
Other		7,070			4,114			183,000			—			226,580
		3,787,049			4,689,125			4,040,539			3,159,248			2,674,157
Other liabilities		273,299			317,263			290,272			159,838			162,203
Total liabilities		4,060,348			5,006,388			4,330,811			3,319,086			2,836,360
Shareholders' equity		1,544,585			1,351,114			1,496,113			1,578,172			1,467,114
Total liabilities and shareholders' equity	$	5,604,933		$	6,357,502		$	5,826,924		$	4,897,258		$	4,303,474
Per Common Share Data:
Earnings:
Basic	$	1.53		$	1.09		$	1.19		$	2.62		$	3.13
Diluted	$	1.48		$	1.08		$	1.16		$	2.47		$	2.96
Cash dividends:
Declared	$	1.88		$	1.88		$	2.16		$	2.40		$	2.87
Paid	$	1.88		$	1.88		$	2.30		$	2.38		$	2.28
Year-end:
Share price	$	16.07		$	16.37		$	15.26		$	21.09		$	23.42
Book value	$	20.13		$	20.26		$	20.28		$	21.18		$	20.82

We are a specialty finance company that invests primarily in residential mortgage loans and mortgage-related assets. Our objective is to provide attractive risk-adjusted returns to our investors over the long-term, primarily through dividends and secondarily through capital appreciation. We have pursued this objective largely by investing in distressed mortgage assets and acquiring, pooling and selling newly originated prime credit quality residential mortgage loans (“correspondent production”) and retaining the mortgage servicing rights (“MSRs”) created in such sales. In 2015, we began investing in credit risk transfer agreements (“CRT Agreements”) on certain of the mortgage loans acquired through our correspondent production activity. Our assets are transitioning away from distressed mortgage loans to investments obtained through our correspondent production such as CRT Agreements and MSRs. We have also invested in excess servicing spread (“ESS”) on MSRs acquired by PennyMac Loan Services, LLC (“PLS”), mortgage-backed securities (“MBS”), and commercial real estate loans that finance multifamily and other commercial real estate.

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

During the year ended December 31, 2017, we purchased newly originated prime credit quality mortgage loans with fair values totaling $66.7 billion, as compared to $66.1 billion for the same period in 2016, in furtherance of our correspondent production business. To the extent that we purchase mortgage loans that are insured by the U.S. Department of Housing and Urban Development (“HUD”) through the Federal Housing Administration (the “FHA”), or insured or guaranteed by the Veterans Administration (the “VA”) or U.S. Department of Agriculture (“USDA”), we and PLS have agreed that PLS will fulfill and purchase such mortgage loans, as PLS is a Ginnie Mae-approved issuer and we are not. This arrangement has enabled us to compete with other correspondent aggregators that purchase both government and conventional mortgage loans. We receive a sourcing fee from PLS ranging from two to three and one-half basis points, generally based on the average number of calendar days that mortgage loans are held by us prior to purchase by PLS, on the unpaid principal balance (“UPB”) of each mortgage loan that we sell to PLS under such arrangement, and earn interest income on the mortgage loan for the period we hold the mortgage loan prior to the sale to PLS. During the year ended December 31, 2017, we received sourcing fees totaling $12.1 million, relating to $40.6 billion in UPB of mortgage loans that we sold to PLS. During the year ended December 31, 2017, we received MSRs with fair values at initial recognition totaling $290.3 million and held MSRs with a carrying value totaling $844.8 million at December 31, 2017.

We believe that CRT Agreements are a long-term investment that can produce attractive risk-adjusted returns through our own mortgage production while aligning with Fannie Mae’s strategic goal to attract private capital investment in GSE credit risk. We believe there is significant potential for investment in front-end credit risk transfer and MSRs that result from our correspondent production activities as we redeploy capital from the liquidation of distressed mortgage loans. During the year ended December 31, 2017, we made investments in CRT Agreements totaling $152.6 million, and held CRT-related investments (composed of restricted cash and derivative financial instruments) totaling $687.5 million at December 31, 2017.

We have invested in distressed mortgage loans through direct acquisitions of mortgage loan portfolios from institutions such as banks and mortgage companies. We seek to maximize the fair value of the distressed mortgage loans that we acquired using means that are appropriate for the particular loan, including both proprietary and nonproprietary loan modification programs, special servicing and other initiatives focused on avoiding foreclosure, when possible. When we are unable to effect a cure for a mortgage loan delinquency, our objective is timely acquisition and/or liquidation of the property securing the mortgage loan through the use, in part, of short sales and deed-in-lieu-of-foreclosure programs. We may elect to hold certain real estate acquired in settlement of loans (“REO”) as income-producing properties for extended periods as a means of maximizing our returns on such properties. In addition to individual loan and property resolutions, we consider bulk sale opportunities from our existing distressed portfolio investments. During the year ended December 31, 2017, we did not acquire distressed mortgage loans. During the year ended December 31, 2017, we received proceeds from liquidation, payoffs, paydowns and sales from our portfolio of distressed mortgage loans and REO totaling $749.1 million including bulk sales totaling $415.2 million in fair value of distressed mortgage loans.

Our board of trustees has authorized a repurchase program under which we may repurchase up to $300 million of our outstanding common shares. During the year ended December 31, 2017, we repurchased approximately 5.6 million common shares at a cost of $91.2 million. We have repurchased a cumulative total of 14.1 million common shares at a cost of $205.9 million under the program. The repurchased common shares were canceled upon settlement of the repurchase transactions and returned to the authorized but unissued share pool.

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

Preparation of financial statements in compliance with accounting principles generally accepted in the United States (“GAAP”) requires us to make estimates and judgments that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements, and revenues and expenses during the reporting period. Certain of these estimates significantly influence the portrayal of our financial condition and results, and they require our Manager to make difficult, subjective or complex judgments. Our critical accounting policies primarily relate to our fair value estimates.

Our 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 our Manager has elected to carry them at fair value. We group financial statement items measured at or based on fair value in three levels based on the markets in which the assets are traded and the observability of the inputs used to determine fair value. These levels are:

Our consolidated balance sheet is substantially comprised of assets that are measured at or based on their fair values. At December 31, 2017, $3.8 billion or 68% of our total assets were carried at fair value and $960.4 million or 17% were carried based on their fair values (consisting of REO, real estate held for investment and certain of our MSRs, all of which are carried at the lower of cost or fair value). Of these assets carried at or based on fair value, $2.2 billion or 39% of total assets are measured using “Level 3” fair value inputs – significant inputs that are difficult to observe due to illiquidity of the markets in which the assets are traded. Changes in inputs to measurement of these financial statement items can have a significant effect on the amounts reported for these items including their reported balances and their effects on our net income.

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

Because the fair value of “Level 3” fair value assets and liabilities is difficult to estimate, our Manager’s valuation process is conducted by specialized staffs and receives significant executive management oversight. Our Manager has assigned the responsibility for estimating the fair values of our “Level 3” fair value assets and liabilities, except for interest rate lock commitments (“IRLCs”), to its Financial Analysis and Valuation group (the “FAV group”). Our Manager’s FAV group submits the results of its valuations to PCM’s valuation committee, which oversees and approves the fair values that are included in our periodic financial statements. During 2017, PCM’s valuation committee included PFSI’s executive chairman, chief executive, chief financial, chief enterprise operations, chief risk and deputy chief financial officers.

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

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

We carry mortgage loans at their fair values. We recognize changes in the fair value of mortgage loans in current period income as a component of Net gain (loss) on investments. Our Manager estimates fair value of mortgage loans based on whether the mortgage loans are saleable into active markets with observable pricing.

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

A shift in the market for “Level 3” fair value mortgage loans or a change in our Manager’s assessment of an input to the valuation of such fair value mortgage loans can have a significant effect on the fair value of our mortgage loans at fair value and in our income for the period. Our Manager believes that the fair value of distressed mortgage loans is most sensitive to changes in underlying property values. Following is a summary of the effect on fair value of changes to the property value inputs used by our Manager to make its fair value estimates as of December 31, 2017:

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

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

A shift in the market for ESS or a change in our Manager’s assessment of an input to the valuation of ESS can have a significant effect on the fair value of ESS and in our income for the period. We believe that the most significant “Level 3” fair value inputs to the valuation of ESS are the pricing spread (discount rate) and prepayment speed. Following is a summary of the effect on fair value of various changes to these inputs on our fair value estimates as of December 31, 2017:

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

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

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

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

A shift in the market for IRLCs or a change in our Manager’s assessment of an input to the valuation of IRLCs can have a significant effect on the amount of gain on sale of mortgage loans acquired for sale for the period. Our Manager believes that the fair value of IRLCs is most sensitive to changes in pull-through rate inputs. Following is a quantitative summary of the effect of changes in pull-through inputs on the fair value of IRLCs at December 31, 2017:

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

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

Following is a summary of the effect on fair value of various changes to the pricing spread input used to estimate the fair value of our CRT Agreements as of December 31, 2017:

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

MSRs represent the value of a contract that obligates us to service the mortgage loans on behalf of the owner of the loan in exchange for servicing fees and the right to collect certain ancillary income from the borrower. We initially recognize MSRs at our Manager’s estimate of the fair value of the contract to service the loans.

After the initial recognition of MSRs, we account for such assets based on the class of MSRs: originated MSRs backed by mortgage loans with initial interest rates of less than or equal to 4.5%; and originated MSRs backed by mortgage loans with initial interest rates of more than 4.5%. Originated MSRs backed by mortgage loans with initial interest rates of less than or equal to 4.5% are accounted for using the amortization method. Originated MSRs backed by loans with initial interest rates of more than 4.5% are accounted for at fair value with changes in fair value recorded in current period income.

Beginning January 1, 2018, the Company will account for MSRs at fair value. The manager determined that a single accounting treatment across all MSRs is consistent with lender valuation under financing arrangements and simplifies hedging activities. As the result of this change in accounting, the Company will record an increase in MSRs totaling $19.6 million, an increase in deferred tax liability totaling $5.3 million and an increase in shareholders’ equity totaling $14.4 million.

As economic fundamentals influencing the underlying mortgage loans and market demand for MSRs change, our Manager’s estimate of the fair value of our MSRs will also change. As a result, we will record changes in fair value for MSRs as the asset’s fair value changes. Changes in fair value of MSRs are recognized as a component of Net mortgage loan servicing fees.

We amortize MSRs accounted for using the amortization method. MSR amortization is determined by applying the ratio of the net MSR cash flows projected for the current period to the estimated total remaining net MSR cash flows. The estimated total net MSR cash flows are determined at the beginning of each month using prepayment inputs applicable at that time.

Our Manager also evaluates MSRs accounted for using the amortization method for impairment with reference to the assets’ fair value at the reporting date. Impairment occurs when the current fair value of the MSR falls below the asset’s amortized cost. If MSRs are impaired, the impairment is recognized in current period income and the carrying value of the MSRs is adjusted through a valuation allowance. If the fair value of impaired MSRs subsequently increases, we recognize the increase in fair value in current period income and, through a reduction in the valuation allowance, adjust the carrying value of the MSRs to a level not in excess of amortized cost.

When evaluating MSRs for impairment, our Manager stratifies the assets by predominant risk characteristic including loan type (fixed-rate or adjustable-rate) and note interest rate. We stratify fixed-rate mortgage loans into note interest rate pools of 50 basis points for note interest rates between 3.0% and 4.5% and a single pool for note interest rates below 3%. We evaluate adjustable-rate mortgage loans with initial interest rates of 4.5% or less in a single pool.

We periodically review the various impairment strata to determine whether the fair value of the impaired MSRs in a given stratum is likely to recover. When our Manager concludes that recovery of the fair value is 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.

Amortization and impairment of MSRs accounted for using the amortization method are included in current period income as a component of Net mortgage loan servicing fees.

We include changes in fair value of MSRs accounted for at fair value in current period income as a component of Net mortgage loan servicing fees.

A shift in the market for MSRs or a change in our Manager’s assessment of an input to the valuation of MSRs can have a significant effect on the fair value of MSRs and in our income for the period. Our Manager believes the most significant “Level 3” fair value inputs to the valuation of MSRs are the pricing spread (discount rate), prepayment speed and annual per-loan cost of servicing. Following is a summary of the effect on fair value of various changes to these key inputs that our Manager uses in making its fair value estimates as of December 31, 2017:

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

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

The level of the liability for representations and warranties is difficult to estimate and requires considerable judgment. The level of mortgage loan repurchase losses is dependent on economic factors, investor behavior, and other external conditions that may change over the lives of the underlying mortgage loans. Our estimate of the liability for representations and warranties is developed by our Manager’s credit administration staff. The liability estimate is reviewed and approved by our Manager’s senior management credit committee which includes its chief executive, credit, portfolio risk, mortgage operations, and mortgage banking officers.

As economic fundamentals change, as investor and Agency evaluations of their loss mitigation strategies (including claims under representations and warranties) change and as the mortgage market and general economic conditions affect our correspondent sellers, the level of repurchase activity and ensuing losses will change and such changes may be material to us. As a result of these changes, we adjust the estimate of our liability for representations and warranties. Such adjustments may be material to our financial condition and net income.

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

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

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

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

For our financial reporting purposes, the underlying assets owned by the securitization VIEs that we consolidate are shown under Mortgage loans at fair value, Derivative assets and Deposits securing credit risk transfer agreements on our consolidated balance sheets. As it relates to the VIE that holds mortgage loans we have securitized, the securities issued to third parties by the consolidated VIE are classified as secured borrowings and are shown as Asset-backed financing of a variable interest entity at fair value on our consolidated balance sheets. We include the interest earned on the loans held by the VIE in Interest income and interest attributable to the asset-backed securities issued by the VIE in Interest expense in our consolidated income statements. Gains and losses relating to mortgage loans held in a consolidated VIE and the associated asset-backed financing are included in Net gain on investments.

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

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

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

H.R. 1, known as the Tax Cuts and Jobs Act (the “Tax Act”) was enacted on December 22, 2017. The Tax Act reduces the federal corporate tax rate to 21% from the previous maximum rate of 35%, effective January 1, 2018. U.S. GAAP requires that the impact of tax legislation be recognized in the period in which the law was enacted. We re-measured our TRS’ deferred tax assets and liabilities and recorded a tax benefit of $13.0 million to our income tax expense in the quarter and year ended December 31, 2017.

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

Refer to Note 33 - Recently Issued Accounting Pronouncements to our consolidated financial statements for a discussion of recent accounting developments and the expected effect of these developments on us.

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

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

	Year ended December 31,
	2017			2016			2015
	(in thousands)
Net gain (loss) on investments:
Mortgage-backed securities	$	5,498		$	(13,168	)	$	(5,224	)
Mortgage loans:
at fair value		(5,711	)		(8,342	)		70,988
at fair value held in a variable interest entity		4,266			(1,748	)		(10,663	)
ESS		(14,530	)		(17,394	)		3,239
CRT Agreements		71,997			11,202			(1,238	)
Asset-backed financing of a VIE		(3,426	)		3,238			4,260
		58,094			(26,212	)		61,362
Net gain on mortgage loans acquired for sale:
Receipt of MSRs in mortgage loan sale transactions		290,309			275,092			154,474
Provision for losses relating to representations and warranties provided in mortgage loan sales:
Pursuant to mortgage loans sales		(3,147	)		(3,254	)		(5,771	)
Reduction in liability due to change in estimate		9,679			7,564			—
Change in fair value during the period of financial instruments held at period end:
IRLCs		855			(869	)		(1,015	)
Mortgage loans acquired for sale		5,879			(1,846	)		(2,977	)
Hedging derivatives		(15,957	)		19,347			961
		287,618			296,034			145,672
Net loan servicing fees—MSR valuation adjustments		(15,638	)		(5,938	)		(2,917	)
Net interest income:
Capitalization of interest pursuant to mortgage loan modifications		30,795			84,820			57,754
Accrual of unearned discounts and amortization of premiums on MBS, mortgage loans and asset-backed financing		(5,703	)		(1,766	)		719
		25,092			83,054			58,473
	$	355,166		$	346,938		$	262,590
Net investment income	$	317,940		$	272,088		$	248,765
Non-cash items as a percentage of net investment income		112	%		128	%		106	%

Cash is generated when mortgage loan investments are paid down, paid off or sold, when payments of principal and interest occur on such mortgage loans or when the property securing the mortgage loan has been sold. We receive proceeds on the sale of mortgage loans acquired for sale that include both cash and our estimate of the fair value of MSRs and we recognize a liability for potential losses relating to representations and warranties created in the mortgage loan sales transactions. We receive cash related to MSRs in the form of mortgage loan servicing fees and we pay cash relating to our provision for representations and warranties when we repurchase mortgage loans or settle loss claims from investors. Cash flows relating to hedging instruments are generally produced when the instruments mature or when we effectively cancel the transactions through an offsetting trade. Cash is generated with respect to CRT Agreements through a portion of both the interest payments collected on mortgage loans in the CRT Agreements’ reference pools and the deposits securing the agreements that is released as principal on such mortgage loans is repaid.

The following table illustrates the proceeds received during the period from dispositions and paydowns of distressed mortgage loan and REO investments, net gain in fair value that we accumulated over the period during which we owned such investments liquidated during the period, and additional net gain realized upon liquidation of such assets:

The amounts included in accumulated gains and gains on liquidation do not include the cost of managing the liquidated assets which may be substantial depending on the collection status of the mortgage loan at acquisition and on our success in working with the borrower to resolve the distress in the mortgage loan. Accumulated gains include the amount of accumulated valuation gains and losses recognized throughout the holding period and, in the case of REO, include estimated direct transaction costs to be incurred in the sale of the property. Accordingly, the preceding amounts do not represent periodic earnings on a cash basis and the amount of gain will have accumulated over varying periods depending on the holding periods for individual assets.

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 $31.8 million, $37.3 million and $17.3 million for assets liquidated during the years ended December 31, 2017, 2016 and 2015, respectively.

During the year ended December 31, 2017, certain states were impacted by hurricanes, primarily in Texas, Florida and Georgia. A portion of our investments are secured by or otherwise tied to real estate in government-declared disaster areas affected by these events. We have evaluated the effect of these events on our assets, including the valuation of our MSRs and CRT Agreements, based on the information that is currently available to us. With respect to our MSRs, we have concluded that most of our loss exposure is addressed by borrower hazard insurance and the Agency guarantees relating to the affected loans. With respect to our CRT Agreements, we initially recorded reductions in the fair value of such investments due to reductions in fair value of similar investments. By December 31, 2017, however, we believe that these fair value reductions have reversed. During 2017, we incurred increased delinquency-based servicing fee expense to address hurricane-related increases in delinquencies in the affected areas, and we expect this elevated level of expense to continue into 2018. Our CRT Agreements may absorb greater losses as a result of the increased delinquencies. However, we do not expect significant negative effects on our future earnings as a result of these events.

	Year ended December 31,
	2017			2016			2015
	(in thousands, except per common share amounts)
Net investment income	$	317,940		$	272,088		$	248,765
Expenses		(193,394	)		(210,325	)		(175,461	)
(Provision for) benefit from income taxes		(6,797	)		14,047			16,796
Net income		117,749			75,810			90,100
Dividends on preferred shares		15,267			—			—
Net income attributable to common shareholders	$	102,482		$	75,810		$	90,100
Pre-tax income (loss) by segment:
Correspondent production	$	42,938		$	73,842		$	36,390
Credit sensitive strategies		102,214			17,288			66,038
Interest rate sensitive strategies		22,683			14,041			20,516
Corporate		(43,289	)		(43,408	)		(49,640	)
	$	124,546		$	61,763		$	73,304
Return on average common shareholder's equity		7.8	%		5.4	%		5.9	%
Earnings per common share:
Basic	$	1.53		$	1.09		$	1.19
Diluted	$	1.48		$	1.08		$	1.16
Dividends per common share:
Declared	$	1.88		$	1.88		$	2.16
Paid	$	1.88		$	1.88		$	2.30
Per common share closing prices:
During the year:
High	$	18.45		$	17.21		$	22.99
Low	$	14.97		$	11.21		$	14.42
At year end	$	16.07		$	16.37		$	15.26

At year end:
Total assets	$	5,604,933		$	6,357,502		$	5,826,924
Book value per common share	$	20.13		$	20.26		$	20.28

During the year ended December 31, 2017, we recorded net income of $117.7 million, or $1.48 per diluted share. Our net income for the year ended December 31, 2017 reflects net gain on investments of $96.4 million, supplemented by net gain on mortgage loans acquired for sale of $74.5 million, net mortgage loan servicing fees of $69.2 million, and net interest income of $43.8 million.

During the year ended December 31, 2016, we recorded net income of $75.8 million, or $1.08 per diluted share. Our net income for the year ended December 31, 2016 reflects net gain on mortgage loans acquired for sale of $106.4 million, net interest income of $72.4 million, net mortgage loan servicing fees of $54.8 million, and net gain on investments totaling $7.2 million.

During the year ended December 31, 2015, we recorded net income of $90.1 million, or $1.16 per diluted share. Our net income for the year ended December 31, 2015 reflects net interest income of $76.6 million, net gain on mortgage loans acquired for sale of $51.0 million, net mortgage loan servicing fees of $49.3 million, and net gain on investments totaling $54.0 million.

Our net income increased during the year ended December 31, 2017, as compared to the same period in 2016, primarily due to an increase in pretax income in our credit sensitive strategies segment of $84.9 million. During the year ended December 31, 2017, our credit sensitive strategies segment recognized net investment income totaling $133.4 million, an increase of $67.1 million from $66.3 million during the same period in 2016, primarily due to gains from our investments in CRT Agreements which reflects both growth in our investment in CRT Agreements and a tightening of credit spreads (credit spreads represent the yield premium demanded by investors for securities similar to CRT Agreements as compared to a U.S. Treasury security).

In our correspondent production activities, our net investment income decreased by $36.5 million during the year ended December 31, 2017, as compared to the same period in 2016, from $168.5 million to $132.0 million. Our net gain on mortgage loans acquired for sale decreased due to tightening gain on sale margins, resulting from a smaller mortgage market size. However, we maintained our mortgage loan production volume in a smaller mortgage market through the continued growth of our correspondent seller network.

Our net income decreased during 2016 as compared to 2015, primarily due to a decrease in pretax income in our credit sensitive strategies segment of $48.8 million, or 74%, from $66.0 million pretax income to $17.3 million. During 2016, we recognized net investment income totaling $7.2 million from our investment activities, a decrease of $46.8 million, or 87%, from $54.0 million during 2015. Our average investment portfolio was approximately $3.0 billion during 2016, a decrease of $408.4 million, or 11%, over 2015.

In our correspondent production activities, our net investment income increased during 2016 compared to 2015 by $68.8 million, or 69%, from $100.0 million to $168.7 million. Our net gain on mortgage loans acquired for sale increased due to both the increase in mortgage loan volume sold to nonaffilitates and higher margins, both of which were driven by an increased market size and a larger number of approved originators selling mortgage loans to us.

During the year ended December 31, 2017, we recorded net investment income of $317.9 million, comprised primarily of $96.4 million of net gain on investments, $74.5 million of net gain on mortgage loans acquired for sale, $69.2 million of net loan servicing fees, $43.8 million of net interest income, and $40.2 million of mortgage loan origination fees, partially offset by $15.0 million of losses from results of REO.

During the year ended December 31, 2016, we recorded net investment income of $272.1 million, comprised primarily of $106.4 million of net gain on mortgage loans acquired for sale, $72.4 million of net interest income, $54.8 million of net loan servicing fees, $42.0 million of loan origination fees and $7.2 million of net gain on investments, partially offset by $19.1 million of losses from results of REO.

During the year ended December 31, 2015, we recorded net investment income of $248.8 million, comprised primarily of $76.6 million of net interest income, supplemented by $54.0 million of net gain on investments, $51.0 million of net gain on mortgage loans acquired for sale, $49.3 million of net loan servicing fees, and $28.7 million of loan origination fees, partially offset by $19.2 million of losses from results of REO.

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

The decrease in net gain on investments during 2016, as compared to 2015, was caused primarily by losses in our mortgage loans at fair value. The change reflects lower actual appreciation versus expectations of home values collateralizing the mortgage loans, increased capitalization of interest on mortgage loan modifications which reduces mortgage loan valuation gains, and reduced cash flow expectations relating to certain of our nonperforming loans and less appreciation on our reperforming mortgage loans. The reduced cash flow expectations largely resulted from expectations for longer liquidation periods with the attendant increased holding costs during the collection period and a reduction in expected liquidation proceeds. These reduced gains were partially offset by gains from our CRT Agreements and hedging derivatives gains during 2016, as compared to 2015.

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

During the year ended December 31, 2015, we recognized net valuation losses on MBS of $5.2 million. The losses we recorded reflect the effects of increasing mortgage interest rates through 2015, which negatively affect the fair value of MBS.

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

Because we have elected to record our mortgage loans at fair value, a substantial portion of the income we record with respect to such mortgage loans results from changes in fair value. Valuation changes amounted to losses of $5.7 million in the year ended December 31, 2017, as compared to losses of $8.3 million for the year ended December 31, 2016 and gains of $71.0 million for the year ended December 31, 2015. We recognize estimated gain (loss) relating to mortgage loans subject to pending sales contracts in the valuation changes. Gains and losses on sales represent settlement adjustments realized at the date of sale.

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

The valuation changes on performing mortgage loans reflect the effects of capitalization of delinquent interest on loans we modify. When we capitalize interest in a loan modification, we increase the carrying value of the mortgage loan. The interest income we recognize is offset by a valuation loss of corresponding magnitude. Changes in other inputs may result in further valuation changes to the mortgage loan, and subsequent performance of a modified mortgage loan will be reflected in its future fair value. During the year ended December 31, 2017, we capitalized interest totaling $30.8 million, as compared to $84.8 million for the year ended December 31, 2016.

Valuation gains on performing mortgage loans increased during the year ended December 31, 2017, as compared to 2016, due to strong observed market activity during the year for portfolios with similar performance characteristics and lower valuation losses offsetting interest capitalized in modifications. Valuation losses on the nonperforming mortgage loans increased during the year ended December 31, 2017, as compared to 2016, as expectations regarding the amount and timing of cash flows on the remaining population of loans have decreased and are expected to take longer to realize.

Gains on nonperforming mortgage loans decreased during 2016, as compared to 2015. The reduction in such gain was due to: (1) smaller increases in our expectations of future cash flows relating to certain of these mortgage loans as a result of lower appreciation versus expectations of the underlying collateral values; (2) reduced cash flow expectations relating to certain of our nonperforming loans during 2016, as compared to 2015; and (3) the effects of our liquidation efforts on our investment in nonperforming loans. Our investment in nonperforming mortgage loans decreased by $480.0 million, or 39%, from $1.2 billion in fair value at December 31, 2015, to $743.0 million at fair value in December 31, 2016. The reduced cash flow expectations largely result from expectations for longer liquidation periods with the attendant increased holding costs during the collection period and a reduction in expected liquidation proceeds.

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

Large-scale refinancing of modified distressed mortgage loans is not expected to occur for an extended period. Borrowers who have recently modified their mortgage loans typically have credit profiles that do not qualify them for refinancing or have mortgage loans on properties whose loan-to-value ratios exceed current underwriting guidelines for new mortgage loans. Further, modified mortgage loans generally require a period of acceptable borrower performance for consideration in most Agency refinance programs.

The following tables present a summary of mortgage loan modifications completed:

	Year ended December 31,
	2017					2016					2015
Modification type (1)	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		739	$	209,167			824	$	221,543			685	$	179,169
Term extension		885	$	272,607			1,244	$	350,530			805	$	213,710
Capitalization of interest and fees		1,039	$	309,703			1,323	$	372,626			952	$	250,869
Principal forbearance		574	$	190,419			453	$	136,360			201	$	60,208
Principal reduction		353	$	110,110			748	$	221,685			519	$	140,340
Total (1)		1,039	$	309,703			1,323	$	372,626			952	$	250,869
Defaults of mortgage loans modified in the prior year			$	59,410				$	33,895				$	50,838
As a percentage of relevant balance of loans before modification				30	%				19	%				16	%
Defaults during the period of mortgage loans modified since acquisition (3)			$	89,664				$	72,878				$	71,174
As a percentage of relevant balance of loans before modification				29	%				22	%				15	%
Repayments and sales of mortgage loans modified in the prior year			$	192,283				$	109,076				$	12,879
As a percentage of relevant balance of loans before modification				52	%				44	%				3	%

The following table summarizes the average effect of the modifications noted above to the terms of the loans modified:

The activity in and balances relating to our CRT Agreements is summarized below:

The increase in gains recognized on CRT Agreements is due to growth in the portfolio of mortgage loans subject to CRT Agreements during 2017 as compared to 2016 and the effect of credit spread decreases during 2017 on the fair value of the derivative assets included in the CRT Agreements.

We recognized fair value losses relating to our investment in ESS totaling $14.5 million during 2017, as compared to fair value losses totaling $17.4 million during 2016. Losses recognized during 2017 reflect the effects of volatile interest rates and a flattening yield curve during 2017, partially offset by a decreasing investment in ESS. Our average investment in ESS decreased from $317.9 million during 2016 to $264.9 million during 2017.

We recognized fair value losses relating to our investment in ESS totaling $17.4 million during 2016, as compared to fair value gains totaling $3.2 million during 2015. Mortgage interest rates were lower during most of 2016 than during 2015, causing prepayments to increase as compared to 2015, resulting in a decrease in fair value. The effect of this decrease in fair value was partially offset by a reduced investment in ESS as our average investment in ESS decreased from $340.5 million during 2015 to $317.9 million during 2016.

		Year ended December 31,
		2017			2016			2015
	(in thousands)
From non-affiliates:
Cash loss:
Mortgage loans		$	(209,898	)	$	(229,743	)	$	(84,489	)
Hedging activities			(15,288	)		30,927			(17,742	)
			(225,186	)		(198,816	)		(102,231	)
Non cash gain:
Receipt of MSRs in mortgage loan sale transactions			290,309			275,092			154,474
Provision for losses relating to representations and warranties provided in mortgage loan sales:
Pursuant to mortgage loan sales			(3,147	)		(3,254	)		(5,771	)
Reduction in liability due to change in estimate			9,679			7,564			—
Change in fair value during the period of financial instruments held at year end:
IRLCs			855			(869	)		(1,015	)
Mortgage loans			5,879			(1,846	)		(2,977	)
Hedging derivatives			(15,957	)		19,347			961
			(9,223	)		16,632			(3,031	)
Total from non-affiliates			62,432			97,218			43,441
From PFSI-cash gain			12,084			9,224			7,575
		$	74,516		$	106,442		$	51,016
Interest rate lock commitments issued:
Loans acquired for sale to nonaffiliates		$	24,855,512		$	25,447,021		$	15,707,683
Loans acquired for sale to PFSI			41,071,446			41,692,087			32,430,379
		$	65,926,958		$	67,139,108		$	48,138,062
Purchases of mortgage loans acquired for sale to nonaffiliates:
At fair value		$	23,742,999		$	23,940,413		$	14,478,602
UPB		$	22,971,119		$	23,188,386		$	14,014,603
Fair value of mortgage loans acquired for sale at year end:
Conventional mortgage loans		$	971,910		$	853,852		$	595,560
Government-insured or guaranteed mortgage loans acquired for sale to PFSI			279,571			804,616			669,288
Commercial mortgage loans			9,898			8,961			14,590
Mortgage loans repurchased pursuant to representations and warranties			8,136			5,683			4,357
		$	1,269,515		$	1,673,112		$	1,283,795

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 mortgage loan sales transactions.

