# PennyMac Mortgage Investment Trust (PMT) FY 2021 MD&A

Verbatim Item 7 Management's Discussion and Analysis from PennyMac Mortgage Investment Trust's 10-K for fiscal year 2021.

SEC filing source: https://www.sec.gov/Archives/edgar/data/1464423/000156459022007180/pmt-10k_20211231.htm
Accession: 0001564590-22-007180
Filing date: 2022-02-25
Report date: 2021-12-31
Extracted structurally from real Item 7 body heading to real Item 7A/8 boundary.
Confidence: high

Company profile: /company/PMT/
All MD&A years: /company/PMT/mda/
Next year: /company/PMT/mda/fy2022/ (FY 2022)

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

We are a specialty finance company that invests primarily in mortgage-related assets. Our objective is to provide attractive risk-adjusted returns to our investors over the long-term, primarily through dividends and secondarily through capital appreciation. Our investment focus is on the mortgage-related assets that we create through our correspondent production activities, including mortgage servicing rights (“MSRs”), non-Agency subordinate Mortgage-backed securities (“MBS”), and credit risk transfer (“CRT”) arrangements, which include CRT Agreements and CRT strips that absorb credit losses on certain of the loans we sold. We also invest in Agency MBS. We have also historically invested in distressed mortgage assets (loans and real estate acquired in settlement of loans (“REO”)), which we have substantially liquidated.  

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

During the year ended December 31, 2021, we purchased newly originated prime credit quality residential loans with fair values totaling $181.4 billion, as compared to $170.0 billion for the year ended December 31, 2020, in our correspondent production business. To the extent that we purchase loans that are insured by the U.S. Department of Housing and Urban Development (“HUD”) through the Federal Housing Administration (the “FHA”), or insured or guaranteed by the Veterans Administration (the “VA”) or U.S. Department of Agriculture, we and PLS have agreed that PLS will fulfill and purchase such loans, as PLS is a Government National Mortgage Association (“Ginnie Mae”) approved issuer and we are not. This arrangement has enabled us to compete with other correspondent aggregators that purchase both government and conventional loans. We receive a sourcing fee from PLS based on the unpaid principal balance (“UPB”) of each loan that we sell to PLS under such arrangement, and earn interest income on the loan for the period we hold it before the sale to PLS. During the year ended December 31, 2021, we received sourcing fees totaling $6.5 million, relating to $64.8 billion in UPB of loans that we sold to PLS.

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

Correspondent Production

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

[[GREPCENT_TABLE]]
[["","","Year ended December 31,"],["","","2021","","","2020","","","2019"],["","(in thousands)"],["Sales of loans acquired for sale:"],["To nonaffiliates","","$","110,919,477","","","$","106,306,805","","","$","61,128,081"],["To PennyMac Financial Services, Inc.","","","67,851,630","","","","63,618,185","","","","50,110,085"],["","","$","178,771,107","","","$","169,924,990","","","$","111,238,166"],["Net gains on loans acquired for sale","","$","87,273","","","$","379,922","","","$","170,164"],["Investment activities resulting from correspondent production:"],["Receipt of MSRs as proceeds from sales of loans","","$","1,484,629","","","$","1,158,475","","","$","837,706"],["Retention of interests in securitizations of loans secured by investment properties, net of associated asset-backed financings","","","42,256","","","","\u2014","","","","\u2014"],["Purchase of subordinate bonds backed by previously-sold loans secured by investment properties held in consolidated variable interest entities","","","28,815","","","","\u2014","","","","\u2014"],["Investments in CRT arrangements:"],["Deposits securing CRT arrangements","","","\u2014","","","","1,700,000","","","","933,370"],["Recognition of firm commitment to purchase CRT securities (1)","","","\u2014","","","","(38,161",")","","","99,305"],["Change in face amount of firm commitment to purchase CRT securities and commitment to fund Deposits securing CRT arrangements","","","\u2014","","","","(1,502,203",")","","","897,151"],["Total investments in CRT arrangements","","","\u2014","","","","159,636","","","","1,929,826"],["Total investments resulting from correspondent activities","","$","1,526,885","","","$","1,318,111","","","$","2,767,532"]]
[[/GREPCENT_TABLE]]

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[[GREPCENT_TABLE]]
[["(1)","Initial recognition of firm commitment upon sale of loans."]]
[[/GREPCENT_TABLE]]

Interest Rate Sensitive Investments

Our interest rate sensitive investments include:

[[GREPCENT_TABLE]]
[["","\u2022","Mortgage servicing rights. During the year ended December 31, 2021, we received approximately $1.5 billion of MSRs as proceeds from sales of loans acquired for sale. We held $2.9 billion of MSRs at fair value at December 31, 2021."]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","\u2022","REIT-eligible mortgage-backed or mortgage-related securities. We purchased approximately $2.2 billion and sold approximately $1.3 billion of Agency MBS during the year ended December 31, 2021. We held Agency MBS with fair values totaling approximately $2.7 billion at December 31, 2021. The purchases and sales during the period reflect a rebalancing of our investment in Agency MBS aimed at reducing prepayment and price risk relating to these assets."]]
[[/GREPCENT_TABLE]]

Credit Sensitive Investments

CRT Arrangements

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

Investments in Subordinate MBS Backed by Loans Secured by Investment Properties

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

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

Taxation

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

We evaluate our deferred tax assets quarterly to determine if valuation allowances are required based on the consideration of all available positive and negative evidence using a “more-likely-than-not” standard with respect to whether deferred tax assets will be realized. Our evaluation considers, among other factors, taxable loss carryback availability, expectations of sufficient future taxable income, trends in earnings, existence of taxable income in recent years, the future reversal of temporary differences, and available tax planning strategies that could be implemented, if required.  The ultimate realization of our deferred tax assets depends primarily on our ability to generate future taxable income during the periods in which the related deferred tax assets become deductible.

Critical Accounting Policies

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

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Fair value

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

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

[[GREPCENT_TABLE]]
[["","","","December 31, 2021"],["","","","","","","","Percentage of"],["Level","Description","","Carrying value of assets measured (1)","","","Total assets","","","Total shareholders' equity"],["","","","(in thousands)"],["1","Prices determined using quoted prices in active markets for identical assets or liabilities.","","$","174,007","","","","1","%","","","7","%"],["2","Prices determined using other significant observable inputs. Observable inputs are inputs that other market participants would use in pricing an asset or liability and are developed based on market data obtained from sources independent of the Company.","","","8,388,043","","","","61","%","","","354","%"],["3","Prices determined using significant unobservable inputs. Unobservable inputs reflect our judgments about the factors that market participants use in pricing an asset or liability, and are based on the best information available in the circumstances. (2)","","","4,669,962","","","","34","%","","","197","%"],["","Total assets measured at or based on fair value","","$","13,232,012","","","","96","%","","","558","%"],["","Total assets","","$","13,772,708"],["","Total shareholders\u2019 equity","","$","2,367,518"]]
[[/GREPCENT_TABLE]]

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

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

At December 31, 2021, $13.2 billion, or 96%, of our total assets were carried at fair value on a recurring basis and $14.4 million, or less than 1% (consisting of REO), were carried based on fair value on a non-recurring basis. Of these assets, $4.7 billion, or 34%, of total assets are measured using “Level 3” fair value inputs, which are difficult to observe and require significant management judgment.

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

[[GREPCENT_TABLE]]
[["","","","","Change in fair value"],["Year ended December 31,","","","Loans at fair value (1)","","","Excess servicing spread","","","Interest rate lock commitments","","","CRT Assets","","","Mortgage servicing rights (2)","","","Total","","","Pre-tax income (loss)"],["","2021","","","$","1,182","","","","1,037","","","","(156,840",")","","","163,290","","","","(39,056",")","","$","(30,387",")","","$","44,661"],["","2020","","","$","(1,578",")","","","(24,970",")","","","536,943","","","","(267,969",")","","","(706,107",")","","$","(463,681",")","","$","79,730"],["","2019","","","$","(6,099",")","","","(9,256",")","","","80,133","","","","59,800","","","","(262,031",")","","$","(137,453",")","","$","190,641"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["(1)","Includes loans held for sale and loans at fair value."]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["(2)","Excluding changes in fair value attributable to realization of cash flows."]]
[[/GREPCENT_TABLE]]

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

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

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

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

Loans

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

[[GREPCENT_TABLE]]
[["","\u2022","We categorize loans that are saleable into active markets as \u201cLevel 2\u201d fair value assets. Such loans include substantially all of our loans acquired for sale and our loans held in VIEs. We estimate such loans\u2019 fair values using their quoted market price or market price equivalent. We held $5.7 billion of such loans at fair value at December 31, 2021."]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","\u2022","We categorize loans that are not saleable into active markets as \u201cLevel 3\u201d fair value assets. Such loans include of our investments in distressed loans, home equity and commercial loans held for sale and certain of the loans acquired for sale which we subsequently repurchased pursuant to representations and warranties or that we identified as non-salable to the Agencies. We held $34.3 million of such loans at fair value at December 31, 2021."]]
[[/GREPCENT_TABLE]]