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

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

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 sellers that, in turn, had sold such mortgage loans to us and breached similar or other representations and warranties. In such event, we have the right to seek a recovery of related repurchase losses from that correspondent seller.

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

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

		Year ended December 31,
		2017			2016			2015
		(in thousands)
	(UPB of mortgage loans)
Indemnification activity:
Mortgage loans indemnified by PMT at beginning of year		$	4,856		$	5,566		$	3,644
New indemnifications			2,069			645			2,471
Less:
Indemnified mortgage loans repaid or refinanced			999			1,355			549
Mortgage loans indemnified by PMT at year end		$	5,926		$	4,856		$	5,566
Mortgage loans with deposits received from correspondent lenders collateralizing prospective indemnification losses at end of period		$	1,145		$	645		$	645
Repurchase activity:
Total mortgage loans repurchased by PMT		$	11,596		$	11,380		$	19,826
Less:
Mortgage loans repurchased by correspondent lenders			7,669			8,808			15,764
Mortgage loans repaid by borrowers			4,133			2,734			3,093
Net mortgage loans repurchased by PMT with losses chargeable to liability for representations and warranties		$	(206	)	$	(162	)	$	969
Net losses (recoveries) charged (credited) to liability for representations and warranties		$	140		$	511		$	(158	)
At year end:
Mortgage loans subject to representations and warranties		$	71,416,333		$	56,114,162		$	41,842,601
Liability for representations and warranties		$	8,678		$	15,350		$	20,171

During the year ended December 31, 2017, we repurchased mortgage loans with UPBs totaling $11.6 million and charged net losses to the liability for representations and warranties totaling $140,000, as compared to repurchases of $11.4 million and recorded net losses of $511,000 during the year ended December 31, 2016. The losses we have recorded to date have been moderated by our ability to recover most of the losses inherent in the repurchased mortgage loans from the correspondent sellers. As the outstanding balance of mortgage loans we purchase and sell subject to representations and warranties increases and the mortgage loans sold season, we expect that the level of repurchase activity and associated losses may increase.

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

We record adjustments to our recorded liability for losses on representations and warranties as economic fundamentals change, as investor and Agency evaluations of their loss mitigation strategies (including claims under representations and warranties) change and as economic conditions affect our correspondent sellers’ ability or willingness to fulfill their recourse obligations to us. Such adjustments may be material to our financial position and income in future periods. Adjustments to our liability for representations and warranties are included as a component of our Net gains on mortgage loans acquired for sale at fair value. We recorded a $9.7 million reduction in liabilities for representations and warranties during the year ended December 31, 2017 due to our revised expectation of lower losses along with the effects of certain mortgage loans reaching specified performance histories identified by the Agencies as sufficient to limit repurchase claims relating to such mortgage loans.

Loan origination fees represent fees we charge correspondent sellers relating to our purchase of mortgage loans from those sellers. The changes in fees during 2017, as compared to 2016, and during 2016, as compared to 2015, are reflective of the changes in the volume of mortgage loans we purchased during 2017 and 2016, as compared to the prior years.

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

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

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

The increase in net mortgage loan servicing fees during the year ended December 31, 2016, as compared to 2015 was due to a $29.7 million, or 29%, increase in servicing fees, partially offset by a $25.0 million increase in the negative effect of MSRs on net mortgage loan servicing fees, reflecting the effect of growth in the Company’s servicing portfolio and the effect of fluctuating mortgage interest rates and prepayment speeds on our MSRs.

We have entered into an MSR recapture agreement that requires PLS to transfer to us cash in an amount equal to 30% of the fair market value of the MSRs related to all the loans so originated. We recognized MSR recapture income during 2017 of $1.4 million, as compared to $1.6 million during 2016 and $0.8 million during 2015.

We have identified two classes of MSRs: originated MSRs backed by mortgage loans with initial interest rates of less than or equal to 4.5% and MSRs backed by mortgage loans with initial interest rates of more than 4.5%. Our accounting for MSRs is based on the class of MSRs. Originated MSRs backed by mortgage loans with initial interest rates of less than or equal to 4.5% are accounted for using the amortization method. Originated MSRs backed by mortgage loans with initial interest rates of more than 4.5% are accounted for at fair value with changes in fair value recorded in current period income.

Our MSRs are summarized by the basis on which we account for the assets as presented below:

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

	For the year ended December 31, 2016
	Interest income/expense
			Discount/					Average		Interest
	Coupon		fees (1)			Total		balance		yield/cost %
	(dollars in thousands)
Assets:
Short-term investments	$	923	$	—		$	923	$	35,194		2.62	%
Mortgage-backed securities		17,054		(2,391	)		14,663		514,847		2.85	%
Mortgage loans acquired for sale at fair value		54,750		—			54,750		1,443,587		3.79	%
Mortgage loans:
Distressed		53,916		53,128			107,044		1,731,638		6.18	%
Held by variable interest entity		15,748		1,294			17,042		422,122		4.04	%
		69,664		54,422			124,086		2,153,760		5.76	%
ESS from PFSI		22,601		—			22,601		317,945		7.11	%
Deposits securing CRT Agreements		930		—			930		311,351		0.30	%
Placement fees relating to custodial funds		4,058		—			4,058
Other		111		—			111
		170,091		52,031			222,122		4,776,684		4.65	%
Liabilities:
Assets sold under agreements to repurchase		84,009		8,829			92,838		3,382,528		2.74	%
Mortgage loan participation purchase and sale agreements		1,246		130			1,376		70,391		1.95	%
Federal Home Loan Bank advances		122		—			122		24,376		0.50	%
Notes payable		9,726		3,166			12,892		202,293		6.37	%
Asset-backed financings of VIEs at fair value		11,422		669			12,091		338,582		3.57	%
Exchangeable Notes		13,438		1,035			14,473		250,000		5.79	%
Borrowing from PFSI		6,509		1,321			7,830		150,000		5.22	%
		126,472		15,150			141,622		4,418,170		3.21	%
Interest shortfall on repayments of mortgage loans serviced for Agency securitizations		6,812		—			6,812
Interest on mortgage loan impound deposits		1,334		—			1,334
		134,618		15,150			149,768		4,418,170		3.39	%
Net interest income	$	35,473	$	36,881		$	72,354
Net interest margin											1.51	%
Net interest spread											1.26	%

	For the year ended December 31, 2015
	Interest income/expense
			Discount/					Average		Interest
	Coupon		fees (1)			Total		balance		yield/cost %
	(dollars in thousands)
Assets:
Short-term investments	$	815	$	—		$	815	$	55,649		1.46	%
Mortgage-backed securities		10,302		(35	)		10,267		308,164		3.33	%
Mortgage loans acquired for sale at fair value		48,281		—			48,281		1,143,232		4.22	%
Mortgage loans:
Distressed		58,779		37,757			96,536		2,231,259		4.33	%
Held by variable interest entity		18,650		1,253			19,903		494,655		4.02	%
		77,429		39,010			116,439		2,725,914		4.27	%
ESS from PFSI		25,365		—			25,365		340,454		7.45	%
Other		178		—			178
		162,370		38,975			201,345		4,573,413		4.40	%
Liabilities:
Assets sold under agreements to repurchase		71,007		8,862			79,869		3,046,963		2.62	%
Mortgage loan participation purchase and sale agreements		808		193			1,001		49,318		2.03	%
Federal Home Loan Bank advances		275		—			275		89,512		0.31	%
Notes payable		5,214		1,612			6,826		119,307		5.72	%
Asset-backed financings of VIEs at fair value		13,255		499			13,754		294,822		4.67	%
Exchangeable Notes		13,438		975			14,413		250,000		5.77	%
Borrowing from PFSI		2,470		873			3,343		78,399		4.26	%
		106,467		13,014			119,481		3,928,321		3.04	%
Interest shortfall on repayments of mortgage loans serviced for Agency securitizations		4,207		—			4,207
Interest on mortgage loan impound deposits		1,020		—			1,020
		111,694		13,014			124,708		3,928,321		3.17	%
Net interest income	$	50,676	$	25,961		$	76,637
Net interest margin											1.68	%
Net interest spread											1.23	%

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

		Year ended December 31, 2017									Year ended December 31, 2016
		vs.									vs.
		Year ended December 31, 2016									Year ended December 31, 2015
		Increase (decrease) due to changes in									Increase (decrease) due to changes in
								Total									Total
		Rate			Volume			change			Rate			Volume			change
	(in thousands)
Assets:
Short-term investments		$	(337	)	$	(10	)	$	(347	)	$	483		$	(375	)	$	108
Mortgage -backed securities			138			14,637			14,775			(1,343	)		5,739			4,396
Mortgage loans acquired for sale at fair value			1,500			(3,086	)		(1,586	)		(5,395	)		11,864			6,469
Mortgage loans at fair value:
Distressed			(10,383	)		(33,048	)		(43,431	)		35,271			(24,763	)		10,508
Held by variable interest entity			628			(3,245	)		(2,617	)		13			(2,874	)		(2,861	)
Total mortgage loans			(9,755	)		(36,293	)		(46,048	)		35,284			(27,637	)		7,647
ESS from PFSI			(2,079	)		(3,571	)		(5,650	)		(1,170	)		(1,594	)		(2,764	)
Interest earned on Deposits securing CRT Agreements			2,533			828			3,361			—			930			930
Placement fees relating to custodial funds			—			8,459			8,459			—			111			111
Other			—			90			90			—			3,880			3,880
			(8,000	)		(18,946	)		(26,946	)		27,859			(7,082	)		20,777
Liabilities:
Assets sold under agreements to repurchase			(1,932	)		2,674			742			3,714			9,255			12,969
Mortgage loan participation purchase and sale agreement			400			(183	)		217			(41	)		416			375
FHLB advances			—			(122	)		(122	)		115			(268	)		(153	)
Asset backed financing of a VIE at fair value			1,358			(265	)		1,093			(3,538	)		1,875			(1,663	)
Exchangeable Notes			62			—			62			60			—			60
Notes payable			3,929			(4,187	)		(258	)		834			5,232			6,066
Assets sold to PFSI under agreement to repurchase			246			(38	)		208			874			3,613			4,487
			4,063			(2,121	)		1,942			2,018			20,123			22,141
Interest shortfall on repayments of mortgage loans serviced for Agency securitizations			—			(884	)		(884	)		—			2,605			2,605
Interest on mortgage loan impound deposits			—			545			545			—			314			314
			4,063			(2,460	)		1,603			2,018			23,042			25,060
Net interest income		$	(12,063	)	$	(16,486	)	$	(28,549	)	$	25,841		$	(30,124	)	$	(4,283	)

During the year ended December 31, 2017, we earned net interest income of $43.8 million, as compared to $72.4 million for the year ended December 31, 2016 and $76.6 million for the year ended December 31, 2015. The decrease in net interest income was due to increased financing of non-interest earning assets, along with a decrease in the average balance of distressed mortgage loans at fair value, which are our highest yielding assets. The effect of the reduction in the average balance of distressed mortgage loans at fair value was partially offset by increased investment in MBS.

During the year ended December 31, 2017, we recognized interest income on distressed mortgage loans and mortgage loans held by VIEs totaling $78.0 million, including $30.8 million of interest capitalized pursuant to loan modifications, which compares to $124.1 million, including $84.8 million of interest capitalized pursuant to loan modifications in the year ended December 31, 2016. The decrease in interest income was due to both the result of continuing sales and liquidations of our distressed mortgage loans and a reduction in yield on our portfolio caused by reduced capitalization of delinquent interest pursuant to mortgage loan modifications.

At December 31, 2017, approximately 46% of the fair value of our distressed mortgage loan portfolio was nonperforming, as compared to 55% at December 31, 2016. We do not accrue interest on nonperforming mortgage loans and generally do not recognize revenues during the period we hold REO. We calculate the yield on our mortgage loan portfolio based on the portfolio’s average fair value, which most closely reflects our investment in the mortgage loans. Accordingly, the yield we realize is substantially higher than would be recorded based on the mortgage loans’ UPBs as the fair values of our distressed mortgage loans are generally at substantial discounts to their UPB.

Nonperforming mortgage loans and REO generally take longer than performing mortgage loans to generate cash flow due to the time required to work with borrowers to resolve payment issues through our modification programs, and to acquire and liquidate the property securing the mortgage loans. The value and returns we realize from these assets are determined by our ability to assist borrowers in curing defaults, or when curing of borrower defaults is not a viable solution, by our ability to effectively manage the liquidation process. At December 31, 2017, we held $353.6 million in fair value of nonperforming mortgage loans and $162.9 million in carrying value of REO, as compared to $743.0 million in fair value of nonperforming mortgage loans and $274.1 million in carrying value of REO at December 31, 2016.

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

Results of REO includes the gains or losses we record upon sale of the properties as well as valuation adjustments we record during the period we hold those properties. During the year ended December 31, 2017, we recorded net losses of $15.0 million, as compared to $19.1 million for 2016, in Results of real estate acquired in settlement of loans.

Losses from REOs during 2017 decreased from 2016 levels due to reduced levels of REO activity during 2017 as compared to 2016. Losses from REOs during 2016 were similar to 2015.

Expenses decreased $16.9 million, or 8%, during 2017, as compared to 2016, primarily due to decreased expenses relating to our portfolio of distressed mortgage loans and reduced mortgage loan fulfillment fees, partially offset by increased servicing expenses resulting from the growth of our MSR portfolio and increased management fees due to an increase in shareholders’ equity.

Expenses increased $34.9 million, or 20%, during 2016, as compared to 2015, primarily due to higher mortgage loan fulfillment fees from an increase in the volume of Agency-eligible mortgage loans we purchased in our correspondent production activities.

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

The decrease in mortgage loan fulfillment fees of $6.1 million during 2017, as compared to 2016, is primarily due to a decrease in the average fulfillment fee rate charged by PFSI due to contractual reductions in the fulfillment fee following an amendment to the mortgage banking services agreement with PFSI in September 2016.

The increase in mortgage loan fulfillment fees of $27.9 million during 2016, as compared to 2015, is primarily due to an increase in the volume of Agency-eligible mortgage loans we purchased in our correspondent production activities, partially offset by a decrease in the average fulfillment fee rate charged by PLS due to contractual discretionary reductions in the fulfillment fee by PFSI to facilitate our successful completion of certain mortgage loan sale transactions during the first eight months of 2016, followed by a contractual change in the mortgage banking services agreement with PLS in September 2016 that reduced the stated fulfillment fee rate and eliminated discretionary fee reductions by PLS.

	Year ended December 31,
	2017		2016		2015
	(in thousands)
Mortgage loan servicing fees
Mortgage loans acquired for sale at fair value:
Base	$	305	$	330	$	260
Activity-based		649		733		371
		954		1,063		631
Mortgage loans at fair value:
Distressed mortgage loans:
Base		6,650		11,078		16,123
Activity-based		8,960		18,521		12,437
		15,610		29,599		28,560
Mortgage loans held in VIE:
Base		129		83		125
Activity-based		—		—		—
		129		83		125
MSRs:
Base		25,862		19,378		16,786
Activity-based		509		492		321
		26,371		19,870		17,107
	$	43,064	$	50,615	$	46,423
Average investment in:
Mortgage loans acquired for sale at fair value	$	1,366,017	$	1,443,587	$	1,143,232
Mortgage loans at fair value:
Distressed mortgage loans	$	1,152,930	$	1,731,638	$	2,231,259
Mortgage loans held in a VIE	$	344,942	$	422,122	$	494,655
Average mortgage loan servicing portfolio	$	63,836,843	$	49,626,758	$	38,450,379

Mortgage loan servicing fees decreased by $7.6 million during the year ended December 31, 2017, as compared to 2016. We incur mortgage loan servicing fees primarily in support of our investment in mortgage loans at fair value and our MSR portfolio. The decrease in mortgage loan servicing fees was primarily due to reductions in the distressed mortgage loan portfolio resulting from continuing loan sales and liquidations throughout 2017. This decrease was partially offset by an increase in servicing fees resulting from the ongoing growth of our MSR portfolio. Servicing fees relating to distressed mortgage loans are significantly higher than those relating to MSRs due to the higher cost of servicing such loans. Therefore, reductions in the balance of distressed mortgage loans have a much more significant effect on mortgage loan servicing fees than the additions of new MSRs.

Management fees increased by $1.9 million during 2017, as compared to 2016, primarily due to the increase in our shareholders’ equity, which is the basis for the calculation of our base management fee, as a result of the issuance of the Preferred Shares during 2017. Management fees decreased by $3.5 million during 2016, as compared to 2015, primarily due to the decrease in our shareholders’ equity as a result of our share repurchases and dividend distributions. The level of our performance incentive fee is based on our profitability in relation to our common shareholders’ equity.

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.

Compensation expense decreased $0.7 million during 2017, as compared to 2016, primarily due to decreased share-based compensation expense, reflecting a decrease in vestings of equity awards as a result of our earnings performance not achieving the performance targets included in the outstanding performance-based awards.

Expenses of real estate held for investment increased by $3.2 million and $2.6 million in 2017 as compared to 2016 and 2016 as compared to 2015, respectively, due to growth in our portfolio of investment properties.

Mortgage loan collection and liquidation expenses decreased $7.4 million during 2017 as compared to 2016 and increased $3.0 million during 2016 as compared to 2015 due to non-recurrence in the 2017 period of certain forbearance costs incurred during 2016. We also realized increased recoveries of previously incurred costs as compared to 2016.

Other expenses decreased during 2017, as compared to 2016, by $0.8 million and $0.9 million during 2016 as compared to 2015, primarily due to the reduction in common overhead allocation from PFSI.

We have elected to treat PMC as a taxable REIT subsidiary (“TRS”). Income from a TRS is only included as a component of REIT taxable income to the extent that the TRS makes distributions of income to us. Prior to 2017, the TRS had made no such distributions to us. In 2017, the TRS made a $20 million distribution to us that resulted in REIT taxable income to us. A TRS is subject to corporate federal and state income tax. Accordingly, a provision for income taxes for PMC is included in the accompanying consolidated statements of operations.

Our effective tax rate was 5.5% for the year ended December 31, 2017 and (22.7)% for the year ended December 31, 2016. The relative values between the tax expense or benefit at the taxable REIT subsidiary and our consolidated pretax income drive the fluctuation in the effective tax rate. The primary difference between our effective tax rate and the statutory tax rate is due to nontaxable REIT income resulting from the dividends paid deduction. The effective tax rate for the year ended December 31, 2017 was also significantly impacted by recording the impact of the Tax Act. Among other provisions, the Tax Act reduces the federal corporate tax rate to 21% from the previous maximum rate of 35%, effective January 1, 2018. GAAP requires that the impact of tax legislation be recognized in the period in which such legislation is enacted. We re-measured our TRS’ deferred tax assets and liabilities and recorded a tax benefit of $13.0 million to our income tax expense in the quarter and year ended December 31, 2017.

In general, cash dividends declared by us will be considered ordinary income to shareholders for income tax purposes. Some portion of the dividends may be characterized as capital gain distributions or as return of capital. For tax years beginning after December 31, 2017, the Tax Act (subject to certain limitations) provides a 20% deduction from taxable income for ordinary REIT dividends.

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

							Taxable income (loss)
	GAAP net income			GAAP/tax differences			Total taxable income (loss)			Taxable subsidiaries			REIT
Year ended December 31, 2017	(in thousands)
Net investment income
Net interest income (expense)	$	43,805		$	42,548		$	86,353		$	(19,545	)	$	105,898
Net gain (loss) on mortgage loans acquired for sale		74,516			(296,541	)		(222,025	)		(222,025	)		—
Loan origination fees		40,184			—			40,184			40,184			—
Net gain on investments		96,384			(15,648	)		80,736			62,812			17,924
Net loan servicing fees		69,240			156,057			225,297			225,297			—
Results of real estate acquired in settlement of loans		(14,955	)		(8,744	)		(23,699	)		(23,699	)		—
Other		8,766			20,000			28,766			5,966			22,800
Net investment income		317,940			(102,328	)		215,612			68,990			146,622
Expenses		193,394			(109,557	)		83,837			48,403			35,434
REIT dividend deduction		—			110,880			110,880			—			110,880
Total expenses and dividend deduction		193,394			1,323			194,717			48,403			146,314
Income (loss) before provision for income taxes		124,546			(103,651	)		20,895			20,587			308
Provision for (benefit from) income taxes		6,797			(6,489	)		308			—			308
Net income (loss)	$	117,749		$	(97,162	)	$	20,587		$	20,587		$	—

	December 31,		December 31,
	2017		2016
	(in thousands)
Assets
Cash	$	77,647	$	34,476
Investments:
Short-term investments		18,398		122,088
Mortgage-backed securities		989,461		865,061
Mortgage loans acquired for sale at fair value		1,269,515		1,673,112
Mortgage loans at fair value		1,089,473		1,721,741
ESS		236,534		288,669
Derivative assets		113,881		33,709
Real estate acquired in settlement of loans		162,865		274,069
Real estate held for investment		44,224		29,324
MSRs		844,781		656,567
Deposits securing CRT Agreements		588,867		450,059
		5,357,999		6,114,399
Other		169,287		208,627
Total assets	$	5,604,933	$	6,357,502
Liabilities
Borrowings:
Assets sold under agreements to repurchase and mortgage loan participation purchase and sale agreements	$	3,225,374	$	3,809,918
Notes payable		—		275,106
Asset-backed financing of a VIE at fair value		307,419		353,898
Exchangeable Notes		247,186		246,089
Assets sold to PennyMac Financial Services, Inc. under agreement to repurchase		144,128		150,000
Interest-only security payable at fair value		7,070		4,114
		3,931,177		4,839,125
Other		129,171		167,263
Total liabilities		4,060,348		5,006,388
Shareholders’ equity		1,544,585		1,351,114
Total liabilities and shareholders’ equity	$	5,604,933	$	6,357,502

Total assets decreased by approximately $752.6 million, or 12%, during the period from December 31, 2016 through December 31, 2017, primarily due to a $632.3 million decrease in mortgage loans at fair value, a $403.6 million decrease in mortgage loans acquired for sale at fair value, a $111.2 million decrease in REO, a $52.1 million decrease in ESS, and a $60.5 million decrease in cash and short-term investments. These decreases were partially offset by a $188.2 million increase in MSRs, a $138.8 million increase in deposits securing CRT Agreements and a $124.4 million increase in MBS.

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

During 2017, we purchased for sale $65.9 billion in fair value of correspondent production loans as compared to $66.1 billion in fair value of correspondent production loans during 2016 and $46.4 billion during 2015. The decrease in correspondent acquisitions from 2016 to 2017 is primarily due to the decreased size of the mortgage market during 2017 as compared to 2016, partially offset by production we generated from continued growth in our correspondent production seller network. The increase in production during 2016 as compared to 2015 was due to growth in the mortgage market in response to decreasing interest rates and to continued growth in our population of correspondent sellers.

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

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

Our acquisitions during 2017 and 2016 were financed through the use of a combination of proceeds from liquidations of existing investments, proceeds from equity issuances and borrowings. We continue to identify additional means of increasing our investment portfolio through cash flow from our business activities, existing investments, borrowings, and transactions that minimize current cash outlays. However, we expect that, over time, our ability to continue our investment portfolio growth will depend on our ability to raise additional equity capital.

	December 31, 2017												December 31, 2016
					Average												Average
	Fair				Life					Market			Fair				Life					Market
	value		Principal		(in years)		Coupon			yield			value		Principal		(in years)		Coupon			yield
	(dollars in thousands)
Agency:
Fannie Mae	$	796,853	$	774,473		7.0		3.5	%		3.0	%	$	691,803	$	674,375		7.3		3.5	%		3.1	%
Freddie Mac		192,608		187,127		7.7		3.5	%		3.0	%		173,258		169,025		7.7		3.5	%		3.1	%
	$	989,461	$	961,600									$	865,061	$	843,400

The relationship of the fair value of our distressed mortgage loans at fair value to the fair value of the underlying real estate collateral is summarized below:

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, our asset disposition strategies with respect to individual loans and the timing of such dispositions, the costs and expenses we incur in the disposition process, changes in borrower performance and the underlying collateral values. Ultimate realization in a disposition of these assets will be net of any servicing advances held on the balance sheet in relation to these investments.

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 mortgage loan, readying the property for sale, holding the property while it is being marketed or in the sale of a property.

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 fair 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 summary of the distribution of our portfolio of mortgage loans at fair value (excluding mortgage loans acquired for sale at fair value and mortgage loans at fair value held by a VIE):

	December 31, 2017																December 31, 2016
	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)
Fixed	$	186,929		45	%		3.61	%	$	130,860		37	%		4.96	%	$	296,901		49	%		3.84	%	$	267,348		36	%		5.38	%
Interest rate step-up		189,724		46	%		2.32	%		51,112		14	%		2.19	%		232,700		38	%		2.56	%		63,816		9	%		2.35	%
ARM/Hybrid		38,132		9	%		4.05	%		171,676		49	%		5.26	%		81,983		13	%		3.71	%		411,824		55	%		4.91	%
	$	414,785		100	%		3.04	%	$	353,648		100	%		4.62	%	$	611,584		100	%		3.33	%	$	742,988		100	%		4.82	%

	December 31, 2017																December 31, 2016
	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)
1st lien	$	413,928		100	%		3.04	%	$	353,431		100	%		4.62	%	$	610,926		100	%		3.32	%	$	742,785		100	%		4.82	%
2nd lien		857		0	%		3.90	%		217		0	%		7.49	%		658		0	%		4.00	%		203		0	%		8.38	%
	$	414,785		100	%		3.04	%	$	353,648		100	%		4.62	%	$	611,584		100	%		3.33	%	$	742,988		100	%		4.82	%

	December 31, 2017																December 31, 2016
	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)
Owner occupied	$	298,468		72	%		3.14	%	$	190,815		54	%		4.50	%	$	469,761		77	%		3.42	%	$	398,137		54	%		4.74	%
Investment property		115,163		28	%		2.80	%		162,697		46	%		4.76	%		140,672		23	%		3.05	%		344,523		46	%		4.92	%
Other		1,154		0	%		3.33	%		136		0	%		3.00	%		1,151		0	%		3.52	%		328		0	%		5.26	%
	$	414,785		100	%		3.04	%	$	353,648		100	%		4.62	%	$	611,584		100	%		3.33	%	$	742,988		100	%		4.82	%

	December 31, 2017																December 31, 2016
	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)
Less than 12 months	$	—		0	%		—		$	—		0	%		—		$	10		0	%		0.60	%	$	—		0	%		0	%
12 - 35 months		138		0	%		2.71	%		—		0	%		3.00	%		15,519		3	%		4.29	%		33		0	%		4.60	%
36 - 59 months		528		0	%		4.70	%		118		0	%		2.02	%		319		0	%		4.95	%		45		0	%		1.56	%
60 months or more		414,119		100	%		3.04	%		353,530		100	%		4.62	%		595,736		97	%		3.31	%		742,910		100	%		4.82	%
	$	414,785		100	%		3.04	%	$	353,648		100	%		4.62	%	$	611,584		100	%		3.33	%	$	742,988		100	%		4.82	%

	December 31, 2017																December 31, 2016
	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)
Less than 600	$	108,762		26	%		3.29	%	$	70,228		20	%		4.20	%	$	147,968		24	%		3.52	%	$	131,629		18	%		4.67	%
600-649		99,428		24	%		3.00	%		63,524		18	%		4.13	%		128,843		21	%		3.36	%		141,404		19	%		4.54	%
650-699		106,196		26	%		2.93	%		114,280		32	%		4.69	%		159,423		26	%		3.18	%		223,325		30	%		4.89	%
700-749		77,324		19	%		2.85	%		80,411		23	%		5.24	%		125,092		20	%		3.19	%		182,767		25	%		5.10	%
750 or greater		23,075		5	%		3.14	%		25,205		7	%		4.93	%		50,258		9	%		3.45	%		63,863		8	%		4.81	%
	$	414,785		100	%		3.04	%	$	353,648		100	%		4.62	%	$	611,584		100	%		3.33	%	$	742,988		100	%		4.82	%

	December 31, 2017																December 31, 2016
	Performing loans								Nonperforming loans								Performing loans								Nonperforming loans
						Average								Average								Average								Average
Current loan-to	Fair		%			note			Fair		%			note			Fair		%			note			Fair		%			note
-value (1)	value		total			rate			value		total			rate			value		total			rate			value		total			rate
	(dollars in thousands)
Less than 80%	$	139,408		33	%		3.80	%	$	136,994		39	%		5.08	%	$	211,195		35	%		4.01	%	$	236,515		32	%		5.14	%
80% - 99.99%		107,121		26	%		3.12	%		94,538		27	%		4.90	%		144,446		24	%		3.52	%		209,148		28	%		4.82	%
100% - 119.99%		74,182		18	%		2.86	%		58,330		16	%		4.45	%		112,903		18	%		3.17	%		155,154		21	%		4.68	%
120% or greater		94,074		23	%		2.35	%		63,786		18	%		4.01	%		143,040		23	%		2.66	%		142,171		19	%		4.66	%
	$	414,785		100	%		3.04	%	$	353,648		100	%		4.62	%	$	611,584		100	%		3.33	%	$	742,988		100	%		4.82	%

	December 31, 2017																December 31, 2016
	Performing loans								Nonperforming loans								Performing loans								Nonperforming loans
						Average								Average								Average								Average
Geographic	Fair		%			note			Fair		%			note			Fair		%			note			Fair		%			note
distribution	value		total			rate			value		total			rate			value		total			rate			value		total			rate
	(dollars in thousands)
New York	$	69,401		17	%		2.61	%	$	104,667		30	%		5.25	%	$	89,079		15	%		2.86	%	$	207,589		28	%		5.44	%
California		92,435		22	%		3.06	%		44,856		13	%		3.91	%		156,636		26	%		3.36	%		104,793		14	%		3.79	%
New Jersey		38,689		9	%		2.55	%		33,857		10	%		4.36	%		43,635		7	%		2.69	%		100,257		13	%		4.85	%
Florida		20,273		5	%		2.71	%		40,518		11	%		4.76	%		43,132		7	%		2.96	%		79,528		11	%		5.29	%
Massachusetts		19,355		5	%		2.75	%		23,039		6	%		4.20	%		23,755		4	%		3.13	%		46,935		6	%		4.14	%
Maryland		21,424		5	%		2.99	%		10,159		3	%		4.06	%		22,944		4	%		3.47	%		20,525		3	%		3.96	%
Other		153,208		37	%		3.61	%		96,552		27	%		4.19	%		232,403		37	%		3.83	%		183,361		25	%		4.88	%
	$	414,785		100	%		3.04	%	$	353,648		100	%		4.62	%	$	611,584		100	%		3.33	%	$	742,988		100	%		4.82	%

	December 31, 2017																December 31, 2016
	Performing loans								Nonperforming loans								Performing loans								Nonperforming loans
						Average								Average								Average								Average
	Fair		%			note			Fair		%			note			Fair		%			note			Fair		%			note
Payment status	value		total			rate			value		total			rate			value		total			rate			value		total			rate
	(dollars in thousands)
Current	$	267,507		65	%		2.99	%	$	—		0	%		—		$	444,254		73	%		3.26	%	$	—		0	%		0.00	%
30 days delinquent		105,101		25	%		3.22	%		—		0	%		—			115,514		19	%		3.53	%		—		0	%		0.00	%
60 days delinquent		42,177		10	%		2.91	%		—		0	%		—			51,816		8	%		3.46	%		—		0	%		0.00	%
90 days or more delinquent		—		0	%		—			166,749		47	%		3.97	%		—		0	%		0.00	%		305,431		41	%		4.26	%
In foreclosure		—		0	%		—			186,899		53	%		5.24	%		—		0	%		0.00	%		437,557		59	%		5.22	%
	$	414,785		100	%		3.04	%	$	353,648		100	%		4.62	%	$	611,584		100	%		3.33	%	$	742,988		100	%		4.82	%

Following is a comparison of the key inputs we use in the valuation of our mortgage loans at fair value using “Level 3” fair value inputs:

We monitor and value our investments in pools of distressed mortgage loans 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 slightly from 7.1% at December 31, 2016 to 6.9% at December 31, 2017 due to shifting characteristics of the portfolio given reperformance, liquidations and loan sales in the period and increased projections of costs relating to liquidation and loan-related foreclosure litigation on the remaining population of non-performing loans.

The weighted average twelve-month projected housing price index change used in the valuation of our portfolio of mortgage loans at fair value increased from 3.7% at December 31, 2016 to 4.4% at December 31, 2017, due to slightly higher near-term forecasts for real estate price appreciation in the geographic areas in which our portfolio of mortgage loans is concentrated.

The weighted average total prepayment speed used in the valuation of our portfolio of mortgage loans at fair value decreased from 17.7% at December 31, 2016 to 16.5% at December 31, 2017 due to shifting characteristics of the portfolio given reperformance, liquidations and loan sales in the period.

Delinquency in the pools of mortgage loans underlying our CRT Agreements increased primarily as a result of increased delinquencies in areas affected by hurricanes that occurred during 2017. Approximately $87.0 million in UPB of mortgage loans delinquent 90 or more days at December 31, 2017, are secured by properties in areas affected by these natural disasters.

Following is a summary of the status of our portfolio of acquisitions by quarter acquired for the periods in which we made acquisitions:

	Acquisitions for the quarter ended
	March 31, 2015						December 31, 2014						June 30, 2014						March 31, 2014
	At			December 31,			At			December 31,			At			December 31,			At			December 31,
	purchase			2017			purchase			2017			purchase			2017			purchase			2017
	(dollars in millions)
UPB	$	310.2		$	141.8		$	330.8		$	124.7		$	37.9		$	13.0		$	439.0		$	169.0
Pool factor (1)		1.00			0.46			1.00			0.38			1.00			0.34			1.00			0.39
Collection status:
Delinquency
Current		1.8	%		21.9	%		1.6	%		29.1	%		0.7	%		37.8	%		6.2	%		14.4	%
30 days		0.3	%		6.2	%		1.6	%		8.5	%		0.6	%		12.8	%		0.7	%		6.8	%
60 days		0.1	%		8.4	%		7.1	%		1.9	%		1.4	%		7.0	%		0.7	%		2.4	%
over 90 days		66.7	%		19.5	%		52.7	%		21.0	%		59.0	%		15.5	%		37.5	%		26.0	%
In foreclosure		31.1	%		25.1	%		36.9	%		20.7	%		38.2	%		13.6	%		53.8	%		25.1	%
REO		—			18.9	%		—			19.0	%		—			13.3	%		1.1	%		25.3	%

	Acquisitions for the quarter ended
	December 31, 2013						September 30, 2013						June 30, 2013						March 31, 2013
	At			December 31,			At			December 31,			At			December 31,			At			December 31,
	purchase			2017			purchase			2017			purchase			2017			purchase			2017
	(dollars in millions)
UPB	$	507.3		$	193.7		$	929.5		$	229.7		$	397.3		$	104.9		$	366.2		$	64.9
Pool factor (1)		1.00			0.38			1.00			0.25			1.00			0.26			1.00			0.18
Collection status:
Delinquency
Current		1.4	%		20.4	%		0.8	%		21.1	%		4.8	%		27.4	%		1.6	%		38.7	%
30 days		0.2	%		5.3	%		0.3	%		8.7	%		7.4	%		12.7	%		1.5	%		14.3	%
60 days		0.0	%		2.6	%		0.7	%		4.0	%		7.6	%		6.4	%		3.5	%		8.2	%
over 90 days		38.3	%		19.2	%		58.6	%		22.9	%		45.3	%		18.7	%		82.2	%		19.4	%
In foreclosure		60.0	%		28.7	%		39.6	%		18.4	%		34.9	%		16.4	%		11.2	%		8.6	%
REO		—			23.8	%		—			24.9	%		0.0	%		18.4	%		—			10.7	%

	Acquisitions for the quarter ended
	December 31, 2012						September 30, 2012						June 30, 2012						December 31, 2011
	At			December 31,			At			December 31,			At			December 31,			At			December 31,
	purchase			2017			purchase			2017			purchase			2017			purchase			2017
	(dollars in millions)
UPB	$	290.3		$	52.1		$	357.2		$	38.5		$	402.5		$	36.3		$	49.0		$	7.8
Pool factor (1)		1.00			0.18			1.00			0.11			1.00			0.09			1.00			0.16
Collection status:
Delinquency
Current		3.1	%		30.9	%		—			22.7	%		45.0	%		33.8	%		0.2	%		36.3	%
30 days		1.3	%		15.9	%		0.0	%		6.2	%		4.0	%		17.0	%		0.1	%		8.5	%
60 days		5.4	%		8.2	%		0.1	%		5.9	%		4.3	%		12.1	%		0.2	%		—
over 90 days		57.8	%		17.2	%		49.1	%		8.9	%		31.3	%		9.6	%		70.4	%		16.6	%
In foreclosure		32.4	%		13.9	%		50.8	%		23.0	%		15.3	%		15.4	%		29.0	%		—
REO		—			13.8	%		—			33.3	%		0.1	%		12.1	%		—			38.6	%

	Acquisitions for the quarter ended
	September 30, 2011						June 30, 2011						March 31, 2011						December 31, 2010
	At			December 31,			At			December 31,			At			December 31,			At			December 31,
	purchase			2017			purchase			2017			purchase			2017			purchase			2017
	(dollars in millions)
UPB	$	542.6		$	34.6		$	259.8		$	22.2		$	515.1		$	42.3		$	277.8		$	14.4
Pool factor (1)		1.00			0.06			1.00			0.09			1.00			0.08			1.00			0.05
Collection status:
Delinquency
Current		0.6	%		35.2	%		11.5	%		36.9	%		2.0	%		29.9	%		5.0	%		22.1	%
30 days		1.3	%		15.5	%		6.5	%		18.3	%		1.9	%		15.9	%		4.0	%		19.1	%
60 days		2.0	%		4.8	%		5.2	%		9.7	%		3.9	%		4.5	%		5.1	%		8.6	%
over 90 days		22.6	%		10.2	%		31.2	%		11.5	%		25.9	%		11.4	%		26.8	%		25.8	%
In foreclosure		73.0	%		10.7	%		43.9	%		9.7	%		66.3	%		18.7	%		59.1	%		5.4	%
REO		0.4	%		23.6	%		1.7	%		14.0	%		—			19.7	%		—			19.0	%

	Acquisitions for the quarter ended
	September 30, 2010						June 30, 2010						March 31, 2010
	At			December 31,			At			December 31,			At			December 31,
	purchase			2017			purchase			2017			purchase			2017
	(dollars in millions)
UPB	$	146.2		$	5.7		$	195.5		$	12.7		$	182.7		$	11.5
Pool factor (1)		1.00			0.04			1.00			0.07			1.00			0.06
Collection status:
Delinquency
Current		1.2	%		22.7	%		5.1	%		44.1	%		6.2	%		42.8	%
30 days		0.4	%		31.7	%		2.0	%		8.8	%		1.6	%		13.3	%
60 days		1.3	%		—			4.1	%		0.9	%		5.8	%		2.4	%
over 90 days		38.2	%		28.3	%		42.8	%		12.2	%		37.8	%		3.4	%
In foreclosure		58.9	%		7.6	%		45.9	%		15.6	%		46.4	%		27.8	%
REO		—			9.8	%		—			18.5	%		2.3	%		10.4	%

Our cash flows for the years ended December 31, 2017 and 2016 are summarized below:

Our cash flows resulted in a net increase in cash of $43.2 million during 2017, as discussed below.

Cash provided by operating activities totaled $223.1 million during 2017, as compared to cash used in operating activities of $621.5 million and $863.2 million during 2016 and 2015, respectively. The increase in cash provided by our operating activities from 2016 to 2017 is primarily due to the reduction of our inventory of mortgage loans acquired for sale during 2017. The decreased use of cash in our operating activities from 2015 to 2016 is primarily due to slower growth of our inventory of mortgage loans acquired for sale during 2016 as compared to 2015.

Net cash provided by our investing activities was $681.7 million during 2017, as compared to cash provided by investing activities of $194.0 million during 2016. The increase in cash flows from investing activities reflects proceeds from sales and repayments on our investments, which exceeded our new investments in CRT Agreements and MBS. During 2016, we made significant additions to our portfolio of MBS. Such additions were not as significant during 2017. We realized cash inflows from repayments of MBS, sales and repayments of mortgage loans, repayment of ESS, sales of REO and distributions from CRT Agreements totaling $1.0 billion. We used cash to purchase MBS of $251.9 million and made deposits of cash collateral securing CRT Agreements transactions totaling $152.6 million during the year ended December 31, 2017.

Net cash provided by our investing activities was $194.0 million for the year ended December 31, 2016. This source of cash reflects sales and repayments on our investments, which exceeded our investments primarily consisting of CRT Agreements and MBS during 2016, as compared to 2015. We realized cash inflows from repayments of MBS, sales and repayments of mortgage loans, repayment of ESS, sales of REO and distributions from CRT Agreements totaling $1.3 billion. We used cash to purchase MBS of $765.5 million and made deposits of cash collateral securing CRT Agreements transactions totaling $306.5 million.

Net cash provided by investing activities was $11.5 million for the year ended December 31, 2015. This source of cash reflects sales and repayments of our investments in mortgage loans at fair value, MBS, ESS and REO of $663.6 million and a decrease in short-term investments of $98.0 million during 2015. Offsetting these cash inflows during 2015 were purchases of investments in mortgage loans at fair value, MBS and ESS of $598.4 million and deposits of cash collateral securing CRT Agreements of $147.4 million.

Our investing activities have included 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 has been in the form of valuation adjustments we record recognizing our estimates of the net appreciation in value of the assets as we work with borrowers to either modify their loans or acquire the property securing their loans in settlement thereof and MSRs we receive in the sale of mortgage loans. 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 mortgage loans and through the servicing of mortgage loans underlying our investments in MSRs, many months or years after we record the revenues.

Net cash used in financing activities was $861.6 million during 2017, as compared to cash provided by financing activities totaling $404.0 million during 2016. The use of cash for financing activities during 2017 as compared to 2016 reflects the reduction in size of our balance sheet during 2017 as compared to an increase in size during 2016.

Net cash provided by financing activities was $833.4 million for the year ended December 31, 2015. We increased borrowings primarily for the purpose of financing growth in our inventory of mortgage loans acquired for sale.

As discussed below in Liquidity and Capital Resources, our Manager continues to evaluate and pursue additional sources of financing to provide us with future investing capacity. We do not raise equity or enter into borrowings for the purpose of financing the payment of dividends. We believe that our cash flows from the liquidation of our investments, which include accumulated gains recorded during the periods we hold those investments, along with our cash earnings, are adequate to fund our operating expenses and dividend payment requirements. However, we manage our liquidity in the aggregate and are reinvesting our cash flows in new investments as well as using such cash to fund our dividend requirements.

Our liquidity reflects our ability to meet our current obligations (including the purchase of loans from correspondent sellers, our operating expenses and, when applicable, retirement of, and margin calls relating to, our debt and derivatives positions), make investments as our Manager identifies them, pursue our share repurchase program, and make distributions to our shareholders. We generally need to distribute at least 90% of our taxable income each year (subject to certain adjustments) to our shareholders to qualify as a REIT under the Internal Revenue Code. This distribution requirement limits our ability to retain earnings and thereby replenish or increase capital to support our activities.

We expect our primary sources of liquidity to be proceeds from liquidations from our investment portfolio, including distressed assets, cash earnings on our investments, cash flows from business activities, and proceeds from borrowings and/or additional equity offerings. When we finance a particular asset, the amount borrowed is less than the asset’s fair value and we must provide the cash in the amount of such difference. Our ability to continue making investments is dependent on our ability to invest the cash representing such difference. Further, certain of our CRT Agreements may allow us, at the time we sell a mortgage loan, to deposit less than the

full amount of cash we would otherwise be required to deposit with respect to such loan until the end of the aggregation period relating to the applicable CRT Agreement. At the end of such aggregation period, we will be required to deposit all remaining cash necessary to fully secure the related CRT Agreement, and our ability to fully invest in such CRT Agreement is dependent on our ability to deposit the required cash. We believe that our liquidity is sufficient to meet our current liquidity needs.

We do not expect repayments from contractual cash flows from our investments in mortgage loans to be a primary source of liquidity as a substantial portion of such investments are distressed assets that 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 mortgage 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 collateralized borrowings in the form of sales of assets under agreements to repurchase, mortgage loan participation purchase and sale agreements and notes payable. We also previously made collateralized borrowings in the form of borrowings under forward purchase agreements and advances from the Federal Home Loan Bank of Des Moines. 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 MSRs, performing, nonperforming and/or reperforming mortgage loans.

We will continue to finance most of our assets on a short-term basis until long-term financing becomes more available. 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 consists of short-term borrowings, we expect to renew these facilities in advance of maturity in order to ensure our ongoing liquidity and access to capital or otherwise allow ourselves sufficient time to replace any necessary financing.

As of December 31, 2017 and December 31, 2016, we financed our investments in MBS, mortgage loans acquired for sale at fair value, mortgage loans at fair value, mortgage loans at fair value held by a VIE, MSRs, ESS, REO and deposits securing CRT Agreements and related CRT derivatives with sales under agreements to repurchase, mortgage loan participation purchase and sale agreements, notes payable, asset sold to PFSI under agreement to repurchase and asset-backed financing. Following is a summary of our borrowings as of the dates presented:

Our repurchase agreements represent the sales of assets together with agreements for us to buy back the assets at a later date. Following is a summary of the activities in our repurchase agreements financing:

The difference between the maximum and average daily amounts outstanding is primarily due to timing of loan purchases and sales in our correspondent acquisition business. The total facility size of our assets sold under agreements to repurchase was approximately $5.9 billion at December 31, 2017.

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

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:

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:

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

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

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

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

As of December 31, 2017, we have not entered into any off-balance sheet arrangements.

As of December 31, 2017, we had contractual obligations aggregating $5.9 billion comprised of borrowings, interest expense on long term debt from our Exchangeable Notes and asset-backed financing of a VIE, and commitments to purchase mortgage loans from correspondent sellers. Payment obligations under these agreements, including expected interest payments on financing 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	$	1,250,803	$	1,250,803	$	—	$	—	$	—
Commitments to fund Deposits securing credit risk transfer agreements		482,471		482,471		—		—		—
Assets sold under agreements to repurchase		3,182,504		3,182,504		—		—		—
Mortgage loan participation purchase and sale agreements		44,550		44,550		—		—		—
Assets sold to PennyMac Financial Services, Inc. under agreement to repurchase		144,128		144,128		—		—		—
Asset-backed financing of a VIE		316,684		—		—		—		316,684
Exchangeable Notes		250,000		—		—		250,000		—
Interest-only security payable at fair value		7,070		—		—		—		7,070
Interest expense on long term debt		201,728		24,720		41,885		20,539		114,584
Total	$	5,879,938	$	5,129,176	$	41,885	$	270,539	$	438,338

All debt financing arrangements that matured between December 31, 2017 and the date of this Report have been renewed, extended or replaced.

The amount at risk (the fair value of the assets pledged plus the related margin deposit, less the amount advanced by the counterparty and accrued interest) relating to our assets sold under agreements to repurchase is summarized by counterparty below as of December 31, 2017:

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

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

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

Pursuant to the terms of our amended and restated management agreement, the base management fee is equal to the sum of (i) 1.5% per year of average shareholders’ equity up to $2 billion, (ii) 1.375% per year of average shareholders’ equity in excess of $2 billion and up to $5 billion, and (iii) 1.25% per year of average shareholders’ equity in excess of $5 billion.

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

The performance incentive fee is calculated quarterly and is equal to: (a) 10% of the amount by which net income attributable to common shares of beneficial interest for the quarter exceeds (i) an 8% return on equity plus the high watermark, up to (ii) a 12% return on equity; plus (b) 15% of the amount by which net income for the quarter exceeds (i) a 12% return on equity plus the high watermark, up to (ii) a 16% return on equity; plus (c) 20% of the amount by which net income for the quarter exceeds a 16% return on equity plus the high watermark.

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

Under the management agreement, PCM is entitled to reimbursement of its organizational and operating expenses, including third-party expenses, incurred on our behalf, it being understood that PCM and its affiliates shall allocate a portion of their personnel’s time to provide certain legal, tax and investor relations services for our direct benefit. With respect to the allocation of PCM’s and its affiliates’ personnel, from and after September 12, 2016, PCM shall be reimbursed $120,000 per fiscal quarter, such amount to be reviewed annually and to not preclude reimbursement for any other services performed by PCM or its affiliates.

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

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

We may terminate the management agreement without the payment of any termination fee under certain circumstances, including, among other circumstances, uncured material breaches by our Manager of the management agreement, upon a change in control of our Manager (defined to include a 50% change in the shareholding of our Manager in a single transaction or related series of transactions or Mr. Stanford L. Kurland’s failure to continue as chief executive officer of our Manager to the extent his suitable replacement (in our discretion) has not been retained by PCM within six months thereof) or upon the termination of our MBS agreement, our MSR recapture agreement or our servicing agreement by PLS without cause. On December 13, 2016, PFSI and our

Manager announced that David A. Spector would succeed Mr. Kurland as their Chief Executive Officer, effective as of January 1, 2017, and that Mr. Kurland would continue to serve in a new capacity as their Executive Chairman. We have determined that Mr. Spector, who previously served as our Executive Managing Director, President and Chief Operating Officer, was a suitable replacement for Mr. Kurland. Accordingly, on December 13, 2016, we also announced changes to the roles of Mr. Spector and Mr. Kurland, electing Mr. Spector as our President and Chief Executive Officer and Mr. Kurland as our Executive Chairman, effective as of January 1, 2017.

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

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

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

PLS is also entitled to certain activity-based fees for distressed whole mortgage loans that are charged based on the achievement of certain events. These fees range from 0.50% for a streamline modification to 1.50% for a liquidation and $500 for a deed-in-lieu of foreclosure. PLS is not entitled to earn more than one liquidation fee, re-performance fee or modification fee per loan in any 18-month period.

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

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

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

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

incentive payments paid to PLS in connection with a mortgage loan modification for which we previously paid PLS a modification fee, PLS is required to reimburse us an amount equal to the incentive payments.

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

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

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

In consideration for the mortgage banking services provided by PLS with respect to our acquisition of mortgage loans, PLS is entitled to a monthly fulfillment fee that shall equal (a) no greater than the product of (i) 0.35% and (ii) the aggregate initial unpaid principal balance (the “Initial UPB”) of all mortgage loans purchased in such month, plus (b) in the case of all mortgage loans other than mortgage loans sold to or securitized through Fannie Mae or Freddie Mac, no greater than the product of (i) 0.50% and (ii) the aggregate Initial UPB of all such mortgage loans sold and securitized in such month; provided however, that no fulfillment fee shall be due or payable to PLS with respect to any Ginnie Mae mortgage loans. We do not hold the Ginnie Mae approval required to issue Ginnie Mae MBS and act as a servicer. Accordingly, under the MBS agreement, PLS currently purchases loans underwritten in accordance with the Ginnie Mae Mortgage-Backed Securities Guide “as is” and without recourse of any kind from us at our cost less an administrative fee plus accrued interest and a sourcing fee ranging from two to three and one-half basis points, generally based on the average number of calendar days that mortgage loans are held by us prior to purchase by PLS.

In consideration for the mortgage banking services provided by PLS with respect to our acquisition of mortgage loans under PLS’ early purchase program, PLS is entitled to fees accruing (i) at a rate equal to $1,500 per year per early purchase facility administered by PLS, and (ii) in the amount of $35 for each mortgage loan that we acquire thereunder.

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

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

Spread Acquisition and MSR Servicing 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 acquired from PLS the rights to receive certain ESS from MSRs acquired by PLS from banks and other third party financial institutions. PLS was generally required to service or subservice the related mortgage loans for the applicable Agency or investor.

To the extent PLS refinanced any of the mortgage loans relating to the ESS sold to us, the 2/1/13 Spread Acquisition Agreement contained recapture provisions requiring that PLS transfer to us, at no cost, the ESS relating to a certain percentage of the UPB of the newly originated mortgage loans. To the extent the fair value of the aggregate ESS to be transferred for the applicable month was less than $200,000, PFSI was, at its option, permitted to pay cash to us in an amount equal to such fair value instead of transferring such ESS. We only used the 2/1/13 Spread Acquisition Agreement for the purpose of acquiring ESS relating to Fannie Mae MSRs.

Effective December 19, 2014, we entered into a second master spread acquisition and MSR servicing agreement (the “12/19/14 Spread Acquisition Agreement”) with PLS. The terms of the 12/19/14 Spread Acquisition Agreement are substantially similar to the terms of the 2/1/13 Spread Acquisition Agreement, except that we only purchased ESS relating to Freddie Mac MSRs under the 12/19/14 Spread Acquisition Agreement.

On February 29, 2016, the parties terminated the 2/1/13 Spread Acquisition Agreement and all amendments thereto. In connection with the termination of the 2/1/13 Spread Acquisition Agreement, PLS reacquired from us all of its right, title and interest in and to all of the Fannie Mae ESS previously sold by PLS to us and then subject to such 2/1/13 Spread Acquisition Agreement. On February 29, 2016, PLS also reacquired from us all of its right, title and interest in and to all of the Freddie Mac ESS previously sold by PLS to us and then subject to such 12/19/14 Spread Acquisition Agreement. The amount of ESS sold by us to PLS under these reacquisitions was $59.0 million.

On December 19, 2016, we amended and restated a third master spread acquisition and MSR servicing agreement with PLS (the “12/19/16 Spread Acquisition Agreement”). The terms of the 12/19/16 Spread Acquisition Agreement are substantially similar to the terms of the 2/1/13 Spread Acquisition Agreement and the 12/19/14 Spread Acquisition Agreement, except that we have only purchased ESS relating to Ginnie Mae MSRs under the 12/19/16 Spread Acquisition Agreement. Pursuant to the 12/19/16 Spread Acquisition Agreement, we may acquire from PLS, from time to time, the right to receive participation certificates representing beneficial ownership in ESS arising from Ginnie Mae MSRs acquired by PLS, in which case PLS generally would be required to service or subservice the related mortgage loans for Ginnie Mae. The primary purpose of the amendment and restatement was to facilitate the continued financing of the ESS owned by us in connection with the parties’ participation in the GNMA MSR Facility (as defined below).

To the extent PLS refinances any of the mortgage loans relating to the ESS we have acquired, the 12/19/16 Spread Acquisition Agreement also contains recapture provisions requiring that PLS transfer to us, at no cost, the ESS relating to a certain percentage of the unpaid principal balance of the newly originated mortgage loans. However, under the 12/19/16 Spread Acquisition Agreement, in any month where the transferred ESS relating to newly originated Ginnie Mae mortgage loans is not equivalent to at least 90% of the product of the excess servicing fee rate and the unpaid principal balance of the refinanced mortgage loans, PLS is also required to transfer additional ESS or cash in the amount of such shortfall. Similarly, in any month where the transferred ESS relating to modified Ginnie Mae mortgage loans is not equivalent to at least 90% of the product of the excess servicing fee rate and the unpaid principal balance of the modified mortgage loans, the 12/19/16 Spread Acquisition Agreement contains provisions that require PLS to transfer additional ESS or cash in the amount of such shortfall. To the extent the fair market value of the aggregate ESS to be transferred for the applicable month is less than $200,000, PLS may, at its option, wire cash to us in an amount equal to such fair market value in lieu of transferring such ESS.

On December 19, 2016, we, through PMH, entered into a master repurchase agreement with PLS (the “PMH Repurchase Agreement”), pursuant to which PMH may borrow from PLS for the purpose of financing PMH’s participation certificates representing beneficial ownership in ESS acquired from PLS under the 12/19/16 Spread Acquisition Agreement. PLS then re-pledges such participation certificates to PNMAC GMSR ISSUER TRUST (the “Issuer Trust”) under a master repurchase agreement by and among PLS, the Issuer Trust and Private National Mortgage Acceptance Company, LLC, as guarantor (the “PC Repurchase Agreement”). The Issuer Trust was formed for the purpose of allowing PLS to finance MSRs and ESS relating to such MSRs (the “GNMA MSR Facility”).

In connection with the GNMA MSR Facility, PLS pledges and/or sells to the Issuer Trust participation certificates representing beneficial interests in MSRs and ESS pursuant to the terms of the PC Repurchase Agreement. In return, the Issuer Trust (a) has issued to PLS, pursuant to the terms of an indenture, the Series 2016-MSRVF1 Variable Funding Note, dated December 19, 2016, known as the “PNMAC GMSR ISSUER TRUST MSR Collateralized Notes, Series 2016-MSRVF1” (the “VFN”), and (b) has issued and may, from time to time pursuant to the terms of any supplemental indenture, issue to institutional investors additional term notes (“Term Notes”), in each case secured on a pari passu basis by the participation certificates relating to the MSRs and ESS. The maximum principal balance of the VFN is $1,000,000,000.

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

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

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

Loan Purchase Agreements. We have entered into a mortgage loan purchase agreement and a flow commercial mortgage loan purchase agreement with our Servicer. Currently, we use the mortgage loan purchase agreement for the purpose of acquiring prime jumbo residential mortgage loans originated by our Servicer through its consumer direct lending channel. We use the flow commercial mortgage loan purchase agreement for the purpose of acquiring small balance commercial mortgage loans, including multifamily mortgage loans, originated by our Servicer as part of our commercial lending business. Each of the loan purchase agreements contains customary terms and provisions, including representations and warranties, covenants, repurchase remedies and indemnities. The purchase prices we pay our Servicer for such loans are market-based.

Commercial Mortgage Servicing Oversight Agreement. We have also entered into a commercial mortgage servicing oversight agreement with PLS that governs its oversight of the master and/or special servicing performed by third party servicers in connection with certain commercial mortgage loans we acquire. For the oversight services performed under this agreement, we are required to pay PLS a fee equal to 5 basis points per annum based on the UPB of the related commercial mortgage loans for which it provides oversight servicing.

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

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

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

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

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

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

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

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

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

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

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

Our mortgage loans and MBS are reported at their fair values. The fair value of these assets fluctuates primarily based on whether the mortgage loans are distressed or whether the MBS are backed by distressed mortgage loans. Mortgage loans (along with any related recognized IRLCs) and MBS that are backed by performing mortgage loans are more sensitive to changes in market interest rates, while mortgage loans and MBS backed by distressed mortgage loans are more sensitive to changes in real estate values and other factors such as the credit performance relating to the loans underlying our investments and the effectiveness and servicing practices of the servicers associated with the properties securing such investment.

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

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

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

The following table summarizes the estimated change in fair value of our mortgage-backed securities as of December 31, 2017, given several hypothetical (instantaneous) changes in interest rates and parallel shifts in the yield curve:

The following table summarizes the estimated change in fair value of our portfolio of distressed mortgage loans (comprised of mortgage loans at fair value, excluding mortgage loans at fair value held by VIE) as of December 31, 2017, given several hypothetical (instantaneous) changes in home values from those used in estimating fair value:

The following table summarizes the estimated change in fair value of our mortgage loans at fair value held by VIE as of December 31, 2017, net of the effect of changes in fair value of the related asset-backed financing of the VIE at fair value, given several hypothetical (instantaneous) changes in interest rates and parallel shifts in the yield curve:

The following tables summarize the estimated change in fair value of MSRs accounted for using the amortization method as of December 31, 2017, given several shifts in pricing spreads, prepayment speed and annual per-loan cost of servicing:

The following tables summarize the estimated change in fair value of MSRs accounted for under the fair value option as of December 31, 2017, given several shifts in pricing spreads, prepayment speed and annual per-loan cost of servicing:

The following tables summarize the estimated change in fair value of our ESS as of December 31, 2017, given several shifts in pricing spreads and prepayment speed:

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

In response to this Item 7A, the information set forth on pages 94 through 98 is incorporated herein by reference.

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

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.

Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Exchange Act Rule 13a-15(f). Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Management assessed the effectiveness of its internal control over financial reporting based on the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control—Integrated Framework (2013) . Based on those criteria, management concluded that our internal control over financial reporting was effective as of December 31, 2017.

The effectiveness of our internal control over financial reporting as of December 31, 2017 has been audited by Deloitte & Touche LLP, an independent registered public accounting firm, as stated in their report which appears herein.

We have audited the internal control over financial reporting of PennyMac Mortgage Investment Trust and subsidiaries (the “Company”) as of December 31, 2017, based on criteria established in Internal Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2017, based on criteria established in Internal Control—Integrated Framework (2013) issued by COSO.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated financial statements as of and for the year ended December 31, 2017; of the Company and our report dated March 1, 2018, expressed an unqualified opinion on those financial statements.

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

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

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

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

There has been no change in our internal control over financial reporting during the quarter ended December 31, 2017, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

The information required by this Item 10 is hereby incorporated by reference from our definitive proxy statement, or will be contained in an amendment to this Report, in either case to be filed by May 1, 2018, which is within 120 days after the end of fiscal year 2017.

The information required by this Item 11 is hereby incorporated by reference from our definitive proxy statement, or will be contained in an amendment to this Report, in either case to be filed by May 1, 2018, which is within 120 days after the end of fiscal year 2017.

The information required by this Item 12 is hereby incorporated by reference from our definitive proxy statement, or will be contained in an amendment to this Report, in either case to be filed by May 1, 2018, which is within 120 days after the end of fiscal year 2017.

The information required by this Item 13 is hereby incorporated by reference from our definitive proxy statement, or will be contained in an amendment to this Report, in either case to be filed by May 1, 2018, which is within 120 days after the end of fiscal year 2017.

The information required by this Item 14 is hereby incorporated by reference from our definitive proxy statement, or will be contained in an amendment to this Report, in either case to be filed by May 1, 2018, which is within 120 days after the end of fiscal year 2017.