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

Derivative Assets

Interest Rate Lock Commitments

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

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

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

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

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

52

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

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

[[GREPCENT_TABLE]]
[["(1)","Pull-through rate adjustments for individual loans are limited to adjustments that will increase the individual loan\u2019s pull-through rate to 100%."]]
[[/GREPCENT_TABLE]]

Credit Risk Transfer Arrangements

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

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

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

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

Mortgage Servicing Rights

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

A shift in the market for MSRs or a change in our assessment of an input to the valuation of MSRs can have a significant effect on the fair value of MSRs and in our income for the period. We believe the most significant “Level 3” fair value inputs to the valuation of MSRs are the pricing spread (discount rate), prepayment speed and annual per-loan cost of servicing. We held

53

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

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

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

Critical Accounting Policies Not Tied to Fair Value

Consolidation—Variable Interest Entities

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

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

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

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

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

[[GREPCENT_TABLE]]
[["","\u2022","The VIEs that hold loans we have securitized are shown as their constituent assets and liabilities- Loans at fair value, and the securities issued to third parties by the consolidated VIE are shown as Asset-backed financings at fair value on our consolidated balance sheets. We include the interest earned on the loans held by the VIEs in Interest income and interest attributable to the asset-backed securities issued by the VIEs in Interest expense in our consolidated income statements. Changes in the fair value of loans held in the VIEs and the associated asset-backed financings are included in Net gains (losses) on investments and financings in our consolidated income statements."]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","\u2022","The VIEs that hold assets relating to our CRT arrangements are shown as their constituent assets and liabilities \u2013 the Deposit securing credit risk transfer agreements, Derivative and credit risk transfer strip assets and liabilities which represent our Interest-only (\u201cIO\u201d) ownership interest and Recourse Obligation, and Interest-only security payable at fair value. We include the income we receive from the IO ownership interests and changes in fair value of the Derivative credit risk transfer strip assets and liabilities and Interest-only security payable at fair value in Net gains (losses) on investments and financings in our consolidated income statements."]]
[[/GREPCENT_TABLE]]

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Income Taxes

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

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

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

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

Accounting Developments

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

Non-Cash Investment Income

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

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

[[GREPCENT_TABLE]]
[["","","Year ended December 31,"],["","","2021","","","2020","","","2019"],["","(dollars in thousands)"],["Net gains (losses) on investments and financings:"],["Mortgage-backed securities","","$","(74,354",")","","$","87,852","","","$","77,283"],["Loans:"],["Held in variable interest entities","","","(12,536",")","","","(6,617",")","","","7,883"],["Distressed","","","(206",")","","","(87",")","","","(7,169",")"],["ESS","","","1,651","","","","(22,729",")","","","(7,530",")"],["CRT arrangements","","","163,126","","","","(161,854",")","","","(11,445",")"],["Firm commitment to purchase CRT securities","","","\u2014","","","","(121,067",")","","","60,943"],["Interest-only security payable at fair value","","","164","","","","14,952","","","","10,302"],["Asset-backed financings at fair value","","","19,708","","","","5,519","","","","(7,553",")"],["","","","97,553","","","","(204,031",")","","","122,714"],["Net gains on loans acquired for sale (1)","","","1,379,717","","","","1,199,605","","","","931,733"],["Net loan servicing fees\u2014MSR valuation adjustments","","","(337,186",")","","","(938,937",")","","","(464,353",")"],["Net interest income\u2014Capitalization of interest pursuant to loan modifications","","","251","","","","\u2014","","","","2,318"],["","","$","1,140,335","","","$","56,637","","","$","592,412"],["Net investment income","","$","420,297","","","$","469,351","","","$","488,815"],["Non-cash items as a percentage of net investment income","","","271","%","","","12","%","","","121","%"]]
[[/GREPCENT_TABLE]]

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

We receive or pay cash relating to:

[[GREPCENT_TABLE]]
[["","\u2022","Our investments in mortgage-backed securities through monthly principal and interest payments from the issuer of such securities or from sale of the investment;"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","\u2022","Loan investments when the investments are paid down, paid off or sold, when payments of principal and interest occur on such loans or when the property securing the loan has been sold;"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","\u2022","ESS investments through a portion of the monthly interest payments collected on the loans in the ESS reference pool or from sale of the investment;"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","\u2022","CRT arrangements through a portion of both the interest payments collected on loans in the CRT arrangements\u2019 reference pools and the release to us of the deposits securing the arrangements as principal on such loans is repaid;"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","\u2022","Hedging instruments when we receive or make margin deposits as the fair value of respective instrument changes, when the instruments mature or when we effectively cancel the transactions through offsetting trades;"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","\u2022","Our liability for representations and warranties when we repurchase loans or settle loss claims from investors; and"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","\u2022","MSRs in the form of loan servicing fees and placement fees on the deposits we manage on behalf of the borrowers and investors in the loans we service."]]
[[/GREPCENT_TABLE]]

56

Results of Operations

The following is a summary of our key performance measures:

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

[[GREPCENT_TABLE]]
[["(1)","As described in Note 3 \u2013 Significant Accounting Policies \u2013 Recently Issued Accounting Pronouncement to the consolidated financial statements included in this Report, beginning in 2022, a portion of PMT\u2019s exchangeable senior notes that are exchangeable for PMT common shares (\u201cCommon Shares\u201d) (the \u201cExchangeable Notes\u201d) originally allocated to additional paid-in capital will be reclassified to the carrying value of the Exchangeable Notes. Giving effect to this change on the pro forma basis, PMT\u2019s book value as of December 31, 2021 would have been $18.60. This reclassification will also require inclusion of the consideration of common shares issuable pursuant to conversion of the Exchangeable Notes in the Company\u2019s diluted earnings per share calculation."]]
[[/GREPCENT_TABLE]]

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

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

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

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

57

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

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

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

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

[[GREPCENT_TABLE]]
[["","\u2022","During the year ended December 31, 2021, we recognized a $636.0 million increase in net gains on our CRT arrangements as compared to 2020, which reflected the severe impact of the market disruption caused by the COVID-19 pandemic on our investments in CRT arrangements during 2020 and the subsequent recovery in 2021."]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","\u2022","Our interest rate sensitive strategies segment was negatively affected by a decrease in net servicing fees of $189.7 million caused by negative fair value changes in our investment in MSRs and hedging results, a $162.2 million decrease in gains on MBS and a $50.7 million increase in net interest expense."]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","\u2022","Growth in production volume in our correspondent production segment was more than offset by reductions in our gain on sale margins as increased market competition compressed such margins, resulting in a $257.7 million decrease in our pretax income."]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","\u2022","We recorded income tax benefit of $12.2 million due to fair value losses on MSRs held in our TRS."]]
[[/GREPCENT_TABLE]]

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

[[GREPCENT_TABLE]]
[["","\u2022","Our credit sensitive strategies segment reflects the severe impact of the market conditions on our investments in CRT arrangements; we recognized a $438.6 million reduction in the net investment gains on our CRT arrangements and initial recognition of firm commitment to purchase CRT securities."]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","\u2022","During the year ended December 31, 2020, our interest rate sensitive strategies segment was positively affected by growth in its servicing portfolio and performance of its interest rate hedges. We recognized a $212.6 million increase in net servicing fees caused by growth in servicing fees due to an increase in our servicing portfolio and improved hedging performance in relation to MSR fair value changes."]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","\u2022","Our correspondent production segment benefited from increases in loan production volume and gain on sale margins due to the increase in loan demand resulting from historically low interest rates that prevailed throughout 2020, compounded by existing mortgage industry capacity constraints, resulting in a $280.0 million increase in our pretax income."]]
[[/GREPCENT_TABLE]]

58

Net Investment Income

Our net investment income is summarized below:

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

Net Gains (Losses) on Investments and Financings

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

[[GREPCENT_TABLE]]
[["","","Year ended December 31,"],["","","2021","","","2020","","","2019"],["","(in thousands)"],["From nonaffiliates:"],["Mortgage-backed securities","","$","(74,354",")","","$","87,852","","","$","77,283"],["Loans at fair value:"],["Held in VIEs","","","(12,536",")","","","(6,617",")","","","7,883"],["Distressed","","","611","","","","(837",")","","","(7,169",")"],["CRT arrangements","","","368,999","","","","(145,938",")","","","110,676"],["Firm commitment to purchase CRT securities","","","\u2014","","","","(121,067",")","","","60,943"],["Asset-backed financings at fair value","","","19,708","","","","5,519","","","","(7,553",")"],["Hedging derivatives","","","\u2014","","","","32,932","","","","28,785"],["","","","302,428","","","","(148,156",")","","","270,848"],["From PFSI\u2014ESS","","","1,651","","","","(22,729",")","","","(7,530",")"],["","","$","304,079","","","$","(170,885",")","","$","263,318"]]
[[/GREPCENT_TABLE]]