We have audited the accompanying consolidated balance sheets of PennyMac Mortgage Investment Trust and subsidiaries (the “Company”) as of December 31, 2017 and 2016, and the related consolidated statements of income, changes in shareholders’ equity, and cash flows for each of the three years in the period ended December 31, 2017, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2017 and 2016, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2017, in conformity with accounting principles generally accepted in the United States of America.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of December 31, 2017, based on criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 1, 2018, expressed an unqualified opinion on the Company’s internal control over financial reporting.

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

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

	December 31,			December 31,
	2017			2016
	(in thousands, except share amounts)
ASSETS
Cash	$	77,647		$	34,476
Short-term investments		18,398			122,088
Mortgage-backed securities at fair (includes $989,461 and $863,802 pledged to creditors, respectively)		989,461			865,061
Mortgage loans acquired for sale at fair value (includes $1,249,277 and $1,653,748 pledged to creditors, respectively)		1,269,515			1,673,112
Mortgage loans at fair value (includes $1,081,893 and $1,712,190 pledged to creditors, respectively)		1,089,473			1,721,741
Excess servicing spread purchased from PennyMac Financial Services, Inc. at fair value pledged to secure assets sold under agreements to repurchase to PennyMac Financial Services, Inc.		236,534			288,669
Derivative assets (includes $26,058 and $9,078 pledged to creditors, respectively)		113,881			33,709
Real estate acquired in settlement of loans (includes $124,532 and $215,713 pledged to creditors, respectively)		162,865			274,069
Real estate held for investment (includes $31,128 pledged to creditors at December 31, 2017)		44,224			29,324
Mortgage servicing rights (includes $91,459 and $64,136 at fair value; $831,892 and $656,567 pledged to creditors)		844,781			656,567
Servicing advances		77,158			76,950
Deposits securing credit risk transfer agreements (includes $400,778 and $414,610 pledged to creditors, respectively)		588,867			450,059
Due from PennyMac Financial Services, Inc.		4,154			7,091
Other		87,975			124,586
Total assets	$	5,604,933		$	6,357,502
LIABILITIES
Assets sold under agreements to repurchase	$	3,180,886		$	3,784,001
Mortgage loan participation purchase and sale agreements		44,488			25,917
Notes payable		—			275,106
Asset-backed financing of a variable interest entity at fair value		307,419			353,898
Exchangeable senior notes		247,186			246,089
Assets sold to PennyMac Financial Services, Inc. under agreements to repurchase		144,128			150,000
Interest-only security payable at fair value		7,070			4,114
Derivative liabilities		1,306			9,573
Accounts payable and accrued liabilities		64,751			107,758
Due to PennyMac Financial Services, Inc.		27,119			16,416
Income taxes payable		27,317			18,166
Liability for losses under representations and warranties		8,678			15,350
Total liabilities		4,060,348			5,006,388
Commitments and contingencies ─ Note 19
SHAREHOLDERS’ EQUITY
Preferred shares of beneficial interest, $0.01 par value per share, authorized 100,000,000 shares, issued and outstanding 12,400,000 shares at December 31, 2017, liquidation preference $310,000,000		299,707			—
Common shares of beneficial interest—authorized, 500,000,000 common shares of $0.01 par value; issued and outstanding, 61,334,087 and 66,697,286 common shares		613			667
Additional paid-in capital		1,290,931			1,377,171
Accumulated deficit		(46,666	)		(26,724	)
Total shareholders’ equity		1,544,585			1,351,114
Total liabilities and shareholders’ equity	$	5,604,933		$	6,357,502

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

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

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

	Year ended December 31,
	2017			2016			2015
	(in thousands, except per share amounts)
Net investment income
Net gain (loss) on investments:
From nonaffiliates	$	110,914		$	24,569		$	50,746
From PennyMac Financial Services, Inc.		(14,530	)		(17,394	)		3,239
		96,384			7,175			53,985
Net gain on mortgage loans acquired for sale:
From nonaffiliates		62,432			97,218			43,441
From PennyMac Financial Services, Inc.		12,084			9,224			7,575
		74,516			106,442			51,016
Mortgage loan origination fees		40,184			41,993			28,702
Net mortgage loan servicing fees:
From nonaffiliates		67,812			53,216			48,532
From PennyMac Financial Services, Inc.		1,428			1,573			787
		69,240			54,789			49,319
Interest income:
From nonaffiliates		178,225			199,521			175,980
From PennyMac Financial Services, Inc.		16,951			22,601			25,365
		195,176			222,122			201,345
Interest expense:
To nonaffiliates		143,333			141,938			121,365
To PennyMac Financial Services, Inc.		8,038			7,830			3,343
		151,371			149,768			124,708
Net interest income		43,805			72,354			76,637
Results of real estate acquired in settlement of loans		(14,955	)		(19,118	)		(19,177	)
Other		8,766			8,453			8,283
Net investment income		317,940			272,088			248,765
Expenses
Earned by PennyMac Financial Services, Inc.:
Mortgage loan fulfillment fees		80,359			86,465			58,607
Mortgage loan servicing fees		43,064			50,615			46,423
Management fees		22,584			20,657			24,194
Mortgage loan origination		7,521			7,108			4,686
Professional services		6,905			6,819			7,306
Real estate held for investment		6,376			3,213			604
Compensation		6,322			7,000			7,366
Mortgage loan collection and liquidation		6,063			13,436			10,408
Other		14,200			15,012			15,867
Total expenses		193,394			210,325			175,461
Income before provision for (benefit from) income taxes		124,546			61,763			73,304
Provision for (benefit from) income taxes		6,797			(14,047	)		(16,796	)
Net income		117,749			75,810			90,100
Dividends on preferred shares		15,267			—			—
Net income attributable to common shareholders	$	102,482		$	75,810		$	90,100
Earnings per common share
Basic	$	1.53		$	1.09		$	1.19
Diluted	$	1.48		$	1.08		$	1.16
Weighted-average common shares outstanding
Basic		66,144			68,642			74,446
Diluted		74,611			77,109			83,336

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

	Preferred shares					Common shares									Retained
	Number					Number						Additional			earnings
	of					of			Par			paid-in			(accumulated
	shares		Amount			shares			value			capital			deficit)			Total
	(in thousands, except per share amounts)
Balance at December 31, 2014		—	$	—			74,510		$	745		$	1,479,699		$	97,728		$	1,578,172
Net income		—		—			—			—			—			90,100			90,100
Share-based compensation		—		—			302			3			6,343			—			6,346
Common share dividends ($2.16 per share)		—		—			—			—			—			(162,175	)		(162,175	)
Issuance of common shares		—		—			—			—			8			—			8
Repurchase of common shares		—		—			(1,045	)		(10	)		(16,328	)		—			(16,338	)
Balance at December 31, 2015		—		—			73,767			738			1,469,722			25,653			1,496,113
Net income		—		—			—			—			—			75,810			75,810
Share-based compensation		—		—			298			3			5,745			—			5,748
Common share dividends ($1.88 per share)		—		—			—			—			—			(128,187	)		(128,187	)
Repurchase of common shares		—		—			(7,368	)		(74	)		(98,296	)		—			(98,370	)
Balance at December 31, 2016		—		—			66,697			667			1,377,171			(26,724	)		1,351,114
Net income		—		—			—			—			—			117,749			117,749
Share-based compensation		—		—			284			2			4,902			—			4,904
Dividends
Common shares ($1.88 per share)		—		—			—			—			—			(123,625	)		(123,625	)
Preferred shares		—		—			—			—			—			(14,066	)		(14,066	)
Issuance of preferred shares		12,400		310,000			—			—			—			—			310,000
Issuance cost relating to preferred shares		—		(10,293	)		—			—			—			—			(10,293	)
Repurchase of common shares		—		—			(5,647	)		(56	)		(91,142	)		—			(91,198	)
Balance at December 31, 2017		12,400	$	299,707			61,334		$	613		$	1,290,931		$	(46,666	)	$	1,544,585

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

	Year ended December 31,
	2017			2016			2015
	(in thousands)
Cash flows from operating activities
Net income	$	117,749		$	75,810		$	90,100
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Accrual of interest on excess servicing spread purchased from PennyMac Financial Services, Inc.		(16,951	)		(22,601	)		(25,365	)
Capitalization of interest, advances and fees on mortgage loans at fair value		(30,795	)		(84,820	)		(57,754	)
Net gain on mortgage loans acquired for sale at fair value		(74,516	)		(106,442	)		(51,016	)
Net gain on investments		(96,384	)		(7,175	)		(53,985	)
Change in fair value, amortization and impairment of mortgage servicing rights		103,487			78,628			53,615
Amortization of debt issuance costs		13,769			13,152			11,587
Accrual of unearned discounts and amortization of premiums on mortgage-backed securities, mortgage loans at fair value, and asset-backed secured financing of a VIE		5,703			1,766			(719	)
Results of real estate acquired in settlement of loans		14,955			19,118			19,177
Share-based compensation expense		4,904			5,748			6,346
Purchase of mortgage loans acquired for sale at fair value from nonaffiliates		(65,830,095	)		(66,112,316	)		(46,423,734	)
Purchase of mortgage loans acquired for sale at fair value from PennyMac Financial Services, Inc.		(904,097	)		(21,541	)		(28,445	)
Repurchase of mortgage loans subject to representation and warranties		(11,412	)		(11,380	)		(17,782	)
Sale and repayment of mortgage loans acquired for sale at fair value to nonaffiliates		24,314,165			23,525,952			14,206,816
Sale of mortgage loans acquired for sale to PennyMac Financial Services, Inc.		42,624,288			42,051,505			31,490,920
(Increase) decrease in servicing advances		(2,353	)		4,672			(30,255	)
Decrease (increase) in due from PennyMac Financial Services, Inc.		2,514			1,640			(1,863	)
Decrease (increase) in other assets		8,822			(62,028	)		(36,161	)
(Decrease) increase in accounts payable and accrued liabilities		(40,435	)		46,657			7,984
Increase (decrease) in due to PennyMac Financial Services, Inc.		10,656			(2,549	)		(4,742	)
Increase (decrease) in income taxes payable		9,151			(15,339	)		(17,912	)
Net cash provided by (used in) operating activities		223,125			(621,543	)		(863,188	)
Cash flows from investing activities
Net decrease (increase) in short-term investments		103,690			(80,223	)		98,035
Purchase of mortgage-backed securities at fair value		(251,872	)		(765,467	)		(84,828	)
Sale and repayment of mortgage-backed securities at fair value		127,591			206,508			64,459
Purchase of mortgage loans at fair value		—			—			(241,981	)
Sale and repayment of mortgage loans at fair value		582,207			712,975			279,683
Sale of mortgage loans at fair value to PennyMac Financial Services, Inc.		—			891			1,466
Purchase of excess servicing spread from PennyMac Financial Services, Inc.		—			—			(271,554	)
Repayment of excess servicing spread by PennyMac Financial Services, Inc.		54,980			69,992			78,578
Sale of excess servicing spread to PennyMac Financial Services, Inc.		—			59,045			—
Net settlement of derivative financial instruments		(716	)		(7,216	)		(6,809	)
Sale of real estate acquired in settlement of loans		166,921			234,684			240,833
Sale of mortgage servicing rights		1,199			106			752
Purchase of mortgage servicing rights		(79	)		(2,739	)		(2,335	)
Deposit of cash collateral securing credit risk transfer agreements		(152,641	)		(306,507	)		(147,446	)
Distribution from credit risk transfer agreements		65,564			24,746			1,831
(Increase) decrease in margin deposits and restricted cash		(15,163	)		40,062			8,148
Purchase of Federal Home Loan Bank capital stock		—			(225	)		(7,691	)
Redemption of Federal Home Loan Bank capital stock		—			7,320			361
Net cash provided by investing activities		681,681			193,952			11,502

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

	Year ended December 31,
	2017			2016			2015
	(in thousands)
Cash flows from financing activities
Sale of assets under agreements to repurchase		77,985,354			70,684,674			50,133,359
Repurchase of assets sold under agreements to repurchase		(78,587,535	)		(70,030,317	)		(49,733,160	)
Issuance of mortgage loan participation certificates		6,960,713			6,579,706			5,009,065
Repayment of mortgage loan participation certificates		(6,942,079	)		(6,553,789	)		(5,029,301	)
Federal Home Loan Bank advances		—			28,000			760,484
Repayment of Federal Home Loan Bank advances		—			(211,000	)		(577,484	)
Advance under notes payable		396,240			129,812			394,242
Repayment of notes payable		(671,346	)		(90,812	)		(158,343	)
Issuance of asset-backed financing of a variable interest entity at fair value		—			182,400			110,482
Repayment of asset-backed financing of a variable interest entity at fair value		(51,687	)		(73,624	)		(24,951	)
Advance on notes payable to PennyMac Financial Services, Inc.		—			—			168,546
Repayment of notes payable to PennyMac Financial Services, Inc.		(5,872	)		—			(18,546	)
Issuance of credit risk transfer financing		—			—			1,204,187
Repayment of credit risk transfer financing		—			—			(1,204,187	)
Payment of debt issuance costs		(13,670	)		(11,161	)		(10,928	)
Issuance of preferred shares		310,000			—			—
Payment of issuance costs related to preferred shares		(10,293	)		—			—
Issuance of common shares		—			—			8
Repurchase of common shares		(91,198	)		(98,370	)		(16,338	)
Payment of dividends to preferred shareholders		(14,066	)		—			—
Payment of dividends to common shareholders		(126,135	)		(131,560	)		(173,022	)
Payment of contingent underwriting fees payable		(61	)		—			(705	)
Net cash (used in) provided by financing activities		(861,635	)		403,959			833,408
Net increase (decrease) in cash		43,171			(23,632	)		(18,278	)
Cash at beginning of year		34,476			58,108			76,386
Cash at end of year	$	77,647		$	34,476		$	58,108

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

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-related assets.

The Company operates in four segments: correspondent production, credit sensitive strategies, interest rate sensitive strategies and corporate:

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

The Company believes that it qualifies, and has elected to be taxed, as a real estate investment trust (“REIT”) under the Internal Revenue Code of 1986, as amended, 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.

As discussed in Note 1— Organization above, PMT’s operations and investing activities are centered in residential mortgage-related assets, a substantial portion of which were distressed at acquisition. The mortgage loans at fair value not acquired for sale or held in a variable interest entity (“VIE”) are generally purchased at discounts reflecting their distressed state or perceived higher risk of default, as well as a greater likelihood of collateral documentation deficiencies.

Due to the nature of a substantial portion of the Company’s investments, PMT is exposed, to a greater extent than traditional mortgage investors, to the risks associated with loan performance and resolution, including 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 that fluctuations in the residential real estate market may affect the performance of its investments. Factors influencing these risks include, but are not limited to:

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 has been acquired by the Company in prior years from or through one or more subsidiaries of JPMorgan Chase & Co., Citigroup Inc., and Bank of America Corporation, as presented in the following summary:

As detailed in Note 5 – Loan Sales and Variable Interest Entities, the Company invests in CRT Agreements whereby it sells pools of mortgage loans into Fannie Mae-guaranteed securitizations while retaining a portion of the credit risk underlying such mortgage loans (“Recourse Obligations”) as part of the retention of an interest-only (“IO”) ownership interest in such mortgage loans. The Company’s retention of credit risk subjects it to risks associated with delinquency and foreclosure similar to the risks associated with owning the underlying mortgage loans, and exposes the Company to risk of loss greater than the risks associated with selling the mortgage loans to Fannie Mae without the retention of such credit risk. Further, the risks associated with delinquency and foreclosure may in some instances be greater than the risks associated with owning the underlying mortgage loans because the structure of certain of the CRT Agreements provides that the Company may be required to realize losses in the event of delinquency or foreclosure even where there is ultimately no loss realized with respect to the underlying loan (e.g., as a result of a borrower’s re-performance). In addition to the risks specific to credit, the Company is exposed to market risk and, as a result of prevailing market conditions or the economy generally, may be required to incur unrealized losses associated with adverse changes to the fair value of the CRT Agreements.

The Company’s consolidated financial statements have been prepared in compliance with accounting principles generally accepted in the United States (“GAAP”) as codified in the Financial Accounting Standards Board’s (“FASB”) Accounting Standards Codification (“ASC”).

Preparation of financial statements in compliance with GAAP requires the Manager to make estimates and judgments that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements, and revenues and expenses during the reporting period. Actual results will likely differ from those estimates.

The consolidated financial statements include the accounts of PMT and all wholly-owned subsidiaries. PMT has no significant equity method or cost-basis investments. Intercompany accounts and transactions have been eliminated upon consolidation. The Company also consolidates assets and liabilities included in a securitization transaction, and CRT Agreements as discussed below.

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

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

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

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

On September 30, 2013, the Company completed a securitization transaction in which PMT Loan Trust 2013-J1, a VIE, issued $537.0 million in unpaid principal balance (“UPB”) of certificates backed by fixed-rate prime jumbo mortgage loans at a 3.9% weighted yield. The VIE is consolidated by the Company as the Manager determined that PMT is the primary beneficiary of the VIE. The Manager concluded that PMT is the primary beneficiary of the VIE as it has the power, through its affiliate, PLS, in its role as servicer of the mortgage loans, to direct the activities of the trust that most significantly impact the trust’s economic performance. Further, the retained subordinated and residual interest trust certificates expose the Company to losses and returns that could potentially be significant to the VIE.

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

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

For financial reporting purposes, the mortgage loans owned by the consolidated VIE are included in Mortgage loans at fair value on the Company’s consolidated balance sheets and are also shown under a separate statement following the Company’s consolidated balance sheets. The securities issued to third parties by the consolidated VIE are included in Asset-backed financing of a variable interest entity at fair value on the Company’s consolidated balance sheets. The Company recognizes the interest income earned on the mortgage loans owned by the VIE and the interest expense attributable to the asset-backed securities issued to nonaffiliates by the VIE on its consolidated income statements.

The Company, through its wholly-owned subsidiary, PennyMac Corp. (“PMC”), entered into CRT Agreements with Fannie Mae, pursuant to which PMC, through subsidiary trust entities, sells pools of mortgage loans into Fannie Mae-guaranteed loan securitizations while retaining a Recourse Obligation as part of the retention of an IO ownership interest in such mortgage loans. The mortgage loans subject to the CRT Agreements are transferred by PMC to subsidiary trust entities which sell the mortgage loans into Fannie Mae mortgage loan securitizations. Transfers of mortgage loans subject to CRT Agreements receive sale accounting treatment.

The Manager has concluded that the Company’s subsidiary trust entities are VIEs and the Company is the primary beneficiary of the VIEs as it is the holder of the primary beneficial interests which absorb the variability of the trusts’ results of operations. Consolidation of the VIEs results in the inclusion on the Company’s consolidated balance sheet of the fair value of the Recourse Obligations, and retained IO ownership interest in the form of a derivative financial instrument and the cash pledged to fulfill the Recourse Obligations. The pledged cash represents the Company’s maximum contractual exposure to claims under its Recourse Obligations and is the sole source of settlement of losses under the CRT Agreements. Gains and losses on net derivatives related to CRT Agreements are included in Net gain on investments in the consolidated statements of income.

These 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 the Manager has elected to carry them at fair value. PMT groups its assets and liabilities at fair value in three levels, based on the markets in which the assets and liabilities are traded and the observability of the inputs used to determine fair value. These levels are:

•Level 1—Quoted prices in active markets for identical assets or liabilities.

•Level 2—Prices determined or determinable using other significant observable inputs. Observable inputs are inputs that other market participants would use in pricing an asset or liability and are developed based on market data obtained from sources independent of the Company. These may include quoted prices for similar assets and liabilities, interest rates, prepayment speeds, credit risk and other inputs.

•Level 3—Prices determined using significant unobservable inputs. In situations where significant observable inputs are unavailable, unobservable inputs may be used. Unobservable inputs reflect the Company’s own judgments about the factors that market participants use in pricing an asset or liability, and are based on the best information available in the circumstances.

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

The Manager reclassifies its assets and liabilities between levels of the fair value hierarchy when the inputs required to establish fair value at a level of the fair value hierarchy are no longer readily available, requiring the use of lower-level inputs, or when the inputs required to establish fair value at a higher level of the hierarchy become available.

Short-term investments are carried at fair value with changes in fair value recognized in current period income. Short-term investments represent deposit accounts. The Company categorizes its short-term investments as “Level 1” fair value assets.

Purchases and sales of MBS are recorded as of the trade date. The Company’s investments in MBS are carried at fair value with changes in fair value recognized in current period income. Changes in fair value arising from amortization of purchase premiums and accrual of unearned discounts are recognized using the interest method and are included in Interest income. Changes in fair value arising from other factors are included in Net gain (loss) on investments. The Company categorizes its investments in MBS as “Level 2” fair value assets.

Interest income on MBS is recognized over the life of the security using the interest method. The Manager estimates, at the time of purchase, the future expected cash flows and determines the effective interest rate based on the estimated cash flows and the security’s purchase price. The Manager updates its cash flow estimates monthly.

Estimating cash flows requires a number of inputs that are subject to uncertainties, including the timing of principal payments, coupon interest rate and mortgage market interest rate fluctuations. The Manager applies its judgment in developing its estimates. However, these uncertainties are difficult to predict; therefore, the outcome of future events will affect the timing and amount of interest income.

Mortgage loans are carried at their fair values. Changes in the fair value of mortgage loans are recognized in current period income. Changes in fair value, other than changes in fair value attributable to accrual of unearned discounts and amortization of purchase premiums, are included in Net gain (loss) on investments for mortgage loans classified as mortgage loans at fair value and Net gain on mortgage loans acquired for sale for mortgage loans classified as mortgage loans acquired for sale at fair value. Changes in fair value attributable to accrual of unearned discounts and amortization of purchase premiums are included in Interest income on the consolidated statements of income.

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

The Company recognizes transfers of mortgage loans as sales based on whether the transfer is made to a VIE:

The Company has the ability but not the intent to hold mortgage loans acquired for sale and mortgage loans at fair value other than mortgage loans held in a VIE for the foreseeable future. Therefore, interest income on mortgage loans acquired for sale and mortgage loans at fair value other than mortgage loans held in a VIE is recognized over the life of the loans using their contractual interest rates.

The Company has both the ability and intent to hold mortgage loans held in a VIE for the foreseeable future. Therefore, interest income on mortgage loans held in a variable interest entity is recognized over the estimated remaining life of the mortgage loans using the interest method. Unearned discounts and purchase premiums are accrued and amortized to interest income using the effective interest rate inherent in the estimated cash flows from the mortgage loans.

Income recognition is suspended and the accrued unpaid interest receivable is reversed against interest income when mortgage loans become 90 days delinquent, or when, in the Manager’s opinion, a full recovery of income and principal becomes doubtful. Income recognition is resumed when the loan becomes contractually current.

The Company has acquired the right to receive the ESS related to certain of the MSRs owned by PFSI. ESS is carried at its fair value. Changes in fair value resulting from changes in market yield requirements are recognized in current period income in Net gain (loss) on investments. The Company categorizes ESS as a “Level 3” fair value asset.

Interest income for ESS is accrued using the interest method, based upon the expected yield from the ESS through the expected life of the underlying mortgages. Changes to the expected interest yield result in a change in fair value which is recorded in Interest income.

The Company holds and issues derivative financial instruments in connection with its operating activities. Derivative financial instruments are created as a result of certain of the Company’s operations and the Company also enters into derivative transactions as part of its interest rate risk management activities.

Derivative financial instruments created as a result of the Company’s operations include:

The Company engages in interest rate risk management activities in an effort to reduce the variability of earnings caused by the effects of changes in interest rates on the fair value of certain of its assets and liabilities. The Company is exposed to price risk relative to the IRLCs it issues to correspondent sellers and to the mortgage loans it purchases as a result of issuing the IRLCs. The Company bears price risk from the time an IRLC is issued to a correspondent seller until the time the purchased mortgage loan is sold. The Company is exposed to loss if market mortgage interest rates increase, because market interest rate increases generally cause the fair value of the IRLC or mortgage loan acquired for sale to decrease. The Company is exposed to losses related to its investment in MSRs if market mortgage interest rates decrease, because market interest rate decreases generally encourage mortgage refinancing activity, which reduces the expected life of the mortgage loans underlying the MSRs, causing the fair value of MSRs to decrease.

To manage the price risk resulting from interest rate risk, the Company uses derivative financial instruments with the intention of moderating the risk that changes in market interest rates will result in unfavorable changes in the fair value of the Company’s MBS, inventory of mortgage loans acquired for sale, mortgage loans held in a VIE, ESS, IRLCs and MSRs.

The Company accounts for its derivative financial instruments as free-standing derivatives. The Company does not designate its derivative financial instruments for hedge accounting. All derivative financial instruments are recognized on the balance sheet at fair value with changes in fair value being reported in current period income. The fair value of the Company’s derivative financial instruments is included in Derivative assets and Derivative liabilities and changes in fair value are included in Net gain (loss) on investments, in Net gain on mortgage loans acquired for sale, in Net mortgage loan servicing fees from nonaffiliates, or in Interest expense, as applicable, in the Company’s consolidated statements of income.

When the Company has master netting agreements with its derivatives counterparties, the Company nets its counterparty positions along with any cash collateral received from or delivered to the counterparty.

Exchange-traded hedging derivatives are classified as “Level 1” fair value financial assets and liabilities. Hedging derivatives whose fair values are derived from observed MBS market interest rates and volatilities are classified as “Level 2” fair value assets and liabilities. IRLCs, CRT Agreements and derivatives embedded in a master repurchase agreement are classified as “Level 3” fair value assets and liabilities.

REO is measured at the lower of the acquisition cost of the property (as measured by purchase price in the case of purchased REO; or the fair value of the mortgage loan immediately before REO acquisition in the case of acquisition in settlement of a mortgage loan) or its fair value reduced by estimated costs to sell. The Company categorizes REO as a “Level 3” fair value asset. Changes in fair value to levels that are less than or equal to acquisition cost and gains or losses on sale of REO are recognized in the consolidated statements of income under the caption Results of real estate acquired in settlement of loans.

MSRs arise from contractual agreements between the Company and investors (or their agents) in mortgage securities and mortgage loans. Under these contracts, the Company is obligated to provide mortgage loan servicing functions in exchange for fees and other remuneration. The servicing functions typically performed include, among other responsibilities, collecting and remitting mortgage loan payments; responding to borrower inquiries; accounting for principal and interest, holding custodial (impound) funds for payment of property taxes and insurance premiums; counseling delinquent mortgagors; and supervising the acquisition and disposition of REO. The Company has engaged PFSI to provide these services on its behalf.

The Company recognizes MSRs initially at their fair values, either as proceeds from sales of mortgage loans where the Company assumes the obligation to service the mortgage loan in the sale transaction, or from the purchase of MSRs. The Company categorizes its MSRs as “Level 3” fair value assets.

The fair value of MSRs is derived from the net positive cash flows associated with the servicing contracts. The Company receives a servicing fee of generally 0.25% annually on the remaining outstanding principal balances of conventional mortgage loans. The Company generally receives other remuneration including rights to various mortgagor-contracted fees such as late charges and collateral reconveyance charges and the Company is generally entitled to retain any interest earned on funds held pending remittance of mortgagor principal, interest, tax and insurance payments.

The Company accounts for MSRs at either the asset’s fair value with changes in fair value recorded in current period earnings or using the amortization method with the MSRs carried at the lower of amortized cost or fair value based on the class of MSR. The Company has identified two classes of MSRs: originated MSRs backed by mortgage loans with initial interest rates of less than or equal to 4.5%; and originated MSRs backed by mortgage loans with initial interest rates of more than 4.5%. Originated MSRs backed by mortgage loans with initial interest rates of less than or equal to 4.5% are accounted for using the amortization method. Originated MSRs backed by loans with initial interest rates of more than 4.5% are accounted for at fair value with changes in fair value recorded in current period income.

The Company amortizes MSRs that are accounted for using the MSR amortization method. MSR amortization is determined by applying the ratio of the net MSR cash flows projected for the current period to the projected total remaining net MSR cash flows. The estimated total net MSR cash flows are estimated at the beginning of each month using prepayment inputs applicable at that time.

The Company assesses MSRs accounted for using the amortization method for impairment monthly. Impairment occurs when the current fair value of the MSR falls below the asset’s amortized cost. If MSRs are impaired, the impairment is recognized in current-period income and the carrying value (carrying value is amortized cost reduced by a valuation allowance) of the MSRs is adjusted through a valuation allowance. If the fair value of impaired MSRs subsequently increases, the Company recognizes the increase in fair value in current-period earnings and adjusts the carrying value of the MSRs through a reduction in the valuation allowance to adjust the carrying value only to the extent of the valuation allowance.

The Company stratifies its MSRs by risk characteristic when evaluating for impairment. For purposes of performing its MSR impairment evaluation, the Company stratifies its servicing portfolio on the basis of certain risk characteristics including mortgage loan type (fixed-rate or adjustable-rate) and note interest rate. Fixed-rate mortgage loans are stratified into note interest rate pools of 50 basis points for note interest rates between 3.0% and 4.5% and a single pool for note interest rates below 3%. Adjustable rate mortgage loans with initial interest rates of 4.5% or less are evaluated in a single pool. If the fair value of MSRs in any of the note interest rate pools is below the amortized cost of the MSRs for that pool, impairment is recognized to the extent of the difference between the fair value and the existing carrying value for that pool.

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

Amortization and impairment of MSRs are included in current period income as a component of Net mortgage loan servicing fees.

Changes in fair value of MSRs accounted for at fair value are recognized in current period income as a component of Net mortgage loan servicing fees.

Servicing advances represent advances made on behalf of borrowers and the mortgage loans’ investors to fund delinquent balances for property tax and insurance premiums and out of pocket costs (e.g., preservation and restoration of mortgaged property REO, legal fees, appraisals and insurance premiums). Servicing advances are made in accordance with the Company’s servicing agreements and, when made, are deemed recoverable. The Company periodically reviews servicing advances for collectability. Servicing advances are written off when they are deemed uncollectible.

Borrowings, other than Asset-backed financing of a VIE at fair value, are carried at amortized cost. Costs of creating the facilities underlying the agreements are included in the carrying value of the borrowing facilities and are amortized to Interest expense over the term of revolving borrowing facilities on the straight-line basis and for Exchangeable Notes are amortized over the Exchangeable Notes’ contractual life using the interest method.

The certificates issued to nonaffiliates by the Company relating to the asset-backed financing are recorded as borrowings. Certificates issued to nonaffiliates have the right to receive principal and interest payments of the mortgage loans held by the consolidated VIE. Asset-backed financings of the VIE are carried at fair value. Changes in fair value are recognized in current period income as a component of Net gain (loss) on investments. The Company categorizes asset-backed financing of the VIE at fair value as a “Level 2” fair value liability.

The Company provides for its estimate of the losses that it expects to incur in the future as a result of its breach of the representations and warranties that it provides to the purchasers and insurers of the mortgage loans it has sold. The Company’s agreements with the Agencies and other investors include representations and warranties related to the mortgage loans the Company sells to the Agencies and other investors. The representations and warranties require adherence to Agency and other investor origination and underwriting guidelines, including but not limited to the validity of the lien securing the mortgage loan, property eligibility, borrower credit, income and asset requirements, and compliance with applicable federal, state and local law.

In the event of a breach of its representations and warranties, the Company may be required to either repurchase the mortgage loans with the identified defects or indemnify the investor or insurer. In such cases, the Company bears any subsequent credit loss on the mortgage loans. The Company’s credit loss may be reduced by any recourse it has to correspondent sellers that, in turn, had sold such mortgage loans to the Company and breached similar or other representations and warranties. In such event, the Company has the right to seek a recovery of related repurchase losses from that correspondent seller.

The Company records a provision for losses relating to representations and warranties as part of its mortgage loan sale transactions. The method used to estimate the liability for representations and warranties is a function of the representations and warranties given and considers a combination of factors, including, but not limited to, estimated future defaults and mortgage loan repurchase rates, the estimated severity of loss in the event of default and the probability of reimbursement by the correspondent mortgage loan seller. The Company establishes a liability at the time mortgage loans are sold and periodically updates its liability estimate. The level of the liability for representations and warranties is reviewed and approved by the Manager’s management credit committee.

The level of the liability for representations and warranties is difficult to estimate and requires considerable judgment. The level of mortgage loan repurchase losses is dependent on economic factors, investor demand strategies, and other external conditions that may change over the lives of the underlying mortgage loans. The Company’s representations and warranties are generally not subject to stated limits of exposure. However, the Manager believes that the current unpaid principal balance of mortgage loans sold by the Company to date represents the maximum exposure to repurchases related to representations and warranties.

Underwriting commissions and offering costs incurred in connection with the Company’s share offerings are reflected as a reduction of additional paid-in capital.

Mortgage loan servicing fees and other remuneration are received by the Company for servicing residential mortgage loans. Mortgage loan servicing includes loan administration, collection, and default management activities, including the collection and remittance of loan payments; response to customer inquiries; accounting for principal and interest; holding custodial (impounded) funds for the payment of property taxes and insurance premiums; counseling delinquent mortgagors; and supervising foreclosures and property dispositions.

Mortgage loan servicing fee amounts are based upon fee schedules established by the applicable investor and upon the unpaid principal balance of the mortgage loans.

The Company’s obligation under its mortgage loan servicing agreements is fulfilled as the Company services the mortgage loans. Mortgage loan servicing fees are recorded net of Agency guarantee fees paid by the Company. Mortgage loan servicing fees are recorded when the mortgage loan payment is collected. Mortgage loan servicing fees are collected when the mortgage loan payments are received from the borrowers.

The Company amortizes the fair value of previously granted share-based awards to compensation expense over the vesting period using the graded vesting method. Expense relating to share-based awards is included in Compensation expense on the consolidated statements of income.

The initial cost of restricted share units awarded is established at the Company’s closing share price on the date of the award. The Company adjusts the cost of its share-based compensation awards depending on whether the awards are made to its trustees and officers or to non-employees such as officers and employees of affiliates:

The Manager’s estimates of compensation costs reflect the expected portion of share-based compensation awards that are expected to vest.

The Company has elected to be taxed as a REIT and the Manager believes the Company complies with the provisions of the Internal Revenue Code applicable to REITs. Accordingly, the Manager believes the Company will not be subject to federal income tax on that portion of its REIT taxable income that is distributed to shareholders as long as certain asset, income and share ownership tests are met. If PMT fails to qualify as a REIT, and does not qualify for certain statutory relief provisions, it will be subject to income taxes and may be precluded from qualifying as a REIT for the four tax years following the year of loss of the Company’s REIT qualification.

The Company’s taxable REIT subsidiary (“TRS”) is subject to federal and state income taxes. Income taxes are provided for using the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted rates expected to apply to taxable income in the years in which the Manager expects those temporary differences to be recovered or settled. The effect on deferred taxes of a change in tax rates is recognized in income in the period in which the change occurs.

A valuation allowance is established if, in the Manager’s judgment, realization of deferred tax assets is not more likely than not. The Company recognizes a tax benefit relating to tax positions it takes only if it is more likely than not that the position will be sustained upon examination by the appropriate taxing authority. A tax position that meets this standard is recognized as the largest amount that exceeds 50 percent likelihood of being realized upon settlement. The Company will classify any penalties and interest as a component of income tax expense.

The Company is provided fulfillment and other services by PLS under a mortgage banking services agreement. The Company’s mortgage banking services agreement provides for a fulfillment fee paid to PLS based on the type of mortgage loan that the Company acquires. The fulfillment fee is equal to a percentage of the unpaid principal balance of mortgage loans purchased by the Company. PLS has also agreed to provide such services exclusively for the Company’s benefit, and PLS and its affiliates are prohibited from providing such services for any other party.

Before September 12, 2016, the applicable fulfillment fee percentages were (i) 0.50% for conventional mortgage loans, (ii) 0.88% for loans sold in accordance with the Ginnie Mae Mortgage-Backed Securities Guide, and (iii) 0.50% for all other mortgage loans not contemplated above; provided, however, that PLS was permitted, in its sole discretion, to reduce the amount of the applicable fulfillment fee and credit the amount of such reduction to any reimbursement that would have otherwise been due based on volumes tied to the aggregate unpaid principal balance of the mortgage loans purchased by the Company in the related month. This reduction was only credited to the reimbursement applicable to the month in which the related mortgage was funded.

Pursuant to the terms of an amended and restated mortgage banking services agreement, the monthly fulfillment fee is an amount that shall equal (a) no greater than the product of (i) 0.35% and (ii) the aggregate initial unpaid principal balance (the “Initial UPB”) of all mortgage loans purchased in such month, plus (b) in the case of all mortgage loans other than mortgage loans sold to or securitized through Fannie Mae or Freddie Mac, no greater than the product of (i) 0.50% and (ii) the aggregate Initial UPB of all such mortgage loans sold and securitized in such month; provided however, that no fulfillment fee shall be due or payable to PLS with respect to any mortgage loans underwritten to Ginnie Mae guidelines.

The Company does not hold the Ginnie Mae approval required to issue securities guaranteed by Ginnie Mae MBS and act as a servicer. Accordingly, under the agreement, PLS currently purchases loans salable in accordance with the Ginnie Mae Mortgage-Backed Securities Guide “as is” and without recourse of any kind from the Company at cost less any administrative fees paid by the correspondent to the Company plus accrued interest and a sourcing fee ranging from two to three and one-half basis points, generally based on the average number of calendar days loans are held by the Company prior to purchase by PLS. The discretionary reductions and volume reimbursements described above are no longer in effect.

In consideration for the mortgage banking services provided by PLS with respect to the Company’s acquisition of mortgage loans under PLS’s early purchase program, PLS is entitled to fees accruing (i) at a rate equal to $1,500 per annum per early purchase facility, and (ii) in the amount of $35 for each mortgage loan that the Company acquires. The mortgage banking services agreement expires on September 12, 2020, subject to automatic renewal for additional 18-month periods, unless terminated earlier in accordance with the terms of the agreement.

The Company purchases newly originated loans from PLS under a mortgage loan participation purchase and sale agreement and a flow commercial mortgage loan purchase agreement. Historically, the Company has used the mortgage loan participation purchase and sale agreement for the purpose of purchasing from PLS prime jumbo residential mortgage loans. Beginning in the quarter ended September 30, 2017, the Company also purchases non-government insured or guaranteed mortgage loans from PLS under the mortgage loan participation purchase and sale agreement. The Company uses the flow commercial mortgage loan purchase agreement for the purpose of purchasing from PLS small balance commercial mortgage loans, including multifamily mortgage loans, originated as part of PLS’s commercial lending activities.

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

The Company, through its Operating Partnership, has a mortgage loan servicing agreement with PLS dated as of September 12, 2016. The servicing agreement provides for servicing fees earned by PLS that are based on a percentage of the mortgage loan’s unpaid principal balance or fixed per loan monthly amounts based on the delinquency, bankruptcy and/or foreclosure status of the serviced mortgage loan or the REO. PLS is also entitled to market-based fees and charges including boarding and deboarding fees, liquidation and disposition, assumption, modification and origination fees and late charges relating to mortgage loans it services for the Company.

The term of the servicing agreement, as amended, expires on September 12, 2020, subject to automatic renewal for additional 18-month periods, unless terminated earlier in accordance with the terms of the servicing agreement.

Pursuant to the terms of an MSR recapture agreement, if PLS refinances mortgage loans for which the Company previously held the MSRs, PLS is generally required to transfer and convey to one of the Company’s wholly-owned subsidiaries cash in an amount equal to 30% of the fair market value of the MSRs related to all the loans so originated. The MSR recapture agreement was amended and restated as of September 12, 2016; however, the fee structure was not amended in any material respect. The MSR recapture agreement expires, unless terminated earlier in accordance with the agreement, on September 12, 2020, subject to automatic renewal for additional 18-month periods.

Following is a summary of mortgage loan servicing fees earned by PLS and MSR recapture income earned from PLS:

	Year ended December 31,
	2017		2016		2015
	(in thousands)
Mortgage loans servicing fees:
Mortgage loans acquired for sale at fair value:
Base	$	305	$	330	$	260
Activity-based		649		733		371
		954		1,063		631
Mortgage loans at fair value:
Distressed mortgage loans:
Base		6,650		11,078		16,123
Activity-based		8,960		18,521		12,437
		15,610		29,599		28,560
Mortgage loans held in VIE:
Base		129		83		125
Activity-based		—		—		—
		129		83		125
MSRs:
Base		25,862		19,378		16,786
Activity-based		509		492		321
		26,371		19,870		17,107
	$	43,064	$	50,615	$	46,423
Average investment in:
Mortgage loans acquired for sale at fair value	$	1,366,017	$	1,443,587	$	1,143,232
Mortgage loans at fair value:
Distressed mortgage loans	$	1,152,930	$	1,731,638	$	2,231,259
Mortgage loans held in a VIE	$	344,942	$	422,122	$	494,655
Average MSR portfolio	$	63,836,843	$	49,626,758	$	38,450,379
MSR recapture income recognized included in Net mortgage loan servicing fees - from PennyMac Financial Service, Inc.	$	1,428	$	1,573	$	787

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

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

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

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

The management agreement was amended and restated as of September 12, 2016; however, the fee structure was not amended in any material respect. Following is a summary of the base management and performance incentive fees payable to PCM recorded by the Company:

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

Under the management agreement, PCM is entitled to reimbursement of its organizational and operating expenses, including third-party expenses, incurred on the Company’s behalf, it being understood that PCM and its affiliates shall allocate a portion of their personnel’s time to provide certain legal, tax and investor relations services for the direct benefit of the Company. With respect to the allocation of PCM’s and its affiliates’ personnel, from and after September 12, 2016, PCM shall be reimbursed $120,000 per fiscal quarter, such amount to be reviewed annually and to not preclude reimbursement for any other services performed by PCM or its affiliates.

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

Effective February 1, 2013, the Company entered into a master spread acquisition and MSR servicing agreement (the “2/1/13 Spread Acquisition Agreement”), pursuant to which it purchased from PLS the rights to receive certain ESS from MSRs acquired by PLS from banks and other third party financial institutions. PLS was generally required to service or subservice the related mortgage loans for the applicable Agency or investor.

To the extent PLS refinanced any of the mortgage loans relating to the ESS sold to the Company, the 2/1/13 Spread Acquisition Agreement contained recapture provisions requiring that PLS transfer to the Company, at no cost, the ESS relating to a certain percentage of the UPB of the newly originated mortgage loans. To the extent the fair value of the aggregate ESS to be transferred for the applicable month was less than $200,000, PFSI was, at its option, permitted to pay cash to the Company in an amount equal to such fair value instead of transferring such ESS. The Company only used the 2/1/13 Spread Acquisition Agreement for the purpose of acquiring ESS relating to Fannie Mae MSRs.

Effective December 19, 2014, the Company entered into a second master spread acquisition and MSR servicing agreement (the “12/19/14 Spread Acquisition Agreement”) with PLS. The terms of the 12/19/14 Spread Acquisition Agreement are substantially similar to the terms of the 2/1/13 Spread Acquisition Agreement, except that the Company only purchased ESS relating to Freddie Mac MSRs under the 12/19/14 Spread Acquisition Agreement.

On February 29, 2016, the Company and PLS terminated the 2/1/13 Spread Acquisition Agreement and all amendments thereto. In connection with the termination of the 2/1/13 Spread Acquisition Agreement, PLS reacquired from the Company all of its right, title and interest in and to all of the Fannie Mae ESS previously sold by PLS to the Company under the 2/1/13 Spread Acquisition Agreement. On February 29, 2016, PLS also reacquired from the Company all of its right, title and interest in and to all of the Freddie Mac ESS previously sold by PLS to the Company under the 12/19/14 Spread Acquisition Agreement. The amount of ESS sold by the Company to PLS under these reacquisitions was $59.0 million.

On December 19, 2016, the Company amended and restated a third master spread acquisition and MSR servicing agreement with PLS (the “12/19/16 Spread Acquisition Agreement”). The terms of the 12/19/16 Spread Acquisition Agreement are substantially similar to the terms of the 2/1/13 Spread Acquisition Agreement and the 12/19/14 Spread Acquisition Agreement, except that the Company has only purchased ESS relating to Ginnie Mae MSRs under the 12/19/16 Spread Acquisition Agreement. Pursuant to the

12/19/16 Spread Acquisition Agreement, the Company may purchase from PLS, from time to time, the right to receive participation certificates representing beneficial ownership in ESS arising from Ginnie Mae MSRs acquired by PLS, in which case PLS generally would be required to service or subservice the related mortgage loans for Ginnie Mae. The primary purpose of the amendment and restatement was to facilitate the continued financing of the ESS owned by the Company in connection with the parties’ participation in the GNMA MSR Facility (as defined below).

To the extent PLS refinances any of the mortgage loans relating to the ESS the Company has acquired, the 12/19/16 Spread Acquisition Agreement also contains recapture provisions requiring that PLS transfer to the Company, at no cost, the ESS relating to a certain percentage of the unpaid principal balance of the newly originated mortgage loans. However, under the 12/19/16 Spread Acquisition Agreement, in any month where the transferred ESS relating to newly originated Ginnie Mae mortgage loans is not equivalent to at least 90% of the product of the excess servicing fee rate and the unpaid principal balance of the refinanced mortgage loans, PLS is also required to transfer additional ESS or cash in the amount of such shortfall. Similarly, in any month where the transferred ESS relating to modified Ginnie Mae mortgage loans is not equivalent to at least 90% of the product of the excess servicing fee rate and the unpaid principal balance of the modified mortgage loans, the 12/19/16 Spread Acquisition Agreement contains provisions that require PLS to transfer additional ESS or cash in the amount of such shortfall. To the extent the fair market value of the aggregate ESS to be transferred for the applicable month is less than $200,000, PLS may, at its option, wire cash to the Company in an amount equal to such fair market value in lieu of transferring such ESS.

PFSI held 75,000 of the Company’s common shares at both December 31, 2017 and December 31, 2016.

On December 19, 2016, the Company, through a wholly-owned subsidiary, PennyMac Holdings, LLC (“PMH”), entered into a master repurchase agreement with PLS (the “PMH Repurchase Agreement”), pursuant to which PMH may borrow from PLS for the purpose of financing PMH’s participation certificates representing beneficial ownership in ESS acquired from PLS under the 12/19/16 Spread Acquisition Agreement. PLS then re-pledges such participation certificates to PNMAC GMSR ISSUER TRUST (the “Issuer Trust”) under a master repurchase agreement by and among PLS, the Issuer Trust and Private National Mortgage Acceptance Company, LLC, as guarantor (the “PC Repurchase Agreement”). The Issuer Trust was formed for the purpose of allowing PLS to finance MSRs and ESS relating to such MSRs (the “GNMA MSR Facility”).

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

Before entering into the PMH Repurchase Agreement, PLS was a party to a repurchase agreement between it and Credit Suisse First Boston Mortgage Capital LLC (“CSFB”) (the “MSR Repo”), pursuant to which PLS financed Ginnie Mae MSRs and servicing advance receivables and pledged all of its rights and interests in any Ginnie Mae MSRs it owned to CSFB, and a separate acknowledgement agreement with respect thereto, by and among Ginnie Mae, CSFB and PLS.

In connection with the MSR Repo, the Company was party to an underlying loan and security agreement with PLS, pursuant to which the Company was able to borrow up to $150 million from PLS for the purpose of financing its investment in ESS (the “Underlying LSA”). The principal amount of the borrowings under the Underlying LSA was based upon a percentage of the market value of the ESS pledged to PLS, subject to the $150 million sublimit described above. Pursuant to the Underlying LSA, the Company granted to PLS a security interest in all of its right, title and interest in, to and under the ESS pledged to secure the borrowings, and PLS, in turn, re-pledged such ESS to CSFB under the MSR Repo. Interest accrued on the Company’s note relating to the Underlying LSA at a rate based on CSFB’s cost of funds under the MSR Repo. The underlying LSA was terminated in connection with the execution of the PMH Agreement.

Conditional Reimbursement of Initial Public Offering (“IPO”) Underwriting Fees

In connection with its IPO, the Company conditionally agreed to reimburse PCM up to $2.9 million for underwriting fees paid to the IPO underwriters by PCM on the Company’s behalf (the “Conditional Reimbursement”). Also in connection with its IPO, the Company agreed to pay the IPO underwriters up to $5.9 million in contingent underwriting fees.

The Company is a variable interest holder in various special purpose entities that relate to its mortgage loan transfer and financing activities. These entities are classified as VIEs for accounting purposes. The Company has distinguished its involvement with VIEs between those VIEs which the Company does not consolidate and those VIEs which the Company consolidates.

The following table summarizes cash flows between the Company and transferees in transfers of mortgage loans that are accounted for as sales where the Company maintains continuing involvement with the mortgage loans:

The following table summarizes UPB information for mortgage loans that are accounted for as sales for the dates presented:

The Company, through PMC, entered into CRT Agreements with Fannie Mae, pursuant to which PMC, through subsidiary trust entities, sells pools of mortgage loans into Fannie Mae-guaranteed securitizations while retaining the Recourse Obligations as part of the retention of an interest-only ownership interest in such mortgage loans. The mortgage loans subject to the CRT Agreements are transferred by PMC to subsidiary trust entities which sell the mortgage loans into Fannie Mae mortgage loan securitizations. Transfers of mortgage loans subject to CRT Agreements receive sale accounting treatment. The pledged cash represents the Company’s maximum contractual exposure to claims under its Recourse Obligations and is the sole source of settlement of losses under the CRT Agreements. Gains and losses on derivatives related to CRT Agreements are included in Net gain (loss) on investments in the consolidated statements of income.

On September 30, 2013, the Company completed a securitization transaction in which PMT Loan Trust 2013-J1, a VIE, issued $537.0 million in UPB of certificates backed by fixed-rate prime jumbo mortgage loans, at a 3.9% weighted yield. The fair value of the certificates retained by the Company was $9.7 million as of December 31, 2017. The Company includes the proceeds from issuance of the certificates to nonaffiliates in Asset backed financing of a variable interest entity at 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 the Manager has elected to carry the item at its fair value as discussed in the following paragraphs.

The Company groups its assets and liabilities at fair value in three levels, based on the markets in which the assets and liabilities are traded and the observability of the inputs used to determine fair value. These levels are:

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

The Manager identified all of the Company’s non-cash financial assets and MSRs relating to non-commercial real estate secured mortgage loans with initial interest rates of more than 4.5%, to be accounted for at fair value. The Manager has elected to account for these assets at fair value so such changes in fair value will be reflected in income as they occur and more timely reflect the results of the Company’s performance.

The Manager has also identified the Company’s asset-backed financing of a VIE and interest only security payable at fair value to be accounted for at fair value to reflect the generally offsetting changes in fair value of these borrowings to changes in fair value of mortgage loans at fair value collateralizing these financings. For other borrowings, the Manager has determined that historical cost accounting is more appropriate because under this method debt issuance costs are amortized over the term of the debt facility, thereby matching the debt issuance cost to the periods benefiting from the availability of the debt.

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

	December 31, 2017
	Level 1		Level 2		Level 3		Total
	(in thousands)
Assets:
Short-term investments	$	18,398	$	—	$	—	$	18,398
Mortgage-backed securities at fair value		—		989,461		—		989,461
Mortgage loans acquired for sale at fair value		—		1,261,380		8,135		1,269,515
Mortgage loans at fair value		—		321,040		768,433		1,089,473
Excess servicing spread purchased from PFSI		—		—		236,534		236,534
Derivative assets:
Interest rate lock commitments		—		—		4,859		4,859
CRT Agreements		—		—		98,640		98,640
Repurchase agreement derivatives		—		—		3,748		3,748
Forward purchase contracts		—		4,343		—		4,343
Forward sale contracts		—		387		—		387
MBS put options		—		3,170		—		3,170
Put options on interest rate futures		656		—		—		656
Total derivative assets before netting		656		7,900		107,247		115,803
Netting		—		—		—		(1,922	)
Total derivative assets after netting		656		7,900		107,247		113,881
Mortgage servicing rights at fair value		—		—		91,459		91,459
	$	19,054	$	2,579,781	$	1,211,808	$	3,808,721
Liabilities:
Asset-backed financing of a VIE at fair value	$	—	$	307,419	$	—	$	307,419
Interest-only security payable at fair value		—		—		7,070		7,070
Derivative liabilities:
Interest rate lock commitments		—		—		227		227
Forward purchase contracts		—		248		—		248
Forward sales contracts		—		2,830		—		2,830
Total derivative liabilities before netting		—		3,078		227		3,305
Netting		—		—		—		(1,999	)
Total derivative liabilities after netting		—		3,078		227		1,306
	$	—	$	310,497	$	7,297	$	315,795

	December 31, 2016
	Level 1		Level 2		Level 3		Total
	(in thousands)
Assets:
Short-term investments	$	122,088	$	—	$	—	$	122,088
Mortgage-backed securities at fair value		—		865,061		—		865,061
Mortgage loans acquired for sale at fair value		—		1,673,112		—		1,673,112
Mortgage loans at fair value		—		367,169		1,354,572		1,721,741
Excess servicing spread purchased from PFSI		—		—		288,669		288,669
Derivative assets:
Interest rate lock commitments		—		—		7,069		7,069
CRT Agreements		—		—		15,610		15,610
Forward purchase contracts		—		30,879		—		30,879
Forward sales contracts		—		13,164		—		13,164
MBS put options		—		1,697		—		1,697
MBS call options		—		142		—		142
Call options on interest rate futures		63		—		—		63
Put options on interest rate futures		2,469		—		—		2,469
Total derivative assets		2,532		45,882		22,679		71,093
Netting		—		—		—		(37,384	)
Total derivative assets after netting		2,532		45,882		22,679		33,709
Mortgage servicing rights at fair value		—		—		64,136		64,136
	$	124,620	$	2,951,224	$	1,730,056	$	4,768,516
Liabilities:
Asset-backed financing of the VIE at fair value	$	—	$	353,898	$	—	$	353,898
Interest-only security payable at fair value		—		—		4,114		4,114
Derivative liabilities:
Interest rate lock commitments		—		—		3,292		3,292
Forward purchase contracts		—		7,619		—		7,619
Forward sales contracts		—		17,974		—		17,974
Total derivative liabilities		—		25,593		3,292		28,885
Netting		—		—		—		(19,312	)
Total derivative liabilities after netting		—		25,593		3,292		9,573
	$	—	$	379,491	$	7,406	$	367,585

The following is a summary of changes in items measured at fair value on a recurring basis using Level 3 inputs that are significant to the estimation of the fair values of the assets and liabilities at either the beginning or end of the years presented:

	Year ended December 31, 2017
	Mortgage loans at fair value			Mortgage loans acquired for sale at fair value			Excess servicing spread			Interest rate lock commitments (1)			CRT Agreements			Repurchase agreement derivatives			Mortgage servicing rights			Total
	(in thousands)
Assets
Balance, December 31, 2016	$	1,354,572		$	5,682		$	288,669		$	3,777		$	15,610		$	—		$	64,136		$	1,732,446
Purchases and issuances		—			11,415			—			36,005			—			3,864			79			51,363
Repayments and sales		(530,367	)		(12,513	)		(54,980	)		—			(51,731	)		—			—			(649,591	)
Capitalization of interest		30,795			—			16,951			—			—			—			—			47,746
Capitalization of advances		18,923			—			—			—			—			—			—			18,923
ESS received pursuant to a recapture agreement with PFSI		—			—			5,244			—			—			—			—			5,244
Servicing received as proceeds from sales of mortgage loans		—			—			—			—			—			—			41,379			41,379
Changes in fair value included in income arising from:
Changes in instrument-specific credit risk		24,685			—			—			—			—			—			—			24,685
Other factors		(25,369	)		1,045			(19,350	)		45,304			134,761			(116	)		(14,135	)		122,140
		(684	)		1,045			(19,350	)		45,304			134,761			(116	)		(14,135	)		146,825
Transfers of mortgage loans to REO and real estate held for investment		(104,806	)		—			—			—			—			—			—			(104,806	)
Transfers of mortgage loans acquired for sale at fair value from "Level 2" to "Level 3" (2)		—			2,506			—			—			—			—			—			2,506
Transfers of interest rate lock commitments to mortgage loans acquired for sale		—			—			—			(80,454	)		—			—			—			(80,454	)
Balance, December 31, 2017	$	768,433		$	8,135		$	236,534		$	4,632		$	98,640		$	3,748		$	91,459		$	1,211,581
Changes in fair value recognized during the period relating to assets still held at December 31, 2017	$	(10,594	)	$	98		$	(19,350	)	$	4,632		$	83,030		$	(116	)	$	(14,135	)	$	43,565

	Year ended December 31, 2016
	Mortgage			Excess			Interest						Mortgage
	loans			servicing			rate lock			CRT			servicing
	at fair value			spread			commitments (1)			Agreements			rights			Total
	(in thousands)
Assets:
Balance, December 31, 2015	$	2,100,394		$	412,425		$	4,646		$	593		$	66,584		$	2,584,642
Purchases and issuances		—			—			71,892			—			2,739			74,631
Repayments and sales		(626,095	)		(129,037	)		—			(21,298	)		—			(776,430	)
Capitalization of interest		84,820			22,601			—			—			—			107,421
ESS received pursuant to a recapture agreement with PFSI		—			6,603			—			—			—			6,603
Servicing received as proceeds from sales of mortgage loans		—			—			—			—			7,337			7,337
Changes in fair value included in income arising from:
Changes in instrument- specific credit risk		26,910			—			—			—			—			26,910
Other factors		(30,414	)		(23,923	)		15,944			36,315			(12,524	)		(14,602	)
		(3,504	)		(23,923	)		15,944			36,315			(12,524	)		12,308
Transfers of mortgage loans to REO and real estate held for investment		(201,043	)		—			—			—			—			(201,043	)
Transfers of interest rate lock commitments to mortgage loans acquired for sale		—			—			(88,705	)		—			—			(88,705	)
Balance, December 31, 2016	$	1,354,572		$	288,669		$	3,777		$	15,610		$	64,136		$	1,726,764
Changes in fair value recognized during the period relating to assets still held at December 31, 2016	$	(15,877	)	$	(16,713	)	$	3,777		$	15,610		$	(12,524	)	$	(25,727	)

	Year ended December 31, 2015
	Mortgage			Excess			Interest					Mortgage
	loans			servicing			rate lock			CRT		servicing
	at fair value			spread			commitments (1)			Agreements		rights			Total
	(in thousands)
Assets:
Balance, December 31, 2014	$	2,199,583		$	191,166		$	5,661		$	—	$	57,358		$	2,453,768
Purchases and issuances		241,981			271,554			50,536			—		2,335			566,406
Repayments and sales		(218,585	)		(78,578	)		—			—		—			(297,163	)
Capitalization of interest		57,754			25,365			—			—		—			83,119
ESS received pursuant to a recapture agreement with PFSI		—			6,728			—			—		—			6,728
Servicing received as proceeds from sales of mortgage loans		—			—			—			—		13,963			13,963
Changes in fair value included in income arising from:
Changes in instrument-specific credit risk		42,267			—			—			—		—			42,267
Other factors		38,866			(3,810	)		(12,811	)		593		(7,072	)		15,766
		81,133			(3,810	)		(12,811	)		593		(7,072	)		58,033
Transfers of mortgage loans to REO		(285,331	)		—			—			—		—			(285,331	)
Transfers of mortgage loans at fair value from “Level 2” to “Level 3” (2)		23,859			—			—			—		—			23,859
Transfers of interest rate lock commitments to mortgage loans acquired for sale		—			—			(38,740	)		—		—			(38,740	)
Balance, December 31, 2015	$	2,100,394		$	412,425		$	4,646		$	593	$	66,584		$	2,584,642
Changes in fair value recognized during the period relating to assets still held at December 31, 2015	$	77,867		$	(3,810	)	$	4,646		$	593	$	(7,072	)	$	72,224

The Company had transfers among the fair value levels arising from transfers of IRLCs to mortgage loans held for sale at fair value upon purchase of the respective mortgage loans.