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

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

Mortgage-Backed Securities

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

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

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

59

CRT Arrangements

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

[[GREPCENT_TABLE]]
[["","","Year ended December 31,"],["","","2021","","","2020","","","2019"],["","(in thousands)"],["UPB of loans sold","","","","","","$","18,277,263","","","$","47,748,300"],["Investments:"],["Deposits securing CRT arrangements","","","","","","$","1,700,000","","","$","933,370"],["Change in expected face amount of firm commitment to purchase CRT securities","","","","","","","(1,502,203",")","","","897,151"],["","","","","","","$","197,797","","","$","1,830,521"],["Investment income (loss):"],["Net gains on loans acquired for sale \u2014 Fair value of firm commitment to purchase CRT securities recognized upon sale of loans","","","","","","$","(38,161",")","","$","99,305"],["Net gains (losses) on investments and financings:"],["Derivative and CRT strips:"],["CRT derivatives"],["Realized","","$","93,837","","","","(53,965",")","","","79,619"],["Valuation changes","","","(12,829",")","","","(82,633",")","","","(9,571",")"],["","","","81,008","","","","(136,598",")","","","70,048"],["CRT strips"],["Realized","","","111,872","","","","54,929","","","","32,200"],["Valuation changes","","","175,955","","","","(79,221",")","","","(1,874",")"],["","","","287,827","","","","(24,292",")","","","30,326"],["Interest-only security payable at fair value","","","164","","","","14,952","","","","10,302"],["","","","368,999","","","","(145,938",")","","","110,676"],["Firm commitments to purchase CRT securities","","","\u2014","","","","(121,067",")","","","60,943"],["","","","368,999","","","","(267,005",")","","","171,619"],["Interest income \u2014 Deposits securing CRT arrangements","","","559","","","","7,012","","","","34,229"],["","","$","369,558","","","$","(298,154",")","","$","305,153"],["Net (recoveries received) payments made to settle (recoveries) losses on CRT arrangements","","$","(62,387",")","","$","115,475","","","$","5,165"]]
[[/GREPCENT_TABLE]]

60

[[GREPCENT_TABLE]]
[["","","December 31, 2021","","","December 31, 2020"],["","","(in thousands)"],["Carrying value of CRT arrangements:"],["Derivative and credit risk transfer strip assets (liabilities), net"],["CRT derivatives","","$","18,964","","","$","31,795"],["CRT strips","","","(26,837",")","","","(202,792",")"],["","","$","(7,873",")","","$","(170,997",")"],["Deposits securing CRT arrangements","","$","1,704,911","","","$","2,799,263"],["Interest-only security payable at fair value","","$","10,593","","","$","10,757"],["CRT arrangement assets pledged to secure borrowings:"],["Derivative and credit risk transfer assets","","$","19,627","","","$","58,699"],["Deposits securing CRT arrangements (1)","","$","1,704,911","","","$","2,799,263"],["UPB of loans \u2014 underlying CRT arrangements","","$","30,808,907","","","$","58,697,942"],["Collection status (UPB):"],["Delinquency (2)"],["Current","","$","29,581,803","","","$","54,990,381"],["30-89 days delinquent","","$","349,291","","","$","710,872"],["90-180 days delinquent","","$","120,775","","","$","693,315"],["180 or more days delinquent","","$","748,576","","","$","2,297,365"],["Foreclosure","","$","8,462","","","$","6,009"],["Bankruptcy","","$","64,694","","","$","75,700"],["Delinquent loans in COVID-19 pandemic-related forbearance plans:"],["30-89 days delinquent","","$","44,015","","","$","383,028"],["90-180 days delinquent","","$","57,815","","","$","546,344"],["180 or more days delinquent","","$","174,041","","","$","1,944,663"]]
[[/GREPCENT_TABLE]]

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

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

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

ESS Purchased from PFSI

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

61

Net Gains on Loans Acquired for Sale

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

[[GREPCENT_TABLE]]
[["","","Year ended December 31,"],["","","2021","","","2020","","","2019"],["","(in thousands)"],["From non-affiliates:"],["Cash loss:"],["Loans","","$","(1,487,649",")","","$","(326,214",")","","$","(687,317",")"],["Hedging activities","","","188,733","","","","(504,506",")","","","(88,633",")"],["","","","(1,298,916",")","","","(830,720",")","","","(775,950",")"],["Non-cash gain:"],["Receipt of MSRs in loan sale transactions","","","1,484,629","","","","1,158,475","","","","837,706"],["Provision for losses relating to representations and warranties provided in loan sales:"],["Pursuant to loan sales","","","(25,029",")","","","(19,316",")","","","(3,778",")"],["Reduction in liability due to change in estimate","","","5,812","","","","4,457","","","","3,550"],["","","","(19,217",")","","","(14,859",")","","","(228",")"],["Recognition of fair value of commitment to purchase credit risk transfer securities relating to loans sold","","","\u2014","","","","(38,161",")","","","99,305"],["Change in fair value during the year of financial instruments:"],["IRLCs","","","(69,935",")","","","61,232","","","","(834",")"],["Loans","","","31,072","","","","(12,279",")","","","(1,765",")"],["Hedging derivatives","","","(46,832",")","","","45,197","","","","(2,451",")"],["","","","(85,695",")","","","94,150","","","","(5,050",")"],["","","","1,379,717","","","","1,199,605","","","","931,733"],["Total from nonaffiliates","","","80,801","","","","368,885","","","","155,783"],["From PFSI\u2014cash","","","6,472","","","","11,037","","","","14,381"],["","","$","87,273","","","$","379,922","","","$","170,164"],["Interest rate lock commitments issued on loans acquired for sale to nonaffiliates","","$","108,458,880","","","$","117,727,579","","","$","63,323,599"],["Acquisition of loans for sale (UPB):"],["To nonaffiliates","","$","110,003,574","","","$","106,898,339","","","$","57,396,037"],["To PFSI","","","64,641,218","","","","62,413,089","","","","49,116,781"],["","","$","174,644,792","","","$","169,311,428","","","$","106,512,818"]]
[[/GREPCENT_TABLE]]

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

Non-cash elements of gain on sale of loans

Interest Rate Lock Commitments

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

62

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

Mortgage Servicing Rights

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

Firm Commitment to Purchase CRT Securities

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

Liability for Losses Under Representations and Warranties

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

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

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

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

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

63

The losses on representations and warranties we have recorded to date have been moderated by our ability to recover most of the losses inherent in the repurchased loans from the correspondent sellers. As the outstanding balance of loans we purchase and sell subject to representations and warranties increases, as the loans sold season, as our investors’ and guarantors’ loss mitigation strategies change and as our correspondent sellers’ ability and willingness to repurchase loans change, we expect that the level of repurchase activity and associated losses may increase.

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

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

We record adjustments to our liability for losses on representations and warranties as economic fundamentals change, as investor and Agency evaluations of their loss mitigation strategies (including claims under representations and warranties) change and as economic conditions affect our correspondent sellers’ ability or willingness to fulfill their recourse obligations to us. Such adjustments may be material to our financial position and income in future periods.

Adjustments to our liability for representations and warranties are included as a component of our Net gains on loans acquired for sale at fair value. We recorded reductions in liabilities for representations and warranties for previously sold loans totaling $5.8 million, $4.5 million and $3.6 million during each of the three years ended December 31, 2021, 2020 and 2019, respectively, due to the effects of certain loans reaching specified performance histories identified by the Agencies as sufficient to limit repurchase claims relating to such loans.

Loan Origination Fees

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

Net Loan Servicing Fees

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

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

Following is a summary of our loan servicing fees:

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

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

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

64

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

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

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

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

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

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

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

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

Following is a summary of our loan servicing portfolio:

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

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

65

[[GREPCENT_TABLE]]
[["(2)","Custodial funds include borrower and investor custodial cash accounts relating to loans serviced under mortgage servicing agreements and are not included on the Company\u2019s consolidated balance sheets. The Company earns placement fees on certain of the custodial funds it manages on behalf of the loans\u2019 borrowers and investors, which are included in Interest income in the Company\u2019s consolidated statements of income."]]
[[/GREPCENT_TABLE]]

Net Interest (Expense) Income

Net interest (expense) income is summarized below:

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

66

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

[[GREPCENT_TABLE]]
[["","","Year ended December 31, 2021","","","Year ended December 31, 2020"],["","","vs.","","","vs."],["","","Year ended December 31, 2020","","","Year ended December 31, 2019"],["","","Increase (decrease) due to changes in","","","Increase (decrease) due to changes in"],["","","Rate","","","Volume","","","Total","","","Rate","","","Volume","","","Total"],["","(in thousands)"],["Assets:"],["Cash and short-term investments","","$","(1,008",")","","$","(1,858",")","","$","(2,866",")","","$","(5,855",")","","$","5,100","","","$","(755",")"],["Mortgage-backed securities","","","(10,318",")","","","(12,963",")","","","(23,281",")","","","(28,146",")","","","9,157","","","","(18,989",")"],["Loans acquired for sale at fair value","","","2,321","","","","19,896","","","","22,217","","","","(45,316",")","","","27,150","","","","(18,166",")"],["Loans at fair value:"],["Held by variable interest entities","","","(3,540",")","","","9,945","","","","6,405","","","","1,940","","","","(3,065",")","","","(1,125",")"],["Distressed","","","11","","","","(135",")","","","(124",")","","","235","","","","(3,590",")","","","(3,355",")"],["","","","(3,529",")","","","9,810","","","","6,281","","","","2,175","","","","(6,655",")","","","(4,480",")"],["ESS from PFSI","","","673","","","","(7,811",")","","","(7,138",")","","","467","","","","(2,340",")","","","(1,873",")"],["Deposits securing CRT arrangements","","","(8,075",")","","","1,622","","","","(6,453",")","","","(29,802",")","","","2,585","","","","(27,217",")"],["","","","(19,936",")","","","8,696","","","","(11,240",")","","","(106,477",")","","","34,997","","","","(71,480",")"],["Placement fees relating to custodial funds","","","\u2014","","","","(15,438",")","","","(15,438",")","","","\u2014","","","","(23,783",")","","","(23,783",")"],["Other","","","\u2014","","","","(218",")","","","(218",")","","","\u2014","","","","(487",")","","","(487",")"],["","","","(19,936",")","","","(6,960",")","","","(26,896",")","","","(106,477",")","","","10,727","","","","(95,750",")"],["Liabilities:"],["Assets sold under agreements to repurchase","","","(16,219",")","","","11,166","","","","(5,053",")","","","(73,199",")","","","(2,881",")","","","(76,080",")"],["Mortgage loan participation purchase and sale agreement","","","(96",")","","","(200",")","","","(296",")","","","(826",")","","","158","","","","(668",")"],["Notes payable secured by credit risk transfer and mortgage servicing assets","","","(808",")","","","28,300","","","","27,492","","","","(20,827",")","","","26,120","","","","5,293"],["Exchangeable senior notes","","","3,914","","","","13,986","","","","17,900","","","","2,428","","","","(618",")","","","1,810"],["Asset-backed financings of at fair value","","","(5,234",")","","","9,339","","","","4,105","","","","2,679","","","","(3,032",")","","","(353",")"],["Assets sold to PFSI under agreement to repurchase","","","(470",")","","","(2,468",")","","","(2,938",")","","","(1,821",")","","","(1,156",")","","","(2,977",")"],["","","","(18,913",")","","","60,123","","","","41,210","","","","(91,566",")","","","18,591","","","","(72,975",")"],["Interest shortfall on repayments of loans serviced for Agency securitizations","","","\u2014","","","","(6,997",")","","","(6,997",")","","","\u2014","","","","45,740","","","","45,740"],["Interest on loan impound deposits","","","\u2014","","","","(246",")","","","(246",")","","","\u2014","","","","559","","","","559"],["","","","(18,913",")","","","52,880","","","","33,967","","","","(91,566",")","","","64,890","","","","(26,676",")"],["Net interest expense","","$","(1,023",")","","$","(59,840",")","","$","(60,863",")","","$","(14,911",")","","$","(54,163",")","","$","(69,074",")"]]
[[/GREPCENT_TABLE]]

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

[[GREPCENT_TABLE]]
[["","\u2022","An increase in long-term debt issued to finance our investments in CRT Agreements and MSRs as well as the issuance of unsecured debt. These forms of debt bear higher interest costs as compared to the short-term debt they replace and do not finance interest-earning assets. Revenues relating to MSRs and CRT arrangements are reflected in Net loan servicing fees and Net gains (losses) on investments and financings."]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","\u2022","A decrease in earnings from placement fees relating to custodial funds managed for borrowers, and investors, and deposits securing CRT arrangements which reflects the decrease in interest rates we earn on these assets."]]
[[/GREPCENT_TABLE]]

67

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

[[GREPCENT_TABLE]]
[["","\u2022","An increase in interest shortfall on repayments of loans serviced for Agency securitizations resulting from the increased levels of prepayment activity in our MSR portfolio. In many cases, when a borrower repays its loan, we are responsible for paying the full month\u2019s interest to the holders of the Agency securities that are backed by the loan regardless of when in the month the borrower repays the loan."]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","\u2022","A decrease in earnings from placement fees relating to custodial funds managed for borrowers and investors and deposits securing CRT arrangements which reflect the effect of decreasing interest rates we earn on these assets."]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","\u2022","Included in net interest income for the year ended December 31, 2019 was $10.8 million of incentives we recognized relating to a master repurchase agreement that provided us with incentives to finance loans approved for satisfying certain consumer characteristics. The master repurchase agreement expired on August 21, 2019."]]
[[/GREPCENT_TABLE]]

Expenses

Our expenses are summarized below:

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

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

Loan Fulfillment Fees

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

68

Loan Servicing Fees

Loan servicing fees payable to PLS are summarized below:

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

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

Management Fees

Management fees payable to PCM are summarized below:

[[GREPCENT_TABLE]]
[["","","Year ended December 31,"],["","","2021","","","2020","","","2019"],["","","(in thousands)"],["Base","","$","34,794","","","$","34,538","","","$","29,303"],["Performance incentive","","","3,007","","","","\u2014","","","","7,189"],["","","$","37,801","","","$","34,538","","","$","36,492"],["Average shareholders' equity amounts used to calculate base management fee expense","","$","2,348,395","","","$","2,330,154","","","$","1,958,970"]]
[[/GREPCENT_TABLE]]

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

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

Loan origination

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

Loan collection and liquidation

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

69

Compensation

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

Other Expenses

Other expenses are summarized below:

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

Income Taxes

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

Our effective tax rates were (27.3)% for the year ended December 31, 2021 and 34.3% for the year ended December 31, 2020.  Our TRS recognized a tax benefit of $12.2 million on pretax loss of $175.3 million while our consolidated pretax income was $44.7 million for the year ended December 31, 2021. For 2020, the TRS recognized tax expense of $27.3 million on pretax income of $151.5 million while our consolidated pretax income was $79.7 million. The relative values between the tax benefit or expense at the TRS and our consolidated pretax income drive the fluctuation in the effective tax rate. The primary difference between our effective tax rate and the statutory tax rate is due to nontaxable REIT income resulting from the dividends paid deduction.

The Company assesses the available positive and negative evidence to estimate whether sufficient future taxable income will be generated to permit use of the existing deferred tax assets. On the basis of this evaluation, as of December 31, 2021, the valuation allowance was increased to $34.1 million from the $110,000 valuation allowance recorded at December 31, 2020 as the result of a GAAP loss at the TRS for the year ended December 31, 2021. The amount of deferred tax assets considered realizable could be adjusted in future periods based on future income.

The CARES Act, passed in March 2020, introduced a number of tax law changes which are generally taxpayer favorable and in December 2020, the Taxpayer Certainty and Disaster Tax Relief Act was signed into law. No material changes in our effective income tax rates resulted from either Act. While the CARES Act provides for carry back of losses from 2019, 2020 and 2021, the TRS does not have taxable income from prior years to which the losses could be carried back.

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

70

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:

[[GREPCENT_TABLE]]
[["","","","","","","","","","","Taxable income (loss)"],["","","GAAP net income","","","GAAP/tax differences","","","Total taxable income (loss)","","","Taxable subsidiaries","","","REIT"],["Year ended December 31, 2021","","(in thousands)"],["Net investment income"],["Net loan servicing fees/ESS transactions","","$","(36,022",")","","$","1,332,675","","","$","1,296,653","","","$","1,296,653","","","$","\u2014"],["Net gains on loans acquired for sale","","","87,273","","","","(1,466,274",")","","","(1,379,001",")","","","(1,379,001",")","","","\u2014"],["Loan origination fees","","","170,672","","","","\u2014","","","","170,672","","","","170,672","","","","\u2014"],["Net gains (losses) on investments and financings","","","304,079","","","","(139,874",")","","","164,205","","","","81,228","","","","82,977"],["Net interest (expense) income","","","(109,498",")","","","197,626","","","","88,127","","","","(36,809",")","","","124,936"],["Results of real estate acquired in settlement of loans","","","3,075","","","","(5,191",")","","","(2,116",")","","","(2,116",")","","","\u2014"],["Other","","","718","","","","\u2014","","","","718","","","","718","","","","\u2014"],["Net investment income","","","420,297","","","","(81,038",")","","","339,258","","","","131,345","","","","207,913"],["Expenses","","","375,636","","","","940","","","","376,576","","","","359,576","","","","17,000"],["REIT dividend deduction","","","\u2014","","","","190,902","","","","190,902","","","","\u2014","","","","190,902"],["Total expenses and dividend deduction","","","375,636","","","","191,842","","","","567,478","","","","359,576","","","","207,902"],["Income (loss) before (benefit from) provision for income taxes","","","44,661","","","","(272,880",")","","","(228,220",")","","","(228,231",")","","","11"],["(Benefit from) provision for income taxes","","","(12,193",")","","","12,204","","","","11","","","","\u2014","","","","11"],["Net income","","$","56,854","","","$","(285,084",")","","$","(228,231",")","","$","(228,231",")","","$","\u2014"]]
[[/GREPCENT_TABLE]]

Balance Sheet Analysis

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

[[GREPCENT_TABLE]]
[["","","December 31,","","","December 31,"],["","","2021","","","2020"],["","","(in thousands)"],["Assets"],["Cash","","$","58,983","","","$","57,704"],["Investments:"],["Short-term","","","167,999","","","","127,295"],["Mortgage-backed securities at fair value","","","2,666,768","","","","2,213,922"],["Loans acquired for sale at fair value","","","4,171,025","","","","3,551,890"],["Loans at fair value","","","1,568,726","","","","151,734"],["ESS","","","\u2014","","","","131,750"],["Derivative assets","","","34,238","","","","164,318"],["Deposits securing credit risk transfer arrangements","","","1,704,911","","","","2,799,263"],["MSRs","","","2,892,855","","","","1,755,236"],["REO","","","14,382","","","","28,709"],["","","","13,220,904","","","","10,924,117"],["Other","","","492,821","","","","510,190"],["Total assets","","$","13,772,708","","","$","11,492,011"],["Liabilities"],["Debt:"],["Short-term","","$","6,721,878","","","$","6,407,131"],["Long-term","","","4,455,012","","","","2,267,278"],["","","","11,176,890","","","","8,674,409"],["Other","","","228,300","","","","520,743"],["Total liabilities","","","11,405,190","","","","9,195,152"],["Shareholders\u2019 equity","","","2,367,518","","","","2,296,859"],["Total liabilities and shareholders\u2019 equity","","$","13,772,708","","","$","11,492,011"]]
[[/GREPCENT_TABLE]]

 Total assets increased by approximately $2.3 billion, or 20%, from December 31, 2020 to December 31, 2021, primarily due to an increase of $1.4 billion in Loans at fair value, $1.1 billion of MSRs and $619.1 million in Loans acquired for sale at fair value,

71

partially offset by a $1.1 billion decrease in Deposits securing credit risk transfer arrangements. The increase in Loans at fair value reflects our increased holdings of investments in loan securitizations backed by loans held in consolidated VIEs. The growth in our investment in MSRs reflects the growth in our servicing portfolio from our correspondent lending activities.

Asset Acquisitions

Our asset acquisitions are summarized below.

Correspondent Production

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

[[GREPCENT_TABLE]]
[["","","Year ended December 31,"],["","","2021","","","2020","","","2019"],["","","(in thousands)"],["Correspondent loan purchases:"],["Agency-eligible (1)","","$","113,667,618","","","$","106,472,654","","","$","63,989,938"],["Government-insured or guaranteed - for sale to PLS","","","67,702,945","","","","63,574,547","","","","50,499,641"],["Jumbo","","","\u2014","","","","\u2014","","","","12,839"],["Advances to home equity lines of credit","","","\u2014","","","","2,569","","","","5,182"],["","","$","181,370,563","","","$","170,049,770","","","$","114,507,600"]]
[[/GREPCENT_TABLE]]

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

During 2021, we purchased for sale $181.4 billion in fair value of correspondent production loans as compared to $170.0 billion during 2020 and $114.5 billion during 2019. Our ability to increase the level of correspondent production during the three-year period ended December 31, 2021 reflects the favorable interest rate environment during 2021 and 2020, along with continuing expansion of our correspondent seller network and our efforts aimed at maximizing the share of our correspondent sellers’ production that is sold to us.

Other Investment Activities

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

[[GREPCENT_TABLE]]
[["","","Year ended December 31,"],["","","2021","","","2020","","","2019"],["","","(in thousands)"],["Credit sensitive assets:"],["Credit risk transfer strips","","","","","","$","(178,501",")","","$","56,804"],["Deposits and commitments to fund deposits relating to CRT arrangements","","","","","","","1,700,000","","","","933,370"],["Change in firm commitment to purchase CRT securities"],["Fair value","","","","","","","(159,228",")","","","160,248"],["Expected face amount","","","","","","","(1,502,203",")","","","897,151"],["","","","","","","","(1,661,431",")","","","1,057,399"],["Loans secured by investment properties, net of associated asset-backed financing","","$","71,071","","","","\u2014","","","","\u2014"],["","","","71,071","","","","(139,932",")","","","2,047,573"],["Interest rate sensitive assets:"],["MBS (net of sales)","","","932,270","","","","352,307","","","","546,111"],["ESS received pursuant to a recapture agreement","","","557","","","","2,093","","","","1,757"],["MSRs received in loan sales","","","1,484,629","","","","1,158,475","","","","837,706"],["","","","2,417,456","","","","1,512,875","","","","1,385,574"],["","","$","2,488,527","","","$","1,372,943","","","$","3,433,147"]]
[[/GREPCENT_TABLE]]

Our acquisitions during the three years ended December 31, 2021 were financed through the use of a combination of proceeds from borrowings, liquidations of existing investments and proceeds from equity issuances. We continue to identify additional means of increasing our investment portfolio through cash flow from our business activities, existing investments, borrowings, and

72

transactions that minimize current cash outlays. However, we expect that, over time, our ability to continue our investment portfolio growth will depend on our ability to raise additional equity capital.

Investment Portfolio Composition

Mortgage-Backed Securities

Following is a summary of our MBS holdings:

[[GREPCENT_TABLE]]
[["","","December 31, 2021","","","December 31, 2020"],["","","","","","","","","","","Average","","","","","","","","","","","Average"],["","","Fair","","","","","","","Life","","","","","","","Fair","","","","","","","Life"],["","","value","","","Principal","","","(in years)","","","Coupon","","","value","","","Principal","","","(in years)","","","Coupon"],["","","(dollars in thousands)"],["Agency:"],["Freddie Mac","","$","831,417","","","$","826,859","","","","8.5","","","","2.1","%","","$","1,311,036","","","$","1,253,755","","","","4.4","","","","2.7","%"],["Fannie Mae","","","1,835,351","","","","1,822,379","","","","8.6","","","","2.2","%","","","902,886","","","","863,758","","","","5.3","","","","2.5","%"],["","","$","2,666,768","","","$","2,649,238","","","","","","","","","","","$","2,213,922","","","$","2,117,513"]]
[[/GREPCENT_TABLE]]

Credit Risk Transfer Transactions

Following is a summary of the composition of the loans underlying our investment in funded CRT arrangements and our firm commitment to purchase CRT securities.

CRT Arrangements

Following is a summary of our holding of CRT arrangements:

[[GREPCENT_TABLE]]
[["","","December 31, 2021","","","December 31, 2020"],["","","(in thousands)"],["Carrying value of CRT arrangements:"],["Derivative and credit risk transfer strip assets (liabilities), net"],["CRT strips","","$","(26,837",")","","$","(202,792",")"],["CRT derivatives","","","18,964","","","","31,795"],["","","","(7,873",")","","","(170,997",")"],["Deposits securing CRT arrangements","","","1,704,911","","","","2,799,263"],["Interest-only security payable at fair value","","","(10,593",")","","","(10,757",")"],["","","$","1,686,445","","","$","2,617,509"],["UPB of loans subject to credit guarantee obligations","","$","30,808,907","","","$","58,697,942"]]
[[/GREPCENT_TABLE]]

Following is a summary of the composition of the loans underlying our investment in CRT arrangements as of December 31, 2021:

[[GREPCENT_TABLE]]
[["","","Year of origination"],["","","2020","","","2019","","","2018","","","2017","","","2016","","","2015","","","Total"],["","(in millions)"],["UPB:"],["Outstanding","","$","5,990","","","$","14,301","","","$","3,871","","","$","3,246","","","$","2,582","","","$","819","","","$","30,809"],["Cumulative defaults","","$","17","","","$","182","","","$","278","","","$","493","","","$","192","","","$","52","","","$","1,214"],["Cumulative losses","","$","\u2014","","","$","1","","","$","10","","","$","34","","","$","14","","","$","6","","","$","65"]]
[[/GREPCENT_TABLE]]