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

	December 31, 2017							December 31, 2016
	Fair value		Principal amount due upon maturity		Difference			Fair value		Principal amount due upon maturity		Difference
	(in thousands)
Mortgage loans acquired for sale at fair value:
Current through 89 days delinquent:	$	1,268,121	$	1,221,125	$	46,996		$	1,672,181	$	1,633,569	$	38,612
90 or more days delinquent:
Not in foreclosure		950		1,120		(170	)		145		189		(44	)
In foreclosure		444		496		(52	)		786		717		69
		1,394		1,616		(222	)		931		906		25
	$	1,269,515	$	1,222,741	$	46,774		$	1,673,112	$	1,634,475	$	38,637
Mortgage loans at fair value:
Mortgage loans held in a consolidated VIE:
Current through 89 days delinquent:	$	321,040	$	316,684	$	4,356		$	367,169	$	368,524	$	(1,355	)
90 or more days delinquent:
Not in foreclosure		—		—		—			—		—		—
In foreclosure		—		—		—			—		—		—
		—		—		—			—		—		—
		321,040		316,684		4,356			367,169		368,524		(1,355	)
Distressed mortgage loans at fair value:
Current through 89 days delinquent:		414,785		519,009		(104,224	)		611,584		818,665		(207,081	)
90 or more days delinquent:
Not in foreclosure		166,749		257,038		(90,289	)		305,431		425,460		(120,029	)
In foreclosure		186,899		267,911		(81,012	)		437,557		595,534		(157,977	)
		353,648		524,949		(171,301	)		742,988		1,020,994		(278,006	)
		768,433		1,043,958		(275,525	)		1,354,572		1,839,659		(485,087	)
	$	1,089,473	$	1,360,642	$	(271,169	)	$	1,721,741	$	2,208,183	$	(486,442	)

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:

	Year ended December 31, 2017
	Net gain on					Net
	mortgage					mortgage
	loans		Net			loan			Net gain
	acquired		interest			servicing			(loss) on
	for sale		income			fees			investments			Total
	(in thousands)
Assets:
Short-term investments	$	—	$	—		$	—		$	—		$	—
Mortgage-backed securities at fair value		—		5,367			—			5,498			10,865
Mortgage loans acquired for sale at fair value		97,940		—			—			—			97,940
Mortgage loans at fair value		—		32,239			—			3,582			35,821
ESS at fair value		—		16,951			—			(19,350	)		(2,399	)
MSRs at fair value		—		—			(14,135	)		—			(14,135	)
	$	97,940	$	54,557		$	(14,135	)	$	(10,270	)	$	128,092
Liabilities:
Interest-only security payable	$	—	$	—		$	—		$	2,956		$	2,956
Asset-backed financing of a VIE at fair value		—		(1,781	)		—			(3,426	)		(5,207	)
	$	—	$	(1,781	)	$	—		$	(470	)	$	(2,251	)

	Year ended December 31, 2016
	Net gain on					Net
	mortgage					mortgage
	loans		Net			loan			Net gain
	acquired		interest			servicing			(loss) on
	for sale		income (1)			fees			investments			Total
	(in thousands)
Assets:
Mortgage-backed securities at fair value	$	—	$	(2,391	)	$	—		$	(13,168	)	$	(15,559	)
Mortgage loans acquired for sale at fair value		55,350		—			—			—			55,350
Mortgage loans at fair value		—		86,114			—			(5,252	)		80,862
ESS at fair value		—		22,601			—			(23,923	)		(1,322	)
MSRs at fair value		—		—			(12,524	)		—			(12,524	)
	$	55,350	$	106,324		$	(12,524	)	$	(42,343	)	$	106,807
Liabilities:
Asset-backed financing of a VIE at fair value	$	—	$	(669	)	$	—		$	3,238		$	2,569
	$	—	$	(669	)	$	—		$	3,238		$	2,569

	Year ended December 31, 2015
	Net gain on					Net
	mortgage					mortgage
	loans		Net			loan			Net gain
	acquired		interest			servicing			(loss) on
	for sale		income (1)			fees			investments			Total
	(in thousands)
Assets:
Mortgage-backed securities at fair value	$	—	$	(35	)	$	—		$	(5,224	)	$	(5,259	)
Mortgage loans acquired for sale at fair value		71,880		—			—			—			71,880
Mortgage loans at fair value		—		59,007			—			70,470			129,477
ESS at fair value		—		25,365			—			3,239			28,604
MSRs at fair value		—		—			(7,072	)		—			(7,072	)
	$	71,880	$	84,337		$	(7,072	)	$	68,485		$	217,630
Liabilities:
Asset-backed financing of a VIE at fair value	$	—	$	(499	)	$	—		$	4,260		$	3,761
	$	—	$	(499	)	$	—		$	4,260		$	3,761

Following is a summary of the carrying value at year end for financial statement items that were re-measured at fair value on a nonrecurring basis during the years presented:

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

The Company evaluates its REO for impairment with reference to the respective properties’ fair values less cost to sell. The initial carrying value of the REO is measured at cost as indicated by the purchase price in the case of purchased REO or as measured by the fair value of the mortgage loan immediately before REO acquisition in the case of acquisition in settlement of a mortgage loan. REO may be subsequently revalued due to the Company receiving greater access to the property, the property being held for an extended period or receiving indications that the property’s fair value may not be supported by developing market conditions. Any subsequent change in fair value to a level that is less than or equal to the property’s cost is recognized in Results of real estate acquired in settlement of loans in the Company’s consolidated statements of income.

The Company evaluates its MSRs at lower of amortized cost or fair value for impairment with reference to the asset’s fair value. For purposes of performing its MSR impairment evaluation, the Company 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 with 50 basis point interest rate ranges for fixed-rate mortgage loans with interest rates between 3.0% and 4.5% and a single pool for mortgage loans with interest rates below 3.0%. MSRs relating to adjustable rate mortgage loans with initial interest rates of 4.5% or less 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, 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.

The Manager 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 the Manager deems recovery of fair value to be unlikely in the foreseeable future, a write-down of the cost of the MSRs for that stratum to its estimated recoverable value is charged to the valuation allowance.

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

The Manager has concluded that the fair values of Assets sold under agreements to repurchase, Mortgage loan participation purchase and sale agreements, Notes payable and Assets sold to PennyMac Financial Services, Inc. under agreements to repurchase approximate the agreements’ carrying values due to the borrowing agreements’ short terms and variable interest rates. The fair value of the Exchangeable senior notes at December 31, 2017 and December 31, 2016 was $244.9 million and $240.7 million, respectively. The fair value of the Exchangeable senior notes is estimated using a broker indication of fair value.

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

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

With respect to the Company’s non-IRLC “Level 3” fair value assets and liabilities, the FAV group reports to PCM’s valuation committee, which oversees and approves the valuations. The FAV group monitors the models used for valuation of the Company’s non-IRLC “Level 3” fair value assets and liabilities, including the models’ performance versus actual results, and reports those results to PCM’s valuation committee. During 2017, PCM’s valuation committee included PFSI’s executive chairman, chief executive, chief financial, chief enterprise operations, chief risk and deputy chief financial officers.

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

The fair value of the Company’s IRLCs is developed by the Manager’s Capital Markets Risk Management staff and is reviewed by the Manager’s Capital Markets Operations group.

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

The Company categorizes its current holdings of MBS as “Level 2” fair value assets. Fair value of these MBS is established based on quoted market prices for the Company’s MBS or similar securities. Changes in the fair value of MBS are included in Net gain (loss) on investments in the consolidated statements of income.

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

The valuation process for “Level 3” fair value mortgage loans includes the computation by stratum of the mortgage loans’ fair values 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 inputs such as interest rates, home prices, and delinquency status to assess the reasonableness of changes in the mortgage loan valuation.

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

The significant unobservable inputs used in the fair value measurement of the Company’s mortgage loans at fair value are discount rate, home price projections, voluntary prepayment speeds and default speeds. Significant changes in any of those inputs in isolation could result in a significant change to the mortgage loans’ fair value measurement. Increases in home price projections are generally accompanied by an increase in voluntary prepayment speeds. Changes in the fair value of mortgage loans at fair value are included in Net gain (loss) on investments in the consolidated statements of income.

Following is a quantitative summary of key inputs used in the valuation of mortgage loans at fair value (excluding loans held in a VIE):

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

Changes in the fair value of ESS are included in Net gain (loss) on investments in the consolidated statements of income.

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

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 or the MSR component of the IRLCs, in isolation, may result in a significant change in fair value. The financial effects of changes in these inputs are generally inversely correlated as increasing interest rates have a positive effect on the fair value of the MSR component of IRLC value, but increase the pull-through rate for the mortgage loan principal and interest payment cash flow component that has decreased in fair value. Changes in fair value of IRLCs are included in Net gain on mortgage loans acquired for sale in the consolidated statements of income.

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

The fair value of CRT Agreements is established based on whether the aggregation period has been completed and the CRT Agreements have been securitized. For securitized CRT Agreements, fair value is based on indications of fair value provided to the Company for the certificates representing the beneficial deposits securing the CRT Agreements, the Recourse Obligation and the IO ownership interest in these items. Fair value of the CRT derivative is derived by deducting the balance of the deposits securing the CRT Agreements from the indication of fair value provided by the nonaffiliated brokers. For CRT Agreements that have not been securitized, fair value is estimated using a discounted cash flow analysis. The Company classifies these derivatives as “Level 3” fair value assets. The significant unobservable inputs into the valuation of these derivatives are the prepayment and default rates of the underlying mortgage loans and discount rate. Changes in fair value of CRT Agreements are included in Net gain (loss) on investments.

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

The Company has a master repurchase agreement that includes incentives for financing mortgage loans approved for satisfying certain consumer relief characteristics. These incentives are classified as embedded derivatives for financial reporting purposes and are accounted for separate from the related repurchase agreements. The Company classifies these derivatives as “Level 3” fair value assets. The significant unobservable input into the valuation of these derivative assets is the Company’s ratio of derivative value to outstanding receivable due to time value of money and the expected approval rate of the mortgage loans financed under the master repurchase agreement. The ratio included in the Company’s fair value estimate was 97% at December 31, 2017.

The Company estimates the fair value of commitments to sell mortgage loans based on quoted MBS prices. Fair values of derivative financial instruments based on exchange traded market prices are categorized by the Company as “Level 1” fair value assets and liabilities; fair values of derivative financial instruments based on observable interest rates and volatilities in the MBS market are categorized by the Company as “Level 2” fair value assets and liabilities. Changes in the fair value of hedging derivatives are included in Net gain (loss) on investments, Net gain on mortgage loans acquired for sale, or Net mortgage loan servicing fees, as applicable, in the consolidated statements of income.

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

REO fair values are reviewed by the Manager’s staff appraisers when the Company obtains multiple indications of fair value and there is a significant difference between the fair values received. PCM’s staff appraisers will attempt to resolve the difference between the indications of fair value. In circumstances where the appraisers are not able to generate adequate data to support a fair value conclusion, the staff appraisers will order an additional appraisal to determine fair value. Changes in the fair value of REO are included in Results of real estate acquired in settlement of loans in the consolidated statements of income.

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

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

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

	Year ended December 31,
	2017				2016				2015
	Amortized cost		Fair value		Amortized cost		Fair value		Amortized cost		Fair value
	(MSR recognized and UPB of underlying mortgage loan amounts in thousands)
MSR recognized	$	248,930	$	41,379	$	267,755	$	7,337	$	140,511	$	13,963
Key inputs
UPB of underlying mortgage loans	$	19,982,686	$	3,724,642	$	22,068,577	$	752,850	$	12,195,574	$	1,430,795
Weighted-average annual servicing fee rate (in basis points)	25		25		25		26		25		25
Pricing spread (1)
Range	7.6% – 12.6%		7.6% – 7.6%		7.2% – 12.6%		7.2% – 7.6%		6.5% –17.5%		7.2% – 16.3%
Weighted average	7.6%		7.6%		7.5%		7.3%		7.9%		8.5%
Annual total prepayment speed (2)
Range	3.2% – 31.1%		7.9% – 29.5%		3.3% – 49.2%		7.2% – 38.0%		3.5% – 51.0%		6.8% – 34.2%
Weighted average	8.0%		10.7%		8.3%		14.5%		9.0%		12.3%
Life (in years)
Range	2.6 – 11.9		2.8 – 8.5		1.4 – 12.3		2.0 – 9.4		1.3 – 12.0		2.2 – 9.4
Weighted average		8.3	7.3			8.0	5.9			6.9		6.4
Annual per-loan cost of servicing
Range	$79 – $79		$79 – $79		$68 – $79		$68 – $82		$62 – $134		$62 – $68
Weighted average	$79		$79		$77		$73		$64		$65

Following is a quantitative summary of key inputs used in the valuation of MSRs as of the dates presented, and the effect on the fair value from adverse changes in those inputs:

	December 31, 2017				December 31, 2016
	Amortized cost		Fair value		Amortized cost		Fair value
	(Carrying value, UPB of underlying mortgage loans and effect on fair value amounts in thousands)
Carrying value	$	753,322	$	91,459	$	592,431	$	64,136
Key inputs:
UPB of underlying mortgage loans	$	63,853,606	$	8,273,696	$	50,539,707	$	5,763,957
Weighted-average annual servicing fee rate (in basis points)		25		25		25		25
Weighted-average note interest rate	3.9%		4.7%		3.8%		4.7%
Pricing spread (1)
Range	7.6% – 13.1%		7.6% – 12.6%		7.6% – 13.0%		7.6% – 12.6%
Weighted average	7.6%		7.6%		7.6%		7.6%
Effect on fair value of (2):
5% adverse change	$(11,848)		$(1,347)		$(10,018)		$(979)
10% adverse change	$(23,352)		$(2,655)		$(19,738)		$(1,929)
20% adverse change	$(45,379)		$(5,162)		$(38,330)		$(3,748)
Prepayment speed (3)
Range	7.1% – 27.1%		7.3% – 20.9%		6.7% – 25.7%		6.8% – 24.2%
Weighted average	8.4%		11.1%		7.7%		10.7%
Life (in years)
Range	2.9 - 8.0		3.1 - 6.8		3.1 - 8.5		3.2 - 7.0
Weighted average		7.6		6.8		8.0		7.0
Effect on fair value of (2):
5% adverse change	$(12,267)		$(1,954)		$(9,436)		$(1,379)
10% adverse change	$(24,120)		$(3,827)		$(18,578)		$(2,704)
20% adverse change	$(46,668)		$(7,352)		$(36,037)		$(5,202)
Annual per-loan cost of servicing
Range	$78 – $79		$77 – $79		$78 – $79		$77 – $79
Weighted average	$79		$79		$79		$79
Effect on fair value of (2):
5% adverse change	$(5,721)		$(744)		$(4,650)		$(555)
10% adverse change	$(11,441)		$(1,488)		$(9,300)		$(1,110)
20% adverse change	$(22,883)		$(2,976)		$(18,600)		$(2,220)

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

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:

The Company is not approved by Ginnie Mae as an issuer of Ginnie Mae-guaranteed securities which are backed by government-insured or guaranteed mortgage loans. The Company transfers government-insured or guaranteed mortgage loans that it purchases from correspondent sellers to PLS, which is a Ginnie Mae-approved issuer, and earns a sourcing fee ranging from two to three and one-half basis points, generally based on the average number of calendar days that mortgage loans are held prior to purchase by PLS.

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 Manager determination that such a sale represents the most advantageous liquidation strategy for the identified mortgage loan.

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

	December 31, 2017				December 31, 2016
Loan type	Fair value		Unpaid principal balance		Fair value		Unpaid principal balance
	(in thousands)
Distressed mortgage loans:
Nonperforming mortgage loans	$	353,648	$	524,949	$	742,988	$	1,020,994
Performing mortgage loans:
Interest rate step-up		189,724		242,335		232,700		317,409
Fixed interest rate		186,929		236,840		296,901		408,943
Adjustable-rate/hybrid		38,132		39,834		81,983		92,313
		414,785		519,009		611,584		818,665
		768,433		1,043,958		1,354,572		1,839,659
Fixed interest rate jumbo mortgage loans held in a VIE		321,040		316,684		367,169		368,524
	$	1,089,473	$	1,360,642	$	1,721,741	$	2,208,183
Mortgage loans at fair value pledged to secure:
Assets sold under agreements to repurchase	$	760,853			$	1,345,021
Asset-backed financing of a VIE at fair value		321,040				367,169
	$	1,081,893			$	1,712,190

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

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

	December 31, 2017								December 31, 2016
			Fair value								Fair value
	Notional		Derivative			Derivative			Notional		Derivative			Derivative
Instrument	amount		assets			liabilities			amount		assets			liabilities
	(in thousands)
Derivatives not designated as hedging instruments:
Not subject to master netting arrangements:
Interest rate lock commitments		1,250,803	$	4,859		$	227			1,420,468	$	7,069		$	3,292
CRT Agreements		26,845,392		98,640			—			14,379,850		15,610			—
Repurchase agreement derivatives				3,748			—					—			—
Subject to master netting agreements─used for hedging purposes:
Forward purchase contracts		1,996,235		4,343			248			4,840,707		30,879			7,619
Forward sale contracts		2,565,271		387			2,830			6,148,242		13,164			17,974
MBS put options		2,375,000		3,170			—			925,000		1,697			—
MBS call options		—		—			—			750,000		142			—
Call options on interest rate futures		—		—			—			200,000		63			—
Put options on interest rate futures		550,000		656			—			550,000		2,469			—
Swap futures		275,000		—			—			150,000		—			—
Eurodollar future sale contracts		937,000		—			—			1,351,000		—			—
Total derivative instruments before netting				115,803			3,305					71,093			28,885
Netting				(1,922	)		(1,999	)				(37,384	)		(19,312	)
			$	113,881		$	1,306				$	33,709		$	9,573
Margin deposits placed with (received from) derivatives counterparties included in Other assets (Accounts payable and accrued liabilities)			$	76							$	(18,071	)
Derivative assets pledged to secure assets sold under agreements to repurchase			$	26,058							$	9,078

The following tables summarize the notional amount activity for derivative contracts used to hedge the Company’s MBS, inventory of mortgage loans acquired for sale, mortgage loans at fair value held in a VIE, IRLCs and MSRs.

The Company has elected to net derivative asset and liability positions, and cash collateral obtained from (or posted 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, CRT Agreement derivatives and repurchase agreement derivatives. As of December 31, 2017 and December 31, 2016, the Company did not enter into reverse repurchase agreements or securities lending transactions that are required to be disclosed in the following tables.

	December 31, 2017								December 31, 2016
	Gross amounts of recognized assets		Gross amounts offset in the consolidated balance sheet			Net amounts of assets presented in the consolidated balance sheet			Gross amounts of recognized assets		Gross amounts offset in the consolidated balance sheet			Net amounts of assets presented in the consolidated balance sheet
	(in thousands)
Derivative assets
Not subject to master netting arrangements:
Interest rate lock commitments	$	4,859	$	—		$	4,859		$	7,069	$	—		$	7,069
CRT Agreement derivatives		98,640		—			98,640			15,610		—			15,610
Repurchase agreement derivatives		3,748		—			3,748			—		—			—
		107,247		—			107,247			22,679		—			22,679
Subject to master netting arrangements:
Forward purchase contracts		4,343		—			4,343			30,879		—			30,879
Forward sale contracts		387		—			387			13,164		—			13,164
MBS put options		3,170		—			3,170			1,697		—			1,697
MBS call options		—		—			—			142		—			142
Call options on interest rate futures		—		—			—			63		—			63
Put options on interest rate futures		656		—			656			2,469		—			2,469
Netting		—		(1,922	)		(1,922	)		—		(37,384	)		(37,384	)
		8,556		(1,922	)		6,634			48,414		(37,384	)		11,030
	$	115,803	$	(1,922	)	$	113,881		$	71,093	$	(37,384	)	$	33,709

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

	December 31, 2017								December 31, 2016
	Net amount		Gross amounts						Net amount		Gross amounts
	of assets		not offset in the						of assets		not offset in the
	presented		consolidated						presented		consolidated
	in the		balance sheet						in the		balance sheet
	consolidated				Cash				consolidated				Cash
	balance		Financial		collateral		Net		balance		Financial		collateral		Net
	sheet		instruments		received		amount		sheet		instruments		received		amount
	(in thousands)
CRT Agreements	$	98,640	$	—	$	—	$	98,640	$	15,610	$	—	$	—	$	15,610
Interest rate lock commitments		4,859		—		—		4,859		7,069		—		—		7,069
Repurchase agreement derivatives		3,748		—		—		3,748		—		—		—		—
JPMorgan Chase & Co.		2,020		—		—		2,020		—		—		—		—
Federal National Mortgage Association		1,606		—		—		1,606		—		—		—		—
Credit Suisse		809		—		—		809		—		—		—		—
RJ O’Brien & Associates, LLC		656		—		—		656		1,531		—		—		1,531
Morgan Stanley Bank, N.A.		457		—		—		457		—		—		—		—
Citibank		429		—		—		429		—		—		—		—
Mitsubishi UFJ Sec		193		—		—		193		664		—		—		664
Jefferies Group LLC		160		—		—		160		967		—		—		967
Wells Fargo Bank, N.A.		146		—		—		146		638		—		—		638
Bank of America, N.A.		—		—		—		—		1,881		—		—		1,881
Royal Bank of Canada		—		—		—		—		1,194		—		—		1,194
Goldman Sachs		—		—		—		—		1,164		—		—		1,164
Barclays Capital		—		—		—		—		855		—		—		855
Other		158		—		—		158		2,136		—		—		2,136
	$	113,881	$	—	$	—	$	113,881	$	33,709	$	—	$	—	$	33,709

Following is a summary of net derivative liabilities and assets sold under agreements to repurchase. Assets sold under agreements to repurchase do not qualify for setoff accounting.

	December 31, 2017									December 31, 2016
	Gross amounts of recognized liabilities			Gross amounts offset in the consolidated balance sheet			Net amounts of liabilities presented in the consolidated balance sheet			Gross amounts of recognized liabilities			Gross amounts offset in the consolidated balance sheet			Net amounts of liabilities presented in the consolidated balance sheet
	(in thousands)
Derivative liabilities:
Not subject to master netting arrangements:
Interest rate lock commitments	$	227		$	—		$	227		$	3,292		$	—		$	3,292
		227			—			227			3,292			—			3,292
Subject to master netting arrangements:
Forward purchase contracts		248			—			248			7,619			—			7,619
Forward sales contracts		2,830			—			2,830			17,974			—			17,974
Netting		—			(1,999	)		(1,999	)		—			(19,312	)		(19,312	)
		3,078			(1,999	)		1,079			25,593			(19,312	)		6,281
		3,305			(1,999	)		1,306			28,885			(19,312	)		9,573
Assets sold under agreements to repurchase:
UPB		3,182,504			—			3,182,504			3,784,685			—			3,784,685
Unamortized debt issuance costs		(1,618	)		—			(1,618	)		(684	)		—			(684	)
		3,180,886			—			3,180,886			3,784,001			—			3,784,001
	$	3,184,191		$	(1,999	)	$	3,182,192		$	3,812,886		$	(19,312	)	$	3,793,574

Derivative Liabilities, Financial Liabilities and Collateral Pledged by Counterparty

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

	December 31, 2017										December 31, 2016
	Net amount			Gross amounts							Net amount			Gross amounts
	of liabilities			not offset in the							of liabilities			not offset in the
	presented			consolidated							presented			consolidated
	in the			balance sheet							in the			balance sheet
	consolidated						Cash				consolidated						Cash
	balance			Financial			collateral		Net		balance			Financial			collateral		Net
	sheet			instruments			pledged		amount		sheet			instruments			pledged		amount
	(in thousands)
Interest rate lock commitments	$	227		$	—		$	—	$	227	$	3,292		$	—		$	—	$	3,292
Bank of America, N.A.		839,057			(838,771	)		—		286		847,683			(847,683	)		—		—
Credit Suisse First Boston Mortgage Capital LLC		845,567			(845,567	)		—		—		1,181,441			(1,181,235	)		—		206
Deutsche Bank		374,526			(374,526	)		—		—		—			—			—		—
JPMorgan Chase & Co.		373,186			(373,186	)		—		—		544,009			(542,542	)		—		1,467
Citibank		235,541			(235,319	)		—		222		575,092			(573,589	)		—		1,503
Morgan Stanley Bank, N.A.		164,530			(164,530	)		—		—		143,951			(142,055	)		—		1,896
Daiwa Capital Markets		153,833			(153,730	)		—		103		177,316			(177,077	)		—		239
Royal Bank of Canada		92,014			(91,805	)		—		209		63,926			(63,926	)		—		—
Wells Fargo, N.A.		50,360			(50,360	)		—		—		116,648			(116,648	)		—		—
BNP Paribas		45,411			(45,411	)		—		—		47,785			(47,134	)		—		651
Barclays Capital		9,374			(9,299	)		—		75		92,796			(92,796	)		—		—
Federal National Mortgage Association		—			—			—		—		312			—			—		312
Other		184			—			—		184		7			—			—		7
Unamortized debt issuance costs		(1,618	)		1,618			—		—		(684	)		684			—		—
	$	3,182,192		$	(3,180,886	)	$	—	$	1,306	$	3,793,574		$	(3,784,001	)	$	—	$	9,573

Following are the net gains (losses) recognized by the Company on derivative financial instruments and the consolidated statements of income line items where such gains and losses are included:

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

	Year ended December 31,
	2017			2016			2015
	(in thousands)
Amortized Cost:
Balance at beginning of year	$	606,103		$	404,101		$	308,137
MSRs resulting from mortgage loan sales		248,930			267,755			140,511
Amortization		(81,624	)		(65,647	)		(43,982	)
Sales		(539	)		(106	)		(565	)
Balance at end of year		772,870			606,103			404,101
Valuation Allowance:
Balance at beginning of year		(13,672	)		(10,944	)		(7,715	)
Additions to valuation allowance		(5,876	)		(2,728	)		(3,229	)
Balance at end of year		(19,548	)		(13,672	)		(10,944	)
MSRs, net	$	753,322		$	592,431		$	393,157
Fair value at beginning of year	$	626,334		$	424,154		$	322,230
Fair value at end of year	$	772,940		$	626,334		$	424,154
At the end of year:
MSRs carried at lower of cost or fair value pledged to secure:
Assets sold under agreements to repurchase	$	584,762		$	—
Notes payable		156,846			592,431
	$	741,608		$	592,431

The following table summarizes the Company’s estimate of future amortization of its existing MSRs carried at amortized cost. This estimate was developed with the inputs used in the December 31, 2017 valuation of MSRs. The inputs 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.

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

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

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

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

The amount at risk (the fair value of the assets pledged plus the related margin deposit, less the amount advanced by the counterparty and interest payable) and maturity information relating to the Company’s assets sold under agreements to repurchase is summarized by pledged asset and counterparty below as of December 31, 2017:

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

Certain borrowing facilities secured by mortgage loans acquired for sale are in the form of mortgage loan participation purchase and sale agreements. Participation certificates, each of which represents an undivided beneficial ownership interest in a pool of mortgage loans that have been pooled with Fannie Mae or Freddie Mac, are sold to a lender pending the securitization of such mortgage loans and the sale of the resulting security. The commitment between the Company and a nonaffiliate to sell such security is also assigned to the lender at the time a participation certificate is sold.

The purchase price paid by the lender for each participation certificate is based on the trade price of the security, plus an amount of interest expected to accrue on the security to its anticipated delivery date, minus a present value adjustment, any related hedging costs and a holdback amount. The holdback amount is based on a percentage of the purchase price and is not required to be paid to the Company until the settlement of the security and its delivery to the lender.

On March 24, 2017, the Company, through PMC and PMH, entered into a Loan and Security Agreement with Barclays Bank PLC (“Barclays”), pursuant to which PMC and PMH may finance certain mortgage servicing rights (inclusive of any related excess servicing spread arising therefrom and that may be transferred from PMC to PMH from time to time) relating to mortgage loans pooled into Freddie Mac securities (collectively, the “Freddie MSRs”), in an aggregate loan amount not to exceed $170 million, all of which is committed. The note matures on February 1, 2018, subject to a wind down period of up to one year following such maturity date.

On March 24, 2017, the Company, through PMC and PMH, entered into a second Amended and Restated Loan and Security Agreement with Citibank, N.A., pursuant to which PMC and PMH finance certain MSRs (inclusive of any related excess servicing spread and/or junior excess strips arising therefrom and that may be transferred from PMC to PMH from time to time) relating to mortgage loans pooled into Fannie Mae securities (collectively, the “Fannie MSRs”) in an aggregate loan amount not to exceed $400 million, all of which is committed. The note was terminated in December 2017.

Following is a summary of financial information relating to the asset-backed financing of a VIE:

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

PMC issued in a private offering $250 million aggregate principal amount of exchangeable senior notes (“Exchangeable Notes”) due May 1, 2020. The Exchangeable Notes bear interest at a rate of 5.375% per year, payable semiannually. The Exchangeable Notes are exchangeable into common shares of the Company at a rate of 33.8667 common shares per $1,000 principal amount of the Exchangeable Notes as of December 31, 2017, which is an increase over the initial exchange rate of 33.5149. The increase in the calculated exchange rate was the result of quarterly cash dividends exceeding the quarterly dividend threshold amount of $0.57 per share in prior reporting periods, as provided in the related indenture.

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

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 December 31, 2017, 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.

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

During March 2017, the Company issued 4.6 million of its 8.125% Series A Fixed-to-Floating Rate Cumulative Redeemable Preferred Shares of Beneficial Interest, $0.01 par value per share (“Series A Preferred Shares” and, together with the Series B Preferred Shares, the “Preferred Shares”). From, and including, the date of original issuance to, but not including, March 15, 2024, the Company pays cumulative dividends on the Series A Preferred Shares at a fixed rate of 8.125% per annum based on the $25.00 per share liquidation preference. From, and including, March 15, 2024 and thereafter, the Company will pay cumulative dividends on the Series A Preferred Shares at a floating rate equal to three-month LIBOR as calculated on each applicable dividend determination date plus a spread of 5.831% per annum based on the $25.00 per share liquidation preference. The Company paid dividends of $1.59 per Series A Preferred Share during the year ended December 31, 2017.

The Series A Preferred Shares will not be redeemable before March 15, 2024, except in connection with the Company’s qualification as a REIT for U.S. federal income tax purposes or upon the occurrence of a change of control of the Company as described in the prospectus supplement filed with the SEC on March 6, 2017. On or after March 15, 2024 or within 120 days of the occurrence of a change in control, the Company may, at its option, redeem any or all of the Series A Preferred Shares at $25.00 per share plus any accumulated and unpaid dividends thereon to, but not including, the redemption date.

During July 2017, the Company issued 7.8 million of its 8.00% Series B Fixed-to-Floating Rate Cumulative Redeemable Preferred Shares of Beneficial Interest, $0.01 par value per share (the “Series B Preferred Shares”). From, and including, the date of original issuance to, but not including, June 15, 2024, the Company pays cumulative dividends on the Series B Preferred Shares at a fixed rate of 8.00% per annum based on the $25.00 per share liquidation preference, or $2.00 per share. From, and including, June 15, 2024 and thereafter, the Company will pay cumulative dividends on the Series B Preferred Shares at a floating rate equal to three-month LIBOR as calculated on each applicable dividend determination date plus a spread of 5.99% per annum based on the $25.00 per share liquidation preference. The Company paid dividends of $0.89 per Series B Preferred Share for the year ended December 31, 2017.

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

The Company will pay quarterly cumulative dividends on its Preferred Shares on the 15th day of each March, June, September and December, provided that if any dividend payment date is not a business day, then the dividend that would otherwise be payable on that dividend payment date may be paid on the following business day. The Preferred Shares have no stated maturity, are not subject to any sinking fund or mandatory redemption and will remain outstanding indefinitely unless redeemed or repurchased by the Company or converted into common shares in connection with a change of control by the holders of the Preferred Shares.

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

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

As more fully described in Note 4—Transactions with Related Parties, on February 1, 2013, the Company entered into a Reimbursement Agreement, by and among the Company, the Operating Partnership and PCM. The Reimbursement Agreement provides that, to the extent the Company is required to pay PCM performance incentive fees under the management agreement, the Company will reimburse PCM for underwriting costs it paid on the IPO offering date at a rate of $10 in reimbursement for every $100 of performance incentive fees earned. The 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 Company paid reimbursements totaling $30,000, $0 and $237,000 during the years ended December 31, 2017, 2016 and 2015, respectively.

The Reimbursement Agreement also provides for the payment to the IPO underwriters of the amount that the Company agreed to pay to them at the time of the IPO if the Company satisfied certain performance measures over a specified period of time. As PCM earns performance incentive fees under the management agreement, the IPO underwriters will be paid at a rate of $20 of payments for every $100 of performance incentive fees earned by PCM. The 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. The Company made payments under the Reimbursement Agreement totaling $61,000,$0, and $473,000 during the years ended December 31, 2017, 2016 and 2015, respectively. The Reimbursement Agreement expires on February 1, 2019.