73

[[GREPCENT_TABLE]]
[["","","Year of origination"],["Original debt-to income ratio","","2020","","","2019","","","2018","","","2017","","","2016","","","2015","","","Total"],["","(in millions)"],["25%","","$","1,209","","","$","2,134","","","$","369","","","$","398","","","$","376","","","$","99","","","$","4,585"],["25 - 30%","","","955","","","","1,824","","","","323","","","","371","","","","350","","","","103","","","","3,926"],["30 - 35%","","","1,066","","","","2,210","","","","461","","","","498","","","","442","","","","145","","","","4,822"],["35 - 40%","","","1,046","","","","2,541","","","","627","","","","589","","","","495","","","","170","","","","5,468"],["40 - 45%","","","1,043","","","","3,081","","","","899","","","","844","","","","690","","","","247","","","","6,804"],["45%","","","671","","","","2,511","","","","1,192","","","","546","","","","229","","","","55","","","","5,204"],["","","$","5,990","","","$","14,301","","","$","3,871","","","$","3,246","","","$","2,582","","","$","819","","","$","30,809"],["Weighted average","","","33.5","%","","","35.8","%","","","38.8","%","","","36.6","%","","","35.1","%","","","35.6","%","","","35.7","%"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","","Year of origination"],["Origination FICO credit score","","2020","","","2019","","","2018","","","2017","","","2016","","","2015","","","Total"],["","(in millions)"],["600 - 649","","$","46","","","$","204","","","$","82","","","$","39","","","$","26","","","$","15","","","$","412"],["650 - 699","","","312","","","","1,375","","","","797","","","","507","","","","325","","","","162","","","","3,478"],["700 - 749","","","1,455","","","","4,246","","","","1,386","","","","1,118","","","","834","","","","258","","","","9,297"],["750 or greater","","","4,169","","","","8,436","","","","1,597","","","","1,576","","","","1,397","","","","384","","","","17,559"],["Not available","","","8","","","","40","","","","9","","","","6","","","","\u2014","","","","\u2014","","","","63"],["","","$","5,990","","","$","14,301","","","$","3,871","","","$","3,246","","","$","2,582","","","$","819","","","$","30,809"],["Weighted average","","","763","","","","752","","","","735","","","","743","","","","750","","","","741","","","","750"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","","Year of origination"],["Origination loan-to value ratio","","2020","","","2019","","","2018","","","2017","","","2016","","","2015","","","Total"],["","(in millions)"],["80%","","$","2,792","","","$","5,077","","","$","1,272","","","$","1,036","","","$","1,035","","","$","324","","","$","11,536"],["80-85%","","","1,010","","","","2,755","","","","934","","","","919","","","","697","","","","220","","","","6,535"],["85-90%","","","391","","","","809","","","","179","","","","164","","","","143","","","","44","","","","1,730"],["90-95%","","","547","","","","1,487","","","","429","","","","400","","","","285","","","","91","","","","3,239"],["95-100%","","","1,250","","","","4,173","","","","1,057","","","","727","","","","422","","","","140","","","","7,769"],["","","$","5,990","","","$","14,301","","","$","3,871","","","$","3,246","","","$","2,582","","","$","819","","","$","30,809"],["Weighted average","","","80.8","%","","","83.2","%","","","83.2","%","","","82.6","%","","","80.8","%","","","81.0","%","","","82.4","%"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","","Year of origination"],["Current loan-to value ratio (1)","","2020","","","2019","","","2018","","","2017","","","2016","","","2015","","","Total"],["","(in millions)"],["80%","","$","5,337","","","$","13,031","","","$","3,714","","","$","3,212","","","$","2,577","","","$","818","","","$","28,689"],["80-85%","","","502","","","","948","","","","114","","","","27","","","","4","","","","1","","","","1,596"],["85-90%","","","125","","","","264","","","","33","","","","4","","","","1","","","","\u2014","","","","427"],["90-95%","","","24","","","","45","","","","8","","","","2","","","","\u2014","","","","\u2014","","","","79"],["95-100%","","","2","","","","10","","","","1","","","","1","","","","\u2014","","","","\u2014","","","","14"],["100%","","","\u2014","","","","3","","","","1","","","","\u2014","","","","\u2014","","","","\u2014","","","","4"],["","","$","5,990","","","$","14,301","","","$","3,871","","","$","3,246","","","$","2,582","","","$","819","","","$","30,809"],["Weighted average","","","66.8","%","","","66.5","%","","","62.8","%","","","57.8","%","","","52.4","%","","","49.4","%","","","63.5","%"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["(1)","Based on current UPB compared to estimated fair value of the property securing the loan."]]
[[/GREPCENT_TABLE]]

74

[[GREPCENT_TABLE]]
[["","","Year of origination"],["Geographic distribution","","2020","","","2019","","","2018","","","2017","","","2016","","","2015","","","Total"],["","(in millions)"],["CA","","$","617","","","$","1,373","","","$","459","","","$","340","","","$","476","","","$","145","","","$","3,410"],["FL","","","662","","","","1,404","","","","486","","","","346","","","","281","","","","74","","","","3,253"],["TX","","","738","","","","1,266","","","","311","","","","284","","","","335","","","","131","","","","3,065"],["VA","","","305","","","","627","","","","144","","","","153","","","","189","","","","77","","","","1,495"],["MD","","","225","","","","574","","","","173","","","","182","","","","168","","","","46","","","","1,368"],["Other","","","3,443","","","","9,057","","","","2,298","","","","1,941","","","","1,133","","","","346","","","","18,218"],["","","$","5,990","","","$","14,301","","","$","3,871","","","$","3,246","","","$","2,582","","","$","819","","","$","30,809"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","","Year of origination"],["Regional geographic distribution (1)","","2020","","","2019","","","2018","","","2017","","","2016","","","2015","","","Total"],["","(in millions)"],["Northeast","","$","538","","","$","1,658","","","$","442","","","$","453","","","$","322","","","$","119","","","$","3,532"],["Southeast","","","2,031","","","","4,951","","","","1,395","","","","1,123","","","","827","","","","256","","","","10,583"],["Midwest","","","546","","","","1,470","","","","318","","","","307","","","","228","","","","59","","","","2,928"],["Southwest","","","1,595","","","","3,253","","","","749","","","","650","","","","498","","","","178","","","","6,923"],["West","","","1,280","","","","2,969","","","","967","","","","713","","","","707","","","","207","","","","6,843"],["","","$","5,990","","","$","14,301","","","$","3,871","","","$","3,246","","","$","2,582","","","$","819","","","$","30,809"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["(1)","Northeast consists of CT, DE, MA, ME, NH, NJ, NY, PA, PR, RI, VT, VI;"]]
[[/GREPCENT_TABLE]]

Southeast consists of AL, DC, FL, GA, KY, MD, MS, NC, SC, TN, VA, WV;

Midwest consists of IA, IL, IN, MI, MN, NE, ND, OH, SD, WI;

Southwest consists of AR, AZ, CO, KS, LA, MO, NM, OK, TX, UT; and

West consists of AK, CA, GU, HI, ID, MT, NV, OR, WA and WY.

[[GREPCENT_TABLE]]
[["","","Year of origination"],["Collection status","","2020","","","2019","","","2018","","","","","2017","","","","","2016","","","","","2015","","","Total"],["","(in millions)"],["Delinquency"],["Current - 89 Days","","$","5,917","","","$","13,854","","","$","3,633","","","","","$","3,165","","","","","$","2,552","","","","","$","810","","","$","29,931"],["90 - 179 Days","","","12","","","","44","","","","29","","","","","","15","","","","","","13","","","","","","8","","","","121"],["180+ Days","","","61","","","","400","","","","204","","","","","","66","","","","","","16","","","","","","1","","","","748"],["Foreclosure","","","\u2014","","","","3","","","","5","","","","","","\u2014","","","","","","1","","","","","","\u2014","","","","9"],["","","$","5,990","","","$","14,301","","","$","3,871","","","","","$","3,246","","","","","$","2,582","","","","","$","819","","","$","30,809"],["Bankruptcy","","$","1","","","$","22","","","$","19","","","","","$","10","","","","","$","11","","","","","$","2","","","$","65"]]
[[/GREPCENT_TABLE]]

Cash Flows

Our cash flows for the years ended December 31, 2021, 2020, and 2019 are summarized below:

[[GREPCENT_TABLE]]
[["","","Year ended December 31,"],["","","2021","","","2020","","","2019"],["","","(in thousands)"],["Operating activities","","$","(2,817,660",")","","$","671,656","","","$","(2,985,074",")"],["Investing activities","","","1,090,959","","","","(15,367",")","","","(704,677",")"],["Financing activities","","","1,727,980","","","","(702,641",")","","","3,733,962"],["Net cash flows","","$","1,279","","","$","(46,352",")","","$","44,211"]]
[[/GREPCENT_TABLE]]

Our cash flows resulted in a net increase in cash of $1.3 million during 2021, as discussed below.

75

Operating activities

Net cash used in operating activities totaled $2.8 billion during 2021, as compared to net cash provided by operating activities of $671.7 million during 2020 and net cash used in operating activities of $3.0 billion during 2019. Cash flows from operating activities are most influenced by cash flows from loans acquired for sale as shown below:

[[GREPCENT_TABLE]]
[["","","Year ended December 31,"],["","","2021","","","2020","","","2019"],["","","(in thousands)"],["Operating cash flows from:"],["Loans acquired for sale","","$","(2,704,816",")","","$","(165,398",")","","$","(3,291,371",")"],["Other","","","(112,844",")","","","837,054","","","","306,297"],["","","$","(2,817,660",")","","$","671,656","","","$","(2,985,074",")"]]
[[/GREPCENT_TABLE]]

Cash flows from loans acquired for sale primarily reflect changes in the level of production inventory from the beginning to end of the years presented as well as cash flows relating to related hedging activities. Our inventory of loans acquired for sale increased during the year ended December 31, 2021, as compared to 2020, resulting in the cash outflow relating to loans acquired for sale. The negative cash flows relating to loans acquired for sale during 2020 reflect the significant cash hedging costs that reduced cash inflows from loan sales by more than the decrease in our inventory of loans held for sale. Our inventory of loans acquired for sale increased during 2019, resulting in the cash outflow relating to loans acquired for sale.