		Year ended December 31,
		2017			2016			2015
	(in thousands)
From non-affiliates:
Cash loss:
Mortgage loans		$	(209,898	)	$	(229,743	)	$	(84,489	)
Hedging activities			(15,288	)		30,927			(17,742	)
			(225,186	)		(198,816	)		(102,231	)
Non cash gain:
Receipt of MSRs in mortgage loan sale transactions			290,309			275,092			154,474
Provision for losses relating to representations and warranties provided in mortgage loan sales
Pursuant to mortgage loans sales			(3,147	)		(3,254	)		(5,771	)
Reduction in liability due to change in estimate			9,679			7,564			—
Change in fair value of financial instruments held at period end:
IRLCs			855			(869	)		(1,015	)
Mortgage loans			5,879			(1,846	)		(2,977	)
Hedging derivatives			(15,957	)		19,347			961
			(9,223	)		16,632			(3,031	)
Total from non-affiliates			62,432			97,218			43,441
From PFSI—cash gain			12,084			9,224			7,575
		$	74,516		$	106,442		$	51,016

		Year ended December 31,
		2017		2016		2015
	(in thousands)
Interest income:
From nonaffiliates:
Short-term investments		$	576	$	923	$	815
Mortgage-backed securities			29,438		14,663		10,267
Mortgage loans acquired for sale at fair value			53,164		54,750		48,281
Mortgage loans at fair value:
Distressed			63,613		107,044		96,536
Held in a VIE			14,425		17,042		19,903
Placement fees relating to custodial funds			12,517		4,058		—
Deposits securing CRT Agreements			4,291		930		—
Other			201		111		178
			178,225		199,521		175,980
From PFSI—ESS			16,951		22,601		25,365
			195,176		222,122		201,345
Interest expense:
To nonaffiliates:
Assets sold under agreements to repurchase (1)			93,580		92,838		79,869
Mortgage loan participation purchase and sale agreements			1,593		1,376		1,001
FHLB advances			—		122		275
Notes payable			12,634		12,892		6,826
Asset-backed financings of VIEs at fair value (2)			13,184		12,091		13,754
Exchangeable Notes			14,535		14,473		14,413
Interest shortfall on repayments of mortgage loans serviced for Agency securitizations			5,928		6,812		4,207
Interest on mortgage loan impound deposits			1,879		1,334		1,020
			143,333		141,938		121,365
To PFSI—Assets sold under agreement to repurchase			8,038		7,830		3,343
			151,371		149,768		124,708
Net interest income		$	43,805	$	72,354	$	76,637

The Company has adopted an equity incentive plan which provides for the issuance of equity based awards, including share options, restricted shares, restricted share units, unrestricted common share awards, LTIP units (a special class of partnership interests in the Operating Partnership) and other awards based on PMT’s common shares that may be made by the Company directly to its officers and trustees, and the members, officers, trustees, directors and employees of PCM, PFSI, or their affiliates and to PCM, PFSI and other entities that provide services to PMT and the employees of such other entities.

The equity incentive plan is administered by the Company’s compensation committee, pursuant to authority delegated by the board of trustees, which has the authority to make awards to the eligible participants referenced above, and to determine what form the awards will take, and the terms and conditions of the awards.

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

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

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

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

		Year ended December 31,
		2017			2016			2015
	(in thousands except per unit amounts)
Number of units:
Outstanding at beginning of year			765			734			725
Granted			262			330			312
Vested			(284	)		(299	)		(302	)
Canceled or forfeited			(50	)		—			(1	)
Outstanding at end of year			693			765			734
Weighted average grant date fair value per unit:
Outstanding at beginning of year		$	16.19		$	21.26		$	21.00
Granted		$	15.25		$	10.46		$	21.06
Vested		$	18.37		$	18.46		$	19.65
Canceled or forfeited		$	16.12		$	—		$	21.29
Outstanding at end of year		$	15.50		$	16.19		$	21.26
Compensation expense recorded during the year		$	4,904		$	5,748		$	6,346
Fair value of vested units during the year		$	5,219		$	5,510		$	5,929
Year end:
Units available for future awards (1)			4,269
Unamortized compensation cost		$	2,954

The Company has elected to be taxed as a REIT for U.S. federal income tax purposes under Sections 856 through 860 of the Internal Revenue Code. Therefore, PMT generally will not be subject to corporate federal or state income tax to the extent that qualifying distributions are made to shareholders and the Company meets the REIT requirements including the asset, income, distribution and share ownership tests. The Company believes that it has met the distribution requirements, as it has declared dividends sufficient to distribute substantially all of its taxable income. Taxable income will generally differ from net income. The primary differences between net income and the REIT taxable income (before deduction for qualifying distributions) are the taxable income of the TRS and the method of determining the income or loss related to valuation of the mortgage loans owned by the qualified REIT subsidiary.

In general, cash dividends declared by the Company will be considered ordinary income to the shareholders for income tax purposes. Some portion of the dividends may be characterized as capital gain distributions or a return of capital. For tax years beginning after December 31, 2017, the Tax Act (subject to certain limitations) provides a 20% deduction from taxable income for ordinary REIT dividends. The approximate tax characterization of the Company’s distributions is as follows:

The Company had elected to treat two of its subsidiaries as TRSs. In the quarter ended September 30, 2012, the Company revoked the election to treat its wholly owned subsidiary that is the sole general partner of the Operating Partnership as a TRS. As a result, beginning September 1, 2012, one subsidiary, PMC, is treated as a TRS. Income from a TRS is only included as a component of REIT taxable income to the extent that the TRS makes dividend distributions of income to the Company. Before 2017, the TRS had made no such distributions to the Company. In 2017, the TRS made a $20 million distribution that resulted in dividend income to the Company. A TRS is subject to corporate federal and state income tax. Accordingly, a provision for income taxes for PMC and, for the periods for which TRS treatment had been elected, the sole general partner of the Operating Partnership is included in the Consolidated Statements of Income.

The Company’s tax expense for the year ended December 31, 2017 was significantly impacted by the enactment on December 22, 2017 of H.R. 1, known as the Tax Cuts and Jobs Act (the “Tax Act”). The Tax Act reduces the U.S. federal corporate tax rate to 21% from the previous maximum rate of 35%, effective January 1, 2018.

GAAP requires that the impact of tax legislation be recognized in the period in which the law was enacted. In the fourth quarter of 2017, the Company recorded a tax benefit of $13.0 million due to a re-measurement of deferred tax assets and liabilities of the TRS resulting from a decrease in the federal tax rate. The re-measurement of the deferred tax assets and liabilities is predominantly based on a reduction to the Federal rate as described above, which will result in lower tax expense when these deferred tax assets and liabilities are realized. The Manager is not aware of any areas of significant interpretation or judgment in the calculation of this benefit; however, if any additional interpretive guidance is released from taxing authorities or accounting standard setters, it is possible these amounts could change the calculation of the tax benefit in future reporting periods.

The Company files U.S. federal and state income tax returns for both the REIT and TRS. These federal income tax returns for 2014 and forward are subject to examination. The Company’s state income tax returns are generally subject to examination for 2013 and forward. The TRS New York state income tax returns for tax years 2013 through 2015 are currently under examination and the Company does not expect any material changes.

The following table details the Company’s provision for (benefit from) income taxes which relates primarily to the TRS for the years presented:

The following table is a reconciliation of the Company’s provision for (benefit from) income taxes at statutory rates to the provision for (benefit from) income taxes at the Company’s effective rate for the years presented:

The Company’s components of the provision for (benefit from) deferred income taxes are as follows:

The tax effects of temporary differences that gave rise to deferred income tax assets and liabilities are presented below:

The net deferred income tax liability is included in Income taxes payable in the consolidated balance sheets.

The Company has net operating loss carryforwards of $131.5 million and $152.1 million at December 31, 2017 and December 31, 2016, respectively, that expire between 2033 and 2036.

At December 31, 2017 and December 31, 2016, the Company had no unrecognized tax benefits and does not anticipate any increase in unrecognized tax benefits. Should the accrual of any interest or penalties relative to unrecognized tax benefits be necessary, it is the Company’s policy to record such accruals in the Company’s income tax accounts. No such accruals existed at December 31, 2017 and December 31, 2016.

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

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

Diluted earnings per share is determined by dividing net income attributable to diluted shareholders, which adds back to net income the interest expense, net of applicable income taxes, on the Company’s Exchangeable Notes, by the weighted-average common shares outstanding, assuming all dilutive securities were issued.

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

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

During the year ended December 31, 2017, the Company changed the composition of its operating segments. The reporting used by the Company’s chief operating decision maker has changed as the Company’s investment activities have become more diversified. The Manager has focused this broadened investment base on two classes of investments: credit sensitive and interest rate sensitive mortgage related assets. As this focus has developed, the Manager’s reporting on and management of the Company’s investments has also developed along these lines. Accordingly, during the year ended December 31, 2017, the Manager re-evaluated this new information in relation to its definition of its operating segments and has redefined its segment reporting to separately distinguish its investment activities between credit sensitive and interest rate sensitive investments and certain corporate activities.

Credit sensitive investment strategies include investments in distressed mortgage loans, REO, CRT Agreements, non-Agency subordinated bonds and small balance commercial real estate mortgage loans. Interest rate sensitive strategies include investments in MSRs, ESS, Agency and senior non-Agency MBS and the related interest rate hedging activities. The corporate segment includes certain interest income, management fee and corporate expense amounts.

Segment results for the year ended December 31, 2016 and 2015 have been restated to conform prior year presentation to the new segment composition.

				Credit			Interest rate
	Correspondent			sensitive			sensitive
Year ended December 31, 2017	production			strategies			strategies			Corporate			Total
	(in thousands)
Net investment income:
Net gain (loss) on investments	$	—		$	123,774		$	(27,390	)	$	—		$	96,384
Net gain on mortgage loans acquired for sale		74,308			208			—			—			74,516
Net mortgage loan servicing fees		—			134			69,106			—			69,240
Net interest income:
Interest income		52,522			69,008			72,870			776			195,176
Interest expense		(35,128	)		(53,434	)		(62,809	)		—			(151,371	)
		17,394			15,574			10,061			776			43,805
Other income (loss)		40,279			(6,290	)		—			6			33,995
		131,981			133,400			51,777			782			317,940
Expenses:
Mortgage loan fulfillment and servicing fees payable to PFSI		80,366			15,611			27,446			—			123,423
Management fees		—			—			—			22,584			22,584
Other		8,677			15,575			1,648			21,487			47,387
		89,043			31,186			29,094			44,071			193,394
Pre-tax income (loss)	$	42,938		$	102,214		$	22,683		$	(43,289	)	$	124,546
Total assets at year end	$	1,302,245		$	1,791,447		$	2,414,423		$	96,818		$	5,604,933

				Credit			Interest rate
	Correspondent			sensitive			sensitive
Year ended December 31, 2016	production			strategies			strategies			Corporate			Total
	(in thousands)
Net investment income:
Net gain (loss) on investments	$	—		$	30,418		$	(23,243	)	$	—		$	7,175
Net gain on mortgage loans acquired for sale		107,126			(684	)		—			—			106,442
Net mortgage loan servicing fees		—			6			54,783			—			54,789
Net interest income:
Interest income		53,943			109,986			57,542			651			222,122
Interest expense		(34,630	)		(62,707	)		(52,431	)		—			(149,768	)
		19,313			47,279			5,111			651			72,354
Other income (loss)		42,091			(10,763	)		—			—			31,328
		168,530			66,256			36,651			651			272,088
Expenses:
Mortgage loan fulfillment and servicing fees payable to PFSI		86,488			29,601			20,991			—			137,080
Management fees		—			—			—			20,657			20,657
Other		8,200			19,367			1,619			23,402			52,588
		94,688			48,968			22,610			44,059			210,325
Pre-tax income (loss)	$	73,842		$	17,288		$	14,041		$	(43,408	)	$	61,763
Total assets at year end	$	1,734,290		$	2,288,886		$	2,177,024		$	157,302		$	6,357,502

				Credit			Interest rate
	Correspondent			sensitive			sensitive
Year ended December 31, 2015	production			strategies			strategies			Corporate			Total
	(in thousands)
Net investment income:
Net gain (loss) on investments	$	—		$	81,992		$	(28,007	)		—		$	53,985
Net gain on mortgage loans acquired for sale		51,223			(207	)		—			—			51,016
Net mortgage loan servicing fees		—			—			49,319			—			49,319
Net interest income:
Interest income		48,281			98,061			54,400			603			201,345
Interest expense		(28,005	)		(60,438	)		(36,265	)		—			(124,708	)
		20,276			37,623			18,135			603			76,637
Other income		28,901			(11,093	)		—			—			17,808
		100,400			108,315			39,447			603			248,765
Expenses:
Mortgage loan fulfillment and servicing fees payable to PFSI		58,607			28,575			17,848			—			105,030
Management fees		—			—			—			24,194			24,194
Other		5,403			13,702			1,083			26,049			46,237
		64,010			42,277			18,931			50,243			175,461
Pre-tax income (loss)	$	36,390		$	66,038		$	20,516		$	(49,640	)	$	73,304
Total assets at year end	$	1,298,968		$	2,787,064		$	1,640,062		$	100,830		$	5,826,924

	Quarter ended
	2017								2016
	Dec. 31		Sept. 30		June 30		Mar. 31		Dec. 31		Sept. 30		June 30			Mar. 31
	(dollars in thousands, except per share data)
Net investment income	$	93,703	$	75,804	$	83,959	$	64,474	$	68,928	$	103,326	$	47,618		$	52,216
Net income (loss)	$	40,838	$	19,395	$	28,780	$	28,737	$	31,174	$	35,408	$	(5,267	)	$	14,496
Earnings (loss) per share:
Basic	$	0.53	$	0.20	$	0.39	$	0.42	$	0.46	$	0.52	$	(0.08	)	$	0.20
Diluted	$	0.50	$	0.20	$	0.38	$	0.40	$	0.44	$	0.49	$	(0.08	)	$	0.20
Cash dividends declared per share	$	0.47	$	0.47	$	0.47	$	0.47	$	0.47	$	0.47	$	0.47		$	0.47
At quarter end:
Short-term investments at fair value	$	18,398	$	5,646	$	77,366	$	19,883	$	122,088	$	33,353	$	16,877		$	47,500
Mortgage-backed securities at fair value		989,461		1,036,669		1,065,540		1,089,610		865,061		708,862		531,612			364,439
Mortgage loans at fair value (1)		2,358,988		2,618,283		2,846,415		2,861,797		3,394,853		4,000,570		3,497,026			3,836,411
Excess servicing spread		236,534		248,763		261,796		277,484		288,669		280,367		294,551			321,976
Real estate (2)		207,089		227,580		247,350		260,368		303,393		314,056		320,120			339,970
Mortgage servicing rights		844,781		790,335		734,800		696,970		656,567		524,529		471,458			455,097
Other assets		949,682		857,767		776,977		796,834		726,871		757,164		635,918			455,047
Total assets	$	5,604,933	$	5,785,043	$	6,010,244	$	6,002,946	$	6,357,502	$	6,618,901	$	5,767,562		$	5,820,440
Assets sold under agreements to repurchase and mortgage loan participation purchase and sale agreement	$	3,225,374	$	3,247,374	$	3,536,344	$	3,573,165	$	3,809,918	$	4,129,543	$	3,372,026		$	3,307,414
Notes payable		144,128		228,178		309,980		250,088		425,106		346,132		313,976			356,191
Asset-backed financing of a VIE at fair value		307,419		318,404		329,459		340,365		353,898		384,407		325,939			344,693
Exchangeable senior notes		247,186		246,906		246,629		246,357		246,089		245,824		245,564			245,307
Other liabilities		136,241		133,616		133,000		134,381		171,377		158,077		149,230			152,332
Total liabilities		4,060,348		4,174,478		4,555,412		4,544,356		5,006,388		5,263,983		4,406,735			4,405,937
Shareholders’ equity		1,544,585		1,610,565		1,454,832		1,458,590		1,351,114		1,354,918		1,360,827			1,414,503
Total liabilities and shareholders’ equity	$	5,604,933	$	5,785,043	$	6,010,244	$	6,002,946	$	6,357,502	$	6,618,901	$	5,767,562		$	5,820,440

PMC is a seller/servicer for Fannie Mae and Freddie Mac. The Company is required to comply with the following minimum capital and liquidity eligibility requirements to remain in good standing with each Agency:

Such Agencies’ capital and liquidity amounts and requirements, the calculations of which are defined by each entity, are summarized below:

Noncompliance with the Agencies’ capital and liquidity requirements can result in the Agencies taking various remedial actions up to and including removing the Company’s ability to sell loans to and service loans on behalf of the Agencies.

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Subtopic 606) (“ASU 2014-09”), which supersedes the guidance in the Revenue Recognition topic of the ASC. ASU 2014-09 clarifies the principles for recognizing revenue in order to improve comparability of revenue recognition practices across entities and industries with certain scope exceptions including financial instruments, leases, and guarantees. ASU 2014-09 provides guidance intended to assist in the identification of contracts with customers and separate performance obligations within those contracts, the determination and allocation of the transaction price to those identified performance obligations and the recognition of revenue when a performance obligation has been satisfied. ASU 2014-09 also requires disclosures regarding the nature, amount, timing, and uncertainty of revenues and cash flows from contracts with customers.

Upon adoption, ASU 2014-09 provides for transition through either a full retrospective approach requiring the restatement of all presented prior periods or a modified retrospective approach, which allows the new recognition standard to be applied to only those contracts that are not completed at the date of transition. If the modified retrospective approach is adopted, a cumulative-effect adjustment to retained earnings is performed with additional disclosures required including the amount by which each line item is affected by the transition as compared to the guidance in effect before adoption and an explanation of the reasons for significant changes in these amounts.

The Manager has evaluated the effect of adoption of ASU 2014-09 and its amendments and their effect on the Company’s consolidated financial statements, and has concluded that ASU 2014-09 will not have a significant effect on such financial statements.

In January 2016, the FASB issued ASU 2016-01, Financial Instruments–Overall: Recognition and Measurement of Financial Assets and Financial Liabilities (“ASU 2016-01”). ASU 2016-01 affects the accounting for equity investments, financial liabilities under the fair value option, the presentation and disclosure requirements for financial instruments, and the valuation allowance assessment when recognizing deferred tax assets resulting from unrealized losses on available-for-sale debt securities.

The classification and measurement guidance will be effective for public business entities in fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. Early adoption of the provision to record fair value changes for financial liabilities under the fair value option resulting from instrument-specific credit risk in other comprehensive income is permitted and can be elected for all financial statements of fiscal years and interim periods that have not yet been issued or that have not yet been made available for issuance. The Manager does not believe that the adoption of ASU 2016-01 will have a significant effect on its consolidated financial statements.

In November of 2016, the FASB issued ASU 2016-18, Statement of Cash Flows (Topic 230) (“ASU 2016-18”). ASU 2016-18 requires that a statement of cash flows explain the change during the reporting period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. Therefore, amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. The amendments in ASU 2016-18 do not provide a definition of restricted cash or restricted cash equivalents. The amendments in ASU 2016-18 are effective for the Company’s fiscal year, including interim periods within the fiscal year ending December 31, 2018. The Manager does not believe the adoption of ASU 2016-18 will have a significant effect on the Company’s consolidated statement of cash flows

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 Company’s subsidiaries including the Operating Partnership of $700 million (net worth was $1.5 billion, which includes PMH and PMC); a minimum tangible net worth for PMH of $250 million (net worth was $569 million); and a minimum tangible net worth for PMC of $150 million (net worth was $488 million). The Company’s subsidiaries are limited from transferring funds to the Parent by these minimum tangible net worth requirements.

	Year ended December 31,
	2017			2016			2015
	(in thousands)
Cash flows from operating activities:
Net income	$	117,493		$	74,544		$	92,478
Equity in distributions in excess of earnings of subsidiaries		60,655			155,093			78,704
Decrease in due from affiliates		620			693			915
Decrease (increase) in other assets		21			196			(284	)
Increase (decrease) in accounts payable and accrued liabilities		2,892			93			(257	)
Increase in due from affiliates		(58	)		(116	)		(238	)
Increase (decrease) due to affiliates		35			(174	)		(119	)
Increase in income taxes payable		—			—			(126	)
Net cash provided by operating activities		181,658			230,329			171,073
Cash flows from investing activities:
Increase in investment in subsidiaries		(299,919	)		—			—
Net (increase) decrease in short-term investments		(838	)		1,571			(2,100	)
Net cash (used in) provided by investing activities		(300,757	)		1,571			(2,100	)
Cash flows from financing activities:
Issuance of common shares		—			—			8
Net increase (decrease) in intercompany unsecured note payable		50,791			(1,970	)		20,379
Repurchases of common shares		(91,198	)		(98,370	)		(16,338	)
Issuance of preferred shares		310,000			—			—
Payment of issuance costs related to preferred shares		(10,293	)		—			—
Payment of dividends to preferred shareholders		(14,066	)		—			—
Payment of dividends to common shareholders		(126,135	)		(131,560	)		(173,022	)
Net cash provided by (used in) financing activities		119,099			(231,900	)		(168,973	)
Net change in cash		—			—			—
Cash at beginning of year		—			—			—
Cash at end of year	$	—		$	—		$	—

Non-cash financing activity — dividends payable	$	29,145		$	31,655		$	35,069

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

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the registrant in the capacities and on the dates indicated.

Large accelerated filer	☒	Accelerated filer	☐
Non-accelerated filer	☐ (Do not check if a smaller reporting company)	Smaller reporting company	☐
		Emerging growth company	☐

Document		Parts Into Which Incorporated
Definitive Proxy Statement for 2018 Annual Meeting of Shareholders		Part III

	(a)		(b)		(c)
Plan category	Number of securities to be issued upon exercise of outstanding options, warrants and rights		Weighted-average exercise price of outstanding options, warrants and rights		Number of securities remaining available for future issuance under equity compensation plans excluding securities reflected in column(a))
Equity compensation plans approved by security holders(1)		692,875	$	—		4,269,286
Equity compensation plans not approved by security holders(2)		—		—	—
Total		692,875		—		4,269,286

Effect on fair value of a change in property value
Shift in input		Effect on fair value
		(in thousands)
	5%	$	16,949
	10%	$	32,005
	15%	$	45,380
(5%)		$	(19,099	)
(10%)		$	(40,570	)
(15%)		$	(64,780	)

	Effect on excess servicing spread of a change in input value
Shift in input	Pricing spread			Prepayment speed
	(in thousands)
5%	$	(1,997	)	$	(5,359	)
10%	$	(3,962	)	$	(10,500	)
20%	$	(7,798	)	$	(20,177	)
(5%)	$	2,031		$	5,590
(10%)	$	4,096		$	11,427
(20%)	$	8,330		$	23,901


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

		Page
Special Note Regarding Forward-Looking Statements		3
PART I		6
Item 1	Business	6
Item 1A	Risk Factors	13
Item 1B	Unresolved Staff Comments	43
Item 2	Properties	43
Item 3	Legal Proceedings	43
Item 4	Mine Safety Disclosures	43
PART II		44
Item 5	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	44
Item 6	Selected Financial Data	46
Item 7	Management’s Discussion and Analysis of Financial Condition and Results of Operations	47
Item 7A	Quantitative and Qualitative Disclosures About Market Risk	99
Item 8	Financial Statements and Supplementary Data	99
Item 9	Changes in and Disagreements With Accountants on Accounting and Financial Disclosure	99
Item 9A	Controls and Procedures	99
Item 9B	Other Information	102
PART III		103
Item 10	Directors, Executive Officers and Corporate Governance	103
Item 11	Executive Compensation	103
Item 12	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	103
Item 13	Certain Relationships and Related Transactions, and Director Independence	103
Item 14	Principal Accounting Fees and Services	103
PART IV		104
Item 15	Exhibits and Financial Statement Schedules	104
Item 16	Form 10-K Summary	113
	Signatures

	Year ended December 31,						Cumulative
	2017		2016		2015		Total
	(in thousands)
Common shares repurchased		5,647		7,368		1,045		14,060
Cost of common shares repurchased	$	91,198	$	98,370	$	16,338	$	205,906

					Cash
	Stock				dividends
Period ended	High		Low		declared
March 31, 2017	$	17.75	$	16.37	$	0.47
June 30, 2017	$	18.33	$	17.20	$	0.47
September 30, 2017	$	18.45	$	16.54	$	0.47
December 31, 2017	$	17.74	$	14.97	$	0.47

		At December 31, 2017
Level	Description	Carrying value of assets measured(1)		% total assets			% shareholders' equity
		(in thousands)
Level 1:	Prices determined using quoted prices in active markets for identical assets or liabilities.	$	19,054		0	%		1	%
Level 2:	Prices determined using other significant observable inputs. Observable inputs are inputs that other market participants would use in pricing an asset or liability and are developed based on market data obtained from sources independent of us. These may include quoted prices for similar assets or liabilities, interest rates, prepayment speeds, credit risk and others.		2,579,781		46	%		167	%
Level 3:	Prices determined using significant unobservable inputs. In situations where quoted prices or observable inputs are unavailable, unobservable inputs may be used. Unobservable inputs reflect our Manager’s judgments about the factors that market participants use in pricing an asset or ability, and are based on the best information available in the circumstances.		2,172,219		39	%		141	%
	Total assets measured at or based on fair value	$	4,771,054		85	%		309	%
	Total assets	$	5,604,933
	Total shareholders’ equity	$	1,544,585

Effect on fair value of a change in pull-through rate
Shift in input (1)	Effect on fair value
	(in thousands)
5%	$	149
10%	$	281
20%	$	501
(5%)	$	(261	)
(10%)	$	(522	)
(20%)	$	(1,044	)

Effect on fair value of a change in pricing spread input
Shift in input (in basis points)	Effect on fair value
	(in thousands)
25	$	(12,333	)
50	$	(24,425	)
100	$	(48,002	)
(25)	$	12,477
(50)	$	25,204
(100)	$	51,322

		Effect on fair value of MSRs of a change in input value
Shift in input		Pricing spread			Prepayment speed			Servicing cost
		(in thousands)
	5%	$	(13,195	)	$	(14,221	)	$	(6,465	)
	10%	$	(26,007	)	$	(27,947	)	$	(12,929	)
	20%	$	(50,541	)	$	(54,020	)	$	(25,859	)
(5%)		$	13,595		$	14,743		$	6,465
(10%)		$	27,606		$	30,039		$	12,929
(20%)		$	56,949		$	62,423		$	25,859

	December 31, 2017					December 31, 2016
Property type	Carrying value		% total			Carrying value		% total
	(dollars in thousands)
1 - 4 dwelling units	$	131,576		81	%	$	215,576		79	%
Condominium/Townhome/Co-op		16,771		10	%		24,074		9	%
Planned unit development		14,311		9	%		34,217		12	%
5+ dwelling units		207		0	%		202		0	%
	$	162,865		100	%	$	274,069		100	%

	December 31, 2017					December 31, 2016
Geographic distribution	Carrying value		% total			Carrying value		% total
	(dollars in thousands)
New Jersey	$	42,795		26	%	$	51,472		19	%
New York		34,107		21	%		44,252		16	%
California		17,777		11	%		53,308		19	%
Florida		15,740		10	%		31,715		12	%
Illinois		8,539		5	%		13,831		5	%
Massachusetts		6,838		4	%		6,244		2	%
Maryland		6,182		4	%		14,488		5	%
Other		30,887		19	%		58,759		22	%
	$	162,865		100	%	$	274,069		100	%

	2017 Quarter ended
Assets sold under agreements to repurchase	December 31		September 30		June 30		March 31
	(in thousands)
Average balance outstanding	$	3,164,303	$	3,474,903	$	3,420,836	$	3,267,864
Maximum daily balance outstanding	$	3,713,291	$	3,973,869	$	4,361,565	$	4,330,825
Ending balance	$	3,180,886	$	3,204,054	$	3,498,916	$	3,500,190

	2016 Quarter ended
Assets sold under agreements to repurchase	December 31		September 30		June 30		March 31
	(in thousands)
Average balance outstanding	$	3,917,719	$	3,538,720	$	3,172,806	$	2,797,301
Maximum daily balance outstanding	$	4,822,056	$	4,824,044	$	3,511,918	$	3,577,236
Ending balance	$	3,784,001	$	4,041,085	$	3,500,569	$	3,245,014

	2015 Quarter ended
Assets sold under agreements to repurchase	December 31		September 30		June 30		March 31
	(in thousands)
Average balance outstanding	$	2,814,424	$	3,252,341	$	3,172,806	$	2,847,915
Maximum daily balance outstanding	$	3,587,271	$	4,160,814	$	3,511,918	$	3,860,671
Ending balance	$	3,128,780	$	2,864,032	$	3,500,569	$	3,562,109

Counterparty	Amount at risk
	(in thousands)
Credit Suisse First Boston Mortgage Capital LLC	$	526,494
Citibank, N.A.		124,370
JPMorgan Chase & Co.		80,299
Bank of America, N.A.		69,783
Deutsche Bank		22,376
BNP Paribas Corporate & Institutional Banking		18,704
Morgan Stanley Bank, N.A.		8,984
Daiwa Capital Markets America Inc.		5,478
Royal Bank of Canada		3,528
Wells Fargo, N.A.		2,992
Barclays Bank PLC		829
	$	863,837

Interest rate shift in basis points	-200			-100			-50			50			100			200
	(dollar in thousands)
Fair value	$	1,015,627		$	1,016,212		$	1,010,225		$	961,680		$	946,664		$	868,231
Change in fair value:
$	$	26,166		$	26,750		$	20,764		$	(27,781	)	$	(42,797	)	$	(121,230	)
%		2.6	%		2.7	%		2.1	%		(2.8	)%		(4.3	)%		(12.3	)%

Property value shift in %	-15%			-10%			-5%			+5%			+10%			+15%
	(dollars in thousands)
Fair value	$	703,652		$	727,863		$	749,333		$	785,382		$	800,437		$	813,812
Change in fair value:
$	$	(64,780	)	$	(40,570	)	$	(19,099	)	$	16,949		$	32,005		$	45,380
%		(8.4	)%		(5.3	)%		(2.5	)%		2.2	%		4.2	%		5.9	%

Pricing spread shift in %		-20%			-10%			-5%			+5%			+10%			+20%
	(dollars in thousands)
Fair value	$	824,082		$	797,730		$	785,148		$	761,092		$	749,588		$	727,561
Change in fair value:
$	$	51,142		$	24,790		$	12,208		$	(11,848	)	$	(23,352	)	$	(45,379	)
%		6.6	%		3.2	%		1.6	%		(1.5	)%		(3.0	)%		(5.9	)%

Prepayment speed shift in %		-20%			-10%			-5%			+5%			+10%			+20%
	(dollars in thousands)
Fair value	$	826,636		$	798,810		$	785,644		$	760,673		$	748,820		$	726,272
Change in fair value:
$	$	53,696		$	25,870		$	12,704		$	(12,267	)	$	(24,120	)	$	(46,668	)
%		7.0	%		3.4	%		1.6	%		(1.6	)%		(3.1	)%		(6.0	)%

Per-loan servicing cost shift in %		-20%			-10%			-5%			+5%			+10%			+20%
	(dollars in thousands)
Fair value	$	795,823		$	784,382		$	778,661		$	767,220		$	761,499		$	750,058
Change in fair value:
$	$	22,883		$	11,441		$	5,721		$	(5,721	)	$	(11,441	)	$	(22,883	)
%		3.0	%		1.5	%		0.7	%		(0.7	)%		(1.5	)%		(3.0	)%