Investing activities

Net cash provided by our investing activities was $1.1 billion during 2021, as compared to net cash used in investing activities of $15.4 million and $704.7 million during 2020 and 2019, respectively, due primarily to the $1.3 billion of distributions from CRT arrangements that were not replaced by new investments in CRT arrangements. Investing cash flows during the year ended December 31, 2021 increased, as compared to 2020 and 2019, primarily due to our reduced investment in MBS during the year. Reduced growth in investment in MBS was partially offset by increased investments in CRT arrangements.

Financing activities

Net cash provided by our financing activities was $1.7 billion during 2021, as compared to net cash used in financing activities of $702.6 million and net cash provided by financing activities of $3.7 billion during 2020 and 2019, respectively. This change reflects the increased borrowings to finance our investment activities. Cash provided by financing activities during 2019, reflects the increased borrowings and the equity issuances made to finance growth in investments in MBS, CRT arrangements and growth in our inventory of loans held for sale.

As discussed below in Liquidity and Capital Resources, our Manager continually evaluates and pursues additional sources of financing to provide us with future investing capacity. We do not raise equity or enter into borrowings for the purpose of financing the payment of dividends. We believe that the cash flows from our investments are adequate to fund our operating expenses and dividend payment requirements. However, we manage our liquidity in the aggregate and are reinvesting our cash flows in new investments as well as using such cash to fund our dividend requirements.

Liquidity and Capital Resources

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

We expect our primary sources of liquidity to be cash flows from our investment portfolio, including cash earnings on our investments, cash flows from business activities, liquidation of existing investments and proceeds from borrowings and/or additional equity offerings. When we finance a particular asset, the amount borrowed is less than the asset’s fair value and we must provide the cash in the amount of such difference. Our ability to continue making investments is dependent on our ability to invest the cash representing such difference.

The impact of the COVID-19 pandemic on our operations, liquidity and capital resources remains uncertain and difficult to predict. For further discussion of the potential impacts of the COVID-19 pandemic please also see “Risk Factors” in Part I, Item 1A.

Our current debt financing strategy is to finance our assets where we believe such borrowing is prudent, appropriate and available. We make collateralized borrowings in the form of sales of assets under agreements to repurchase, loan participation

76

purchase and sale agreements and notes payable, including secured term financing for our MSRs and our CRT arrangements which has allowed us to more closely match the term of our borrowings to the expected lives of the assets securing those borrowings. Our leverage ratio, defined as all borrowings divided by shareholders’ equity at the date presented, was 4.72 and 3.78 at December 31, 2021 and December 31, 2020, respectively.

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

[[GREPCENT_TABLE]]
[["","","Year ended December 31,"],["Assets sold under agreements to repurchase","","","2021","","","","2020","","","","2019"],["","(in thousands)"],["Average balance outstanding","","$","6,161,755","","","$","5,508,147","","","$","5,600,469"],["Maximum daily balance outstanding","","$","8,882,538","","","$","10,433,609","","","$","8,577,065"],["Ending balance","","$","6,671,890","","","$","6,309,418","","","$","6,648,890"]]
[[/GREPCENT_TABLE]]

The difference between the maximum and average daily amounts outstanding is primarily due to timing of loan purchases and sales in our correspondent production business. The total facility size of our assets sold under agreements to repurchase was approximately $11.8 billion at December 31, 2021.

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

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

[[GREPCENT_TABLE]]
[["","\u2022","The transactions relating to loans and REO under agreements to repurchase generally provide for terms of approximately one to two years;"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","\u2022","The transactions relating to loans under mortgage loan participation purchase and sale agreements provide for terms of approximately one year; and"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","\u2022","The transactions relating to assets under notes payable provide for terms ranging from two to five years."]]
[[/GREPCENT_TABLE]]

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:

[[GREPCENT_TABLE]]
[["","\u2022","a minimum of $75 million in unrestricted cash and cash equivalents among the Company and/or our subsidiaries; a minimum of $75 million in unrestricted cash and cash equivalents among our Operating Partnership and its consolidated subsidiaries; a minimum of $25 million in unrestricted cash and cash equivalents between PennyMac Corp. (\u201cPMC\u201d) and PennyMac Holdings, LLC (\u201cPMH\u201d); a minimum of $25 million in unrestricted cash and cash equivalents at PMC; and a minimum of $10 million in unrestricted cash and cash equivalents at PMH;"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","\u2022","a minimum tangible net worth for the Company of $1.25 billion; a minimum tangible net worth for our Operating Partnership of $1.25 billion; a minimum tangible net worth for PMH of $250 million; and a minimum tangible net worth for PMC of $300 million;"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","\u2022","a maximum ratio of total liabilities to tangible net worth of less than 10:1 for PMC and PMH and 7:1 for the Company and our Operating Partnership; and"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","\u2022","at least two warehouse or repurchase facilities that finance amounts and assets similar to those being financed under our existing debt financing agreements."]]
[[/GREPCENT_TABLE]]

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:

[[GREPCENT_TABLE]]
[["","\u2022","a minimum in unrestricted cash and cash equivalents of $100 million;"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","\u2022","a minimum tangible net worth of $1.25 billion;"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","\u2022","a maximum ratio of total liabilities to tangible net worth of 10:1; and"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","\u2022","at least one other warehouse or repurchase facility that finances amounts and assets that are similar to those being financed under certain of our existing secured financing agreements."]]
[[/GREPCENT_TABLE]]

77

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:

[[GREPCENT_TABLE]]
[["","\u2022","A minimum net worth of a base of $2.5 million plus 25 basis points of UPB for total 1-4 unit residential loans serviced;"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","\u2022","A tangible net worth/total assets ratio greater than or equal to 6%;"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","\u2022","Effective June 30, 2020, FHFA liquidity requirement is equal to 0.035% (3.5 basis points) of total Agency servicing UPB plus an incremental 200 basis points of the amount by which total nonperforming Agency servicing UPB (reduced by 70% of the UPB of nonperforming Agency loans that are in COVID-19 payment forbearance and were current when they entered such forbearance) exceeds 6% of the applicable Agency servicing UPB; allowable assets to satisfy liquidity requirement include cash and cash equivalents (unrestricted), certain investment-grade securities that are available for sale or held for trading including Agency mortgage-backed securities, obligations of Fannie Mae or Freddie Mac, and U.S. Treasury obligations, and unused and available portions of committed servicing advance lines;"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","\u2022","In the case of PLS, liquidity equal to the greater of $1.0 million or 0.10% (10 basis points) of its outstanding Ginnie Mae single-family securities, which must be met with cash and cash equivalents; and"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","\u2022","In the case of PLS, net worth equal to $2.5 million plus 0.35% (35 basis points) of its outstanding Ginnie Mae single-family obligations."]]
[[/GREPCENT_TABLE]]

On January 31, 2020, FHFA proposed changes to the eligibility requirements:

[[GREPCENT_TABLE]]
[["","\u2022","A tangible net worth requirement of a base of $2.5 million plus 35 basis points of the UPB of loans serviced for Ginnie Mae and 25 basis points of the UPB of all other 1-4 unit loans serviced;"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","\u2022","Liquidity equal to or exceeding four basis points multiplied by the aggregate UPB of mortgages serviced for Fannie Mae and Freddie Mac plus 10 basis points multiplied by the aggregate UPB of mortgages serviced for Ginnie Mae plus 300 basis points multiplied by the sum of nonperforming Agency Mortgage Servicing that exceeds 4% of the UPB of total Agency Mortgage Servicing; and"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","\u2022","On June 15, 2020, FHFA announced that it will be re-proposing changes to these requirements."]]
[[/GREPCENT_TABLE]]

Many of our debt financing agreements contain a condition precedent to obtaining additional funding that requires us to maintain positive net income for at least one (1) of the previous two consecutive quarters, or other similar measures.  For the first quarter of 2022, we have obtained waivers of this requirement from all of the applicable lenders.  We may be required to obtain additional waivers in the future if this condition precedent is not met.

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

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

Off-Balance Sheet Arrangements and Aggregate Contractual Obligations

Off-Balance Sheet Arrangements

As of December 31, 2021, we have not entered into any off-balance sheet arrangements.

All debt financing arrangements that matured between December 31, 2021 and the date of this Report have been renewed, extended or replaced.

78

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, 2021:

[[GREPCENT_TABLE]]
[["Counterparty","","Amount at risk"],["","","(in thousands)"],["RBC Capital Markets, L.P.","","$","69,095"],["Barclays Capital Inc.","","","65,905"],["Bank of America, N.A.","","","50,736"],["Credit Suisse First Boston Mortgage Capital LLC","","","46,355"],["JPMorgan Chase & Co.","","","29,294"],["Morgan Stanley Bank, N.A.","","","24,216"],["Citibank, N.A.","","","16,902"],["Daiwa Capital Markets America Inc.","","","13,771"],["Goldman Sachs & Co. LLC","","","13,340"],["BNP Paribas Corporate & Institutional Banking","","","8,513"],["Wells Fargo Securities, LLC","","","6,183"],["Amherst Pierpont Securities LLC","","","3,848"],["","","$","348,158"]]
[[/GREPCENT_TABLE]]

Management Agreement. We are externally managed and advised by our Manager pursuant to a management agreement, which 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 June 30, 2025 subject to automatic renewal for additional 18-month periods, unless terminated earlier in accordance with the terms of the servicing agreement.

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

Pursuant to the terms of our 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.

79

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, PCM was reimbursed $120,000 per fiscal quarter through June 30, 2020 and is reimbursed $165,000 per fiscal quarter from and after July 1, 2020, such amount to be reviewed annually and to not preclude reimbursement for any other services performed by PCM or its affiliates.

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

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

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

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

Servicing Agreement. We have entered into a loan servicing agreement with PLS, pursuant to which PLS provides servicing for our portfolio of residential loans and subservicing for our portfolio of MSRs. Such servicing and subservicing provided by PLS include collecting principal, interest and escrow account payments, if any, with respect to loans, as well as managing loss mitigation, which may include, among other things, collection activities, loan workouts, modifications, foreclosures and short sales. PLS also engages in certain loan origination activities that include refinancing loans and financings that facilitate sales of real estate owned properties, or REOs.

The base servicing fee rates for distressed whole loans are charged based on a monthly per-loan dollar amount, with the actual dollar amount for each loan based on the delinquency, bankruptcy and/or foreclosure status of such loan or whether the underlying mortgage property has become REO. The base servicing fee rates for distressed whole loans range from $30 per month for current loans up to $95 per month for loans where the borrower has declared bankruptcy. The base servicing fee rate for REO is $75 per month. To the extent that we rent our REO under our REO rental program, we pay PLS an REO rental fee of $30 per month per REO, an REO property lease renewal fee of $100 per lease renewal, and a property management fee in an amount equal to PLS’ cost if property management services and/or any related software costs are outsourced to a third-party property management firm or 9% of gross rental income if PLS provides property management services directly. PLS is also entitled to retain any tenant paid application fees and late rent fees and seek reimbursement for certain third-party vendor fees.

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

The base servicing fee rates for non-distressed loans subserviced by PLS on our behalf are also calculated through a monthly per-loan dollar amount, with the actual dollar amount for each loan based on whether the loan is a fixed-rate or adjustable-rate loan.

80

The base servicing fee rates for loans subserviced on our behalf are $7.50 per month for fixed-rate loans and $8.50 per month for adjustable-rate loans. To the extent that these loans become delinquent, PLS is entitled to an additional servicing fee per loan falling within a range of $10 to $55 per month and based on the delinquency, bankruptcy and foreclosure status of the loan or $75 per month if the underlying mortgaged property becomes REO. PLS is also entitled to customary ancillary income and certain market-based fees and charges, including boarding and deboarding fees, liquidation and disposition fees, and assumption, modification and origination fees, as well as certain fees for COVID-19 related forbearance and modification activities provided for under the CARES Act.

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

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

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

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

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

Pursuant to the MBS agreement, PLS has agreed to provide such services exclusively for our benefit, and PLS and its affiliates are prohibited from providing such services for any other third party. However, such exclusivity and prohibition shall not apply, and certain other duties instead will be imposed upon PLS, if we are unable to purchase or finance loans as contemplated under our MBS agreement for any reason.

In consideration for the mortgage banking services provided by PLS with respect to our acquisition of loans, through June 30, 2020, PLS was entitled to a monthly fulfillment fee that shall equal (a) no greater than the product of (i) 0.35% and (ii) the aggregate initial unpaid principal balance (the “Initial UPB”) of all loans purchased in such month, plus (b) in the case of all loans other than loans sold to or securitized through Fannie Mae or Freddie Mac, no greater than the product of (i) 0.50% and (ii) the aggregate Initial UPB of all such loans sold and securitized in such month; provided however, that no fulfillment fee shall be due or payable to PLS with respect to any Ginnie Mae loans. We do not hold the Ginnie Mae approval required to issue Ginnie Mae MBS and act as a servicer. Accordingly, under the MBS agreement, PLS currently purchases loans underwritten in accordance with the Ginnie Mae Mortgage-Backed Securities Guide “as is” and without recourse of any kind from us at our cost less an administrative fee plus accrued interest and a sourcing fee ranging from two to three and one-half basis points, generally based on the average number of calendar days that loans are held by us prior to purchase by PLS.

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

[[GREPCENT_TABLE]]
[["","\u2022","Fulfillment fees shall not exceed the following:"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","(i)","the number of loan commitments multiplied by a pull-through factor of either .99 or .80 depending on whether the loan commitments are subject to a \u201cmandatory trade confirmation\u201d or a \u201cbest efforts lock confirmation\u201d, respectively, and then multiplied by $585 for each pull-through adjusted loan commitment up to and including 16,500 per quarter and $355 for each pull-through adjusted loan commitment in excess of 16,500 per quarter, plus"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","(ii)","$315 multiplied by the number of purchased loans up to and including 16,500 per quarter and $195 multiplied by the number of purchased loans in excess of 16,500 per quarter, plus"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","(iii)","$750 multiplied by the number of all purchased loans that are sold or securitized to parties other than Fannie Mae and Freddie Mac; provided, however, that no fulfillment fee shall be due or payable to PLS with respect to any Ginnie Mae loans."]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","\u2022","Sourcing fees charged to PLS range from one to two basis points, generally based on the average number of calendar days the loans are held by us before purchase by PLS."]]
[[/GREPCENT_TABLE]]

81

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. Through June 30, 2020, pursuant to the terms of the MSR recapture agreement entered into by PMC with PLS, if PLS refinanced through its consumer direct lending business loans for which we previously held the MSRs, PLS was generally required to transfer and convey to PMC, cash in an amount equal to 30% of the fair market value of the MSRs related to all such loans so originated.

Effective July 1, 2020, the 2020 MSR recapture agreement changes the recapture fee payable by PLS to a tiered amount equal to:

[[GREPCENT_TABLE]]
[["","\u2022","40% of the fair market value of the MSRs relating to the recaptured loans subject to the first 15% of the \u201crecapture rate\u201d;"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","\u2022","35% of the fair market value of the MSRs relating to the recaptured loans subject to the recapture rate in excess of 15% and up to 30%; and"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","\u2022","30% of the fair market value of the MSRs relating to the recaptured loans subject to the recapture rate in excess of 30%."]]
[[/GREPCENT_TABLE]]

The “recapture rate” means, during each month, the ratio of (i) the aggregate unpaid principal balance of all recaptured loans, to (ii) the aggregate unpaid principal balance of all mortgage loans for which the Company held the MSRs and that were refinanced or otherwise paid off in such month. The Company has further agreed to allocate sufficient resources to target a recapture rate of 15%.

The MSR recapture agreement expires, unless terminated earlier in accordance with its terms, on June 30, 2025, subject to automatic renewal for additional 18-month periods, unless terminated in accordance with its terms.

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

To the extent PLS refinances any of the loans relating to the ESS we have acquired, the 12/19/16 Spread Acquisition Agreement also contains recapture provisions requiring that PLS transfer to us, at no cost, the ESS relating to a certain percentage of the unpaid principal balance of the newly originated loans. However, under the 12/19/16 Spread Acquisition Agreement, in any month where the transferred ESS relating to newly originated Ginnie Mae loans is not equivalent to at least 90% of the product of the excess servicing fee rate and the unpaid principal balance of the refinanced loans, PLS is also required to transfer additional ESS or cash in the amount of such shortfall. Similarly, in any month where the transferred ESS relating to modified Ginnie Mae loans is not equivalent to at least 90% of the product of the excess servicing fee rate and the unpaid principal balance of the modified loans, the 12/19/16 Spread Acquisition Agreement contains provisions that require PLS to transfer additional ESS or cash in the amount of such shortfall. To the extent the fair market value of the aggregate ESS to be transferred for the applicable month is less than $200,000, PLS may, at its option, wire cash to us in an amount equal to such fair market value in lieu of transferring such ESS. The remaining balance of the ESS was repaid during the quarter ended March 31, 2021.

Master Repurchase Agreement with PLS. On December 19, 2016, we, through PMH, entered into a master repurchase agreement with PLS (the “PMH Repurchase Agreement”), pursuant to which PMH may borrow from PLS for the purpose of financing PMH’s participation certificates representing beneficial ownership in ESS acquired from PLS under the 12/19/16 Spread Acquisition Agreement. PLS then re-pledges such participation certificates to PNMAC 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

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weighted average note rate of the VFN and any outstanding Term Notes) to the date of such repurchase. PLS is then required to repay the Issuer Trust the corresponding amount under the PC Repurchase Agreement.

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

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

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

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

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