		Incorporated by Reference from the Below-Listed Form (Each Filed under SEC File Number 14-64423)


Exhibit No.	Exhibit Description	Form	Filing Date

3.1	Declaration of Trust of PennyMac Mortgage Investment Trust, as amended and restated.	10-Q	November 6, 2009

3.2	Amended and Restated Bylaws of PennyMac Mortgage Investment Trust.	8-K	August 13, 2013

3.3	Articles Supplementary classifying and designating the 8.125% Series A Fixed-to-Floating Rate Cumulative Redeemable Preferred Shares of Beneficial Interest.	8-A	March 7, 2017

3.4	Articles Supplementary classifying and designating the 8.00% Series B Fixed-to-Floating Rate Cumulative Redeemable Preferred Shares of Beneficial Interest.	8-A	June 30, 2017

4.1	Specimen Common Share Certificate of PennyMac Mortgage Investment Trust.	10-Q	November 6, 2009

4.2	Specimen Certificate for 8.125% Series A Fixed-to-Floating Rate Cumulative Redeemable Preferred Shares of Beneficial Interest.	8-A	March 7, 2017

4.3	Specimen Certificate for 8.00% Series B Fixed-to-Floating Rate Cumulative Redeemable Preferred Shares of Beneficial Interest.	8-A	June 30, 2017

4.4	Indenture for Senior Debt Securities, dated as of April 30, 2013, among PennyMac Corp., PennyMac Mortgage Investment Trust and The Bank of New York Mellon Trust Company, N.A.	8-K	April 30, 2013

4.5	First Supplemental Indenture, dated as of April 30, 2013, among PennyMac Corp., PennyMac Mortgage Investment Trust and The Bank of New York Mellon Trust Company, N.A.	8-K	April 30, 2013

4.6	Form of 5.375% Exchangeable Senior Notes due 2020 (included in Exhibit 4.5).

10.1	Amended and Restated Limited Partnership Agreement of PennyMac Operating Partnership, L.P.	10-Q	November 6, 2009

10.2	First Amendment to the Amended and Restated Limited Partnership Agreement of PennyMac Operating Partnership, L.P., dated as of March 9, 2017.	8-K	March 9, 2017

10.3	Second Amendment to the Amended and Restated Limited Partnership Agreement of PennyMac Operating Partnership, L.P., dated as of July 5, 2017.	8-K	July 6, 2017

10.4	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.	10-Q	November 6, 2009

10.5	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.	8-K	February 7, 2013


10.6	Second Amended and Restated Management Agreement, dated as of September 12, 2016, by and among PennyMac Mortgage Investment Trust, PennyMac Operating Partnership, L.P. and PNMAC Capital Management, LLC.	8-K	September 12, 2016

10.7	Amendment No. 1 to Second Amended and Restated Management Agreement, dated as of September 27, 2017, among PennyMac Mortgage Investment Trust, PennyMac Operating Partnership, L.P. and PNMAC Capital Management, LLC.	10-Q	November 8, 2017

10.8	Third Amended and Restated Flow Servicing Agreement, dated as of September 12, 2016, between PennyMac Operating Partnership, L.P. and PennyMac Loan Services, LLC.	8-K	September 12, 2016

10.9	Amended and Restated Mortgage Banking Services Agreement, dated as of September 12, 2016, by and between PennyMac Loan Services, LLC and PennyMac Corp.	8-K	September 12, 2016

10.10	Amendment No. 1 to Amended and Restated Mortgage Banking Services Agreement, dated as of May 25, 2017, by and between PennyMac Loan Services, LLC and PennyMac Corp.	10-Q	August 8, 2017

10.11	Amendment No. 2 to Amended and Restated Mortgage Banking Services Agreement, dated as of October 31, 2017, among PennyMac Loan Services, LLC and PennyMac Corp.	10-Q	November 8, 2017

10.12	Amendment No. 3 to Amended and Restated Mortgage Banking Services Agreement, dated as of December 1, 2017, by and between PennyMac Loan Services, LLC and PennyMac Corp.	*

10.13	Amended and Restated MSR Recapture Agreement, dated as of September 12, 2016, by and between PennyMac Loan Services, LLC and PennyMac Corp.	8-K	September 12, 2016

10.14	Amendment No. 1 to Amended and Restated MSR Recapture Agreement, dated as of December 1, 2017, by and between PennyMac Loan Services, LLC and PennyMac Corp.	*

10.15	Master Spread Acquisition and MSR Servicing Agreement, dated as of December 19, 2014, by and between PennyMac Loan Services, LLC, PennyMac Holdings, LLC and PennyMac Operating Partnership, L.P.	8-K	December 24, 2014

10.16	Amendment No 1. to Master Spread Acquisition and MSR Servicing Agreement, dated as of March 3, 2015, by and between PennyMac Loan Services, LLC, PennyMac Operating Partnership, L.P., and PennyMac Holdings, LLC.	10-Q	May 8, 2015

10.17†	PennyMac Mortgage Investment Trust 2009 Equity Incentive Plan.	10-Q	November 6, 2009

10.18†	First Amendment to the PennyMac Mortgage Investment Trust Equity Incentive Plan.	10-Q	November 8, 2017

10.19†	Second Amendment to the PennyMac Mortgage Investment Trust Equity Incentive Plan.	*

10.20†	Form of Restricted Share Unit Award Agreement under the PennyMac Mortgage Investment Trust 2009 Equity Incentive Plan.	S-11/A	July 24, 2009

10.21†	Form of Restricted Share Unit Award Agreement under the PennyMac Mortgage Investment Trust 2009 Equity Incentive Plan.	10-Q	May 6, 2016

10.22†	Form of Performance Share Unit Award Agreement under the PennyMac Mortgage Investment Trust 2009 Equity Incentive Plan.	10-Q	May 6, 2016

10.23†	Form of Performance Share Unit Award Agreement under the PennyMac Mortgage Investment Trust 2009 Equity Incentive Plan (2016).	*



10.24†	Form of Performance Share Unit Award Agreement under the PennyMac Mortgage Investment Trust 2009 Equity Incentive Plan (2017).	10-Q	November 8, 2017

10.25	Amended and Restated Master Repurchase Agreement, dated as of March 3, 2017, among Citibank, N.A., PennyMac Corp., PennyMac Holdings, LLC and PennyMac Loan Services, LLC.	8-K	March 8, 2017

10.26	Guaranty Agreement, dated as of December 9, 2010, by PennyMac Mortgage Investment Trust in favor of Citibank, N.A.	8-K	December 15, 2010

10.27	Second Amended and Restated Master Repurchase Agreement, dated as of April 28, 2017, by and among Credit Suisse First Boston Mortgage Capital LLC, Credit Suisse AG, Alpine Securitization LTD, PennyMac Holdings, LLC, PennyMac Corp., PennyMac Operating Partnership, L.P., PMC REO Financing Trust and PennyMac Mortgage Investment Trust.	8-K	May 3, 2017

10.28	Amendment No. 1 to Second Amended and Restated Master Repurchase Agreement, dated as of June 1, 2017, by and among Credit Suisse First Boston Mortgage Capital LLC, Credit Suisse AG, Alpine Securitization LTD, PennyMac Holdings, LLC, PennyMac Corp., PennyMac Operating Partnership, L.P., PMC REO Financing Trust and PennyMac Mortgage Investment Trust.	10-Q	August 8, 2017

10.29	Amendment No. 2 to Second Amended and Restated Master Repurchase Agreement, dated December 20, 2017, by and among Credit Suisse First Boston Mortgage Capital LLC, Credit Suisse AG, Alpine Securitization LTD, PennyMac Holdings, LLC, PennyMac Corp., PennyMac Operating Partnership, L.P., PMC REO Financing Trust, LLC and PennyMac Mortgage Investment Trust.	*

10.30	Amendment No. 3 to Second Amended and Restated Master Repurchase Agreement, dated February 1, 2018, by and among Credit Suisse First Boston Mortgage Capital LLC, Credit Suisse AG, Alpine Securitization LTD, PennyMac Holdings, LLC, PennyMac Corp., PennyMac Operating Partnership, L.P., PMC REO Financing Trust, LLC and PennyMac Mortgage Investment Trust.	8-K	February 7, 2018

10.31	Second Amended and Restated Guaranty, dated as of April 28, 2017, by PennyMac Mortgage Investment Trust and PennyMac Operating Partnership, L.P., in favor of Credit Suisse First Boston Mortgage Capital LLC.	8-K	May 3, 2017

10.32	Second Amended and Restated Master Repurchase Agreement, dated as of April 28, 2017, by and among Credit Suisse First Boston Mortgage Capital LLC, Credit Suisse AG, Alpine Securitization LTD, PennyMac Operating Partnership, L.P. and PennyMac Mortgage Investment Trust.	8-K	May 3, 2017

10.33	Amended and Restated Guaranty, dated as of April 28, 2017, by PennyMac Mortgage Investment Trust in favor of Credit Suisse First Boston Mortgage Capital LLC.	8-K	May 3, 2017

10.34	Amended and Restated Master Repurchase Agreement, dated as of March 3, 2017, among Citibank, N.A., PennyMac Corp., and PennyMac Loan Services, LLC.	8-K	March 8, 2017

10.35	Guaranty, dated as of May 24, 2012, by PennyMac Mortgage Investment Trust in favor of Citibank, N.A.	8-K	May 30, 2012

10.36	Master Repurchase Agreement, dated as of November 20, 2012, among PennyMac Corp., Morgan Stanley Bank, N.A. and Morgan Stanley Mortgage Capital Holdings LLC.	8-K	November 26, 2012

10.37	Amendment Number One to the Master Repurchase Agreement, dated as of August 20, 2013, among PennyMac Corp., Morgan Stanley Bank, N.A. and Morgan Stanley Mortgage Capital Holdings LLC.	10-Q	November 12, 2013



10.38	Amendment Number Two to the Master Repurchase Agreement, dated as of August 26, 2013, among PennyMac Corp., Morgan Stanley Bank, N.A. and Morgan Stanley Mortgage Capital Holdings LLC.	10-Q	November 12, 2013

10.39	Amendment Number Three to the Master Repurchase Agreement, dated as of November 14, 2013, among PennyMac Corp., Morgan Stanley Bank, N.A. and Morgan Stanley Mortgage Capital Holdings LLC.	10-K	February 28, 2014

10.40	Amendment Number Four to the Master Repurchase Agreement, dated as of December 19, 2013, among PennyMac Corp., Morgan Stanley Bank, N.A. and Morgan Stanley Mortgage Capital Holdings LLC.	10-K	February 28, 2014

10.41	Amendment Number Five to the Master Repurchase Agreement, dated as of December 18, 2014, among PennyMac Corp., Morgan Stanley Bank, N.A. and Morgan Stanley Mortgage Capital Holdings LLC.	10-K	March 2, 2015

10.42	Amendment Number Six to the Master Repurchase Agreement, dated as of July 27, 2015, among PennyMac Corp., Morgan Stanley Bank, N.A. and Morgan Stanley Mortgage Capital Holdings LLC.	8-K	July 30, 2015

10.43	Amendment Number Seven to the Master Repurchase Agreement, dated as of December 17, 2015, among PennyMac Corp., Morgan Stanley Bank, N.A. and Morgan Stanley Mortgage Capital Holdings LLC.	10-K	February 29, 2016

10.44	Amendment Number Eight to the Master Repurchase Agreement, dated as of August 26, 2016, among PennyMac Corp., Morgan Stanley Bank, N.A. and Morgan Stanley Mortgage Capital Holdings LLC.	10-Q	November 4, 2016

10.45	Amendment Number Nine to the Master Repurchase Agreement, dated as of June 30, 2017, among PennyMac Corp., Morgan Stanley Bank, N.A. and Morgan Stanley Mortgage Capital Holdings LLC.	8-K	July 7, 2017

10.46	Amendment Number Ten to the Master Repurchase Agreement, dated as of August 25, 2017, among PennyMac Corp., Morgan Stanley Bank N.A. and Morgan Stanley Mortgage Capital Holdings LLC.	8-K	August 31, 2017

10.47	Guaranty, dated as of November 20, 2012, by PennyMac Mortgage Investment Trust in favor of Morgan Stanley Bank, N.A. and Morgan Stanley Mortgage Capital Holdings LLC.	8-K	November 26, 2012

10.48	Second Amended and Restated Master Spread Acquisition and MSR Servicing Agreement, dated as of December 19, 2016, between PennyMac Loan Services, LLC and PennyMac Holdings, LLC.	8-K	December 21, 2016

10.49	Master Repurchase Agreement, dated as of December 19, 2016, by and among PennyMac Holdings, LLC, as Seller, PennyMac Loan Services, LLC, as Buyer, and PennyMac Mortgage Investment Trust, as Guarantor.	8-K	December 21, 2016

10.50	Guaranty, dated as of December 19, 2016, by PennyMac Mortgage Investment Trust, in favor of PennyMac Loan Services, LLC.	8-K	December 21, 2016

10.51	Subordination, Acknowledgment and Pledge Agreement, dated as of December 19, 2016, between PNMAC GMSR ISSUER TRUST, as Buyer, and PennyMac Holdings, LLC, as Pledgor.	8-K	December 21, 2016

10.52	Mortgage Loan Participation Purchase and Sale Agreement, dated as of December 23, 2011, among Bank of America, N.A., PennyMac Corp., PennyMac Mortgage Investment Trust and PennyMac Operating Partnership, L.P.	8-K	February 6, 2014


10.53	Amendment No. 1 to Mortgage Loan Participation Purchase and Sale Agreement, dated as of August 17, 2012, among Bank of America, N.A., PennyMac Corp., PennyMac Mortgage Investment Trust and PennyMac Operating Partnership, L.P.	8-K	February 6, 2014

10.54	Amendment No. 2 to Mortgage Loan Participation Purchase and Sale Agreement, dated as of October 29, 2012, among Bank of America, N.A., PennyMac Corp., PennyMac Mortgage Investment Trust and PennyMac Operating Partnership, L.P.	8-K	February 6, 2014

10.55	Amendment No. 3 to Mortgage Loan Participation Purchase and Sale Agreement, dated as of December 5, 2012, among Bank of America, N.A., PennyMac Corp., PennyMac Mortgage Investment Trust and PennyMac Operating Partnership, L.P.	8-K	February 6, 2014

10.56	Amendment No. 4 to Mortgage Loan Participation Purchase and Sale Agreement, dated as of January 3, 2013, among Bank of America, N.A., PennyMac Corp., PennyMac Mortgage Investment Trust and PennyMac Operating Partnership, L.P.	8-K	February 6, 2014

10.57	Amendment No. 5 to Mortgage Loan Participation Purchase and Sale Agreement, dated as of March 28, 2013, among Bank of America, N.A., PennyMac Corp., PennyMac Mortgage Investment Trust and PennyMac Operating Partnership, L.P.	8-K	February 6, 2014

10.58	Amendment No. 6 to Mortgage Loan Participation Purchase and Sale Agreement, dated as of January 2, 2014, among Bank of America, N.A., PennyMac Corp., PennyMac Mortgage Investment Trust and PennyMac Operating Partnership, L.P.	8-K	February 6, 2014

10.59	Amendment No. 7 to Mortgage Loan Participation Purchase and Sale Agreement, dated as of January 31, 2014, among Bank of America, N.A., PennyMac Corp., PennyMac Mortgage Investment Trust and PennyMac Operating Partnership, L.P.	8-K	February 6, 2014

10.60	Amendment No. 8 to Mortgage Loan Participation Purchase and Sale Agreement, dated as of March 27, 2014, among Bank of America, N.A., PennyMac Corp., PennyMac Mortgage Investment Trust and PennyMac Operating Partnership, L.P.	10-Q	August 11, 2014

10.61	Amendment No. 9 to Mortgage Loan Participation Purchase and Sale Agreement, dated as of January 30, 2015, among Bank of America, N.A., PennyMac Corp., PennyMac Mortgage Investment Trust and PennyMac Operating Partnership, L.P.	10-K	March 2, 2015

10.62	Amendment No. 10 to Mortgage Loan Participation Purchase and Sale Agreement, dated as of December 22, 2015, among Bank of America, N.A., PennyMac Corp., PennyMac Mortgage Investment Trust and PennyMac Operating Partnership, L.P.	10-K	February 29, 2016

10.63	Amendment No. 11 to Mortgage Loan Participation Purchase and Sale Agreement, dated as of March 29, 2016, among Bank of America, N.A., PennyMac Corp., PennyMac Mortgage Investment Trust and PennyMac Operating Partnership, L.P.	10-Q	May 6, 2016

10.64	Amendment No. 12 to Mortgage Loan Participation Purchase and Sale Agreement, dated as of March 28, 2017, among Bank of America, N.A., PennyMac Corp., PennyMac Mortgage Investment Trust and PennyMac Operating Partnership, L.P.	10-Q	August 8, 2017

10.65	Amendment No. 13 to Mortgage Loan Participation Purchase and Sale Agreement, dated as of May 23, 2017, among Bank of America, N.A., PennyMac Corp., PennyMac Mortgage Investment Trust and PennyMac Operating Partnership, L.P.	10-Q	August 8, 2017

10.66	Guaranty, dated as of December 23, 2011, by PennyMac Mortgage Investment Trust and PennyMac Operating Partnership, L.P. in favor of Bank of America, N.A.	8-K	February 6, 2014

10.67	Master Repurchase Agreement, dated as of July 9, 2014, among Bank of America, N.A., PennyMac Operating Partnership, L.P. and PennyMac Mortgage Investment Trust.	8-K	July 14, 2014


10.68	Amendment No. 1 to Master Repurchase Agreement, dated as of January 30, 2015, among Bank of America, N.A., PennyMac Operating Partnership, L.P. and PennyMac Mortgage Investment Trust.	10-K	March 2, 2015

10.69	Amendment No. 2 to Master Repurchase Agreement, dated as of March 29, 2016, among Bank of America, N.A., PennyMac Operating Partnership, L.P. and PennyMac Mortgage Investment Trust.	10-Q	May 6, 2016

10.70	Amendment No. 3 to Master Repurchase Agreement, dated as of May 23, 2017, among Bank of America, N.A., PennyMac Operating Partnership, L.P. and PennyMac Mortgage Investment Trust.	8-K	May 30, 2017

10.71	Guaranty, dated as of July 9, 2014, by PennyMac Mortgage Investment Trust in favor of Bank of America, N.A.	8-K	July 14, 2014

10.72	Amended and Restated Master Repurchase Agreement, dated as of March 15, 2017, among JPMorgan Chase Bank, National Association, PennyMac Corp., PennyMac Operating Partnership, L.P., PennyMac Holdings, LLC, PMC REO Trust 2015-1 and PennyMac Mortgage Investment Trust.	8-K	March 21, 2017

10.73	Amended and Restated Guaranty, dated as of March 15, 2017, of PennyMac Mortgage Investment Trust in favor of JPMorgan Chase Bank, National Association.	8-K	March 21, 2017

10.74	Second Amended and Restated Loan and Security Agreement, dated as of March 24, 2017, by and among PennyMac Corp., PennyMac Holdings, LLC and Citibank, N.A.	8-K	March 30, 2017

10.75	Amended and Restated Guaranty Agreement, dated as of September 15, 2016, by PennyMac Mortgage Investment Trust in favor of Citibank, N.A.	8-K	September 21, 2016

10.76	Master Repurchase Agreement, dated as of October 14, 2016, among PennyMac Corp., PennyMac Operating Partnership, L.P. and JPMorgan Chase Bank, N.A.	8-K	October 20, 2016

10.77	First Amendment to Master Repurchase Agreement, dated as of May 23, 2017, among PennyMac Corp., PennyMac Operating Partnership, L.P. and JPMorgan Chase Bank, N.A.	8-K	May 30, 2017

10.78	Second Amendment to Master Repurchase Agreement, dated as of July 31, 2017, among JPMorgan Chase Bank, N.A., PennyMac Corp. and PennyMac Operating Partnership, L.P.	10-Q	November 8, 2017

10.79	Third Amendment to Master Repurchase Agreement, dated as of October 13, 2017, among JPMorgan Chase Bank, N.A., PennyMac Corp. and PennyMac Operating Partnership, L.P.	10-Q	November 8, 2017

10.80	Guaranty, dated as of October 14, 2016, by PennyMac Mortgage Investment Trust in favor of JPMorgan Chase Bank, N.A.	8-K	October 20, 2016

10.81	Mortgage Loan Purchase Agreement, dated as of September 25, 2012, by and between PennyMac Loan Services, LLC and PennyMac Corp.	10-K	February 29, 2016

10.82	Flow Sale Agreement, dated as of June 16, 2015, by and between PennyMac Corp. and PennyMac Loan Services, LLC.	10-Q	August 10, 2015

10.83	Master Repurchase Agreement, dated as of September 14, 2015, among Barclays Bank PLC, PennyMac Corp., PennyMac Loan Services, LLC and PennyMac Mortgage Investment Trust.	8-K	September 18, 2015

10.84	Amendment Number One to Master Repurchase Agreement, dated as of August 31, 2016, among Barclays Bank PLC, PennyMac Corp., PennyMac Loan Services, LLC and PennyMac Mortgage Investment Trust.	10-Q	November 4, 2016



10.85	Amendment Number Two to Master Repurchase Agreement, dated as of September 29, 2016, among Barclays Bank PLC, PennyMac Corp., PennyMac Loan Services, LLC and PennyMac Mortgage Investment Trust.	10-Q	November 4, 2016

10.86	Amendment Number Three to Master Repurchase Agreement, dated as of December 2, 2016, among Barclays Bank PLC, PennyMac Corp., PennyMac Loan Services, LLC and PennyMac Mortgage Investment Trust.	10-K	February 28, 2017

10.87	Amendment Number Four to Master Repurchase Agreement, dated as of March 24, 2017, among Barclays Bank PLC, PennyMac Corp., PennyMac Loan Services, LLC and PennyMac Mortgage Investment Trust.	10-Q	May 9, 2017

10.88	Amendment Number Five to Master Repurchase Agreement, dated as of May 3, 2017, among Barclays Bank PLC, PennyMac Corp., PennyMac Loan Services, LLC and PennyMac Mortgage Investment Trust.	8-K	May 5, 2017

10.89	Amendment Number Six to Master Repurchase Agreement, dated as of June 16, 2017, among Barclays Bank PLC, PennyMac Corp., PennyMac Loan Services, LLC and PennyMac Mortgage Investment Trust.	8-K	June 21, 2017

10.90	Amendment Number Seven to Master Repurchase Agreement, dated as of December 1, 2017, among Barclays Bank PLC, PennyMac Corp., PennyMac Loan Services, LLC and PennyMac Mortgage Investment Trust.	*

10.91	Mortgage Loan Participation Purchase and Sale Agreement, dated as of September 14, 2015, among PennyMac Corp., PennyMac Loan Services, LLC and Barclays Bank PLC.	8-K	September 18, 2015

10.92	Amendment Number One to Mortgage Loan Participation Purchase and Sale Agreement, dated as of August 31, 2016, among PennyMac Corp., PennyMac Loan Services, LLC and Barclays Bank PLC.	10-Q	November 4, 2016

10.93	Amendment Number Two to Mortgage Loan Participation Purchase and Sale Agreement, dated as of December 2, 2016, among PennyMac Corp., PennyMac Loan Services, LLC and Barclays Bank PLC.	10-K	February 28, 2017

10.94	Amendment Number Three to Mortgage Loan Participation Purchase and Sale Agreement, dated as of May 3, 2017, among PennyMac Corp., PennyMac Loan Services, LLC and Barclays Bank PLC.	8-K	May 5, 2017

10.95	Amendment Number Four to Mortgage Loan Participation Purchase and Sale Agreement, dated as of June 16, 2017, among PennyMac Corp., PennyMac Loan Services, LLC and Barclays Bank PLC.	8-K	June 21, 2017

10.96	Amendment Number Five to Mortgage Loan Participation Purchase and Sale Agreement, dated as of December 1, 2017, among PennyMac Corp., PennyMac Loan Services, LLC and Barclays Bank PLC.	*

10.97	Amended and Restated Loan and Security Agreement, dated as of January 22, 2016, among PennyMac Corp., PennyMac Holdings, LLC, PennyMac Mortgage Investment Trust and Barclays Bank PLC.	8-K	January 28, 2016

10.98	Amendment Number One to Amended and Restated Loan and Security Agreement, dated as of August 31, 2016, among PennyMac Corp., PennyMac Holdings, LLC, PennyMac Mortgage Investment Trust and Barclays Bank PLC.	10-Q	November 4, 2016

10.99	Amendment Number Two to Amended and Restated Loan and Security Agreement, dated as of December 2, 2016, among PennyMac Corp., PennyMac Holdings, LLC, PennyMac Mortgage Investment Trust and Barclays Bank PLC.	10-K	February 28, 2017



10.100	Amendment Number Three to Amended and Restated Loan and Security Agreement, dated as of January 30, 2017, among PennyMac Corp., PennyMac Holdings, LLC, PennyMac Mortgage Investment Trust and Barclays Bank PLC.	10-K	February 28, 2017

10.101	Amendment Number Four to Amended and Restated Loan and Security Agreement, dated as of March 24, 2017, among PennyMac Corp., PennyMac Holdings, LLC, PennyMac Mortgage Investment Trust and Barclays Bank PLC.	10-Q	May 9, 2017

10.102	Amendment Number Five to Amended and Restated Loan and Security Agreement, dated as of June 16, 2017, among PennyMac Corp., PennyMac Holdings, LLC, PennyMac Mortgage Investment Trust and Barclays Bank PLC.	8-K	June 21, 2017

10.103	Amendment Number Six to Amended and Restated Loan and Security Agreement, dated as of December 1, 2017, among PennyMac Corp., PennyMac Holdings, LLC, PennyMac Mortgage Investment Trust and Barclays Bank PLC.	*

10.104	Loan and Security Agreement, dated as of March 24, 2017, by and among PennyMac Corp., PennyMac Holdings, LLC, PennyMac Mortgage Investment Trust and Barclays Bank PLC.	8-K	March 30, 2017

10.105	Amendment Number One to Loan and Security Agreement, dated June 16, 2017, by and among PennyMac Corp., PennyMac Holdings, LLC, PennyMac Mortgage Investment Trust and Barclays Bank PLC.	8-K	June 21, 2017

10.106	Amendment Number Two to Loan and Security Agreement, dated December 1, 2017, by and among PennyMac Corp., PennyMac Holdings, LLC, PennyMac Mortgage Investment Trust and Barclays Bank PLC.	*

10.107	Amended and Restated Flow Commercial Mortgage Loan Purchase Agreement, dated as of June 1, 2016, by and between PennyMac Loan Services, LLC and PennyMac Corp.	10-Q	August 5, 2016

10.108	Amendment No. 1 to Amended and Restated Flow Commercial Mortgage Loan Purchase Agreement, dated as of September 27, 2017, among PennyMac Corp. and PennyMac Loan Services, LLC.	10-Q	November 8, 2017

10.109	Servicing Agreement, dated as of July 13, 2015, between PennyMac Corp., PennyMac Holdings, LLC, any other parties signing this Agreement as an owner of Mortgage Loans as listed in Schedule I and any New Owners, PennyMac Loan Services, LLC, and Midland Loan Services, a division of PNC Bank, National Association.	10-K	February 29, 2016

10.110	Amended and Restated Commercial Mortgage Servicing Oversight Agreement, dated as of June 1, 2016, among PennyMac Corp., PennyMac Holdings, LLC, and PennyMac Loan Services, LLC.	10-Q	August 5, 2016

10.111	Amendment No. 1 to Amended and Restated Commercial Mortgage Servicing Oversight Agreement, dated as of September 27, 2017, among PennyMac Corp., PennyMac Holdings, LLC and PennyMac Loan Services, LLC.	10-Q	November 8, 2017

10.112	Master Repurchase Agreement, dated as of August 18, 2017, among PennyMac Corp. and Deutsche Bank AG, Cayman Islands Branch.	8-K	August 24, 2017

10.113	Guaranty, dated as of August 18, 2017, by PennyMac Mortgage Investment Trust in favor of Deutsche Bank AG, Cayman Islands Branch.	8-K	August 24, 2017

10.114	Base Indenture, dated as of December 20, 2017, by and among PMT ISSUER TRUST-FMSR, Citibank, N.A., PennyMac Corp. and Credit Suisse First Boston Mortgage Capital LLC.	8-K	December 27, 2017


10.115	Series 2017-VF1 Indenture Supplement, dated as of December 20, 2017, by and among PMT ISSUER TRUST-FMSR, Citibank, N.A., PennyMac Corp. and Credit Suisse First Boston Mortgage Capital LLC.	*

10.116	Master Repurchase Agreement, dated as of December 20, 2017, by and among PennyMac Corp., PMT ISSUER TRUST-FMSR and PennyMac Mortgage Investment Trust.	8-K	December 27, 2017

10.117	Guaranty, dated as of December 20, 2017, by PennyMac Mortgage Investment Trust in favor of PMT ISSUER TRUST – FMSR.	8-K	December 27, 2017

10.118	Master Repurchase Agreement, dated as of December 20, 2017, by and among PennyMac Holdings, LLC, PennyMac Corp. and PennyMac Mortgage Investment Trust.	8-K	December 27, 2017

10.119	Guaranty, dated as of December 20, 2017, by PennyMac Mortgage Investment Trust in favor of PennyMac Corp.	8-K	December 27, 2017

10.120	Subordination, Acknowledgement and Pledge Agreement, dated as of December 20, 2017, between PMT ISSUER TRUST – FMSR and PennyMac Holdings, LLC.	8-K	December 27, 2017

10.121	Master Repurchase Agreement, dated as of December 20, 2017, by and among PennyMac Corp., Credit Suisse AG and Credit Suisse First Boston Mortgage Capital, LLC.	8-K	December 27, 2017

10.122	Guaranty, dated as of December 20, 2017, by PennyMac Mortgage Investment Trust in favor of Credit Suisse AG.	8-K	December 27, 2017

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

21.1	Subsidiaries of PennyMac Mortgage Investment Trust	*

23.1	Consent of Deloitte & Touche LLP.	*

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

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

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

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

101	Interactive data files pursuant to Rule 405 of Regulation S-T: (i) the Consolidated Balance Sheets as of December 31, 2017 and December 31, 2016 (ii) the Consolidated Statements of Income for the years ended December 31, 2017 and December 31, 2016, (iii) the Consolidated Statements of Changes in Stockholders’ Equity for the years ended December 31, 2017 and December 31, 2016, (iv) the Consolidated Statements of Cash Flows for the years ended December 31, 2017 and December 31, 2016 and (v) the Notes to the Consolidated Financial Statements.

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

	Year ended December 31, 2017
	Interest-only
	security payable
	(in thousands)
Liability:
Balance, December 31, 2016	$	4,114
Changes in fair value included in income arising from:
Changes in instrument- specific credit risk		—
Other factors		2,956
		2,956
Balance, December 31, 2017	$	7,070
Changes in fair value recognized during the period relating to liability outstanding at December 31, 2017	$	2,956